international pricing 15-2 learning objectives explain how internal and external variables...
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International Pricing
15-2
Learning objectives Explain how internal and external
variables influence international pricing decisions.
Under the application of Pricing in the international marketing perspective.
Thinkbox
Indian IT firms provide world class services at one tenth the cost of what the same services would cost in the USA.
An MBA degree costs about $8000 in India. In the US an MBA degree costs around US$ 120,000.
Developing a new automobile model in the US costs about US$ 1 billion. Indica and Scorpio have been designed, developed and produced in India totally. They have been acclaimed abroad. Cost of design is half what the design would costs in USA.
Arvind netralaya performs a cataract operation including the cost of the lens for US$12 while that very operation costs about US $ 1500 in US.
PRACTICAL INSIGHT 1
Dip Trix, a successful US brand was launched by General Mills in 2005 in the Indian market.
Targeted at 4 -12 years of children. Packaged in a twin tray. Children can eat the cookies in their own way
either dipping the cookies in cream, licking the cream with fingers or making a cookie and cream sandwitch.
Dip Trix has gone for a penetration pricing strategy by offering the product at reasonable price of Rs. 5.
The Harley Davidson (HD) corporation has been dominating the motorcycle industry for many decades.
HD still has a 30% price premium. In 2006, HD decided to enter the Indian market
through the sourcing route i.e. not to produce the bike but to import it.
Given the high import duty of 60% for imported bikes the price of HD in India was estimated to be between Rs. 4 – 14 Lakh.
PRACTICAL INSIGHT 2
In 2007, HD decided to suspend plans to enter the market but again import duties continued to be 60%. While this time the company succeeded in gaining permission to enter the market because of European emission standards that are accepted in India.
In early 2008, negotiations at the India –US trade forum inform the co. that they could import and sell the bikes in the country through dealer networks and not directly to the customers but no change in the import duties.
With an already high end price tag which will be doubled with import duties and taxes the bike can only target a niche market of affluent customers?
Does the image justify the price level?
In the battle to out blade the competition Gillette launched a five bladed razor called Fusion.
Fusion is the first entirely new men’s razor system launched by Gillette since Mach3.
Is it possible for Gillette to standarize pricing across borders for its new five blade fusion.
PRACTICAL INSIGHT 3
15-9
Gillette relies on product line pricing
www.gillette.com/
15-10
Pricing
Only area of global marketing mix where policy can be changed rapidly without large direct cost implications
Decisions in global markets are affected by complexity of influential factors
15-11
Internal factors affecting international pricing decisions
Firm-level factors Corporate and
marketing objectives Competitive strategy Firm positioning Product development Production location Market entry modes
Product factors Stage in PLC Place in product line Most important
product features Product positioning Product cost structure
15-12
External factors affecting international pricing decisions
Environmental factors
Government influences and constraints
Inflation Currency fluctuations Business cycle stage
Market factorsCustomers’
perceptionsCustomers’ ability to
payNature of competitionCompetitors’
objectives, strategies, strengths and weaknesses
Grey market appeal
15-13
What is this?
What price-related phenomenon is caused by the summation of all cost factors in the distribution channel including ex-works price, shipping costs, tariffs, and distributor mark-up?
Price escalation
15-14
Tactics for countering price escalation
Rationalizing the distribution processLowering the export price from the
factoryEstablishing local production of the
productPressurizing channel members to
accept lower profit margins
15-15
Factors influencing customer sensitivity to price (1)
More distinctive productGreater perceived quality of productsConsumers less aware of substitutes
in the marketDifficulty in making comparisonsProportion price represents of total
expenditure of the customer
15-16
Factors influencing customer sensitivity to price (2)
Perceived benefit for customer increases
Product is used in association with a product bought previously, such that components and replacements are highly priced
Costs are shared with other partiesProduct or service cannot be stored
15-17
Basic approaches to pricing across countries
Price standardization
Price differentiation
15-18
Figure - Structural factors of standardized
versus differentiated pricing
Source: Reprinted from European Management Journal, Vol. 12, No. 2, Diller. H. and Bukhari, I. (1994) ‘Pricing conditions in the European Common Market’, p. 168, Copyright 1994, with permission from Elsevier.
15-19
What is this?
When a customer requires one global price per product from the supplier for all its foreign SBUs and subsidiaries, a _____ has been requested.
Global pricing contract
15-20
What is this?
What term is used to describe the prices charged for intracompany movement of goods and services?
Transfer pricing
Distribution Decisions in the International Marketing
16-22
Learning objectives (1)Explore the determinants of
Distribution decisions.Discuss the key points in putting
together and managing International marketing channels
Discuss the factors influencing channel width
Explain what is meant by integration of the marketing channel
Think box
The Distribution network in Japan has more wholesalers and retailers per capita than any other industrial nation.
A consequence of the more complex Japanese distribution system is the considerable price escalations.
This distribution serves social and economic purposes. Channel members are like family.
Relationships to each other are tightly interlocked by emotion and tradition.
Inefficient channel members are retained.
Figure - Japanese car parts distribution channels
Sources: Cateora (1993); Onkvisit and Shaw (1993); Pirog and Lancioni (1997).
Figure - US car parts distribution channels
Sources: Cateora (1993); Onkvisit and Shaw (1993); Pirog and Lancioni (1997).
Figure - A hypothetical channel sequence in the Japanese consumer market
Source: Pirog and Lancioni, 1997, p. 57. Adapted with kind permission from International Journal of Physical Distribution and Logistics Management, Emerald Group Publishing Ltd.
Practical Insight 1
Wal Mart has set up Wal Mart Global Procurement company in Bangalore to expand business in India.
Wal – Mart has a dedicated factory certification department that inspects supplier’s facilities four times a year.
Wal Mart engage audit firms PWC and Dun & Bradstreet to check quality and audit accounts.
Wal Mart is particular about work conditions at sourcing bases which means no child labour, clean bathrooms and fire fighting equipment at every floor.
Link Pen and Plastics Limited supplied 30 million pens to Wal Mart. The firm tied up with Mitsubishi Pencil Company of Japan to have access to latest technology.
Welspun and Trident are other examples with whom Wal Mart is doing business in India.
Practical Insight 2
Bata operates almost 4700 stores around the world with an objective to consistently be the most satisfying store to shop for well priced and fashionable footwear.
City Store - The Bata City Store gives you unique shopping experience as it showcases the latest collections for footwear of local and international brands. The store ambience is designed to create a lifestyle store
Family store : Bata is the world's leading family chain thanks to the wide assortment of every fashion footwear available in our stores. The products are primarily the Bata brand
Superstore : Bata Superstore offers a wide assortment of fashion, casual and athletic for the entire family. Located primarily in urban and suburban shopping centre, these spacious stores offer the best value by providing good quality shoes at great prices
Factory store : Factory stores are the largest and the most value-oriented stores of our retail chain. They are ideally located in power centers, commercial parks and outlet centers with easy parking facilities.Thus a firm operating in International markets may evolve its own system of retail stores so as to project a uniform market image globally.
Practical Insight 3
ITC E-Choupal offers five distinct servicesa. Information: Daily weather forecasts, pricingb. Knowledge: farming methodsc. Purchase: seeds, fertilizers and pesticides.d. Sales: Sale of cropse. Development Work: Cattle breed improvement,
water harvesting techniques.
Practical Insight 4
Since the late 1800s the south african MNC De Beers has regulated both the Industrial and gemstone diamond markets.
Mark up on DiamondsStage of Distribution
Mark Up (%) Average Value of 0.5 Carat Gem ($/carat)
Cost of Mining - 100Mine Sales 67 167Dealers of rough gems
20 200
Cutting units 200 400Wholesaler units 15 460Retail 100 920
In 2001 De Beers made a joint venture with Louis Vuitton.
As part of the agreement De Beers SA has transferred to De Beers LV the worldwide rights to use the De Beers Brand name and it will be sold exclusively through De Beers Stores.
External factors affecting channel decisions
Customer characteristics
Nature of product
Nature of demand
Competition
Legal regulations/ local business practices
Internal decisions concerning channel structure
Types of intermediaries Coverage Length (number of levels) Control resources Degree of integration
Internal decisions concerning management and control of channel
Screening and selecting intermediaries Contracting Motivating Controlling Termination
Internal decisions concerning management of channel logistics
Physical movement of goods through channel system Order handling Transportation Inventory Storage/warehousing
Market coverage
Coverage can refer to geographical areas of a country or the number of retail outlets (as a percentage of all retail outlets).
Approaches to market coverage
Intensive
Selective
Exclusive
Figure -Intensive distribution
M = ManufacturerW= WholesalerR = Retailer
Figure - Selective distribution
M = ManufacturerW= WholesalerR = Retailer
Figure - Exclusive distribution
M = ManufacturerW= WholesalerR = Retailer
Entry Strategy for International Markets
Going Global - Decisions
Should I Go Abroad?
How Should I Market My Product?
Which Markets
Should I Enter?
How Should I Enter Them?
Learning Objectives:
To understand the determinants on which entry
mode depends.
To explain various entry modes for international
markets
To explain different theories of
internationalization.
To evaluate selection criteria for entry mode
decisions
Determinants of International Entry Modes
Industry-specific factors• Industry´s degree of internationalisation• Choice of entry mode by key competitors
Entry Mode
Home-country factors
•Policies on investment abroad• Bilateral agreements• Domestic market size and competition
Target Market Factors• Government policies•Availability of local distributors• Local infrastructure
Firm-Specific factors• Firm´s degree of internationalisation• Marketing objectives• Nature of product• Availability of resources
Many Unknown; task is not only to maximize return but also to minimize risk
Different modes of entry possible
Export mode
• Indirect
• Direct
↓Low risk,
Low control,High flexibility
Intermediate mode Contractual
• Licensing• Franchising• Strategic Alliances• Joint Ventures
↓Shared risk,
Shared control,Split Ownership
Investment
• Acquisition• Create new subsidiary
↓High risk,
High control,
Low flexibility
The Choice of Entry Modes: A Hierarchical Model
Source: Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business Studies, 31: 535–554.
Strategic Decisions On
Risk vs. Control
Strategic Decisions On
Risk vs. Control
Definition: a mode of entry involving production of a productin one country and shipping it to another country for sale.
Risk
High
Low HighControl
Exporting
Exporting
Degree of Export
Involvement
Degree of Export
Involvement
Direct
Exporting
Direct
Exporting
Indirect
Exporting
Indirect
Exporting
ContractualIntermediate Modes of Entry
ContractualIntermediate Modes of Entry
Definition: an agreement in which an organization grants anotherorganization the right to use a trademark, a patented product or a process.
Definition: an agreement in which an organization grants anotherorganization the right to use a trademark, a patented product or a process.
Risk
High
Low HighControl
Exporting
Licensing
Licensing
Licensing (Contd.)
Examples of licensing abound in drugs
Playboy used to take licensed material
from Lui
Advantages of Licensing
Financing international expansion
Reducing expansion risks
Minimizing the black market
Upgrading production technologies
Transportation cost is high
Disadvantages of Licensing
Restricting future activities
Reducing quality and consistency
Hindering marketing efforts
Assisting competitors
NEED CAREFUL NEGOTIATION
FranchisingFranchising
Franchising
Franchising
Low-cost, low-risk mode of entry
Rapid expansion
Knowledge of local managers
Low-cost, low-risk mode of entry
Rapid expansion
Knowledge of local managers
AdvantagesAdvantages DisadvantagesDisadvantages
• Hard to manage a
large number of
franchises
• Loss of flexibility in
franchising
• Hard to manage a
large number of
franchises
• Loss of flexibility in
franchising
Turnkey Projects
Advantages Disadvantages
FutureCompetition
Politics overKnow-How
Obtain Designsfor Infrastructure
Focus onCore Competencies
Strategic AlliancesStrategic Alliances
Strategic Alliances
Reduce Risk Exposure
Gain Access toDistribution
Channels
Advantages ofStrategic Alliances
Tap Into aCompetitor’s
Strengths
ShareInvestment Cost
FutureCompetition
Conflict with Partners
Disadvantages of Strategic Alliances
Definition: a business agreement in which two or more organizationsshare management of an enterprise.
Risk
High
Low HighControl
Exporting
Licensing
Joint Ventures
Joint Ventures
Joint VenturesTechnology supplier company get foothold
Option when indianisation or mexicanisation is in force
DefensiveReasons
InternationalDistribution
Network
Reduce RiskPenetrate
InternationalMarkets
Advantages of Joint Ventures
Local every where
Loss of
Control
Conflict
with Partners
Disadvantages of Joint Ventures
InvestmentModes of Entry
InvestmentModes of Entry
definition: A mode of entry involving an organization setting new facilities or acquiring a foreign firm in the same line of business.
definition: A mode of entry involving an organization setting new facilities or acquiring a foreign firm in the same line of business.
Risk
High
Low HighControl
Exporting
Licensing
Joint Ventures
Direct Ownership
Direct Ownership
Direct Ownership
Wholly Owned Subsidiaries
Compatible withGlobal Strategies
Complete Managerial Control
High Risk Exposure
Expensive toStart and Maintain
Advantages Disadvantages
Entry mode and Means of Organising Marketing
Mode of Entry Independent
agent
Joint with alliance
partners
Own sales Subsidiary
Exporting Absolut Vodka with Seagram in US
EMI with Toshiba in Japan
Volvo in US
Licensing Disney in Japan with Japanese licensee
Microsoft with ASCII in Japan Initially
Nike in Asia.
FDI LG in USA with Sears private lebel
Mitsubishi manufacture car at Illinois with Chrysler
P&G manufacture and sale through own subsidiary in Europe
Alternate ways of marketing
Local marketing effort can be exercised irrespective of entry mode
Which mode of entry should be chosen?
Strategy &
Market situation Emerging High Growth Mature
Incremental Posture
( Few resources , tentative, wants to be flexible )
Protected Posture (protected trade secret, patentable know-how, potentiality abroad is clear,self imposed limit)
Control Posture (has FSA, Large enough to handle resource disadvantages)
Indirect export
Indirect export
Direct Export
JV Indirect export
Acquisition/alliance
WOS Acquisition /alliance
WOS