INTERNATIONAL MARKETING NOTES

International Marketing

Definition:
International marketing is the performance of business activities designed to plan, price,
promote, and direct the flow of company’s goods & services to consumers in more than
one nation for profit.

Adaptation of the controllables (marketing mix elements) to the uncontrollable elements

determines the ultimate outcome of the marketing enterprise.

Domestic Uncontrollables
• Political / Legal
o Political decisions involving domestic foreign policy
o Any country has a right to restrict foreign trade when it adversely affects the security or
economy of the country
o Conversely there may be positive effects when there are changes in foreign policy and
countries are given favored treatment (MFN)

• Domestic Economic Climate

o Home based uncontrollable element
o Direct impact on the capacity to invest in plants and facilities
o Capital generated in the home country and then mobilized
o Internal economic conditions will result in restrictions against foreign investment in
order to strengthen the domestic economy

• Competition
o In the home country – Eg. Kodak & Fuji

Foreign Uncontrollables
• Political / Legal Forces
o E.g. China – communist legal system where all the deals were done with the state to a
commercial legal system

• Level of Technology
o Technical expertise may vary
o Technical Knowledge
o Special training

• Alien Status of Foreign businesses

o Foreigner control the business
o Alien in the culture of the host country
o E.g. Coke

• Cultural Forces
• Distribution

• Competitive forces (Soft Drink)

For Global marketing to be a success environmental adjustments are needed.

SRC – Self Reference Criterion

- Unconscious reference to ones own cultural values, experiences and knowledge

Culture

Values Meanings History Beliefs Symbols

E.g. - Vicks / Germany

Maharaja Mac

Stages of International Marketing

• No direct foreign Marketing
o No activity in cultivating customers outside domestic market
o Distributors / Dealers / Foreign Customers coming directly to the firm
o Web Pages (Indication)

• Infrequent Foreign Marketing

o Product surplus in domestic market
o No intention of maintaining continuous market representation
o Few companies fir this model as customers always look for long term commitment

• Regular Foreign Marketing

o Marketing goods on a continuous basis to foreign markets
o Overseas Middlemen / Own Sales force / Sales subsidiary
o Adaptation of the product to the foreign market

• International Marketing / Multinational Marketing

o Fully committed & involved in international marketing
o Markets all over the world
o Production & marketing activities outside the home market
o The company formulates a unique strategy for every country with which it conducts
business
E.g. Balsara – Mint / Cinamint

• Global Marketing
o At this stage, companies treat the world, including their home market as one
o Maximize returns through global standardization of its business activities
o Efficiency of scale by developing a standardized product, of dependable quality, to be
sold at a reasonable price to a global market
o The company standardizes its logo, image, store, processes
o Wherever necessary due to cultural differentiation adaptations are made

(Multidomestic & Global Marketing can exist simultaneously)

International trade involves voluntary exchange of goods, services, assets, or money

between residents of two different countries or between different countries. The
fundamental question that arises for most of us at the thought of international trade is
why should a business firms of one country should to the another country, when the
industries of that country also produce goods and market them. What is the basis of
international business?

A number of theories have been developed to explain the basis for international trade.
The different trade theories include theory of absolute advantage, theory of comparative
advantage, and classical trade theory. These theories discuss and analyze different
nuances of trade for the trading partners and deal with the financial dynamics of the
trading activity between two countries

Theory of absolute advantage

The Scottish economist Adam Smith first explained the theory of absolute advantage in
1776. He argued that a country has an absolute advantage in the production of a good
when it can produce more of that good with a given amount of resources than another
country.
A simple economic model can be used to illustrate the principle of absolute advantage.

The following economic model is based on the following assumptions and is just an
example:
• There are only two countries, Australia and China.
• These two countries each produce only wheat and cloth.
• Each country has the same amount of resources (land, labor and capital), however the
quality differs.
• Resources are transferable between the production of wheat and cloth.
• Production costs for each country are fixed.
• There are no trade barriers, such as tariffs between the two countries.
Table 1 Absolute Advantage - Production before Specialization

Wheat
(units) Cloth
(units)
Australia 30 20
China 5 25
Total output 35 45
Table 1 shows the production for each country before specialization.
With a given amount of resources Australia can produce 30 units of wheat and 20 units
of cloth. While China can produce 5 units of wheat and 25 units of cloth.
In this example Australia produces more wheat while China can produce more cloth.
Australia then has an absolute advantage in the production of wheat and China an
absolute advantage in the production of cloth.
Table 2 Production gains after specialization
Wheat (units) Cloth (units)
Australia 60(+30) 0 (-20)
China 0 (-5) 50 (+25)
Total output 60 (+25) (net gain) 50 (+5) (net gain)
When each country specializes in the production of the goods they have a comparative
advantage in, greater production of both goods could occur.
This is illustrated in Table 2, were the production of wheat has increased by 25 units and
production of cloth by 5 units.
It is quite realistic to think that one country has an absolute advantage over another
country in the production of some goods. Finland has done this recently by specializing
in the production and distribution of Nokia telephones.
Criticism: According to this theory every country should be able to produce certain
products at low cost compared to other countries and should product certain other
products at comparatively high price than other countries. International trade takes place
only under such condition. But, in reality most of the countries do not have absolute
advantage of producing at lowest cost and commodity, yet they participate in
international business.

Theory of comparative advantage

Adam Smith's theory of absolute advantage is a simple explanation of the benefits of
international trade. However, if one country has an absolute advantage in the production
all goods, can there be benefits from trade.
In 1817, David Ricardo, a classical economist developed the principal of comparative
advantage to explain this situation. The principal is based on the relative efficiencies of
production where each country has a comparative advantage in producing the
commodity in which it has the lower opportunity cost.
Opportunity costs are what must be given up in order to consume or produce another
good. For example, going on an overseas holiday may involve giving up the purchase of
a new car. The comparative advantage principle can be illustrated using Tables 3 and 4.
Table 3 Comparative advantages: production before specialization
Wheat (units) Cloth (units)
Australia 20 10
China 5 5
Total Output 25 15
In Table 3, Australia has an absolute advantage in the production of both wheat and
cloth. By using the theory of comparative advantage, both countries can gain from
specialization and trade.
Table 4 Opportunity costs
Opportunity cost
Country 1 unit of wheat 1 unit of cloth
Australia 0.5 (10/20) units of cloth 2 (20/10) units of wheat
China 1 (5/5) units of cloth 1 (5/5) units of wheat
From Table 4:
• Australia has a comparative advantage in the production of wheat since it has to give
up only 0.5 units of cloth to produce an extra unit of wheat, while China must give up 1
unit of cloth to produce an extra unit of wheat. So it is more practical for Australia to
specialize in the production of wheat.
• China has a comparative advantage in the production of cloth since it has to give up
only 1 unit of wheat to produce an extra unit of cloth, while Australia must give up 2 units
of wheat to produce an extra unit of cloth. Consequently it is more practical for China to
specialize in the production of cloth.
Australia has a comparative advantage in the production of wheat and China cloth.
Trade between the two countries should be beneficial because of the different
opportunity costs for these commodities.
Table 5 Production levels after specialization
Wheat (units) Cloth (units)
Australia 40 (+20) 0 (-10)
China 0 (-5) 10 (+5)
Total output 40 (+15) (net gain) 10 (-5) (net gain)
From Table 5 we can see that total output has increased when countries specialize in
the production of goods and services based on comparative advantage. As both
countries are using their resources more efficiently, trade will lead to higher standard of
living than would be otherwise possible.
A modern approach to comparative advantage
Michael Porter The Comparative Advantage of Nations (London, Macmillan 1990),
suggests that instead of different factor endowments being the basis for international
trade much of the world's trade is taking place between nations with similar factor
endowments.
Factor endowments and comparative advantages are important in countries that have
industries based on natural resources and where production does not rely on high levels
of technology or where the labor force is relatively unskilled. Porter suggests that it is
competitive advantage (based on lower costs, technological innovation and product
differentiation) rather than comparative advantage that is becoming an important factor
in determining the pattern and direction of international trade.
Transnational corporations are playing a very important role in this development
because they are able to coordinate their production activities by moving resources
production components, investment funds, technology and labor across the world.
Assumptions and Limitations
a. It assumes countries are only driven by the maximization of production and
consumption.
b. It assumes only two countries are engaged in the production and consumption of two
goods.
c. It assumes no transportation costs. In reality, transportation costs are a major
expense of international trade.
d. It assumes labor is the only resource for production and is mobile within each nation
but cannot be transferred.
e. It assumes specialization does not result in gains in efficiency. In fact, specialization
results in increased knowledge of a task and future improvements.
The Opportunity Cost Theory
Gottfried Harberler proposed the opportunity cost theory in 1969. The limitations of the
comparative cost theory produced the basis of this theory. The opportunity cost is the
value of alternatives, which have to be forgone in order to obtain a particular thing. For
example Rs. 1000 is invested in the equity of Rama News Print Limited and earned a
dividend of 6% in 1999, the opportunity cost of this investment is 10% interest, had this
amount been deposited in a commercial bank for a term of one year.
Another example is that, India produces textile garments by utilizing its human resources
worth of Rs. 1 billion and exports to the US in 1999. The opportunity cost of this project
is, had India developed software packages by utilizing the same human resources and
exported the same to USA in 1999, the worth of the exports would have been Rs. 10
billion.
Opportunity cost approach specifies the cost in terms of the value of the alternatives,
which have to be forgone in order to fulfill a specific act.
Thus, this theory provides the basis for international business terms of exporting a
particular product rather than other products. The previous example suggests that it
would be profitable to India to develop and export software packages rather than textile
garments to USA.
We slightly modify the previous example. For example, assume that India earned Rs. 15
billion by exporting the same software packages to UK in 1999 rather than to USA. This
theory suggests that the opportunity cost of India’s software exports to USA in 1999 is
Rs. 15 billion.
This. This theory also provides basis for international business of exporting a product to
a particular country rather to another country.

Other theories of International Trade

1. The Productivity Theory
It is criticized that most of the comparative cost theories are not applicable to developing
countries. Hence, H. Myint proposed productivity theory and the vent for surplus theory.
The productivity theory points toward indirect and direct benefits. This theory
emphasizes that the process of specialization involves adapting and reshaping the
production structure of a trading country to meet the export demands. Countries
increase productivity in order to utilize these gains of exports. This theory encourages
the developing countries to go for cash crops, increase by enhancing the efficiency of
human resources, adapting latest technology etc.
Limitations – However, this theory has also certain limitations. They are:
Labour productivity did not increase after certain level.¬
Increase in working hours¬
Increase in the proportion of gainfully employed labour in proportion to disguised
unemployed labour.¬
2. The Vent for Surplus Theory
International trade absorbs the output of unemployed factors. If the countries produce
more than the domestic requirements, they have to export the surplus to other countries.
Otherwise, a part of the productive labour of the country must cease and the value of its
annual produce diminishes.
Thus, in the absence of foreign trade, they would be surplus productive capacity in the
country. This surplus capacity is taken by another country and in turn gives the benefit
under international trade.
Appropriateness of this Theory for Developing Countries: According to this theory, the
factors of production of developing countries are fully utilized. The unemployed labour of
the developing countries is profitably employed when the vent for surplus is exported.
International trade permits for more efficient use of capital and labour. Hence. J.S. Mill
described this theory as, “serving relic of the Mercantile Theory.”
3. Mill’s Theory of Reciprocal Demand
Comparative cost advantage theories do not explain the ratios at which commodities are
exchanged for another. J.S. Mill introduced the concept of “Reciprocal demand” to
explain the determinations of the equilibrium terms of trade. Reciprocal demand
indicates a country’s demand for one commodity in terms of the other commodity; it is
prepared to give up in exchange. Reciprocal demand determines the terms of trade and
relative share of each country.
Quality of a product exported by country A
Equilibrium = -----------------------------------------------------
Quality of another Product exported by country B

Assumptions: Assumptions of this theory are: Existence of two countries, trade in only
two goods, both the goods are produced under the law of constant returns, absence of
the transportation costs, existence of perfect competition and existence of full
employment.

Modern Trade Theories

Modern theories focus on the concept of economies of scale as opposed to the
assumption of constant returns of scale incorporated in other theories. This may mean
that as a company produces on a larger scale, average costs fall (internal economies of
scale), but also that costs (the establishment of good infrastructure, the presence of well-
trained employees, etc.) will decline if numerous other businesses are established in the
vicinity (external economies of scale). The company's earnings increase
disproportionately to the increase in use of all factors of production (e.g. labour,
machinery, capital). The company then gains an ever-increasing advantage over other
firms in its sector and thereby ends perfect competition, which was an assumption of
traditional theories.
It should be clear that if economies of scale, regardless of their base, largely determine
international competitiveness, it is mainly incidental factors or even chance that will
decide why one country, for example, has a strong aircraft industry as a result of internal
economies of scale and another country has acquired and electronics industry as a
result of external economies of scale.
A second implication of economies of scale is that even if countries have comparable
supply structures (so that there are no comparative cost advantages and, according to
traditional theory, no reason for specialization either), there are still reasons why one
country specializes in one product and another in something else. If they do so,
production costs can be reduced in both countries by economies of scale, and everyone
involved in international trade can benefit.
However, economies of scale need not include all stages of production. They may
actually be important at the sub-process stage of production because production can be
considered as a series of sub-activities ranging from design to assembly. The company
can create economies of scale by concentrating on a few sub-activities such as design
and production of certain components or assembly. Other sub-activities then take place
elsewhere, e.g. abroad. And when it comes to explaining the location of these sub-
activities, companies often resort to the concept of comparative costs (as used by
traditional theorists): labour-intensive assembly takes place where labour is cheap, and
the design takes place where there is plenty of technological know-how.

INTERNATIONAL MARKETING DECISIONS

International Marketing presents a more complex task than domestic marketing because
of the uncontrollable international marketing environment and their heterogeneity.
Hence, though the basic marketing decisions to be made are similar in international and
domestic marketing, making international marketing decision is generally more
challenging.
In international marketing, a company has to make, broadly five strategic decisions.
1. International marketing decision: The first decision a company has to make, is
whether to take up international marketing or not. This decision is based on a serious
consideration of a number of important factors, such as the present and future overseas
opportunities, present and future domestic market opportunities, the resources of the
company in terms of skills, experience, production and marketing capabilities and
finance, company objectives etc.
2. Market Selection Decision: Once it has been decided to do international marketing,
the next important step is the selection of the most appropriate market. For this purpose,
a thorough study of potentials of the various overseas markets and their respective
marketing environment is essential. Company resources and objectives may not permit
a company to do business in all the overseas markets. Further, some markets are not
potentially good, and it may be suicidal to waste company resources in such markets. A
proper selection of the overseas markets therefore is very important.
3. Entry and Operating Decisions: Once the market selection decision has been made,
the next important task is to determine the appropriate mode of entering the foreign
market such as export, contract manufacturing, direct manufacturing plant etc. on the
basis of this decision, proper arrangements must be made to continue the activities of
marketing.
4. Marketing Mix Decision: As in the domestic marketing, the success highly depends
upon the applicability of proper Marketing Mix, in International marketing also; Marketing
Mix plays a major role. The elements of marketing mix – product, promotion, price and
physical distribution should be suitably designed so that they may be adapted to the
characteristics of the overseas market.

INTERNAL AND EXTERNAL INTERNATIONAL MKTG CONCEPT

The key difference between domestic and international marketing is the multi-
dimensionality and complexity of foreign country markets a country may operate in.
Knowledge and awareness of these complexity and implications for international
marketing is must.
SLEPT (Social, Legal, Economical, Political and Technological)◊The important
environmental analysis model

1. SOCIAL AND CULTURAL Influences

a. SOCIAL: Difference in social conditions, religion and culture determines whether the
customers are similar or dissimilar across the globe.
McDonald’s had to understand the same in India when they had to enter such huge
market with its burger. In 1995 / 6 India’s vegetarian market was 40%. These
vegetarians preferred that the burger should be made in a clean and separate kitchen.
Also their love for spicy food was required to be considered. Among the non-veg. eaters,
their disliking towards pork and beef among mean eater was very well known.
McDonald’s realize that they need to serve Indians more than just burger, a burger that
satisfies Indians taste.

b. CULTURE: Culture describes the kind of behaviour considered acceptable in society.

The prescriptive characteristic of culture simplifies a consumer’s decision-making
process by limiting product choices to those which are socially acceptable. The same
feature creates problems for those products, which are not in time with culture.
• Coca Cola had to withdraw its 2 liters bottle from Spain market as Spaniards were not
having refrigerator having larger compartments.
• Johnson’s floor wax was doomed to failure in Japan as it made the wooden floors very
slippery and Johnson failed to take into account the custom of not wearing shoes inside
the home.
• Coca Cola when introduced in china the name sounded like “KOOKE – KOULA” meant
thirsty mouth, full of candle wax. So they had to change the name to “KEE KOU KEELE”
which meant “joyful taste and happiness.”
• In Japan, White face is associated with death of mask.
• The size of refrigerators in USA is very big compared to Indian refrigerators, as women
there believe in storing vegetables and other eatable items, which can be consumed till
longer period of time.
Even the value and beliefs associated with color vary significantly between different
cultures. Blue considered as feminine and worm in Holland, is seen as masculine and
cold in Sweden. Green is a favorite color in Muslims, but in Malaysia, it is associated
with illness. White is associated with death and mourning in China, Korea and in some
traditions in India. Although, the same color expresses happiness and is color of
wedding dress of the bride in English country.
Such differences suggest that same marketing mix can not be used for all markets.

2. Legal Environment:
Legal systems vary both in content and interpretations. A successful marketer will modify
his marketing strategies in accordance with such variations. Laws affect the marketing
mix in terms of products, price, distribution and promotional activities quite dramatically.
For many firms such laws are burdensome regulations.
For e.g. in Germany environmental laws mean a firm is responsible for the retrieval and
disposal of packaging waste it creates and must produce packaging which is recyclable.
In Canada, if the information does not appear in both French and English, the goods
may be confiscated.
An international Marketer should learn about the advertising, packaging, and labeling
regulations in foreign markets.
India has been seen by many firms to be an attractive emerging market having many
legal difficulties, bureaucratic delays and lots of official procedures. Many MNCs have
found it difficult to break such hard structure. Foreign companies are often viewed with
suspicion. How ever, some firms have been innovative in overcoming difficulties.

3. ECONOMIC ENVIRONMENT:
The economic situation varies from country to country. There are variations in the levels
of income and living standards, interpersonal distribution of income, economic
organization, occupational structure and so on. These factors affect market conditions.
The level of development in a country and the nature of its economy will indicate the
type of products that may be marketed in it and the marketing strategy that may be
employed in it. In high income countries there is a good market for a large variety of
consumer goods. But in low-income countries where a large segment does not have
sufficient income even for their basic necessities, the situation is quite different.

4. POLITICAL ENVIRONMENT:
The political environment of international marketing includes any national or international
political factor that can affect the organization’s operations or its decision-making. The
tendencies of governments to change regulations can seriously affect an international
strategy providing both opportunities and threat. (1992’s liberalization policy by
Narsimha Rao Govt.) An unstable political climate can expose firms to many
commercial, economic and legal risks.
Political risk is defined as being: “A risk due to a sudden or gradual change in a local
political environment that is disadvantageous to foreign firms and markets.”

5. TECHNOLOGICAL ENVIRONMENT:
The Technological Environment is perhaps the most dramatic force now shaping our
destiny. An international marketer should very well keep in his mind the change taking
place in technology and thereby affecting the product.
New technologies create new markets and opportunities. However, every new
technology replaces an old technology. Xerography hurt carbon-paper industry,
computer hurt typewriter industry, and examples are so on. Any international marketer,
when ignored or forgot new technologies, their business has declined. Thus, the
marketer should watch the technological environment closely. Companies that do not
keep up with technological changes, soon find their products outdated.
The United States leads the world in research and development spending. Scientists
today are researching a wide range of promising new products and services ranging
from solar energy, electric car, and cancer cures. All these researches give a marketer
an opportunity to set his products as per the current desired standard. The challenge in
each case is not only technical but also commercial that means manufacture a product
that can be afforded by mass crowd.

MULTINATIONAL CORPORATIONS (MNCs)

A Multinational Corporation is a business unit which operates simultaneously in different

part of world either by manufacturing or marketing or both by keeping its headquarter
elsewhere as a strategic nerve centre.
Although MNC took birth in the early 1860s, it was after the Second World War that the
Multinationals have grown rapidly.
Generally, an MNC meets five criteria.
1. It operates in many countries at different levels of economic development.
2. Its local subsidiaries are managed by nationals.
3. It maintains complete industrial organizations including R & D and manufacturing
facilities, in several countries.
4. It has direct investment base in different countries.
5. It derives from 20 % to 50 % or more of its net profits from foreign operations.

CLASSIFICATIONS OF MNCS
Pyramid Model Umbrella Model Inter/ Conglomerate
MNC MNC MNC

a. Pyramid Model MNC: These organizations have strong Headquarters and weak
subsidiaries. Head Quarter is rude, arrogant and gives no powers to its subsidiaries. The
decision making capacity is also not centralized. For E.g. Siemens, Johnson & Johnson,
IBM, McDonalds, Marks & Spencer etc. This model of MNC is very power conscious.
b. Umbrella Model MNC: This model is very good among others. There is a relationship
of mutual help between the Head quarter and the subsidiary. Ideas and money flow
freely.
Making money and using power is not the primary motto of the organizations. Head
quarters give full freedom to the subsidiaries. Both HQ and subsidiaries are very strong.
E.g. P & G, Price water house, KPMG etc.
Problems: These organizations are very image conscious. If anything damages their
image, strong actions are taken for that.
c. Inter conglomerate Model MNC:
For such organizations, money is main aim.¬
Investment and Rate of Investments are very high.¬
No loyalty towards any subsidiary countries. E.g. HLL, Unilever etc.¬
Companies enter any segment and adapt the approach of Multi segments, Multi
markets, Multi products and Multi countries.¬
Such companies try to acquire monopoly and take over its competitors there by
reducing competition. E.g. Brooke Bond and Lipton are taken over by HLL.¬

How MNCs expand their business:

1. International Licensing: MNC permits the domestic company to use its trademark,
brand name or technical know-how for manufacturing and marketing purpose. The
license is given against payment of fee which acts as source of income to the MNCs.
E.g. Brand 555 is the licensed user of British American Tobacco company. In India it is
manufactured by ITC (the licensee). It has the market of 600 cr. And company pays 5%
of the total sales to BAT (licensor) as license fees. The BAT does not provide any raw
material but just the brand name is given. This company took 45 years to establish. The
licensor generally keeps supervisor in the plant of licensee.
2. International Franchising: the licensor not only provides the brand name but also the
raw material. E.g. McDonalds. (Syrup – pharmaceutical companies, printed circuit
boards to electronic items, essence – cold drink companies (Pepsi gives its essence to
Punjab Agro).
3. Turnkey projects: MNCs undertake to complete the whole project and handover the
same when ready to the host country. Such project may be supplied on tender basis.
Such projects provide new opportunity to expand the business activities.

4. Joint Ventures: “Like marriage, binding between home country representative and
host country representative, to set up a project either in home country or host or 3rd
country with a commitment of joint risk taking and joint profit sharing.”
E.g. Modi Luft – Modi and Lufthansa
Successful JVs: Indo Gulf fertilizer – Birla group, Taj group of hotels with Russian
government.
5. Collaborations: It deals with any one part of management function, either finance or
technology collaboration. (it is not possible to have collaboration in consumer products
and FMCG. It happens generally with medicines, technological products.)
E.g. Bajaj – Kawasaki, Hero Honda ,Kinetic Honda
Collaborations are time bound and not permanent.

Merits of Multinational Corporations:

1. Change and progress: MNCs are said to be the agents of change and progress, on
world wide.
2. Enables maximum use of resources.
3. To the host countries, the plants, equipments, and technical know how necessary for
its operations which is not available otherwise is made available thru MNCs.
4. MNCs create employment opportunities in the host countries. Local recruitment of
Junior Managers creates a pool of managerial talent in the host country.
5. Goods are made available at cheaper price due to economies of scale.
6. MNCs contribute enormously to technology transfer between rich and poor countries.
7. MNCs stimulate domestic employment.
8. Helps removal of monopoly and improve the quality of domestic made products.
9. Promotes exports and reduce imports by raising domestic productions.
10. Provides benefits of R & D.

DEMERITS OF MNCs
(Students please elaborate the following points)
1. Provides out-dated technology.
2. MNCs exploit local labour by paying relatively lesser rates.
3. MNCs involvement often results in the lack of development of local research and
development.
4. Use of capital-intensive technology reduces jobs in local country.
5. MNCs ruin domestic companies.
6. Adverse effect on life style / culture in host countries.
7. Charge very high fees.
Some of the Indian MNCs: IOC, Ranbaxy, Dr. Reddy, Wipro, Infosys, ONGC, Hindustan
Petroleum, and Bharat Petroleum.

TRADE BLOC
Along with trade barriers, there are trade blocs among the countries of the world. These
blocs offer special concessions to members of the group but impose restrictions on the
imports from the non-member countries. As a result, these trade blocs are harmful to the
growth of free international trade. Efforts should be made to remove such trade blocs so
as to have free trade among the nations of the world. Unfortunately, efforts in this
direction by WTO are not effective.

Trade blocs are groups of countries that have established special preferential
arrangements governing trade between members. Although in some cases the
preferences-such as lower tariff duties or exemptions from quantitative restrictions the
general purpose of such arrangements is to encourage exports by bloc members to one
another-sometimes called intra-trade.
OBJECTIVES OF TRADE BLOCS (REASONS OF FORMING T.B.)
To remove or at least to reduce trade barriers among the member-countries of the
group.¬
To impose common external tariff and non-tariff barriers on non-member countries.¬
To bring integration of economies of member countries through free transfer of labour,
capital and other factor of production.¬
To maintain cordial economic, political, cultural and social relations among the members
of the group.¬
To provide assistance to member countries of the group in all possible ways in solving
their current economic problems.¬

TYPES OF ECONOMIC INTEGRATION / TRADE BLOCS

FREE TRADE AREA: In Free Trade Area all barriers to the trade of goods and services
among member countries are removed. In an ideal free trade area, no discriminatory
tariffs, quotas, subsidies o administrative impediments would be allowed to distort trade
between member countries. Each country however, is allowed to determine its own trade
policies with regard to non-members. For e.g. there is a free trade agreement known as
NAFTA (The North American Free Trade Agreement) between three counties; USA,
Canada and Mexico.¬
Custom Union: A Custom Union represents the next stage in economic cooperation.
Member countries here not only remove trade restrictions for members but also adopt a
uniform commercial policy (Common external tariff) against non-members. A customs
union brings more economic integration as compared to free trade area. Custom Union
exists between France and Monaco, Italy and San Marino, to name some examples.¬
Common Market: A Common Market is a step ahead of custom union. It eliminates all
tariffs and other restrictions on internal trade, adopts a set of common external tariffs
and removes all restrictions on free flow of capital and labor among member nations.
Thus, a common market is a common marketplace for goods as well as for services.
Unlike a custom Union, a common Market allows free movement of factors necessary to
production. Latin America possesses three common markets: The Central American
Common Market (CACM), the Andean Common Market, and the Southern Cone
Common Market.¬
Economic Union: It is a step ahead to common market. It has all features of common
market and also uniformity in respect of monetary and fiscal policy of member countries.
Member countries are expected to pursue common fiscal and monetary policies.¬

DETAILS OF IMPORTANT TRADE BLOCS

1. Association of South East Asian Nations

The Association of Southeast Asian Nations or ASEAN was established on 8 August
1967 in Bangkok by the five original Member Countries, namely, Indonesia, Malaysia,
Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984,
Vietnam on 28 July 1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30
April 1999.
OBJECTIVES
The ASEAN Declaration states that the aims and purposes of the Association are:
(i) To accelerate the economic growth, social progress and cultural development in the
region through joint endeavors.
(ii) To promote regional peace and stability through abiding respect for justice and the
rule of law in the relationship among countries in the region and adherence to the
principles of the United Nations Charter.
(iii) To maintain close cooperation with the existing international and regional
organizations with similar aims.
WORKING OF ASEAN
The member countries of ASEAN have Preferential Trading Arrangements (PTA), which
reduces tariffs on products traded among member countries. In 1992, ASEAN developed
a Common Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for
manufactured and processed products.
The members have also established a series of co-operative efforts to encourage joint
participation in industrial, agricultural and technical development projects and to increase
foreign investments in their economies. These efforts include an ASEAN finance
corporation, the ASEAN Industrial Joint Ventures Programme (AJIV) etc. ASEAN nations
have introduced some programmes for greater diversification in their economies.
India and ASEAN
India is interested in maintaining close economic relations with the members of ASEAN,
as these countries are closer to India. The ASEAN countries are offering co-operation to
India in the field of trade, investment, science and technology and training of personnel.
Also, India’s trade with ASEAN countries is satisfactory in recent years.

2. LAFTA (LATIN AMERICAN FREE TRADE ASSOCIATION)

LAFTA was established in February 1960 under the Treaty of Montevideo. The member
countries of the association are Argentina, Brazil, Columbia, Chile, Ecuador, Mexico,
Paraguay, Peru, Uruguay, Venezuela and Bolivia.
The main objective of the association is to build up a common market for South
American countries and thereby to bring about a gradual reduction in trade barriers
among member countries. LAFTA as a trade bloc wants to stimulate intra-Latin
American trade and also to increase Latin American’s declining share in world trade.
However, LAFTA could not emerge as a powerful economic union due to non-
cooperation among the member countries. The member countries have been competing
among themselves for promoting their exports. Political instability among the member
countries is another cause responsible for making this union weak and ineffective. Due
to lack of understanding and mutual trust, the integration among the member countries is
not effective.
In recent years, the Latin American debt crisis has eroded some of the industrial
progress that the countries had made and has forced them to rely on primary product
exports to patch up their debt. In 1989, Andean countries made a renewed effort to
revive regional co-operation with new measures. LAFTA was replaced (renamed) by the
Latin American Integration Association (LAIA) with the signing of the Montevideo Treaty
of 1980. The achievements of LAIA are also moderate.
An 'advising bank' is a correspondent of a bank which issues a letter of credit, and, on
behalf of the issuing bank, the advising bank notifies the beneficiary of the terms of the
credit, without engagement on its part to pay or guarantee the credit.

3. EUROPEAN UNION:
As a major center of power in the global economy, the European Union (EU) is second
only to the United States. In 2002, GDP of EU was US$ 8531 bn. This constituted 26.6
% of the global GDP as compared to 32.5 % for the US and 12.2 % for Japan. Today
after a number of Eastern European Countries joined the EU, it is a bloc of 25 counties
with a population of over 450 mn. The EU also includes Germany, UK, France, Italy and
Spain, which are respectively 3rd, 4th, 5th, 7th, and 9th largest economies in the world.
Thus EU presents an enormous export and investor market that is both mature and
sophisticated.
In 2004, EU accounted for 35.1 % of global merchandise exports as compared to 11.1 %
by the US, valued at US$ 3,300 bn.
About the EU: The EU is an organization of European Countries dedicated to increasing
economic integration and strengthening cooperation among its members. The EU has its
headquarters in Brussels, Belgium. The union consists of 25 members namely, Belgium,
Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal,
UK, Spain, Austria, Finland, Sweden, Czech Republic, Hungary, Latvia, Malta, Poland,
Slovakia, Cyprus, Estonia, Lithuania and Slovenia.
Objectives of the EU: Its principal goal is to promote and expand cooperation among
members states in economics, trade, social issues, foreign policies, security, defence,
and judicial matters. Another major goal of the EU is to implement the Economic and
Monetary Union, which introduced a single currency, the Euro for the EU members.
The Single Market and Common Commercial Policy: The single market refers to the
creation of a fully integrated market within the EU, which allows for free movement of
goods, services and factors of production. The EU, in conjunction with Member States,
has a number of policies designed to assist the functioning of the market. Some of the
policies are given below:
Competition Policy: The main competition lied in energy and transport sector. The union
designed this strategy to prevent price fixing, collusion (secret agreement), and abuse of
monopoly.
Free movement of goods: A custom union covering all trade in goods was established
and a common customs tariff was adopted with respect to countries outside the union.
Services: Any member nation has a right to provide services in other Member States.
Free movement of persons: Any citizen of EU member state can live work in any other
EU member state
Capital: There are no restrictions on the movement of capital and on payments with the
EU and between member states and third countries.

Trade between the European Union and India

India was one of the first Asian nations to accord recognition to the European
Community in 1962. The EU is India’s largest partner and biggest source community in
1962. The EU is India’s largest trading partner and biggest source of FDI. It is a major
contributor of developmental aid and an important source of technology. Over the years,
EU – India trade has grown from 4.4 bn to 28.4 bn US$.

Top items of trade between India and EU

India’s exports to EU % India’s Imports from EU %
Textile and clothing 35 Gemstones and jewellery 31
Leather and leather products 25 Power generating equipment 28
Gemstones and jewellery 12 Chemical products 15
Agriculture products 10 Office machinery 10
Chemical products 9 Transport equipment 6
India is EU’s 17th largest supplier and 20th largest destination for exports.¬
India’s strength lies in its traditional exports like textiles, agriculture and marine
products, gems and jewellery, leather and electronics products.¬
 Tariff and non-tariffs have been reduced, but compared to International standards they
are still high.¬
Under the Bilateral trade between India and EU, it accounts for 26% of India’s exports
and 25% of its imports.¬
Under the same trade there is an agreement on sugarcane. The EU has undertaken to
buy and import a specific quantity of sugarcane, raw or white, from India at guaranteed
price, the prices are fixed annually.¬

3. THEORY OF INTERNATIONAL PRODUCT LIFE CYCLE (IPLC)

The International Product Life Cycle (IPLC) theory explains trade in a context of
comparative advantage, describes the diffusion process of an innovation across national
boundaries.
The life cycle begins when a developed country, having a new product to satisfy
consumer needs, wants to exploit its technological breakthrough by selling abroad.
Other advanced nations soon start up their own production facilities and before long
LDCs do the same. Efficiency shifts from developed countries to developing nations.
Finally, advanced nations, no longer cost-effective, import products from their former
customers. The advanced nation becomes a victim of its own creation.

Stages and characteristics

There are 5 distinct stages in the IPLC stage 0 through 4. The given below table shows
the major characteristics of the IPLC stages, with the US as the developer of the
innovation in question. The next exhibit shows three life-cycle curves for the same
innovation: One for the initiating country, one for the other advanced countries and one
for LDCs. For each curve, net export results when the curve is above the horizontal line;
if under the horizontal line, net import results for that particular country. As the innovation
moves through time, directions of all three curves change. Time is relative, as the time
needed for a cycle to be completed varies from one kind of product to another.

IPLC stages and characteristics for the initiating country

STAGE IMP / EXP TARGET MARKET COMPETITORS PRDTN COST
(1) Local Innovation None USA Few: Local Firms Initially High
(2) Overseas innovation Increasing export USA & Advanced Nations Few: Local Firms
Decline owing to economies of scale
(3) Maturity Stable export Advanced Nations & LDCs Advanced Nations Stable
(4) Worldwide imitation Decline export LDCs Advanced nations Increase owing to lower
eco. Of scale.
(5) Reversal Increasing import USA Advanced nations & LDCs Increase owing to
comparative disadvantage

Stage 1 – Local Innovation: Stage 1, on the left of the vertical importing / exporting axis,
represents a regular and highly familiar product life cycle in operation within its original
market. Innovations are most likely to occur in highly developed countries because
consumers in such countries are affluent and have relatively unlimited want. From the
supply side, firms in advanced nations have both the technological know-how and
abundant capital to develop new products.
Stage 2 – Overseas Innovation: As soon as the new product is well developed, its
original market well cultivated, and local demands adequately supplied, the innovating
firm will look to overseas markets in order to expand its sales and profit. Thus, this stage
is known as a “Pioneering” or “International Introduction” stage. The technological gap is
first noticed in other advanced nations because of their similar needs and high-income
levels.
Competition in this stage comes from usually US Firms, since firms in other countries
may not have much knowledge about innovation. Production cost tends to be decreasing
at this stage because by this time the innovating firm will normally have improved the
production process. Supported by overseas sales, aggregate production costs tend to
decline further because of increased economies of scales. A low introductory price is not
necessary because of the technological breakthrough; a low price is not desirable
because of heavy and costly marketing effort needed to educate consumers in other
countries about the new products.
Stage 3 – Maturity: Growing demand in advanced nations provide a movement for firms
there to commit themselves to starting local production, often with the help of their
government’s protective measures to preserve infant industries. Thus, these firms can
survive and succeed in spite of relative inefficiency.
Development in competition does not mean that the initiating country’s export level will
immediately suffer. The innovating firm’s sales and export volumes are kept stable
because LDCs are now beginning to generate a need for the product. Introduction of the
product in LDCs help offset any reduction in export sales to advanced countries.
Stage 4 – Worldwide imitation: This stage means tough times for the innovating nation
because of its continuous decline in exports. There is no more new demand anywhere to
cultivate. The decline will certainly affect the US innovating firm’s economies of scale,
and its production cost thus begin to rise again. Consequently, firms in other advanced
nations use their lower prices to gain more consumer acceptance abroad at the
expenses of the US firm. As the product becomes more and more widely aware,
imitation picks up at a faster pace. Towards the end of this stage, US export declines to
nothing and any US production still remaining is basically for local consumption.
Stage 5 – Reversal: The major characteristics of this stage are product standardization
and comparative disadvantage. The innovating country’s comparative advantage has
disappeared and what is left is comparative disadvantage. This disadvantage is brought
about because the product is no more capital-intensive or technology-intensive but
instead has become labor-intensive for LDCs. LDCs now can establish sufficient
productive facilities to satisfy their own domestic needs as well as to produce for biggest
market in the world. For e.g. the black and white televisions are now no more
manufactured in USA as many Asian firms can produce them much less expensively
than any US firms.

VALIDITY OF THE IPLC

Several products have conformed to the characteristics described by the IPLC. For e.g.
at one time the US used to be an exporter of typewriters, cash registers, B/W
Televisions etc. but with passage of time, these simple machines are now being
imported, while US firms exports only the sophisticated, electronic version of such
machines.
Marketing Strategies:
For industries suffering the imitation stage or maturity stage things are likely to get worse
rather than better. Companies can understand the implications of the IPLC and adjust
marketing strategies accordingly.

I. Product Policy:
I. a. Automation: The IPLC emphasizes the importance of cost advantage. If for
innovating firms it is difficult to match labor costs in low-wage nations (it happens
generally with countries like US where labor cost is too high) the firms can cut labor
costs through automation and robotics. For e.g. IBM has converted its Kentucky plant
into one of the most automated plants thereby cutting labor costs.
I. b. Outsourcing: Another way to cut the cost of product is to outsource the product.
Outsourcing is the practice of buying the parts or whole product from other
manufacturers while allowing a buyer to maintain its own brand name.
Another modified version of outsourcing is having various components produced under
contract in different countries. That way, a firm takes advantage of the most abundant
factor of production in each country before assembling components into final products
for worldwide distribution.
IBM’s PC system consists of components made in low-cost countries-monochrome
monitor in South Korea; Floppy disk drives in Singapore, and printer, keyboard, power
supply in Japan. The final assembly takes place in USA.
I. c. manufacturing in other country: the innovator may use local manufacturing in other
countries as an entry strategy. The company not only can minimize transportation costs
but can also slow down potential local competition.
I. d. New Technology: Once in the maturity stage, the innovator’s comparative
advantage is gone; the firm should switch from producing simple versions to producing
new technologies in order to remove itself from cutthroat competition.

II. Pricing Policy:

Stage – 1: At this stage, firm can afford to behave as a monopolist, charging a premium
price for its innovation. But this price must be adjusted downward in the second and third
stage of IPLC to discourage potential new comers and to maintain market share. For
e.g. IBM was slow in reducing prices for its PC models. They believed that the IBM PC
was too complex for Asian imitators. This proved to be a costly error as the basic PC
hardly changed for several years. As a result other Asian companies came out with their
own brands.
Stage – 4: In the last stage, it is not practical for the innovating firm to maintain low price
due to competitor’s cost advantage. But the firm’s above-the-market price is feasible
only if it is accompanied by top-quality product.

III Promotion Policy: Promotion and pricing are highly related in IPLC. In the starting, the
marketer must plan for a non-priced promotional strategy such as providing technical
support, or offering after-sales-service or giving warranty for a particular period after the
product is offered. The concentration should be towards meeting consumer’s demand.
Positioning is another important point at the beginning. The marketer should try to
position the product as a high-quality product having good reputation. One thing the
company must never do is to allow its product to become a commodity item with prices
as the only buying motive as such products can easily be duplicated by other firms.
Through out four stages product differentiation, not price is most important for protecting
a company from the crowded, low-profit market segment.

IV Place: A strong dealer network can provide the innovating firm with a good defensive
strategy. Because of its monopoly situation at the beginning, the firm is in a good
position to be able to select only the most qualified agents and the network should be
expanded further as the product becomes more diffused. GM’s old policy of limiting its
dealer from carrying several GM brands inadvertently encouraged those dealers to start
carrying imports, there by creating alternative channel for GM which threatened the
existing channel.
Once a product is in the final stage of its life cycle, the innovating firm should strive to
become a specialist not a generalist, by concentrating its efforts in carefully selected
market segments, where it can distinguish itself from foreign competitors. To achieve
distinction in product, the innovating firm can add product features or offer more service.

PORTERS NATIONAL DIAMOND FOR COMPETATIVE ADVANTAGE

According to Porter, as a rule competitive advantage of nations is the outcome of 4
interlinked advanced factors and activities in and between companies in these clusters.
These can be influenced in a pro-active way by government.

Factor Conditions
The situation in a country regarding production factors, like skilled labor, infrastructure,
etc., which are relevant for competition in particular industries. These factors can be
grouped into human resources (qualification level, cost of labor, commitment etc.),
material resources (natural resources, vegetation, space etc.), knowledge resources,
capital resources, and infrastructure. They also include factors like quality of research on
universities, deregulation of labor markets, or liquidity of national stock markets. These
national factors often provide initial advantages, which are subsequently built upon.
Each country has its own particular set of factor conditions; hence, in each country will
develop those industries for which the particular set of factor conditions is optimal. ¬
This explains the existence of so-called lowcost- countries (low costs of labor),
agricultural countries (large countries with fertile soil), or the start-up culture in the United
States (well developed venture capital market). Porter points out that these factors are
not necessarily nature-made or inherited. They may develop and change. Political
initiatives, technological progress or socio-cultural changes, for instance, may shape
national factor conditions. A good example is the discussion on the ethics of genetic
engineering and cloning that will influence knowledge capital in this field in North
America and Europe.

Home Demand Conditions

Describes the state of home demand for products and services produced in a country.
Home demand conditions influence the shaping of particular factor conditions. They
have impact on the pace and direction of innovation and product development.
According to Porter, home demand is determined by three major characteristics: their
mixture (the mix of customers needs and wants), their scope and growth rate, and the
mechanisms that transmit domestic preferences to foreign markets. Porter states that a
country can achieve national advantages in an industry or market segment, if home
demand provides clearer and earlier signals of demand trends to domestic suppliers
than to foreign competitors. Normally, ¬
home markets have a much higher influence on an organization's ability to recognize
customers’ needs than foreign markets do.

Related and Supporting Industries

The existence or non-existence of internationally competitive supplying industries and
supporting industries. One internationally successful industry may lead to advantages in
other related or supporting industries. Competitive supplying industries will reinforce
innovation and internationalization in industries at later stages in the value system.
Besides suppliers, related industries are of importance. These are industries that can
use and coordinate particular activities in the value chain together, or that are concerned
with complementary products (e.g. hardware and software). A typical example is the
shoe and leather industry in Italy. Italy is not only successful with shoes and leather, but
with related products and services such as leather working machinery, design, etc. ¬

Firm Strategy, Structure, and Rivalry

The conditions in a country that determine how companies are established, are
organized and are managed, and that determine the characteristics of domestic
competition Here, cultural aspects play an important role. In different nations, factors like
management structures, working morale, or interactions between companies are shaped
differently. This will provide advantages and disadvantages for particular industries.
Typical corporate objectives in relation to patterns of commitment among workforce
are ¬
of special importance. They are heavily influenced by structures of ownership and
control. Family-business based industries that are dominated by owner-managers will
behave differently than publicly quoted companies. Porter argues that domestic rivalry
and the search for competitive advantage within a nation can help provide organizations
with bases for achieving such advantage on a more global scale.

The role of government in the Diamond Model of Porter

The role of government in the Diamond Model of Porter is to act as a catalyst and
challenger; it is to encourage - or even push - companies to raise their aspirations and
move to higher levels of competitive performance. They must encourage companies to
raise their performance, to stimulate early demand for advanced products, to focus on
specialized factor creation and to stimulate local rivalry by limiting direct cooperation and
enforcing anti-trust regulations.

Diffusion of innovation

This extension of the product life cycle was developed by Everett M. Rogers in 1962 and
simply looks who adopts products at the different stages of the life cycle.
Rogers identified five types of purchasers as the product moves through its life cycle
stage. He suggested:

1. Innovator who make up 2.5% of all purchases of the product, purchase the product at
the beginning of the life cycle. They are not afraid of trying new products that suit their
lifestyle and will also pay a premium for that benefit.
2. Early Adopters make up 13.5% of purchases, they are usually opinion leaders and
naturally adopt products after the innovators. This group of purchasers are crucial
because adoption by them means the product becomes acceptable, spurring on later
purchasers.
3. Early Majority make up 34% of purchases and have been spurred on by the early
adopters. They wait to see if the product will be adopted by society and will purchase
only when this has happened. They early majority usually have some status in society.
4. Late Majority make up another 34% of sales and usually purchase the product at the
late stages of majority within the life cycle.
5. Laggards make up 16% of total sales and usually purchase the product near the end
of its life. They are the ‘wait and see’ group. They wait to see if the product will get
cheaper. Usually when they purchase the product a new version is already on the
market. Some may call Laggards, bargain hunters!

CULTURAL FACTORS

1. HOFSTEDES THEORY
According to Geert Hofstede, there is no such thing as a universal management method
or management theory, valid across the whole world. Even the word 'management' has
different origins and meanings in countries throughout the world. Management is not a
phenomenon that can be isolated from other processes taking place in society. It
interacts with what happens in the family, at school, in politics, and government. It is
obviously also related to religion and to beliefs about science.

The five Cultural Dimensions of Hofstede

The cultural dimensions model of Geert Hofstede is a framework that describes five
sorts (dimensions) of differences / value perspectives between national cultures:

Power distance. The degree of inequality among people which the population of a
country considers as normal.
Individualism versus collectivism. The extent to which people feel they are supposed to
take care for, or to be cared for by themselves, their families or organizations they
belong to.
Masculinity versus femininity. The extent to which a culture is conducive to dominance,
assertiveness and acquisition of things. Versus a culture which is more conducive to
people, feelings and the quality of life.
Uncertainty avoidance. The degree to which people in a country prefer structured over
unstructured situations.
Long-term versus short-term orientation. Long-term: values oriented towards the future,
like saving and persistence. Short-term: values oriented towards the past and present,
like respect for tradition and fulfilling social obligations.

To understand management in a country, one should have both knowledge and empathy
with the entire local scene. However, the scores of the unique statistical survey that
Hofstede carried out should make everybody aware that people in other countries may
think, feel, and act very differently from yourself, even when confronted with basic
problems of society.

HIGH AND LOW CONTEXT CULTURE

The general terms "high context" and "low context" (popularized by Edward Hall) are
used to describe broad-brush cultural differences between societies.

High context refers to societies or groups where people have close connections over a
long period of time. Many aspects of cultural behavior are not made explicit because
most members know what to do and what to think from years of interaction with each
other. Your family is probably an example of a high context environment.
Low context refers to societies where people tend to have many connections but of
shorter duration or for some specific reason. In these societies, cultural behavior and
beliefs may need to be spelled out explicitly so that those coming into the cultural
environment know how to behave.

High Context
• Less verbally explicit communication, less written/formal information
• More internalized understandings of what is communicated
• Multiple cross-cutting ties and intersections with others
• Long term relationships
• Strong boundaries- who is accepted as belonging vs who is considered an "outsider"
• Knowledge is situational, relational.
• Decisions and activities focus around personal face-to-face relationships, often around
a central person who has authority.
Examples: Small religious congregations, a party with friends, family gatherings,
expensive gourmet restaurants and neighborhood restaurants with a regular clientele,
undergraduate on-campus friendships, regular pick-up games, hosting a friend in your
home overnight.

Low Context
• Rule oriented, people play by external rules
• More knowledge is codified, public, external, and accessible.
• Sequencing, separation--of time, of space, of activities, of relationships
• More interpersonal connections of shorter duration
• Knowledge is more often transferable
• Task-centered. Decisions and activities focus around what needs to be done, division
of responsibilities.
Examples: large US airports, a chain supermarket, a cafeteria, a convenience store,
sports where rules are clearly laid out, a motel.

CULTURAL DIMENSIONS:
The major elements of culture are material culture, language, aesthetics, education,
religion, attitudes and values and social organisation.

Material culture
Material culture refers to tools, artifacts and technology. Before marketing in a foreign
culture it is important to assess the material culture like transportation, power,
communications and so on. Input-output tables may be useful in assessing this. All
aspects of marketing are affected by material culture like sources of power for products,
media availability and distribution. For example, refrigerated transport does not exist in
many African countries. Material culture introductions into a country may bring about
cultural changes which may or may not be desirable.
Language
Language reflects the nature and values of society. There may be many sub-cultural
languages like dialects which may have to be accounted for. Some countries have two
or three languages. In Zimbabwe there are three languages - English, Shona and
Ndebele with numerous dialects. In Nigeria, some linguistic groups have engaged in
hostile activities. Language can cause communication problems - especially in the use of
media or written material. It is best to learn the language or engage some
one who understands it well.
Aesthetics
Aesthetics refer to the ideas in a culture concerning beauty and good taste as expressed
in the arts -music, art, drama and dancing and the particular appreciation of colour and
form. African music is different in form to Western music. Aesthetic differences affect
design, colours, packaging, brand names and media messages. For example, unless
explained, the brand name FAVCO would mean nothing to Western importers, in
Zimbabwe most people would instantly recognise FAVCO as the brand of horticultural
produce.
Education
Education refers to the transmission of skills, ideas and attitudes as well as training in
particular disciplines. Education can transmit cultural ideas or be used for change, for
example the local university can build up an economy's performance.

The UN agency UNESCO gathers data on education information. For example it shows
in Ethiopia only 12% of the viable age group enrol at secondary school, but the figure is
97% in the USA.
Education levels, or lack of it, affect marketers in a number of ways:
• • advertising programmes and labelling
• • girls and women excluded from formal education (literacy rates)
• • conducting market research
• • complex products with instructions
• • relations with distributors and,
• • support sources - finance, advancing agencies etc.

Religion
Religion provides the best insight into a society's behaviour and helps answer the
question why people behave rather than how they behave.
Religion can affect marketing in a number of ways:
• • religious holidays - Ramadan cannot get access to consumers as shops are closed.
• • consumption patterns - fish for Catholics on Friday
• • economic role of women - Islam
• • caste systems - difficulty in getting to different costs for segmentation/niche marketing
• • joint and extended families - Hinduism and organizational structures;
• • institution of the church - Iran and its effect on advertising, "Western" images
• • market segments - Maylasia - Malay, Chinese and Indian cultures making market
segmentation
• • ensitivity is needed to be alert to religious differences.

Attitudes and values

Values often have a religious foundation, and attitudes relate to economic activities. It is
essential to ascertain attitudes towards marketing activities which lead to wealth or
material gain, for example, in Buddhist society these may not be relevant.
Also "change" may not be needed, or even wanted, and it may be better to relate
products to traditional values rather than just new ones. Many African societies are risk
averse, therefore, entrepreneurialism may not always be relevant. Attitudes are always
precursors of human behaviour and so it is essential that research is done carefully on
these.

Social organisation
Refers to the way people relate to each other, for example, extended families, units,
kinship. In some countries kinship may be a tribe and so segmentation may have to be
based on this. Other forms of groups may be religious or political, age, caste and so on.
All these groups may affect the marketer in his planning.
There are other aspects of culture, but the above covers the main ingredients. In one
form or another these have to be taken account of when marketing internationally.
STRATEGIES TO ENTER GLOBAL MARKETS
There are a variety of ways in which organisations can enter foreign markets.

Exporting
Exporting is the most traditional and well established form of operating in foreign
markets. Exporting can be defined as the marketing of goods produced in one country
into another.

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 has to be weighed against the advantages. For example, in the
exporting of African horticultural products, the agents and Dutch flower auctions are in a
position to dictate to producers.
Besides exporting, other market entry strategies include licensing, joint ventures,
contract manufacture, ownership and participation in export processing zones or free
trade zones.

Licensing: Licensing is defined as "the method of foreign operation whereby a firm in one
country agrees to permit a company in another country to use the manufacturing,
processing, trademark, know-how or some other skill provided by the licensor".
It is quite similar to the "franchise" operation. Coca Cola is an excellent example of
licensing. In Zimbabwe, United Bottlers have the licence to make Coke.
Licensing involves little expense and involvement. The only cost is signing the
agreement and policing its implementation.

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
• not tied up in foreign operation and
• Options to buy into partner exist or provision to take royalties in stock.

The disadvantages are:

• • 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 licence 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 be done through joint ventures with the licensee.

Joint ventures
Joint ventures can be defined as "an enterprise in which two or more investors share
ownership and control over property rights and operation".
Joint ventures are a more extensive form of participation than either exporting or
licensing. In Zimbabwe, Olivine industries has a joint venture agreement with HJ Heinz
in food processing.
Joint ventures give the following advantages:
• • Sharing of risk and ability to combine the local in-depth knowledge with a foreign
partner with know-how in 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 and
• • 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 can be overcome.

Ownership: The most extensive form of participation is 100% ownership and this
involves the greatest commitment in capital and managerial effort. The ability to
communicate and control 100% may outweigh any of the disadvantages of joint ventures
and licensing. However, as mentioned earlier, repatriation of earnings and capital has to
be carefully monitored. The more unstable the environment the less likely is the
ownership pathway an option.

Pricing products
Three basic factors determine the boundaries of the pricing decision - the price floor, or
minimum price, bounded by product cost, the price ceiling or maximum price, bounded
by competition and the market and the optimum price, a function of demand and the cost
of supplying the product. In addition, in price setting cognisance must be, taken of
government tax policies, resale prices, dumping problems, transportation costs,
middlemen and so on. Whilst many agricultural products are at the mercy of the market
(price takers) others are not. These include high value added products like ostrich,
crocodile products and hardwoods, where demand outstrips supply at present.

Transfer pricing
Transfer pricing is more appropriate to those organisations with decentralised profit
centres. Transfer pricing is used to motivate profit centre managers, provide divisional
flexibility and also further corporate profit goals. Across national boundaries the system
gets complicated by taxes, joint ventures, attitudes of governments and so on. There are
four basic approaches to transfer pricing.
• • Transfer at cost: few practise this, which recognises foreign affiliates contribute to
profitability by operating domestic scale economies. Prices may be unrealistic so this
method is seldom used. Otherwise it is basically used for increasing corporate
profitability.
• • Transfer at direct cost plus overheads and margin. Similar to that in transfer at cost.
Profits are show at every stage.
• • Transfer at a price derived from end market prices: very useful strategy in which
market based transfer prices and foreign sourcing are used as devices to enter markets
too small for supporting local manufacturers. This gives a valuable foothold. Prices are
required to be competitive in the international market.
• • Transfer at an "arm's length": this is the price that would have been reached by
unrelated parties in a similar transaction. The problem is identifying a point "arm's
length" price for all products other than commodities. Pricing at "arm's length" for
differentiated products results not in a specific price but prices, which fall in a
predeterminable range.

Global pricing
There are three possible global pricing policies - extension (ethnocentric), adaptation
(polycentric) and invention (geocentric).
Extension: The same global price. A very simple method but does not respond to market
sensitivity.
Adaptation : Different prices in different markets. The only control is setting transfer
prices within the corporate system. It prevents problems of arbitrage when the disparities
in local market prices exceed the transportation and duty costs separating markets.
Innovation : A mix of a) and b). This takes cognisance of any unique market factor (s)
like costs, competition, income levels and local marketing strategy. In addition it
recognises the fact that headquarters price coordination is necessary in dealing with
international accounts and arbitrage and it systematically seeks to embrace national
experience.

Pricing Strategies:

Skimming Price strategy: Skimming price strategy is strategy in which the manufacturer
charges a very high price in the initial stage of the PLC from the consumers. The
exporter has also to incur very high promotional expenses since the product the newly
introduced in the market. In this strategy, the exporter keeps his profit margin very high.
This type of strategy is used in case of fashionable and novelty items, perishable items
and consumer durables which are introduced for the first time in the market. This type of
strategy is particularly useful if the exporter enters in the international market for a short
term and his main motive is profit maximization. It is not possible for any exporter to
follow this export pricing strategy for a long time. It is used to match the demand and
supply of early adopters and reinforce customers perception of high value products.
Penetration Price strategy: In this type of pricing strategy, the exporter charges a lower
price in the initial stages since the main objective of the exporter is to capture a large
market share and create brand loyalty among the consumers. In the later stages, the
exporter raises the prices of the product and recovers the losses suffered in the initial
period. This pricing strategy can be followed in case of products where the exporter is
assured of large market and continuous sale. It is used by organizations who have non
differentiated products or have large marketing systems in place.
Market Holding strategy: in this type of strategy, the goal is to maintain the market share.
It is used for price adjustment against competitors. Here, the organization usually keeps
a similar price with that of the competitors in the initial stage. Such type is also required
due to the price and currency flutuations in different countries.
Cost plus pricing: There are basically two types under this heading, the historical
accounting cost method and the estimated future cost method. The former includes
direct and indirect costs and has the disadvantage of ignoring demand and competitive
position in the target market. Estimated cost approaches are based on assumptions of
production volume (depending on process) which will be a principal factor determining
costs. Again difficulties may lie in trying to estimate production levels. In reality, costs
may be a useful starting point but should never be used as a final arbiter.
Price escalation
One major feature of international pricing is the increase on the price due to the
application of duties, increase in costs of transportation and distribution margin increase,
increase with the length of distribution channel, etc.
Dumping: It is the sale of an imported good or product at a price lower than normally
charged in domestic market or country of origin than the country of sale. It is usually
done by organizations to capture the market share. There are anti dumping legislations
used by the government to protect local industries since it affects development of local
economy, as it cannot be predicted. To be convicted, both price discrimination and injury
must be proved.

GENERIC STRATEGIES

If the primary determinant of a firm's profitability is the attractiveness of the industry in

which it operates, an important secondary determinant is its position within that industry.
Even though an industry may have below-average profitability, a firm that is optimally
positioned can generate superior returns.
A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's
strengths ultimately fall into one of two headings: cost advantage and differentiation. By
applying these strengths in either a broad or narrow scope, three generic strategies
result: cost leadership, differentiation, and focus. These strategies are applied at the
business unit level. They are called generic strategies because they are not firm or
industry dependent. The following table illustrates Porter's generic strategies:

Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a given level
of quality. The firm sells its products either at average industry prices to earn a profit
higher than that of rivals, or below the average industry prices to gain market share. In
the event of a price war, the firm can maintain some profitability while the competition
suffers losses. Even without a price war, as the industry matures and prices decline, the
firms that can produce more cheaply will remain profitable for a longer period of time.
The cost leadership strategy usually targets a broad market.
Some of the ways that firms acquire cost advantages are by improving process
efficiencies, gaining unique access to a large source of lower cost materials, making
optimal outsourcing and vertical integration decisions, or avoiding some costs altogether.
If competing firms are unable to lower their costs by a similar amount, the firm may be
able to sustain a competitive advantage based on cost leadership.
Firms that succeed in cost leadership often have the following internal strengths:
• Access to the capital required to make a significant investment in production assets;
this investment represents a barrier to entry that many firms may not overcome.
• Skill in designing products for efficient manufacturing, for example, having a small
component count to shorten the assembly process.
• High level of expertise in manufacturing process engineering.
• Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For example, other
firms may be able to lower their costs as well. As technology improves, the competition
may be able to leapfrog the production capabilities, thus eliminating the competitive
advantage. Additionally, several firms following a focus strategy and targeting various
narrow markets may be able to achieve an even lower cost within their segments and as
a group gain significant market share.

Differentiation Strategy
A differentiation strategy calls for the development of a product or service that offers
unique attributes that are valued by customers and that customers perceive to be better
than or different from the products of the competition. The value added by the
uniqueness of the product may allow the firm to charge a premium price for it. The firm
hopes that the higher price will more than cover the extra costs incurred in offering the
unique product. Because of the product's unique attributes, if suppliers increase their
prices the firm may be able to pass along the costs to its customers who cannot find
substitute products easily.
Firms that succeed in a differentiation strategy often have the following internal
strengths:
• Access to leading scientific research.
• Highly skilled and creative product development team.
• Strong sales team with the ability to successfully communicate the perceived strengths
of the product.
• Corporate reputation for quality and innovation.
The risks associated with a differentiation strategy include imitation by competitors and
changes in customer tastes. Additionally, various firms pursuing focus strategies may be
able to achieve even greater differentiation in their market segments.

Focus Strategy
The focus strategy concentrates on a narrow segment and within that segment attempts
to achieve either a cost advantage or differentiation. The premise is that the needs of the
group can be better serviced by focusing entirely on it. A firm using a focus strategy
often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages
other firms from competing directly.
Because of their narrow market focus, firms pursuing a focus strategy have lower
volumes and therefore less bargaining power with their suppliers. However, firms
pursuing a differentiation-focused strategy may be able to pass higher costs on to
customers since close substitute products do not exist.
Firms that succeed in a focus strategy are able to tailor a broad range of product
development strengths to a relatively narrow market segment that they know very well.
Some risks of focus strategies include imitation and changes in the target segments.
Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in
order to compete directly. Finally, other focusers may be able to carve out sub-segments
that they can serve even better.

A Combination of Generic Strategies

- Stuck in the Middle?
These generic strategies are not necessarily compatible with one another. If a firm
attempts to achieve an advantage on all fronts, in this attempt it may achieve no
advantage at all. For example, if a firm differentiates itself by supplying very high quality
products, it risks undermining that quality if it seeks to become a cost leader. Even if the
quality did not suffer, the firm would risk projecting a confusing image. For this reason,
Michael Porter argued that to be successful over the long-term, a firm must select only
one of these three generic strategies. Otherwise, with more than one single generic
strategy the firm will be "stuck in the middle" and will not achieve a competitive
advantage.

Porter argued that firms that are able to succeed at multiple strategies often do so by
creating separate business units for each strategy. By separating the strategies into
different units having different policies and even different cultures, a corporation is less
likely to become "stuck in the middle."
However, there exists a viewpoint that a single generic strategy is not always best
because within the same product customers often seek multi-dimensional satisfactions
such as a combination of quality, style, convenience, and price. There have been cases
in which high quality producers faithfully followed a single strategy and then suffered
greatly when another firm entered the market with a lower-quality product that better met
the overall needs of the customers.

Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to defend against
competitive forces. The following table compares some characteristics of the generic
strategies in the context of the Porter's five forces.