MARKET SIZE ANALYSIS
MARKET SIZE ANALYSIS
We have explained the importance of market potential in determining a com- pany's allocational efforts among different countries and have discussed some
common variables used as broad indicators for comparing countries' market
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potentials. The following section covers some techniques that can be used to
estimate the size of potential markets. These are merely tools to help man-
estimate market potential, thus helping in the decision of which markets to emphasize.3
To determine the potential demand for a given company, management usually must first estimate the possible sales of the category of products for all companies and then estimate its own market-share potential. For advanced countries, there usually are consumption figures and trained market-research personnel, so costly and detailed research studies are feasible. For many LDCs, however, it may be useful to develop inexpensive forecasting methods based on readily available data. Regardless of whether a firm is dealing with industrial or poor countries, there are different informational needs depending on the precision of data required and the commitments that firms have already made in markets. For example, a firm may first scan a large number of potential markets fairly inexpensively by using published data. Only those markets that appear most promising will then be analyzed more closely, such as by test marketing in those areas.
Total Market Potential
Existing Consumption Patterns Input-output is a tool used widely in national economic planning to show the resources utilized by different industries for a given output as well as the interdependence of economic sectors. Through the use of tables showing all sectors on both the vertical and horizontal axes, the production (output) of one is shown as the demand (input) of another. For instance, steel output becomes an input to the automobile industry, households, government, foreign sector, and even to the sted industry itself. Many countries now publish input-output tables. By comparing these with economic projections for an economy as a whole or with plans for production changes in a given industry, management can project the total volume of sales changes for a given type of product as well as the purchases by each sector. The three major shortcomings of this method are: (1) Fat many countries, the data contained within the input-output tables and id plans or projections of economic changes are too sparse; (2) there is a ques-j tionable assumption that the relationships among sectors and resources fixed; and (3) the tables may be many years old before they are publish and readily available.
Data on Other Countries The amount of sales of a product in one countf
may be based on the same conditions that could determine sales in othfl countries. For example, as incomes change, the demand for a product ma change on the basis of that income change. For instance, Japanese consum| tion of beef, sugar, hard liquor, and dairy products grew between 1970 an 1990 as per capita income increased—closely paralleling what had occurro in the United States at an earlier period.4 Management thus may collect dats on the consumption of a given product in countries with different per capital GNPs and then project sales at different income levels by plotting a palii through which average demand changes as incomes change (see Fig. 18.11.
Reasonably good fits for many products have been found by using tt» method. However, for some products the analysis breaks down in some coun-
tries because other variables affect demand. For instance, the consumption c cars in Switzerland is lower than income would predict because of the publi transportation system, difficult terrain, and high import duties.5 A furthe problem is that this method is static. With changes in technology and price: a country may change its consumption pattern much earlier or later tha: would be indicated by looking at a group of countries in only one time perioc
Time-Series Data Sometimes sales follow a pattern over a historical perioc If this is the case and data are available over a period of time, a firm may b able to make future projections based on past values.6 Figure 18.2 illustrate sugar consumption in the United States based on time-series data. Th: contrasts with projections of sugar consumption in Fig. 18.1 based on cross national data. The use of time-series and cross-national data also may b combined. Such analyses within an economy are useful for predicting tot. demand and for identifying the economic sectors generating this demand.
Income Elasticity A common predictive means is to divide the percentag of change in product demand by the percentage of change in income. If th resultant answer is greater than 1, the demand for the product is considere elastic (or sales are likely to increase or decrease by a percentage that
greater than the percentage change in income); if the number is less than 1, demand is inelastic (or sales are likely to increase or decrease by a percentage that is less than the percentage change in income). Demand for necessities, such as food, is relatively less elastic than demand for discretionary products, such as automobiles. In other words, upward or downward movements in income ordinarily would affect automobile sales more than food sales. This concept is useful in estimating the expenditures for countries at different levels of income. For instance, people in the United States spend a lower percentage of personal income on food than do South Koreans. The difference is due not to relative appetites but rather to income differences that allow people in the United States to spend more on other types of purchases. Since a large portion of people in South Korea are poor, a change in income level; affects food consumption much more than in a higher-income country.7 Ar elasticity of 1.5 would mean that a percentage change in income would resuli in 1.5 times that percentage change in the demand for the specific product.
As is true with any method of demand projection, income-elasticity mea surements must be approached with caution, especially if a firm is makinj projections in one country based on demand analysis in another. Price differences and taste affect consumers' demand as well. Italy consumes a much higher quantity of fruits and vegetables than Norway, even though Norway's income is higher, because of price differences. Denmark and Switzerland have very similar per capita incomes, but per capita consumption of frozen food is much higher in Denmark because of the Danes' great penchant for convenience.8
Regression Regression is an important means of refining data and making predictions by uncovering relationships between variables. By using data based on the historical relationship between demand for a given product and economic or other indicators, or between demand and some indicators in a given time period, a firm may construct a regression equation that shows the demand (the dependent variable) based on a level of the indicators (the independent variables). This technique allows an amount of consumption that is not directly attributable to changes in the indicators to be taken into consideration and allows for the determination of the degree of correlation between the independent and dependent variables. Regression analysis can thus be used to predict demand from changes in related indicators.
Gap Analysis
The tools just described may give an estimation of the market potential for a given product. Once this rough determination is made, a firm must calculate how well it is doing within each of the markets. A useful tool for scanning markets and comparing countries in this respect is gap analysis.9 When a company's sales are lower than the estimated market potential for a given type of product, there is a company potential for increased sales, which may be due to a usage, competitive, product line, or distribution gap.
The two largest Swiss chocolate companies, Nestle and Interfood, have found in recent years very different types of gaps in different countries.10 This has led them to emphasize different types of marketing programs among nations. In some markets they have found substantial usage gaps; in other words, less chocolate is being consumed than would be expected on the basis of population and income levels. This has led the two companies to try to increase primary demand in those areas for chocolate in general. Industry specialists estimated, for example, that in many countries more than 80 percent of the population have never tasted a chocolate bar..They project, consequently, that if more people can be persuaded to try chocolate bars, the companies' sales should increase with the market increase."
The U.S. market comprises another type of usage gap. Nearly everyone in this market has tried most chocolate products, but per capita consumption has fallen because of increasing concern about calories, nutrition, and health. To increase chocolate consumption in general, Nestle' for a short time promoted chocolate as an energy source for the sports-minded. The building of
consumption in general is most useful when one is the leader in the market thus Nestle, with U.S. chocolate sales below Mars and Hershey, benefitted it: competitors during the short-lived campaign. In some hot climates the com panies have found that they have product-line gaps in terms of the marke for sweetened products. By working on new products, such as chocolau products that melt less easily, they may be able to garner a larger share of th< present market for sweetened products. They also have found chocolate prod ucts with which they do not compete directly. There are also some markets such as Japan, where they have not yet achieved a sufficient distribution t( reach their sales potentials; therefore, Nestle formed a joint venture with < Japanese cake and candy maker, Fujiya, to make Kit Kats and gain more distribution.11 Finally, there are competitive gaps, sales by competitors o products through distribution similar to one's own products and distribution For example, in markets such as France and Germany Nestle and Interfooc feel that most of the potential market demand is being fulfilled but that then is a competitive gap; that is, they might increase sales there but only at th< expense of competitors.
Product Policy
The Philosophies International marketing philosophies may be categorizec as:
1. we sell what we make,
2. we make what we sell, and
3. we adapt what we make to the needs of foreign consumers.
This frame of reference is useful for understanding the varied approache: firms may validly take in international product policy decisions.
We Sell What We Make For some products, particularly raw materials an< agricultural commodities, there is little need or possibility of product differ entiation from one country to another. Although this is one approach withii the philosophy of "we sell what we make," this idea better describes the firn that develops a product for one market and then attempts to sell the produc abroad—as it is. There are three circumstances under which this approacl may be valid:
1. passive exports, particularly those that serve as an appendage to the do mestic market;
2. the existence of foreign-market segments or niches that may resembli the market for which the product is aimed initially; and
3. situations in which product standardization may so lower prices that< large group of consumers from many countries are willing to forgo cer consumption in general is most useful when one is the leader in the market; thus Nestle, with U.S. chocolate sales below Mars and Hershey, benefitted its competitors during the short-lived campaign. In some hot climates the companies have found that they have product-line gaps in terms of the market for sweetened products. By working on new products, such as chocolate products that melt less easily, they may be able to garner a larger share of the present market for sweetened products. They also have found chocolate products with which they do not compete directly. There are also some markets, such as Japan, where they have not yet achieved a sufficient distribution to reach their sales potentials; therefore, Nestld formed a joint venture with a Japanese cake and candy maker, Fujiya, to make Kit Kats and gain more distribution.11 Finally, there are competitive gaps, sales by competitors of products through distribution similar to one's own products and distribution. For example, in markets such as France and Germany Nestld and Interfood feel that most of the potential market demand is being fulfilled but that there is a competitive gap; that is, they might increase sales there but only at the expense of competitors.
Product Policy
The Philosophies International marketing philosophies may be categorized
as:
1. we sell what we make,
2. we make what we sell, and
3. we adapt what we make to the needs of foreign consumers.
This frame of reference is useful for understanding the varied approaches firms may validly take in international product policy decisions.
We Sell What We Make For some products, particularly raw materials and agricultural commodities, there is little need or possibility of product differentiation from one country to another. Although this is one approach within the philosophy of "we sell what we make," this idea better describes the firm that develops a product for one market and then attempts to sell the product abroad—as it is. There are three circumstances under which this approach may be valid:
1. passive exports, particularly those that serve as an appendage to the domestic market;
2. the existence of foreign-market segments or niches that may resemble the market for which the product is aimed initially; and
3. situations in which product standardization may so lower prices that a large group of consumers from many countries are willing to forgo certain nationally differentiated product characteristics in order to get lower prices.
Many firms begin selling abroad very passively. Sometimes for unknown reasons, requests for information on products or even actual orders simply arrive from abroad. Foreign products are discovered through numerous chan-' nels, including new developments reported in scientific and trade journals with international circulation, advertising that spills across national boundaries, and demonstrations of products that consumers have bought in one country and transferred abroad. Finally, many firms send buyers abroad or actively search for new products. At this point firms do very little if any real adaptation to what consumers abroad might prefer, which suffices for many companies that view foreign sales as an appendage to domestic sales. This same type of company frequently exports only if it has excess inventory for the domestic market. In fact, fixed costs are sometimes covered from domestic sales so that lower prices are offered on exports as a means of liquidating inventories without disrupting the domestic market.12
A company may develop a product aimed at achieving a large share of its domestic market, yet find that there are market segments abroad willing to buy the same product. Sometimes the product may have a universal appeal, such as French champagne. In other situations, the company may be able to target to a mass market at home, but to a small niche within foreign locations, such as U.S. bourbon production.13 Another situation involves sales to countries for which the total market potential is assessed to be small regardless of whether changes are geared to unique consumer needs. In small developing countries, particularly, international firms are apt to make few changes because the market size does not justify the expense to them and because competitors are apt to be other international firms that do not make product alterations. Firms may not even adjust electrical voltage and plugs to local standards, leaving the job of conversion to local purchasers. The greatest ability to sell the same product in more than one country occurs when consumer characteristics are similar and when there is a great deal of spillover in product information, such as between the United States and Canada. Improvements in international communications and transportation are increasingly extending the spillover effects to more distant countries so that there are more opportunities to aim the same products to groups of similar consumers in a number of different countries.
Whether a firm is exporting or has foreign production facilities, it may cut costs substantially by standardizing its products. This usually is done on the basis of the home-country experience, since costs associated with product development, promotional programs, and distributional expertise already have been expended there. But for companies with foreign operating facilities in place, the standardized product may first have been developed abroad, such as Whiskas, a cat food that Mars first developed outside the United
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States.14 The transference to more than one country allows for economies as the outlays are spread over a larger volume of output.
"We make what we sell" We Make What We Sell In a firm that operates according to the dictum
• is not a common strat- described in the previous section, management is usually guided by such
, . questions as: "Should we send some exports abroad?" "Where can we sell
• Takes geographic areas ^ r
as given some more of product X?" In other words, the product is held constant, and
the location of sales is varied. The type of strategy to be described in this section is one that asks, "What can we sell in country A?" In this case the country is held constant, and the product is varied.
Sometimes a firm wants to penetrate markets in a given country because of the country's size, growth potential, proximity to home operations, currency or political stability, or a host of other reasons. The extreme of this approach would be for a company to move to completely unrelated products. This is not a common strategy, but there are examples: Henkel of Germany wished to diversify into the United States in order to counter an expected sluggish market at home, but management felt that it would be difficult to compete in the United States in its major product lines, detergents and cosmetics. Thus Henkel chose instead to buy the chemical division of General Mills.15
This reactive attitude to consumers does not necessarily mean that a firm has to forgo the economies of standardization. A company may well do market research in a number of countries in order to develop and aim a product at a global market segment. Canon's development of a 35-millimeter automatic camera is an example. Instead of merely trying to transfer sales of a domestic product abroad, the firm designs a product to fit some global market segment, which may mean changing what is sold domestically to correspond to the international standard. The possibilities of global products foe industrial users may be large as well because the purchasers are apt to be technically trained decision makers. SKF, for example, introduced a line of 20,000 ball bearings to replace 50,000 on a worldwide basis.16
As in the preceding philosophy, a firm following a "make-what-we-sell" approach may do so passively. Increasingly there are examples of purchasing agents who set specifications and then seek out contracts for the foreign manufacture of components or finished products. For example, S. T. King, a Hong Kong company, makes clothing to the specifications of firms such as Calvin Klein. In responding, a firm may make a product that is quite different from what it sells within its home market. In such a situation, the producer is less concerned about choosing the product characteristics than about the pricing and distribution aspects of what it is marketing abroad.
This is the most common We Adapt What We Make to the Needs ot Foreign Consumers Most
slrategy: firms that are committed to continual rather than sporadic foreign sales adopt
• mlapta^ionrXneby a strate8y that combines the production and consumer orientations just de-degree, scribed. Refusal to make changes for the needs of foreign markets means that too many sales may be lost, especially if there are aggressive competitors willing to make desired adaptations. Yet expertise concerning a type of product may be very important, and companies want the foreign operations to be compatible with their product understanding. Product changes are common but tend to occur in degree. Thus a company accustomed to manufacturing electric typewriters is more apt to move into the production of manual typewriters or personal computers than tires or detergents. The latter products ordinarily would be too far from the management's area of expertise.
Reasons for Product Alteration
Legal Factors Direct legal requirements are the most obvious reason for altering products for foreign markets, since without adhering to the regulations the company will not get permission to operate. The exact requirements vary widely by country but are usually meant to protect people who come into contact with a given product or service. Pharmaceuticals and foods are particularly subject to regulations concerning purity, testing, and the labeling of contents. Cars sold in the United States must conform to safety and pollution standards not found in many other countries.
When foreign legal requirements are less stringent than those at home, a firm then may not be compelled legally to alter its products for sales in the foreign country. However, the firm will have to weigh such questions as whether foreign sales will be lost if high domestic standards are used abroad and whether there .will be domestic ill will if those standards are not used. Firms have been criticized in recent years for selling abroad, especially in LDCs, such products as toys, automobiles, contraceptives, and pharmaceuticals that did not meet home-country safety or quality standards.17
A recurring question is to what extent it is possible to arrive at international product standards to eliminate some of the seemingly wasteful product alterations from country to country. Although there has been some progress, such as agreement on the sprocket dimensions on movie film, other things (railroad gauges and electrical socket shapes, for instance) continue to vary. In reality, there is both consumer and economic resistance. The conversion to the metric system on beverages, for example, meant that U.S. consumers had to learn that 236.58 milliliters is the same as the 8-fluid-ounce soft drinks to which they were accustomed. In an economic sense the changeover was more costly than simply educating people and relabeling. Containers had to be redesigned and production had to be retooled so that dimensions would be in even numbers. Even for new products or those still in a developmental stage, such as high-definition television (HDTV), countries seldom reach agreement because they wish to protect the investments already made by their home-based companies.18 At best, international standards will come very slowly.
Less apparent are the indirect legal requirements that may affect product
content or demand. In some countries it may be difficult or prohibitively expensive to import certain raw materials or components, thus forcing a firm to construct an end product with local substitutes that may alter the final product substantially. Or legal requirements, such as high taxes on heavy automobiles, may shift sales to smaller models, thus altering demand indirectly for tire sales and gasoline octanes.
Cultural Factors Consumer buying behavior is complex. It is difficult to determine in advance if the introduction of new or different products will meet with acceptance. Some U.S. food franchisers, such as McDonald's, have been highly successful in Japan by duplicating most of their U.S. product and distribution—an acceptance attributed to the "enthusiastic assimilation" by the Japanese of Western ways. In contrast, McDonald's found it necessary to provide cheese curds and hot gravy for french fries in seemingly more similar Canada (Quebec) to create a dish called poutine.19 Furthermore, Western cosmetic firms have been able to garner only small shares of the Japanese cosmetics market. Cultural factors render some Western products unsuited to the Japanese market: Perfume is hardly used in Japan, suntans are considered ugly, and bath oil is impractical in home showers or in communal baths.20 In another case, Armstrong World Industries had heard so much about the so-called world car that it reasoned there must be a market for a world gasket. Management found though that consumer and therefore industrial requirements were very different. For example, U.S. car owners are not bothered b> an occasional drop of oil on the garage floor, whereas Japanese'car owner; will complain to the manufacturer.21
Economic Factors If consumers in a foreign country lack sufficient income they may not be able to buy in sufficient quantity the same product the in ternational firm sells in its home market. The company therefore may hav< to design a cheaper model or perhaps sell a product with characteristics sim ilar to those sold in the home market at an earlier period. National Casl Register has designed crank-operated machines to sell in some LDCs. When incomes are low, consumers may buy many personal items in smaller quan tities, such as one aspirin, one piece of chewing gum, or one cigarette, whicl usually necessitates new types of packaging.
Even if a market segment has sufficient income for purchasing the sam product the firm sells at home, the general level of the economy may be sue! that products have to be altered. The type of infrastructure (e.g., roads an utilities) in a country may determine the necessary structural compositio and tolerances of products. Factory managers will have to consider the lo^ educational levels of machine operators when planning equipment pui chases, which may result in product simplification.
LDC Criticisms Within LDCs, labor-saving industrial equipment and luxur goods are criticized for contributing to unemployment problems and to th enhancement of elitist class distinctions. Therefore, MNEs are being increasingly pressured to justify their contributions or to design and sell products that are perceived to be more in line with the needs of LDCs.22 The question of luxury or superfluous products has been largely answered by MNEs through showing the positive side effects of seemingly unnecessary products. For example, soft-drink manufacturers have argued that they are responsible for the establishment of sanitary bottling operations, which are essential for other industries, such as pharmaceuticals.
Cost of Alteration
Cost savings through uniformity may apply to any part of the marketing program; however, product standardization is the area where the greatest savings are possible. If a firm is exporting, longer production runs from a centralized output may result in substantial economies of scale. Total inventories also may be lowered, since domestic and foreign sales come from the same backlog. Even if different production centers in different countries are involved, a standardized approach ordinarily reduces product development costs and should lead to easier and more comparable cost controls. Output in different countries also may be exported to substitute for domestic production when local manufacturing units cannot fill orders, as in periods of unusual demand or during strikes.
There is a wide variance in cost-saving possibilities, though. For example, a production that has a need for a high fixed-capital input (e.g., automobile manufacture) can gain more through long production runs than one with a high proportion of variable to fixed costs (e.g., pharmaceuticals). If a company must produce abroad in order to serve the foreign market, some of the economies of product standardization, such as from long runs or inventory centralization, will be lost anyway. In this situation, there is less cost pressure to maintain uniformity.
Furthermore, some changes are cheap to effect, yet have an important influence on demand. One such area is packaging, which is the most common alteration made by exporters.23 In Panama, Aunt Jemima Pancake Mix and Ritz Crackers are sold in cans rather than in boxes because of the high humidity—a low-cost change with a high potential payoff. Before making a decision a firm should always compare the cost of alteration with the cost of lost sales if no alteration is made.
One strategy a firm can use for compromising between uniformity and diversity is to standardize many components while changing the end characteristics. Coca-Cola, for example, exports concentrates to bottling plants all over the world; then carbonation, color, and sugar are added to conform with local preferences.24 This type of change is practically costless, since standardization is achieved for the concentrate process and the finished product cannot feasibly be exported. Even when end products appear to be quite different, the standardization of many components is possible. Another strat-
Extent and Mix of the Product Line
Most companies produce multiple products. It is doubtful that all of these products would generate sufficient sales in a given foreign locale to justify the expenditures to penetrate the markets. Even if those that would did, a company may offer only a portion—such as some products at home that are not sold abroad or vice versa. Instead of offering as many models and options as in the United States, GM in Mexico produces and sells a much more limited variety, which reduces the amount of capital investment for production and spare parts, allowing sales activity to concentrate on fewer products. In other words, a firm may narrow its efforts to a few segments of a given market.
A firm also must consider whether any new products need to be added to the line for sale in certain countries. Two primary considerations in reaching these decisions are the possible effects on sales and the relative cost of! having one product as opposed to a family of products. Sometimes a firm finds that it must produce and sell some unpopular items if it is to sell the: more popular ones, such as sherry glasses to match the crystal wine and watc glasses. The manufacturer may be forced to go to a few short production runs in order to gain the mass market on other products. If a firm must set some foreign production if it is to sell in the foreign market, it may be able produce locally those products in its line with a longer production run import the other products needed to help sell the local production.
If the foreign market is small in relation to the domestic market, sell costs per unit may be high because of the fixed costs associated with sell When faced with a situation such as this, the firm can follow a strategy broadening the product line to be handled. This may be done by group" sales of several manufacturers or by developing new products for the 1 market that the same salesperson can handle.25 Coca-Cola, for instance, added a line of bar mixes in South Africa, a lemonade in Australia, a m~ drink in Pakistan, a tomato juice in Belgium, and some mixed juice-b drinks in Mexico and Indonesia.
Product Life Cycle Considerations
There may be differences among countries in either the shape or the len of the product life cycle. Thus a manufacturer who faces declining sales one country may be able to find a foreign market that will have growing < at least sustained sales for a product. For example, cellular phone producers, such as Ericsson and Motorola, faced falling demand growth in industrial countries during the late 1980s but found that sales in some developing cour-tries were just entering a rapid growth stage. Mattel found that its Cheerrj
Tearful Doll had a much longer sales life span in the former West Germany than in the United States.26
Firms generally place only product above price when ranking the importance of marketing-program variables.27 A price needs to be high enough to guarantee the proper flow of funds to carry on the other activities that bridge the gap between production and consumption. The proper price will not only assure short-term profits, but will also allow the firm to have the resources to build its other elements within the marketing mix that are necessary to achieve long-term competitive viability. Pricing in the international context is more complex than in the domestic arena because of:
1. a different degree of governmental intervention,
2. a greater diversity of markets,
3. price escalation in exporting,
4. the changing relative value of currencies,
5. differences in fixed versus variable pricing practices, and
6. strategies to counter international competitors.
II
Governmental Intervention
Every country has laws that affect the prices of goods at the consumer level, but these laws may affect different products in different ways at different times. Restrictions may prevent firms from using the strategies they consider optimal in achieving their ends. A governmental price control may set either maximum or minimum levels to be charged to the consumer. Controls against lowering prices usually are intended to prevent firms from eliminating competitors in order to gain monopoly positions. An example of this type of control would be Germany's Unfair Competition Law, which has been interpreted by the German courts to prohibit such items as coupons, boxtops, and giveaway articles unless these will remain a consistent policy of the company throughout the years. A firm accustomed to relying on such devices as a means of increasing its sales at home must develop new methods in Germany consistent with the German laws. Many countries set maximum prices on many products: If costs rise, profit margins necessarily contract, sometimes resulting in an unwillingness of producers to continue selling. For example, in 1988 Procter & Gamble and some of its suppliers were hard hit by price controls in Venezuela. Although P&G was willing to wait out the situation while negotiating with governmental authorities, its phosphate suppliers could not afford to sell P&G the materials needed for detergents. Therefore, P&G was forced to suspend operations.28 Or price controls may force firms to
lower the quality of a product, in which case they may consider changing the brand name in order to reintroduce the higher-quality product at a latei date.
Another type of control that reduces discretionary pricing is directed specifically at imports. The General Agreement on Tariffs and Trade (GATT) ha: a provision, the Antidumping Code, that permits countries to establish restrictions against imports that come in below the price to consumers in the exporting country. The provision makes it more difficult for firms to differentiate markets through price.
A firm might wish to export abroad at a lower price than that charged a home for several reasons. One might be to test sales in the foreign market Assume that a firm finds that it cannot export to a given country because tariffs or transportation costs make the price to foreign consumers prohibitively high, but some preliminary calculations show that by establishing foreign production, prices may be reduced substantially to the foreign consumer Before committing resources to produce overseas, management may wish tc test the market by exporting so that goods may be sold at the price that woulc be charged if they were produced in the local market. If sales do not mate rialize, management will know that factors other than price may be prevent ing product sales. If sales do materialize, management may go ahead anc establish an investment or make a second round of exports to determin< whether repeat sales develop. For example, before completing a $55 millioi frozen-food plant to make Lean Cuisine products in the U.K., Nestle testec the market by exporting from Canada a year in advance.29 The shipping o such dishes as spaghetti bolognese in refrigerated ships and the payment o customs duties made export costs much higher than the U.K. selling prices however, Nestld incurred a small cost in relation to the information gaine< and the amount of eventual commitment. Other reasons for charging differ ent prices in different countries involve competitive and demand factors. Fo: example, a firm may feel that prices can be kept high in the domestic marke by restricting supply to that market. Excess production then can be sol< abroad at a lower price as the sales price makes some contribution to over head.
Greater Diversity of Markets
Although there are numerous ways for a firm to segment the domestic marke and to charge differently in each segment, the country-to-country variation create even greater natural segments. Few sea urchins can be sold in thi United States, for example, at any price, yet they are exported to Japan where they are considered delicacies. In some countries a firm may hav< many competitors and thus little discretion on its prices, whereas in others i may have a near monopoly due either to the stage in the product life cycle o to government-granted manufacturing rights not held by competitors. Ii near-monopoly situations the firm may exercise considerable pricing discre tion, such as using skimming, penetration, or cost-plus strategies.
Another factor differentiating pricing possibilities is that country-of-origin stereotypes differ among countries. For example, in comparing consumer perceptions for automobiles with their objective ratings, German cars seem overrated by American consumers in relation to U.S.-made cars, yet Japanese consumers overrate Japanese cars in relation to German ones. In effect, German producers may be able to charge a higher margin above their American competitors in the United States than they can with their Japanese competitors in Japan. Yet any competitor who responds to adverse stereotypes by lowering prices to increase sales actually may reduce the product image even further.30 This could occur, for example, if the German automobile producers were to lower their prices in the Japanese market where consumers often equate price with quality, The total cost that a consumer may pay for a product will be more than
tne saies p^ce if there are additional charges because of buying on credit. How
consumers view these additional charges may thus affect total demand as well as the sales price they are willing to pay. The tax treatment of interest payments as well as attitudes toward being in debt affect whether consumers will pay in cash or by credit. The Japanese, for example, have been much more reluctant to rely on consumer credit than Americans. In selling to Japanese consumers, therefore, it is less possible than in the United States to use credit payments as a means of receiving revenue from the sale of goods.
We have explained the importance of market potential in determining a com- pany's allocational efforts among different countries and have discussed some
common variables used as broad indicators for comparing countries' market
. ■ ., , ,
potentials. The following section covers some techniques that can be used to
estimate the size of potential markets. These are merely tools to help man-
estimate market potential, thus helping in the decision of which markets to emphasize.3
To determine the potential demand for a given company, management usually must first estimate the possible sales of the category of products for all companies and then estimate its own market-share potential. For advanced countries, there usually are consumption figures and trained market-research personnel, so costly and detailed research studies are feasible. For many LDCs, however, it may be useful to develop inexpensive forecasting methods based on readily available data. Regardless of whether a firm is dealing with industrial or poor countries, there are different informational needs depending on the precision of data required and the commitments that firms have already made in markets. For example, a firm may first scan a large number of potential markets fairly inexpensively by using published data. Only those markets that appear most promising will then be analyzed more closely, such as by test marketing in those areas.
Total Market Potential
Existing Consumption Patterns Input-output is a tool used widely in national economic planning to show the resources utilized by different industries for a given output as well as the interdependence of economic sectors. Through the use of tables showing all sectors on both the vertical and horizontal axes, the production (output) of one is shown as the demand (input) of another. For instance, steel output becomes an input to the automobile industry, households, government, foreign sector, and even to the sted industry itself. Many countries now publish input-output tables. By comparing these with economic projections for an economy as a whole or with plans for production changes in a given industry, management can project the total volume of sales changes for a given type of product as well as the purchases by each sector. The three major shortcomings of this method are: (1) Fat many countries, the data contained within the input-output tables and id plans or projections of economic changes are too sparse; (2) there is a ques-j tionable assumption that the relationships among sectors and resources fixed; and (3) the tables may be many years old before they are publish and readily available.
Data on Other Countries The amount of sales of a product in one countf
may be based on the same conditions that could determine sales in othfl countries. For example, as incomes change, the demand for a product ma change on the basis of that income change. For instance, Japanese consum| tion of beef, sugar, hard liquor, and dairy products grew between 1970 an 1990 as per capita income increased—closely paralleling what had occurro in the United States at an earlier period.4 Management thus may collect dats on the consumption of a given product in countries with different per capital GNPs and then project sales at different income levels by plotting a palii through which average demand changes as incomes change (see Fig. 18.11.
Reasonably good fits for many products have been found by using tt» method. However, for some products the analysis breaks down in some coun-
tries because other variables affect demand. For instance, the consumption c cars in Switzerland is lower than income would predict because of the publi transportation system, difficult terrain, and high import duties.5 A furthe problem is that this method is static. With changes in technology and price: a country may change its consumption pattern much earlier or later tha: would be indicated by looking at a group of countries in only one time perioc
Time-Series Data Sometimes sales follow a pattern over a historical perioc If this is the case and data are available over a period of time, a firm may b able to make future projections based on past values.6 Figure 18.2 illustrate sugar consumption in the United States based on time-series data. Th: contrasts with projections of sugar consumption in Fig. 18.1 based on cross national data. The use of time-series and cross-national data also may b combined. Such analyses within an economy are useful for predicting tot. demand and for identifying the economic sectors generating this demand.
Income Elasticity A common predictive means is to divide the percentag of change in product demand by the percentage of change in income. If th resultant answer is greater than 1, the demand for the product is considere elastic (or sales are likely to increase or decrease by a percentage that
greater than the percentage change in income); if the number is less than 1, demand is inelastic (or sales are likely to increase or decrease by a percentage that is less than the percentage change in income). Demand for necessities, such as food, is relatively less elastic than demand for discretionary products, such as automobiles. In other words, upward or downward movements in income ordinarily would affect automobile sales more than food sales. This concept is useful in estimating the expenditures for countries at different levels of income. For instance, people in the United States spend a lower percentage of personal income on food than do South Koreans. The difference is due not to relative appetites but rather to income differences that allow people in the United States to spend more on other types of purchases. Since a large portion of people in South Korea are poor, a change in income level; affects food consumption much more than in a higher-income country.7 Ar elasticity of 1.5 would mean that a percentage change in income would resuli in 1.5 times that percentage change in the demand for the specific product.
As is true with any method of demand projection, income-elasticity mea surements must be approached with caution, especially if a firm is makinj projections in one country based on demand analysis in another. Price differences and taste affect consumers' demand as well. Italy consumes a much higher quantity of fruits and vegetables than Norway, even though Norway's income is higher, because of price differences. Denmark and Switzerland have very similar per capita incomes, but per capita consumption of frozen food is much higher in Denmark because of the Danes' great penchant for convenience.8
Regression Regression is an important means of refining data and making predictions by uncovering relationships between variables. By using data based on the historical relationship between demand for a given product and economic or other indicators, or between demand and some indicators in a given time period, a firm may construct a regression equation that shows the demand (the dependent variable) based on a level of the indicators (the independent variables). This technique allows an amount of consumption that is not directly attributable to changes in the indicators to be taken into consideration and allows for the determination of the degree of correlation between the independent and dependent variables. Regression analysis can thus be used to predict demand from changes in related indicators.
Gap Analysis
The tools just described may give an estimation of the market potential for a given product. Once this rough determination is made, a firm must calculate how well it is doing within each of the markets. A useful tool for scanning markets and comparing countries in this respect is gap analysis.9 When a company's sales are lower than the estimated market potential for a given type of product, there is a company potential for increased sales, which may be due to a usage, competitive, product line, or distribution gap.
The two largest Swiss chocolate companies, Nestle and Interfood, have found in recent years very different types of gaps in different countries.10 This has led them to emphasize different types of marketing programs among nations. In some markets they have found substantial usage gaps; in other words, less chocolate is being consumed than would be expected on the basis of population and income levels. This has led the two companies to try to increase primary demand in those areas for chocolate in general. Industry specialists estimated, for example, that in many countries more than 80 percent of the population have never tasted a chocolate bar..They project, consequently, that if more people can be persuaded to try chocolate bars, the companies' sales should increase with the market increase."
The U.S. market comprises another type of usage gap. Nearly everyone in this market has tried most chocolate products, but per capita consumption has fallen because of increasing concern about calories, nutrition, and health. To increase chocolate consumption in general, Nestle' for a short time promoted chocolate as an energy source for the sports-minded. The building of
consumption in general is most useful when one is the leader in the market thus Nestle, with U.S. chocolate sales below Mars and Hershey, benefitted it: competitors during the short-lived campaign. In some hot climates the com panies have found that they have product-line gaps in terms of the marke for sweetened products. By working on new products, such as chocolau products that melt less easily, they may be able to garner a larger share of th< present market for sweetened products. They also have found chocolate prod ucts with which they do not compete directly. There are also some markets such as Japan, where they have not yet achieved a sufficient distribution t( reach their sales potentials; therefore, Nestle formed a joint venture with < Japanese cake and candy maker, Fujiya, to make Kit Kats and gain more distribution.11 Finally, there are competitive gaps, sales by competitors o products through distribution similar to one's own products and distribution For example, in markets such as France and Germany Nestle and Interfooc feel that most of the potential market demand is being fulfilled but that then is a competitive gap; that is, they might increase sales there but only at th< expense of competitors.
Product Policy
The Philosophies International marketing philosophies may be categorizec as:
1. we sell what we make,
2. we make what we sell, and
3. we adapt what we make to the needs of foreign consumers.
This frame of reference is useful for understanding the varied approache: firms may validly take in international product policy decisions.
We Sell What We Make For some products, particularly raw materials an< agricultural commodities, there is little need or possibility of product differ entiation from one country to another. Although this is one approach withii the philosophy of "we sell what we make," this idea better describes the firn that develops a product for one market and then attempts to sell the produc abroad—as it is. There are three circumstances under which this approacl may be valid:
1. passive exports, particularly those that serve as an appendage to the do mestic market;
2. the existence of foreign-market segments or niches that may resembli the market for which the product is aimed initially; and
3. situations in which product standardization may so lower prices that< large group of consumers from many countries are willing to forgo cer consumption in general is most useful when one is the leader in the market; thus Nestle, with U.S. chocolate sales below Mars and Hershey, benefitted its competitors during the short-lived campaign. In some hot climates the companies have found that they have product-line gaps in terms of the market for sweetened products. By working on new products, such as chocolate products that melt less easily, they may be able to garner a larger share of the present market for sweetened products. They also have found chocolate products with which they do not compete directly. There are also some markets, such as Japan, where they have not yet achieved a sufficient distribution to reach their sales potentials; therefore, Nestld formed a joint venture with a Japanese cake and candy maker, Fujiya, to make Kit Kats and gain more distribution.11 Finally, there are competitive gaps, sales by competitors of products through distribution similar to one's own products and distribution. For example, in markets such as France and Germany Nestld and Interfood feel that most of the potential market demand is being fulfilled but that there is a competitive gap; that is, they might increase sales there but only at the expense of competitors.
Product Policy
The Philosophies International marketing philosophies may be categorized
as:
1. we sell what we make,
2. we make what we sell, and
3. we adapt what we make to the needs of foreign consumers.
This frame of reference is useful for understanding the varied approaches firms may validly take in international product policy decisions.
We Sell What We Make For some products, particularly raw materials and agricultural commodities, there is little need or possibility of product differentiation from one country to another. Although this is one approach within the philosophy of "we sell what we make," this idea better describes the firm that develops a product for one market and then attempts to sell the product abroad—as it is. There are three circumstances under which this approach may be valid:
1. passive exports, particularly those that serve as an appendage to the domestic market;
2. the existence of foreign-market segments or niches that may resemble the market for which the product is aimed initially; and
3. situations in which product standardization may so lower prices that a large group of consumers from many countries are willing to forgo certain nationally differentiated product characteristics in order to get lower prices.
Many firms begin selling abroad very passively. Sometimes for unknown reasons, requests for information on products or even actual orders simply arrive from abroad. Foreign products are discovered through numerous chan-' nels, including new developments reported in scientific and trade journals with international circulation, advertising that spills across national boundaries, and demonstrations of products that consumers have bought in one country and transferred abroad. Finally, many firms send buyers abroad or actively search for new products. At this point firms do very little if any real adaptation to what consumers abroad might prefer, which suffices for many companies that view foreign sales as an appendage to domestic sales. This same type of company frequently exports only if it has excess inventory for the domestic market. In fact, fixed costs are sometimes covered from domestic sales so that lower prices are offered on exports as a means of liquidating inventories without disrupting the domestic market.12
A company may develop a product aimed at achieving a large share of its domestic market, yet find that there are market segments abroad willing to buy the same product. Sometimes the product may have a universal appeal, such as French champagne. In other situations, the company may be able to target to a mass market at home, but to a small niche within foreign locations, such as U.S. bourbon production.13 Another situation involves sales to countries for which the total market potential is assessed to be small regardless of whether changes are geared to unique consumer needs. In small developing countries, particularly, international firms are apt to make few changes because the market size does not justify the expense to them and because competitors are apt to be other international firms that do not make product alterations. Firms may not even adjust electrical voltage and plugs to local standards, leaving the job of conversion to local purchasers. The greatest ability to sell the same product in more than one country occurs when consumer characteristics are similar and when there is a great deal of spillover in product information, such as between the United States and Canada. Improvements in international communications and transportation are increasingly extending the spillover effects to more distant countries so that there are more opportunities to aim the same products to groups of similar consumers in a number of different countries.
Whether a firm is exporting or has foreign production facilities, it may cut costs substantially by standardizing its products. This usually is done on the basis of the home-country experience, since costs associated with product development, promotional programs, and distributional expertise already have been expended there. But for companies with foreign operating facilities in place, the standardized product may first have been developed abroad, such as Whiskas, a cat food that Mars first developed outside the United
r
States.14 The transference to more than one country allows for economies as the outlays are spread over a larger volume of output.
"We make what we sell" We Make What We Sell In a firm that operates according to the dictum
• is not a common strat- described in the previous section, management is usually guided by such
, . questions as: "Should we send some exports abroad?" "Where can we sell
• Takes geographic areas ^ r
as given some more of product X?" In other words, the product is held constant, and
the location of sales is varied. The type of strategy to be described in this section is one that asks, "What can we sell in country A?" In this case the country is held constant, and the product is varied.
Sometimes a firm wants to penetrate markets in a given country because of the country's size, growth potential, proximity to home operations, currency or political stability, or a host of other reasons. The extreme of this approach would be for a company to move to completely unrelated products. This is not a common strategy, but there are examples: Henkel of Germany wished to diversify into the United States in order to counter an expected sluggish market at home, but management felt that it would be difficult to compete in the United States in its major product lines, detergents and cosmetics. Thus Henkel chose instead to buy the chemical division of General Mills.15
This reactive attitude to consumers does not necessarily mean that a firm has to forgo the economies of standardization. A company may well do market research in a number of countries in order to develop and aim a product at a global market segment. Canon's development of a 35-millimeter automatic camera is an example. Instead of merely trying to transfer sales of a domestic product abroad, the firm designs a product to fit some global market segment, which may mean changing what is sold domestically to correspond to the international standard. The possibilities of global products foe industrial users may be large as well because the purchasers are apt to be technically trained decision makers. SKF, for example, introduced a line of 20,000 ball bearings to replace 50,000 on a worldwide basis.16
As in the preceding philosophy, a firm following a "make-what-we-sell" approach may do so passively. Increasingly there are examples of purchasing agents who set specifications and then seek out contracts for the foreign manufacture of components or finished products. For example, S. T. King, a Hong Kong company, makes clothing to the specifications of firms such as Calvin Klein. In responding, a firm may make a product that is quite different from what it sells within its home market. In such a situation, the producer is less concerned about choosing the product characteristics than about the pricing and distribution aspects of what it is marketing abroad.
This is the most common We Adapt What We Make to the Needs ot Foreign Consumers Most
slrategy: firms that are committed to continual rather than sporadic foreign sales adopt
• mlapta^ionrXneby a strate8y that combines the production and consumer orientations just de-degree, scribed. Refusal to make changes for the needs of foreign markets means that too many sales may be lost, especially if there are aggressive competitors willing to make desired adaptations. Yet expertise concerning a type of product may be very important, and companies want the foreign operations to be compatible with their product understanding. Product changes are common but tend to occur in degree. Thus a company accustomed to manufacturing electric typewriters is more apt to move into the production of manual typewriters or personal computers than tires or detergents. The latter products ordinarily would be too far from the management's area of expertise.
Reasons for Product Alteration
Legal Factors Direct legal requirements are the most obvious reason for altering products for foreign markets, since without adhering to the regulations the company will not get permission to operate. The exact requirements vary widely by country but are usually meant to protect people who come into contact with a given product or service. Pharmaceuticals and foods are particularly subject to regulations concerning purity, testing, and the labeling of contents. Cars sold in the United States must conform to safety and pollution standards not found in many other countries.
When foreign legal requirements are less stringent than those at home, a firm then may not be compelled legally to alter its products for sales in the foreign country. However, the firm will have to weigh such questions as whether foreign sales will be lost if high domestic standards are used abroad and whether there .will be domestic ill will if those standards are not used. Firms have been criticized in recent years for selling abroad, especially in LDCs, such products as toys, automobiles, contraceptives, and pharmaceuticals that did not meet home-country safety or quality standards.17
A recurring question is to what extent it is possible to arrive at international product standards to eliminate some of the seemingly wasteful product alterations from country to country. Although there has been some progress, such as agreement on the sprocket dimensions on movie film, other things (railroad gauges and electrical socket shapes, for instance) continue to vary. In reality, there is both consumer and economic resistance. The conversion to the metric system on beverages, for example, meant that U.S. consumers had to learn that 236.58 milliliters is the same as the 8-fluid-ounce soft drinks to which they were accustomed. In an economic sense the changeover was more costly than simply educating people and relabeling. Containers had to be redesigned and production had to be retooled so that dimensions would be in even numbers. Even for new products or those still in a developmental stage, such as high-definition television (HDTV), countries seldom reach agreement because they wish to protect the investments already made by their home-based companies.18 At best, international standards will come very slowly.
Less apparent are the indirect legal requirements that may affect product
content or demand. In some countries it may be difficult or prohibitively expensive to import certain raw materials or components, thus forcing a firm to construct an end product with local substitutes that may alter the final product substantially. Or legal requirements, such as high taxes on heavy automobiles, may shift sales to smaller models, thus altering demand indirectly for tire sales and gasoline octanes.
Cultural Factors Consumer buying behavior is complex. It is difficult to determine in advance if the introduction of new or different products will meet with acceptance. Some U.S. food franchisers, such as McDonald's, have been highly successful in Japan by duplicating most of their U.S. product and distribution—an acceptance attributed to the "enthusiastic assimilation" by the Japanese of Western ways. In contrast, McDonald's found it necessary to provide cheese curds and hot gravy for french fries in seemingly more similar Canada (Quebec) to create a dish called poutine.19 Furthermore, Western cosmetic firms have been able to garner only small shares of the Japanese cosmetics market. Cultural factors render some Western products unsuited to the Japanese market: Perfume is hardly used in Japan, suntans are considered ugly, and bath oil is impractical in home showers or in communal baths.20 In another case, Armstrong World Industries had heard so much about the so-called world car that it reasoned there must be a market for a world gasket. Management found though that consumer and therefore industrial requirements were very different. For example, U.S. car owners are not bothered b> an occasional drop of oil on the garage floor, whereas Japanese'car owner; will complain to the manufacturer.21
Economic Factors If consumers in a foreign country lack sufficient income they may not be able to buy in sufficient quantity the same product the in ternational firm sells in its home market. The company therefore may hav< to design a cheaper model or perhaps sell a product with characteristics sim ilar to those sold in the home market at an earlier period. National Casl Register has designed crank-operated machines to sell in some LDCs. When incomes are low, consumers may buy many personal items in smaller quan tities, such as one aspirin, one piece of chewing gum, or one cigarette, whicl usually necessitates new types of packaging.
Even if a market segment has sufficient income for purchasing the sam product the firm sells at home, the general level of the economy may be sue! that products have to be altered. The type of infrastructure (e.g., roads an utilities) in a country may determine the necessary structural compositio and tolerances of products. Factory managers will have to consider the lo^ educational levels of machine operators when planning equipment pui chases, which may result in product simplification.
LDC Criticisms Within LDCs, labor-saving industrial equipment and luxur goods are criticized for contributing to unemployment problems and to th enhancement of elitist class distinctions. Therefore, MNEs are being increasingly pressured to justify their contributions or to design and sell products that are perceived to be more in line with the needs of LDCs.22 The question of luxury or superfluous products has been largely answered by MNEs through showing the positive side effects of seemingly unnecessary products. For example, soft-drink manufacturers have argued that they are responsible for the establishment of sanitary bottling operations, which are essential for other industries, such as pharmaceuticals.
Cost of Alteration
Cost savings through uniformity may apply to any part of the marketing program; however, product standardization is the area where the greatest savings are possible. If a firm is exporting, longer production runs from a centralized output may result in substantial economies of scale. Total inventories also may be lowered, since domestic and foreign sales come from the same backlog. Even if different production centers in different countries are involved, a standardized approach ordinarily reduces product development costs and should lead to easier and more comparable cost controls. Output in different countries also may be exported to substitute for domestic production when local manufacturing units cannot fill orders, as in periods of unusual demand or during strikes.
There is a wide variance in cost-saving possibilities, though. For example, a production that has a need for a high fixed-capital input (e.g., automobile manufacture) can gain more through long production runs than one with a high proportion of variable to fixed costs (e.g., pharmaceuticals). If a company must produce abroad in order to serve the foreign market, some of the economies of product standardization, such as from long runs or inventory centralization, will be lost anyway. In this situation, there is less cost pressure to maintain uniformity.
Furthermore, some changes are cheap to effect, yet have an important influence on demand. One such area is packaging, which is the most common alteration made by exporters.23 In Panama, Aunt Jemima Pancake Mix and Ritz Crackers are sold in cans rather than in boxes because of the high humidity—a low-cost change with a high potential payoff. Before making a decision a firm should always compare the cost of alteration with the cost of lost sales if no alteration is made.
One strategy a firm can use for compromising between uniformity and diversity is to standardize many components while changing the end characteristics. Coca-Cola, for example, exports concentrates to bottling plants all over the world; then carbonation, color, and sugar are added to conform with local preferences.24 This type of change is practically costless, since standardization is achieved for the concentrate process and the finished product cannot feasibly be exported. Even when end products appear to be quite different, the standardization of many components is possible. Another strat-
Extent and Mix of the Product Line
Most companies produce multiple products. It is doubtful that all of these products would generate sufficient sales in a given foreign locale to justify the expenditures to penetrate the markets. Even if those that would did, a company may offer only a portion—such as some products at home that are not sold abroad or vice versa. Instead of offering as many models and options as in the United States, GM in Mexico produces and sells a much more limited variety, which reduces the amount of capital investment for production and spare parts, allowing sales activity to concentrate on fewer products. In other words, a firm may narrow its efforts to a few segments of a given market.
A firm also must consider whether any new products need to be added to the line for sale in certain countries. Two primary considerations in reaching these decisions are the possible effects on sales and the relative cost of! having one product as opposed to a family of products. Sometimes a firm finds that it must produce and sell some unpopular items if it is to sell the: more popular ones, such as sherry glasses to match the crystal wine and watc glasses. The manufacturer may be forced to go to a few short production runs in order to gain the mass market on other products. If a firm must set some foreign production if it is to sell in the foreign market, it may be able produce locally those products in its line with a longer production run import the other products needed to help sell the local production.
If the foreign market is small in relation to the domestic market, sell costs per unit may be high because of the fixed costs associated with sell When faced with a situation such as this, the firm can follow a strategy broadening the product line to be handled. This may be done by group" sales of several manufacturers or by developing new products for the 1 market that the same salesperson can handle.25 Coca-Cola, for instance, added a line of bar mixes in South Africa, a lemonade in Australia, a m~ drink in Pakistan, a tomato juice in Belgium, and some mixed juice-b drinks in Mexico and Indonesia.
Product Life Cycle Considerations
There may be differences among countries in either the shape or the len of the product life cycle. Thus a manufacturer who faces declining sales one country may be able to find a foreign market that will have growing < at least sustained sales for a product. For example, cellular phone producers, such as Ericsson and Motorola, faced falling demand growth in industrial countries during the late 1980s but found that sales in some developing cour-tries were just entering a rapid growth stage. Mattel found that its Cheerrj
Tearful Doll had a much longer sales life span in the former West Germany than in the United States.26
Firms generally place only product above price when ranking the importance of marketing-program variables.27 A price needs to be high enough to guarantee the proper flow of funds to carry on the other activities that bridge the gap between production and consumption. The proper price will not only assure short-term profits, but will also allow the firm to have the resources to build its other elements within the marketing mix that are necessary to achieve long-term competitive viability. Pricing in the international context is more complex than in the domestic arena because of:
1. a different degree of governmental intervention,
2. a greater diversity of markets,
3. price escalation in exporting,
4. the changing relative value of currencies,
5. differences in fixed versus variable pricing practices, and
6. strategies to counter international competitors.
II
Governmental Intervention
Every country has laws that affect the prices of goods at the consumer level, but these laws may affect different products in different ways at different times. Restrictions may prevent firms from using the strategies they consider optimal in achieving their ends. A governmental price control may set either maximum or minimum levels to be charged to the consumer. Controls against lowering prices usually are intended to prevent firms from eliminating competitors in order to gain monopoly positions. An example of this type of control would be Germany's Unfair Competition Law, which has been interpreted by the German courts to prohibit such items as coupons, boxtops, and giveaway articles unless these will remain a consistent policy of the company throughout the years. A firm accustomed to relying on such devices as a means of increasing its sales at home must develop new methods in Germany consistent with the German laws. Many countries set maximum prices on many products: If costs rise, profit margins necessarily contract, sometimes resulting in an unwillingness of producers to continue selling. For example, in 1988 Procter & Gamble and some of its suppliers were hard hit by price controls in Venezuela. Although P&G was willing to wait out the situation while negotiating with governmental authorities, its phosphate suppliers could not afford to sell P&G the materials needed for detergents. Therefore, P&G was forced to suspend operations.28 Or price controls may force firms to
lower the quality of a product, in which case they may consider changing the brand name in order to reintroduce the higher-quality product at a latei date.
Another type of control that reduces discretionary pricing is directed specifically at imports. The General Agreement on Tariffs and Trade (GATT) ha: a provision, the Antidumping Code, that permits countries to establish restrictions against imports that come in below the price to consumers in the exporting country. The provision makes it more difficult for firms to differentiate markets through price.
A firm might wish to export abroad at a lower price than that charged a home for several reasons. One might be to test sales in the foreign market Assume that a firm finds that it cannot export to a given country because tariffs or transportation costs make the price to foreign consumers prohibitively high, but some preliminary calculations show that by establishing foreign production, prices may be reduced substantially to the foreign consumer Before committing resources to produce overseas, management may wish tc test the market by exporting so that goods may be sold at the price that woulc be charged if they were produced in the local market. If sales do not mate rialize, management will know that factors other than price may be prevent ing product sales. If sales do materialize, management may go ahead anc establish an investment or make a second round of exports to determin< whether repeat sales develop. For example, before completing a $55 millioi frozen-food plant to make Lean Cuisine products in the U.K., Nestle testec the market by exporting from Canada a year in advance.29 The shipping o such dishes as spaghetti bolognese in refrigerated ships and the payment o customs duties made export costs much higher than the U.K. selling prices however, Nestld incurred a small cost in relation to the information gaine< and the amount of eventual commitment. Other reasons for charging differ ent prices in different countries involve competitive and demand factors. Fo: example, a firm may feel that prices can be kept high in the domestic marke by restricting supply to that market. Excess production then can be sol< abroad at a lower price as the sales price makes some contribution to over head.
Greater Diversity of Markets
Although there are numerous ways for a firm to segment the domestic marke and to charge differently in each segment, the country-to-country variation create even greater natural segments. Few sea urchins can be sold in thi United States, for example, at any price, yet they are exported to Japan where they are considered delicacies. In some countries a firm may hav< many competitors and thus little discretion on its prices, whereas in others i may have a near monopoly due either to the stage in the product life cycle o to government-granted manufacturing rights not held by competitors. Ii near-monopoly situations the firm may exercise considerable pricing discre tion, such as using skimming, penetration, or cost-plus strategies.
Another factor differentiating pricing possibilities is that country-of-origin stereotypes differ among countries. For example, in comparing consumer perceptions for automobiles with their objective ratings, German cars seem overrated by American consumers in relation to U.S.-made cars, yet Japanese consumers overrate Japanese cars in relation to German ones. In effect, German producers may be able to charge a higher margin above their American competitors in the United States than they can with their Japanese competitors in Japan. Yet any competitor who responds to adverse stereotypes by lowering prices to increase sales actually may reduce the product image even further.30 This could occur, for example, if the German automobile producers were to lower their prices in the Japanese market where consumers often equate price with quality, The total cost that a consumer may pay for a product will be more than
tne saies p^ce if there are additional charges because of buying on credit. How
consumers view these additional charges may thus affect total demand as well as the sales price they are willing to pay. The tax treatment of interest payments as well as attitudes toward being in debt affect whether consumers will pay in cash or by credit. The Japanese, for example, have been much more reluctant to rely on consumer credit than Americans. In selling to Japanese consumers, therefore, it is less possible than in the United States to use credit payments as a means of receiving revenue from the sale of goods.
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