International marketing notes
1 International marketing definitions
There is much uncertainty between the terms: multinational marketing, international marketing and exporting.
Multinational marketing refers to a number of very large companies whose business interests, manufacturing plant and offices are spread throughout the world. Although their strategic headquarters might be based in the original parent country, they tend to operate autonomously in individual countries. Multinational companies can also be exporters and importers, but the main point is that they actually produce and market goods within the countries they have chosen to develop.
International marketing is the term commonly used to describe all international activity. However, strictly speaking, it is a term used to describe companies whose overseas sales account for more than 20% of their total turnover; where a strategic decision has been taken to enter foreign markets; where product mix and communications mix adaptations are considered when supplying goods or services for a particular overseas market.
Exporting is the term commonly used to describe the commercial activity involved when international transactions take place. However, in an international marketing sense it refers to those companies who consider overseas business as being marginal to their main activities. In such circumstances they simply accept export orders, rather than engage in active manipulation of their marketing mixes to suit the needs of customers in specifically targeted countries.
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2 The significance of international marketing
The economic theory of comparative advantage states that each country should specialise in the production of those goods it can most efficiently provide, which should encourage unrestricted trade, international specialisation and increased global efficiency.
This is perhaps a commonsense, yet idealistic view for individual countries, for a variety of political and economic reasons, erect barriers to the free movement of goods and services between countries. Agreements are formed which encourage free trade within defined geographical regions, but which tend to erect barriers against those who are not in this ‘club’.
2.1 World trading blocks
The biggest of these ‘clubs’ is the Common Market or the European Union (EU) which was formerly known as the European Community (EC) and before that the European Economic Community (EEC). Its latest title of EU perhaps reflects the change that taken place since the initial phases when it was termed the EEC. In the early days it was seen as a trading block - hence its title - whereas the current title reflects its trading and political role as a kind of United States of Europe. Indeed this is an issue which currently rages among member nations of the EU in terms of those wishing for more federal control from Brussels (the headquarters) and those wishing to keep their autonomy. Currently the membership of the EU is as follows:
Belgium, France, Germany, Netherlands, Luxembourg, Italy, Ireland, United Kingdom, Denmark, Greece, Spain, Portugal, Finland, Sweden and Austria. A number of former Communist countries are now queueing up to join (and indeed the former East Germany has already been incorporated as part of what is now simply Germany) and amongst the most likely front runners are: Hungary, Czech Republic, Slovakia and Poland plus the two ex-Soviet Republics of Estonia and Latvia.
Other organisations exist throughout the world, but such organisations are not as politically integrated as the EU. These organisations are:
North American Free Trade Association (NAFTA) comprising the USA, Canada and Mexico.
Organisation for Petroleum Exporting Countries (OPEC) comprising Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Iran, Iraq, Libya, Algeria, Nigeria, Venezuela and Indonesia.
Association of South-East Asian Nations (ASEAN) comprising Singapore, Thailand, Malaysia, the Philippines, Indonesia and Brunei.
European Free Trade Association (EFTA) has lost most of its membership to the EU, but those remaining in this trading block are Norway, Switzerland and Iceland.
However, international business continues to rise on a worldwide basis as barriers to trade slowly come down. This has been principally due to the incremental agreements being sought by the General Agreement on Tariffs and Trade (GATT) organisation which was formed in 1948 to develop fair trading practices amongst its members who now total over 100 individual countries.
2.2 Reasons for international trading between companies
Amongst individual companies there is an increasing need for them to expand their markets into the international arena for a number of reasons, namely:
To increase the overall level of total profits
Because the home market might be saturated
To take advantage of an innovative to the world product or service
To satisfy the goals of corporate management who might wish as a general matter of policy that the company should be committed to international operations
To enjoy the corporate tax advantages offered in overseas countries
To enjoy the funding benefits from setting up manufacturing and assembly bases in certain overseas countries which might also offer access to the trading block to which that country belongs
To obtain economies of larger scale operations
Freer trade in general as a result of GATT accords
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However, against these positive factors and advantages there are a number of negative factors, namely:
The reason why a company might wish to enter the international arena is to escape competition in the home market. One of the principal reasons that has spurred a number of UK companies to unwillingly enter EU markets is because UK markets have now been legitimately opened up to other EU countries and the only way for them to keep market share is to enter EU markets
To dispose of surplus production or to utilise surplus manufacturing capacity. This is a negative factor, but a number of companies dispose of their surplus production overseas at cost or even below cost rather than cut their prices on the domestic market. In the case of selling below cost there is international law under ‘Anti-dumping and countervailing measures’ which prohibits dumping as it constitutes unfair competition against domestic manufacturers. The USA in particular is very sensitive to products being ‘dumped’ in the USA and will enact this legislation whenever it is appropriate to do so
Import tariffs which impose a percentage duty on the cost of landed products pose a negative factor to exporting as do import quotas which impose a numerical value on the numbers of products that can be imported. Sometimes import licences are required which demand a licence to import certain goods or services and in most cases the foreign government has to be paid for such licences
Political unrest is a factor which negates against companies wishing to trade in a foreign country. Quite often it stems from political unrest, but in certain cases an overseas government might stop payment for goods or services that have been provided on the basis that it seeks to preserve its foreign exchanges. In the UK an organisation exists called the Export Credits Guarantee Department (ECGD) which is set up to insure companies against such risks, and indeed insurance is available to insure against non-payment by individual overseas companies. However, the negative side is that such services cost money and this all adds to the costs of trading competitively on an international basis.
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3 A macro overview of international trade
Foreign exchange is important to a country in order to pay for the goods and services it imports. As a country it is vital that we export to pay for essential imports, because we are not self sufficient in food or raw materials and a lot of manufactured goods. However, we are also a free trading nation and traditionally we have put up few barriers to those countries who have wished to market their goods and services here.
The gap between a country’s total exports and its total imports is known as the balance of trade and in payment terms it is known as the balance of payments. If a country imports more than it exports in value terms then the balance of payments will be in deficit, but if exports are higher than imports then the balance of payments will be in surplus.
Two types of trade are considered. Visible trade means the trading of physical commodities ranging from raw materials to finished goods and this is accounted for separately in Government statistics and quoted as the visible trade balance which, in the case of the UK, is usually in defecit. The other account is for what is called invisible trade and this is for the trading of less tangible services that are traded between countries. In the case of the UK, trade in invisibles is usually in surplus. The total account of both visibles and invisibles is the balance of payments.
3.1 Help for exporters
A number of organisations exist to help companies to engaged in international trade. Many companies belong to trade associations that reflect the corporate views of their subscribing members. Such trade associations often provide significant advice in relation to export markets. Many public libraries now offer special sections devoted to information relating to the export trade. Most developed countries have Government help and in the UK the most significant organisation that gives export advice in the UK is the British Overseas Trade Board (BOTB) that helps exporters by providing financial support to individual companies who are working with a recognised agency like a Chamber of Commerce in a number of ways:
Financial support when exhibiting at overseas trade fairs or exhibitions
Subsidies to air travel and accommodation expenses when travelling as part of an overseas trade delegation to a specific part of the world
Low interest loans for a substantial amount of the costs involved in entering new export markets on the basis that if the venture is unsuccessful the loss is shared
Help in general in terms of putting exporters in touch with markets (eg Computerised Export Intelligence that is a subsidised scheme through which companies receive regular updated reports in relation to export opportunities). It also engages in export intelligence gathering in a more general way in terms of investigating the commercial viability of doing business in certain countries and making this information available to the business community
Help through contacts with British Embassies and British Council establishments in overseas countries. In recent years such organisations have become far more commercially proactive in terms of helping the interests of UK overseas businesses. Services provided by such consular offices can include the preparation of shortlists of potential agents or distributors of a company’s products
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3.2 Stages of economic development
In relation to individual countries an international classification exists to denote the stage in terms of development status in which such countries are placed. This classification is as follows:
Undeveloped countries (sometimes termed ‘subsistence economies) which have subsistence living and engage in barter trade for the exchange of goods largely in central markets. There is no specialisation and no modern marketing activity.
Less developed countries have more of a self-sufficiency philosophy with a predominance of small scale cottage industry. Agriculture and manufacturing is labour intensive. Producers tend to be marketers (production orientation).
Developing countries are sometimes referred to as ‘newly industrialising countries’ (NIC) and they have specialisation of labour and manufacturing. There is a separation of production from the marketing function.
Developed countries (sometimes termed industrialised countries) engage in regional, national and international marketing. There is specialisation of manufacture and mass distribution.
Affluent countries is a further category that is sometime used and this relates to countries who have reached developed country status, but additionally its population demands high quality, sophisticated consumer goods.
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4 International marketing mix
It makes sense to institute a marketing policy for international markets developed on the basis of an integrated marketing mix rather than simply selling products designed for the domestic market on an international scale. Marketing mix elements for international operations are no different to those used for domestic marketing, the principal difference being in the range of options. It is up to the marketing manager, or the manager designated to look after international operations (perhaps the international marketing or sales manager) to decide. This is done on the basis of what marketing research indicates, how the marketing mix should be adapted for each target area in which the company markets or is considering entering.
Each of the marketing mix elements, which includes the important aspect of selling that is considered separately from promotion, are now considered from the viewpoint of examining the issues that are at stake when considering them in the context of international marketing.
5 Product
Due regard must be given to whether to market the entire product range or part of the range and whether to modify these products to suit local demand, standards and regulations that might pertain in the overseas market. This might mean high modification costs, packaging, labelling and product or brand name considerations.
A policy of standardisation (we sell what we make) is typical for a passive company who has found itself in international trade by accident. This is akin, perhaps, to simple exporting in terms of fulfilling unsolicited export orders. Such orders might come from an advertisement in a domestic journal that has some circulation overseas, but the company’s philosophy tends to be that it will export if it has surplus stocks or production capacity. When selling to countries with a similar culture (eg. Ireland, UK, Canada, Australia, New Zealand and the USA) there will be few problems because of the similarities in terms of culture and language.
Some companies adapt their products to as to promote sales in particular countries (we make what we can sell) and engage in market segmentation. Instead of simply attempting to sell domestic product overseas, attempts are made to adapt product in terms of their design, their function and their size.
Where a company is committed to continuous, rather than ad hoc, overseas sales and takes on the notion of international marketing activity as being central to its very existence then it can be regarded more truly as an international marketing company (ecological approach).
The notion of the three strategies just mentioned was first put forward by H.B.Thorelli in 1980. From what has been described it is clear that international marketing decision-making must consider the organisation’s resources and its corporate objectives. If the company is to seriously consider the international marketing route (the ecological approach) then it should have the backing of the board of directors and the active support of top strategic level management.
6 Price
6.1 Price considerations
Depending upon whether the company pursues a strategy of differentiated, undifferentiated or concentrated marketing in relation to its chosen market segments, will depend upon the price levels to be charged overseas. Considerations relating to chosen market segments will affect the decision as to whether to adopt a skimming or penetration approach to pricing. In the end analysis, the method of pricing international sales will very largely depend upon how important the overseas price will be in the overall marketing mix.
An extra factor in terms of costs which has to be considered in pricing decision are such factors as tariffs and logistics costs. In addition to this, there is the added uncertainty of extending credit for goods supplied to an overseas customer whom the company does not know as well as an equivalent domestic customer. However, this latter need not be such a problem, as part of the sales agreement can include payment through a letter of credit or an irrevocable letter of credit, which means that the buyer’s and the seller’s banks exchange agreed funds at a certain point in the export delivery cycle.
Consideration should also be given as to the currency in which payment is to be made. Most export order arrangements stipulate ‘hard’ currency payments in US dollars or other stable currencies. However, there are circumstances in which the order can only be received if payment is made in the local currency. Here, consideration should be given to the strength of the currency and the fact that it might devalue by the time the contract is paid. In such a case, what might have originally looked like a reasonably lucrative contract might end up as a loss-making venture. For some export contracts to less developed countries, the government of that country might insist on some kind of barter deal, whereby in return for a company’s products, some other products of that country must be taken as payment, thus saving the country valuable foreign exchange. Added to this, is the probability is that in order to be competitive, margins on products destined for overseas markets will carry less profit that those manufactured for home consumption. With such added costs, and potential uncertainties, this is precisely the reason why a number of manufacturers prefer to remain with the domestic market rather than becoming involved internationally.
In meeting pricing objectives, both cost and market considerations are important together with the very practical issue of ‘Is it worth it?’ Clearly, if the company is simply breaking even to achieve volume in its international activities, then serious consideration should be give to only engaging in domestic sales.
6.2 Price quotations
At a more practical level, price will have to consider the extra costs for packing and freight charges. As a result, quotations in export markets sometime include freight charges and sometime it is the ex-factory cost. The principal quotations used include:
Ex-works which means that the purchaser has to bear all of the costs of packing and freightage and insurance, plus other liabilities like import duties after they have left the supplier’s factory.
Free alongside ship (FAS) means that the exporter is responsible for transporting the goods to the point where they are being loaded onto the ship.
Free on board (FOB) extends the responsibility to the exporter until the goods have been loaded on the ship. The ship’s master will then give the goods a ‘clean bill of lading’ which means that they have been accepted as being in good condition for the sea journey. If goods are not received in good condition by the ship’s master, a ‘foul bill of lading’ will be issued. This is not to say that the goods are damaged, but that the way they are packed might be not sturdy enough to stand the sea journey, in which case any insurance claims will be problematical. Assuming a clean bill of lading, from there the importer pays the costs of carriage insurance and freight.
Cost insurance and freight (CIF) means that as well as placing the goods on board the ship the exporter is also responsible for the freight to the end port destination plus any freight insurance charges. A variation of this quotation is ‘Cost and freight’ (C&F) which is similar, but the importer pays the insurance premium.
Free delivered or ‘franco rendu’ as it is sometimes called means that the exporter has responsibility for all the costs of freightage right to the customer’s premises which will include payment of any import duties, obtaining import licences where appropriate plus all other administrative details right up to organising foreign exchange where necessary. Clearly, this option is the most complicated one for the seller and the least complicated one for the buyer. However, companies that engage in regular international marketing have departments specifically established to deal with these kinds of transactions so the problem becomes a one of routine.
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6.3 Transfer pricing