Part 8 : Creating Successful Long Term Growth Chapter 21 – Tapping into Global Markets

Competing on a Global Basis A global firm is a firm that operates in more than one country and captures R&D, production, logistical, marketing, and financial advantage in its cost and reputation that are not available to purely domestic competitors One of the most successful global companies is ABB, formed by a merger between the Swedish company ASEA and the Swiss company Brown Boveri. ABB’s products include power transformers, auto components, Air Conditioning. Its motto: “ABB is a global company local everywhere”. English is its official language, all financial results must be reported in dollars. ABB aims to reconcile 3 contradictions: to be global and local, to be big and small, and to be radically decentralized with centralized reporting and control. Managers are regularly rotated among countries and mixed-nationality teams are encouraged.

A global firm is a firm that operates in more than one country and captures R&D, production, logistical, marketing, and financial advantage in its cost and reputation that are not available to purely domestic competitors

One of the most successful global companies is ABB, formed by a merger between the Swedish company ASEA and the Swiss company Brown Boveri.

ABB’s products include power transformers, auto components, Air Conditioning. Its motto: “ABB is a global company local everywhere”. English is its official language, all financial results must be reported in dollars. ABB aims to reconcile 3 contradictions: to be global and local, to be big and small, and to be radically decentralized with centralized reporting and control. Managers are regularly rotated among countries and mixed-nationality teams are encouraged.

Deciding whether to go abroad The Advantages for companies participating into the international arena: Foreign markets present higher profit opportunities The company needs a larger customer base to achieve economies of scale The company reduces its dependence on any one market The company’s customers are going abroad and require international servicing The Risks are: The company might not understand foreign customer preferences or culture thus fail to offer a competitive product The company might underestimate foreign regulations and incur unexpected costs (weaken cost structure) The company’s managers lacks international experience

The Advantages for companies participating into the international arena:

Foreign markets present higher profit opportunities

The company needs a larger customer base to achieve economies of scale

The company reduces its dependence on any one market

The company’s customers are going abroad and require international servicing

The Risks are:

The company might not understand foreign customer preferences or culture thus fail to offer a competitive product

The company might underestimate foreign regulations and incur unexpected costs (weaken cost structure)

The company’s managers lacks international experience

Deciding whether to go abroad How companies become internationalized: No regular export activities. Export via independent representatives (agents). Firm makes first decisions on export and establishes an export department (sales manager and a few assistant). Establishment of one or more sales subsidiaries. A firm replaces the export department with an international division (a division with president who sets goals and budgets assisted with functional specialists to various operating units) Establishment of production facilities abroad. This time a firm is engaged in its global sourcing, financing, manufacturing, and marketing

How companies become internationalized:

No regular export activities.

Export via independent representatives (agents). Firm makes first decisions on export and establishes an export department (sales manager and a few assistant).

Establishment of one or more sales subsidiaries. A firm replaces the export department with an international division (a division with president who sets goals and budgets assisted with functional specialists to various operating units)

Establishment of production facilities abroad. This time a firm is engaged in its global sourcing, financing, manufacturing, and marketing

Deciding which markets to enter The company must also decide on the types of countries to consider: Market Attractiveness is influenced by income and population, product and communication adaptation costs, dominant foreign firms as barrier to entry, political-legal-culture environments Market risks e.g. Tang, product of General foods, fails to market in France because Tang was positioned as substitute for orange juice during breakfast. The fact is the French people seldom drink orange juice and even never at all during breakfast Competitive advantages on 4P’s – product, price, place, promotion, marketing infrastructure (technology), management and human resources, and capital resources

The company must also decide on the types of countries to consider:

Market Attractiveness is influenced by income and population, product and communication adaptation costs, dominant foreign firms as barrier to entry, political-legal-culture environments

Market risks e.g. Tang, product of General foods, fails to market in France because Tang was positioned as substitute for orange juice during breakfast. The fact is the French people seldom drink orange juice and even never at all during breakfast

Competitive advantages on 4P’s – product, price, place, promotion, marketing infrastructure (technology), management and human resources, and capital resources

Deciding how to enter the market Once a company decides to target a particular country, it has to determine the best mode of entry. Its broad choices are Indirect export the company work through independent intermediaries e.g. domestic-based export merchants (buy and sell products abroad), and domestic-based export agents (trading companies are paid a commission) Indirect export has less investment (no export department, sales force, contracts) and less risk Direct export: the company wants to handle its own export. the investment and risk are somewhat greater, but so is the potential return the company work through export department, overseas sales branch, sales representatives, and foreign agents Licensing: a simple way to become involved in international marketing The licensor issues a license to a foreign company to use a manufacturing process, trademark, patent, or a fee of royalty The licensor gains entry at little risk, the licensee gains production expertise or a well-known product or brand name e.g. KFC

Once a company decides to target a particular country, it has to determine the best mode of entry. Its broad choices are

Indirect export

the company work through independent intermediaries e.g. domestic-based export merchants (buy and sell products abroad), and domestic-based export agents (trading companies are paid a commission)

Indirect export has less investment (no export department, sales force, contracts) and less risk

Direct export: the company wants to handle its own export.

the investment and risk are somewhat greater, but so is the potential return

the company work through export department, overseas sales branch, sales representatives, and foreign agents

Licensing: a simple way to become involved in international marketing

The licensor issues a license to a foreign company to use a manufacturing process, trademark, patent, or a fee of royalty

The licensor gains entry at little risk, the licensee gains production expertise or a well-known product or brand name e.g. KFC

Deciding how to enter the market Joint ventures: foreign investors may join with local investors in which they share ownership and control e.g. coca-cola and nestle joined forces to develop the international market for “ready-to-drink” tea and coffee advantage: the foreign company might lack the financial, physical, or managerial resources to undertake the venture alone disadvantage: the partners might disagree over investment, marketing or other policies e.g. one partner wants earnings for growth but the other partner want more dividends. Direct investment: the ultimate form of foreign involvement is direct ownership of foreign-based assembly or manufacturing facilities, e.g. General Motors have invested billions of dollars in auto manufacturers around the world, such as Fiat Auto holdings, Isuzu, Suzuki, Daewoo advantage: the firm retains full control in manufacturing and marketing policies with other parties such as government, local suppliers and customers disadvantage: the firm exposes a large investment to risks such as devalued currencies, worsening markets, or expropriation

Joint ventures: foreign investors may join with local investors in which they share ownership and control e.g. coca-cola and nestle joined forces to develop the international market for “ready-to-drink” tea and coffee

advantage: the foreign company might lack the financial, physical, or managerial resources to undertake the venture alone

disadvantage: the partners might disagree over investment, marketing or other policies e.g. one partner wants earnings for growth but the other partner want more dividends.

Direct investment: the ultimate form of foreign involvement is direct ownership of foreign-based assembly or manufacturing facilities, e.g. General Motors have invested billions of dollars in auto manufacturers around the world, such as Fiat Auto holdings, Isuzu, Suzuki, Daewoo

advantage: the firm retains full control in manufacturing and marketing policies with other parties such as government, local suppliers and customers

disadvantage: the firm exposes a large investment to risks such as devalued currencies, worsening markets, or expropriation

Deciding on the marketing program In deciding on the marketing program, a company must decide how much to adapt its marketing program: Product level: firm can pursue a strategy of straight extension: introducing products in the foreign market without any change e.g. camera product adaptation: e.g. Kraft blends different coffees for the British (who drink their coffee with milk), the French (who drink their coffee black), & Latin Americans (who want a chicory taste) product invention : backward invention (e.g. crank operated cash register at half the price of a modern cash register); and forward invention (e.g. Toyota with Multi Vehicle Purpose or MVP and Sport Utility Vehicle or SUV for marketing the family segment in Indonesia) Communication level: firm may choose communication adaptation (the same theme globally but adapt the copy to each local market e.g. camay soap commercial showed a beautiful woman bathing dual adaptation (adapts both product and the communication e.g. Mc Donalds with Paket Panas dengan nasi putih)

In deciding on the marketing program, a company must decide how much to adapt its marketing program:

Product level: firm can pursue a strategy of

straight extension: introducing products in the foreign market without any change e.g. camera

product adaptation: e.g. Kraft blends different coffees for the British (who drink their coffee with milk), the French (who drink their coffee black), & Latin Americans (who want a chicory taste)

product invention : backward invention (e.g. crank operated cash register at half the price of a modern cash register); and forward invention (e.g. Toyota with Multi Vehicle Purpose or MVP and Sport Utility Vehicle or SUV for marketing the family segment in Indonesia)

Communication level: firm may choose

communication adaptation (the same theme globally but adapt the copy to each local market e.g. camay soap commercial showed a beautiful woman bathing

dual adaptation (adapts both product and the communication e.g. Mc Donalds with Paket Panas dengan nasi putih)

Deciding on the marketing program Price level: firm may encounter price escalation: Gucci handbag may sell for $ 120 in Italy and $ 240 in the United States. Why? Gucci has to add the cost of transportation, tariff, wholesaler and retailer margin to its factory price transfer price: the price the company charges to local subsidiary for shipping to foreign subsidiary. If too high a price to subsidiary, it ends up with higher tariff duties dumping: a company charges less than its home market, in order to win a foreign market gray market: dealer in the low price country find ways to sell some of their products in higher-price countries, thus earning more (e.g. no registered in customs area) Distribution level: firm needs to take a whole-channel view of distributing products to the final users Seller  Seller’s international marketing headquarters  Channels between nations (gets the products to the borders of the foreign nation by using agents, trading companies)  Channels within foreign nation  Final buyers In creating all elements of the marketing program, firm must be aware of the cultural, social, political, technological, environmental, and legal limitations they face in other countries

Price level: firm may encounter

price escalation: Gucci handbag may sell for $ 120 in Italy and $ 240 in the United States. Why? Gucci has to add the cost of transportation, tariff, wholesaler and retailer margin to its factory price

transfer price: the price the company charges to local subsidiary for shipping to foreign subsidiary. If too high a price to subsidiary, it ends up with higher tariff duties

dumping: a company charges less than its home market, in order to win a foreign market

gray market: dealer in the low price country find ways to sell some of their products in higher-price countries, thus earning more (e.g. no registered in customs area)

Distribution level: firm needs to take a whole-channel view of distributing products to the final users

Seller  Seller’s international marketing headquarters  Channels between nations (gets the products to the borders of the foreign nation by using agents, trading companies)  Channels within foreign nation  Final buyers

In creating all elements of the marketing program, firm must be aware of the cultural, social, political, technological, environmental, and legal limitations they face in other countries