Aau International Modularization Chapter One

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UNIT 1: AN OVERVIEW TO INTERNATIONAL MARKETING

1.1 INTRODUCTION
A firm selling abroad its merchandise often faced with cultural, economic, and legal
systems that are quite different from those in its home country. Thus a firm must
understand and adapt to a new and unfamiliar environment.
A firm moves beyond domestic markets into international trade for several reasons.
The first is simply the existence of foreign markets. There is a strong demand for a wide
variety of consumer products in the developed nations of the world. And with in the
developing as well as the developed nations of the world, there is a demand for business
products such as machine tools, construction, equipment and computers. Second, as
domestic markets become saturated, producers even those with no previous international
experience, look to foreign markets.
Third, some countries possess unique natural or human resources that give them a
comparative advantage when it comes to producing particular products. Another factor in
international expansion is the possession of a technological advantage.
What do we mean by international marketing?

An organization whose products are marketed in two or more countries is engaged in
international marketing.
The fundamentals of marketing apply to international marketing in the same way they
apply to domestic marketing. Marketing program should be built around a good product
that is properly priced, promoted, and distributed to a market that has been carefully
selected.
International markets create attractive opportunities, but the competition is intense.

Success goes to the firms that understand and adapt to the environmental factors that
influence international marketing.
1.2 MEANING
The American Marketing Association (AMA) defines the term international marketing as
follows.
Compiled by Tewodros Wuhib( Asst Professor) AAU Page 1

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“International Marketing is the multinational process of planning and executing the

conception, pricing, promotion and distribution of ideas, goods, and services to create
an exchange that satisfy individual and organizational objectives. “
1.3 TYPES OF MARKETING
One way to understand the concept of international / global world marketing is to

examine how international marketing differs from such similar concept as domestic
marketing, Foreign marketing, comparative marketing, international trade and
multinational marketing.
Domestic marketing is concerned with the marketing practices with n a marketer’s home
country. From the perspective of domestic marketing, marketing methods used outside
the home market are foreign marketing.
Therefore, foreign marketing encompasses the domestic operation with in a foreign

country.
A study becomes comparative marketing when its purpose is to contrast two or more
marketing systems rather than examine a particular country’s marketing system for its
own sake. Similarities and differences between systems are identified. Thus comparative
marketing involves two or more countries and an analytical comparison of marketing
methods used in these countries.
International marketing must be distinguished from international trade. International

trade is concerned with the flow of goods and capital across national borders. The focus
of the analysis is on commercial and monetary conditions that affect balance of payment
and resource transfers. This economics approach provides a macro view of the market at
the national level, with no specific attention given to companies marketing intervention.
The study of international marketing on the other hand, is more concerned with the micro
level of the market and uses the company as a unit of analysis. The focus of the analysis
is on how and why a product succeeds or fails abroad and how marketing efforts affects
the outcome.
Some marketing authorities differentiate international marketing from multinational
marketing because international marketing in its literal sense signifies marketing

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between nations. The word international can thus imply that a firm is not a corporate
citizen of the world but rather operates form a home base.
Domestic marketing involves are set of uncontrollable derived from the domestic market.
International marketing is much more complex because a marketer faces two or more sets
of uncontrollable variables originating from various countries. The marketer must cope
with different cultural, legal, political and monetary systems.
A firm marketing mix is determined by the uncontrollable factors with in each country’s
environment as well as by the interaction between the sets.
 Global/Transnational marketing
At the global marketing level, companies treat the world, including their home market,
as one market. This is in contrast to the international company that views the world as a
separate markets (including there own markets) with unique sets of market characteristics
for which marketing strategies must be developed. A global company develops a strategy
to reflect the existing commonalties of market need among many countries to maximize
returns through global standardization of its business activities whenever it is cost
effective and culturally possible. In summary, global marketing refers to marketing
activities by companies that emphasize:
 Reduction of cost inefficiencies and duplication of efforts among their national
and regional subsidiaries
 Opportunities for the transfer of products ,brands, and other ideas across
subsidiaries
 Emergence of global customers, and
 Improved linkages among national marketing infrastructure leading to the
development of a global marketing infrastructure.
 Export marketing
Export marketing is the first stage of addressing market opportunities outside the home
country. The export marketer targets markets outside the home country and relies upon
home country production to supply product for these markets. The focus in this stage is
upon leveraging the home –country products and experience. A sophisticated export

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marketer will study target markets and adapt products to meet the specific needs of
customers in each country.
1.5 BENEFITS OF INTERNATIONAL MARKETING
The nation will be benefited through International Marketing, as discussed in the

summarized form below:
 To meet imports of industrial needs

The developing countries need imports of capital equipments, raw materials of critical
nature, technical know how for building the industrial base in the country with a view to
rapid industrialization and developing the necessary infrastructure.
 Debt servicing
All most all underdeveloped countries have been receiving external aid over the years for
their industrial development. Hence it is necessary to aim at sufficient export earnings to
cover both imports and debt servicing.
 Rapid economic growth
An expanding export trade can be a dynamic factor in a country’s development process.

The country should have to utilize domestic resources and to provide technological
improvement and improved production at lower costs.
The benefits include: -

i) The foreign exchange earnings can be used for the import of agricultural implements
and fertilizers to raise the production of agricultural produce and that can provide a base
for many agriculture-based industries.
ii) Mitigate unemployment in labor – intensive industries
iii) Full utilization of idle resources
iv) Spin of benefits for the domestic consumer by exposing the industry to international
markets and making it more competitive as well as conscious of costs and quality.
 Profitable use of natural resources

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Earning from exports can be utilized in establishing industrial unit based on different
natural resources available in the country by making the necessary imports of plant and
machinery for the purpose.
 Facing competition successfully

Better quality and lower prices improve the image of the producer as well as of the
country in minds of foreign customers.
 Increase in employment opportunities

In an effort to increase the export, many export oriented industrial units are established.
In underdeveloped countries, the problem of the employment and underemployment is
very serious that can be solved to some extent by increasing the level of export.
 Role of exports in national income

Exports play an important role in the national income of the country and it can be
increased to a sizeable extent through organized export marketing.
 Increase in the standard of living

Export marketing improve the standard of living of the countrymen in the following
ways: -
i) The imports of necessary item for consumption can be made which may help
improve standard of living.
ii) Exports increase the employment opportunities, which in turn, increase the
purchasing power of the people.
iii) Exports are responsible for the rapid industrialization of the country. New items are
produced for consumption in domestic market, which increases the level of standard
of living.
iv) In order to face the competition in the international market, the producer improves
the quality of the product by applying the latest technology. In this way, people get
better quality products at cheaper rates. It helps improve the standard of living of
the people.
 International collaboration

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Export marketing results in international collaboration. Developed country fix their

import quotas for different countries and for different commodities.
 Closer cultural relations

International trade brings various countries closer. Better trade relations are established
among the countries.
 Help in political peace

The economic relations between two countries help improve their political relations.
1.6 BARRIERS TO INTERNATIONAL MARKETING
The major legal, political and economical forces affecting international marketers are
barriers created by governments to restrict trade and protect domestic industries.
Examples includes the following: -
 Tariff: - a tax imposed on a product entering a country. Tariffs are used to protect
domestic producers and / or to raise revenue. E.g. Japan has a high tariff on imported
rice.
 Import quota: - a limit on the amount of a particular product that can be brought
into a country. Like tariffs, quotas are intended to protect local industry.
 Unstable governments: - high indebt-ness, high inflation, and high unemployment

in several countries have resulted in high unstable governments that exposed foreign
firms in business risks and profit repatriation.
 Foreign exchange problems: - high indebtedness and economic and political

instability decrease the value of a country’s currency. Profit repatriation for foreign
firms are not available in many markets.
 Foreign government entry requirements and bureaucracy. Government places

many regulations on foreign firms. For example: - they might require joint ventures with
the majority share going to the domestic partner, a high number of nationals to be hired,
limits on profit repatriation etc.

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 Corruption: - an official in several countries requires bribes to cooperate. They

award business to the highest briber rather than the lowest bidder. Etc.
 Technological pirating: - a company locating its plant abroad worries about foreign
managers learning how to make its product and breaking away to compete openly. I.e.
machinery, electronics, chemicals, pharmaceuticals area
1.7 CHARACTERISTICS OF MULTINATIONAL CORPORATION
Several firms have passed beyond the international division – stage and have become
truly global organizations. They have stopped thinking of themselves as national
marketers who have ventured abroad and now think of themselves as global marketers.
Their top corporate management and staff plan worldwide manufacturing facilities,
marketing policies, financial flows, and logistical systems.
The global operating units report directly to the chief executives or executive committee,
not to the head of an international division. Executives are trained in world wide
operations; not just domestic or international ones. Management is recruited from many
countries; components and supplies are purchased where they can be obtained at the least
cost; and investment is made where the anticipated returns are greatest.
What is a Global firm?
“A global firm is a firm that operates in more than one country and captures R&D,
production, logistical, marketing, and financial advantages in its costs and reputation
that are not available to purely domestic competitors. “
The mention of MNCS usually elicits mixed reactions. On the one hand, MNCS are
associated with exploitation and ruthlessness. They are often criticized for moving
resources in and out of a country, as they strive for profit, without much regard for the
country’s social welfare.
On the other hand, MNCS have power and prestige. Additionally they create social benefits
by facilitating economic balance. As explained by Miller, “with resources, capital food,
and technology unevenly distributed around the planet, and all in short supply, an efficient
instrument of quick and effective production and distribution of a complex of goods and
services is a first essential.
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According to Aharoni, an MNC has at least three significant dimensions: structural,

performance and behavior.
1. Structural
Structural requirements for definition as a MNC include the number of countries in which
the firm does business and the citizenship of corporate owners and top managers.
2. Performance
Definition by performance depends as such characteristics, as earnings, sales and assets.
These performance characteristics indicate the extent of the commitment of corporate
resources to foreign operations and the amount of rewards from the commitment; the
greater the commitment and reward, the greater the degree of internationalization.
3. Behavior
Behavior is somewhat less reliable as a measure of multinationals than either structure or
performance, though it is no less important. Thus a company becomes more multinational
as its management thinks more internationally. Such thinking, known as Geocentricity,
must be distinguished from the two other attitudes or orientations, known as
ethnocentricity and Polycentricity.
a) Ethnocentricity: - is a strong orientation toward the home country. Markets and

consumers abroad are viewed as unfamiliar and even inferior in taste, sophistication
and opportunity. Centralization of decision-making is thus a necessity. The usual
practice is to use the home base for the production of standardized products (i.e.
without significant modification) for export in order to gain some marginal business.
b) Polycentricity: - is the opposite of ethnocentricity, is or strong orientation to the host

country. The attitude places emphasize on differences between markets that are caused b y
variation with in, such as income, culture, laws and politics. The assumption is that each
market is a unique and consequently difficult for outsiders to understand. Thus, managers
from the host country should be employed and allowed to have a great deal of discretion
in market decision. A significant degree of decentralization is thus common across the
overseas divisions.

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c) Geocentricity: - is a compromise between the two extremes of ethnocentricity and

polycentricity. Geocentricity is an orientation that considers the whole world rather than
any particular country as the target market. A geocentric company might be thought of as
a denationalized or supranational. As such, “international” or foreign departments or
markets do not exist because the company does not designate anything international or
foreign about a market.
1.8 INTERNATIONAL TRADE CONCEPT

INTRODUCTION
There is a range of economic factors at an industry level such as the availability of land,
capital and labor in different economies and regions. In economic language, the three
central economic tasks of every society are really about choices among on economy's
inputs and outputs.
Inputs are commodities or services used by firms in their product processes. Outputs are
the various useful goods or services that are either consumed or employed in further
production.
We classify inputs, also called factors of production, into three broad categorized land,
labor and capital.
1. Land – or more generally natural resources represents the gift of nature to our
production processes. It consists of land used for farming or for underpinning houses,
factories and roads etc.
2. Labor – consists of the human time spent in production – working in automobile,
factories, teaching school etc.
Capital – resources form the durable goods of an economy, produced in order to produce
yet other goods. Capital goods include machines, roads, computers, hammers, trucks etc.
1.8.1 PRODUCTION POSSIBILITY FRONTIER
Life is full of choices. Because resources are scarce, we must constantly decide what to
do with our limited time and income.
i.e.,
 Should we go to a movie or read a book?

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 Should we travel or buy a car?

 Should we get postgraduate or begin work?
In each of these cases, making a choice in the world of scarcity requires us to give up
something else, costing us the opportunity to do something else. The alternative forgone
is the opportunity cost.
The opportunity cost of a decision arises because choosing one thing in a world of
scarcity means giving up something else. The opportunity cost is the value of the good or
service forgone. The production – possibility curve shows the maximum amounts of
production that can be obtained by an economy, given the technological knowledge and
quantity of inputs available. The production possibility curve represents the menu of
choices available to society.
Consider an economy with only so much labor, so much technical knowledge, so many
factories and tools and so much land, waterpower and natural resources. In deciding what
shall be produced and how, the economy is deciding in reality just how to allocate its
resources among the thousands of different possible commodities. How much land should
go into wheat growing? Or into housing the population? How many factories will
produce computers? How many will make pizzas? These issues are complicated even to
discuss. Therefore, we must simplify. Let us assume that only two economic goods are to
be produced. For dramatic purposes we can select Guns and Butter to illustrate the
problem of choosing between military spending and civilians’ goods.
We can represent our economy's production possibilities more vividly in the diagram
shown. This diagram measures Butter along the horizontal axis and Guns along the
vertical one.
Alternative Production Possibilities

Possibilities Butter (Millions of pounds) Guns (Thousands)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

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15
A
Guns 14 B
12 C
9 D
5 E
F
0 1 2 3 4 5
Butter millions of pounds
(Graphical Depiction of alternative production possibilities)
Suppose the economy throws all its energy into producing the civilian good, Butter.
Suppose 5 million pounds of Butter is the maximum amount that can be produced with
the existing technology and resources. At the other extreme, imagine that all resources
are instead devoted to the production of Guns i.e., assume that the economy can produce
15 thousands Guns of a certain kind of no Butter is produced.
A schedule of possibilities given in the diagram combination F shows the extreme where
all Butter and no Guns are produced. While A depicts the opposite extreme where all
resources go in to Guns. In between at E, D, C and B increasing amounts of Butter are
given up in return for more Guns.
Butter is transformed into Guns, not physically but by diverting the economy's resources
from one use to the other.
How do we know that any point the curve is efficient?
15 A
14 B
I
C
Guns
12
9 D
5 E
F
0 1 2 3 4 5
Butter

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Let us start in the situation shown by point D in the figure above. Decree that we want
another million pounds of Butter. If we ignored the constraints shown in the diagram, we
might think it possible to produce more Butter without reducing Gun production, say by
moving to point I, due east of point D. but point I is outside the diagram in the impossible
region. Starting from D, we cannot get more Butter without giving up some Guns. Hence
point D is efficient and point I is infeasible.
- Productive efficiency occurs when society cannot increase the output of one good
without cutting back on another good. An efficient economy is on its production-
possibility curve.
1.8.2 TRADE THEORIES

1.8.2.1 Principle of Absolute Advantage
Adam Smith may have been the first scholar to investigate formally the rationale behind
foreign trade. In his book "Wealth of Nations" Smith used the principles of absolute
advantage as the justification for international trade.
According to this principle, a country should export a commodity that can be produced at
a lower cost than other nations. Conversely it shared import of a commodity that can only
be produced at a higher cost than can other nations. Consider a hypothetical example of
the nations producing two products.
Product USA Japan

Computer 20 10
Automobile 10 20
It shows that given certain resources and labor, the United States can produce 20
computer or 10 automobiles or some combination of both. In contrast, Japan is able to
produce only half as many computers (i.e., Japan produces 10 for every 20 the United
States produces).
The disparity might be the result of better skills by American workers in making this
product. Therefore the United States is having an absolute advantage in computers; if the
situation is reversed for automobiles, the United States makes only 10 cars for every 20
units manufactured in Japan. In this instance, Japan has an absolute advantage.

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In this instance, it should be apparent why trade should take place between the two
countries. The USA has an absolute advantage for computers but an absolute
disadvantage for automobiles.
For Japan, the absolute advantage exists for automobiles and an absolute disadvantage for
computers. If each country specializes in the product for which it has an absolute
advantage, each can use its resources more effectively while improving consumer welfare
at the same time. Since the USA would use less resource in making computers, it should
produce this product for its own consumption as well as for export to Japan. Based on
this same rationale, the USA should import automobiles form Japan rather than
manufacturer them itself. For Japan, of course, automobiles would be exported and
computers imported.
Example: A doctor is absolutely better than a mechanic in performing surgery; whereas

the mechanic is absolutely superior in repairing cars. It would be impractical for the
doctor to practice medicine as well as repair the car when repairs are needed. Just as
impractical would be the reverse situation for the mechanic to attempt to practice
surgery.
Thus, for practicality each person concentrates on and specializes in the craft that person
has mastered. Similarly, it would not be practical for consumers to attempt to produce all
the things they desire to consume. One should practice what one does well and leave the
production of other things to people who produce them well.
1.8.2.2 Principle of Comparative Advantage

The principle of comparative advantage holds that each country will specialize in the
production and export of those goods that it can produce at relatively low cost (in which
it is relatively more efficient than other countries). Conversely each country will import
those goods that it produces at relatively high cost or in which it is relatively less efficient
than other countries.
Ricardo's Analysis of Comparative Advantage

Let us illustrate the fundamental principles of international trade by considering America
and Europe of a century ago. If labor (or resources more generally) is absolutely more

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productive in America than in Europe, does this mean that America will import nothing?
And is it economically wise for Europe to "protect" its markets with tariff or quotas.
These questions were first answered by the English economist David Ricardo in 1817.
Ricardo supplied a beautiful proof that international specialization benefits a nation,
calling the result the law of comparative advantage.
For simplicity, Ricardo worked with only two countries and only two goods, and he
choose to measure all production costs in terms of labor hours. We shall follow his lead
here; analyze food and clothing for Europe and America.
American and European Labor Requirements for Production

Necessary Labor (Labor – Hours)
Product In America In Europe
1 Unit of food 1 3
1 Unit of clothing 2 4
Note: In hypothetical example, America has lower labor costs in both food and clothing;
American labor productivity is between 2 and 3 times Europe's (twice in clothing, thrice
in food). Yet it benefits both regions to trade with each other.
In America it takes 1 hour of labor to produce a unit of food while a unit of clothing costs
2 hours of labor. In Europe the cost is 3 hours of labor for food and 4 hours of labor for
clothing. We see that America has an absolute advantage in both goods, for it can
produce them with greater absolute efficiency, than can Europe. However America has
comparative advantage in food, while Europe has comparative advantage in clothing,
because food is relatively inexpensive in America while clothing is less expensive in
Europe.
From these facts, Ricardo proved that both countries will benefit if they specialize in their
areas of comparative advantage that is America specializes in the production of food
while Europe specialize in the production of clothing. In this situation, America will
export food to pay for European clothing while Europe exports clothing to pay for
American food.

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To analyze the effect of trade and the benefits to specializing in areas of comparative
advantage, we must measure the amounts of food and clothing that can be produced and
consumed in each country.
A. If there is no international trade and
B. If there is free trade with each country specializing in its area of comparative
advantage.
Before Trade
Start by examining what occurs in the absence of any international trade. Say because all
trade is illegal or because of prohibitive tariff.
The real wage of the American worker for an hour's work is 1 unit of food or ½ unit of
clothing. The European worker is less well off in a no-trade position, getting only 1/3 unit
of food or ¼ unit of clothing per hour of work. Clearly, if perfect competition prevails in
each isolated region, the prices of food and clothing will be different in the two places
because of the difference in production costs. In America, clothing will be 2 times as
expensive as food because it takes twice as much labor to produce a unit of clothing as it
does to produce a unit of food. In Europe clothing will be only 4/3 as expensive as food.
After Trade
Now suppose that all tariffs are repealed and free trade is allowed. For simplicity, further
assume that there are no transportation costs. In this case, goods will flow from their low
price region to their high price region. Indeed with no transportation cost, all prices in the
two regions must be equalized just as the water in the connecting pipes must come to a
common level once you remove the barrier between them. Hence food sells for the same
price everywhere as will clothing.
What is the flow of goods when trade opened up? Clothing is relatively more expensive
in America and food is relatively more expensive in Europe.
Given these relative prices, and with no tariffs or transportation costs, this means that
food will soon be shipped from America to Europe and clothing from Europe to America.
As European clothing penetrates the American market, American clothiers will find price
falling and profits shrinking and they will begin to shut down their factories.

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The opposite will occur in Europe. European farmers will find that the prices of
foodstuffs begin to fall when American products hit the European markets they will
suffer losses, some will go bankrupt, and resources will be withdrawn from farming.
The relative prices of food and clothing must lie somewhere between the European price
ratio (which ¾ for the ratio of food to clothing price) and the American price ratio is
(which is ½).
Let us say that the final price ratio is 2/3, so that 2 units of clothing trade for 3 units of
food. For simplicity, we measure price in American dollars and assume that the free trade
price of food is $2 per unit, which means that the free trade price of clothing is $3 per
unit.
More over the regions have shifted their production activities. America has withdrawn
resources from clothing and invested in food while Europe has contracted its farm sector
and expanded its clothing manufacture. Under free trade, countries shifts production
toward their areas of comparative advantage.
When trade opens and each country concentrates on its area of comparative advantage,
every one is better off. Workers in each region can obtain larger quantity of consumer
goods for the same amount of work when people specialize in the areas of comparative
advantage and trade their own production for goods in which they have a relative
disadvantage. When borders are opened to international trade, the national income of
each and every trading country rises.
The Economic Gains From Trade

Real wages are measured by the amount of goods of service that a worker buy's with an
hours pay.
Before trade for both countries:

For simplicity, assume that each worker buys 1 unit of clothing and 1 unit of food. Before
trade, the bundle of consumer goods costs an American worker 3 hours of work and a
European worker 7 hours of work.
After trade has opened up, recall that the price of clothing is $3 per unit while the price of
food is $2 per unit. An American worker must still work 1 hour to buy a unit of food. But

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the price ratio of 2 to 3, the American worker need work only 1½ hours to produce
enough to buy 1 unit of European clothing. Therefore the bundle of goods costs the
American workers 2 ½ hours of work when trade is allowed, this represents an increase
of 16 2/3 percent in the real wage of the American worker.
For European workers, a unit of clothing will still cost 4 hours of labor in a free trade
situation, for clothing is domestically produced. To obtain a unit of food, however, the
European worker need produce only 2/3 unit for 1 unit of American food.
The total European labor needed to obtain the bundle of consumption is then 4 + 2 2/3 =
6 2/3, which represents an increase in real wages of about 5 percent over the no trade
situation.
Limitation and Suggested Refinements
Trade theories provide logical explanations about why nation trade with one another, but
such theories are limited by their underlying assumptions. Most of the world's trade rules
are based on a traditional model that assumes that:
 trade is bilateral
 trade involves products originating primarily in the exporting country
 the exporting country has a comparative advantage, and
 competition primarily focuses on the importing country's market.
However today's realities are quite different. That is

 trade is a multilateral processes
 trade is often based on products assembled from components that are produced in
various countries
 it is not easy to determine a country's comparative advantage, as evidenced by the
countries that often export and import the same product and
 competition usually extends beyond the importing country to include the exporting
country and third countries.
Limitations
1. One limitation of classical trade theories is that the factors of production are
assumed to remain constant for each country because of the assumed immobility of such

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resources between countries. This assumption is especially true in the case of land, since
physical transfer and ownership of land can only be accomplished by war or purchase.
Example: US seizure of California from Mexico and the US purchase of Alaska from
Russia.
2. A significant difference exists in the degree of mobility between land and capital. In
spite of the restrictions on the movement of capital imposed by most governments, it is
possible for a country to attract foreign capital for investment or for a country to borrow
money from foreign banks or international development agencies.
3. Labor as a factor is relatively immobile. Immigration laws in most countries severely
limit the freedom for movement of labor between countries. In China, people (i.e. labor)
are not even able to select residence in a city of their choice. Still, labor can and does
move across borders.
4. Production factors are now considered more mobile than previously assumed, but
their mobility is still considerably restricted. As a result, production costs and product
prices are never completely equalized across countries. The small amount of mobility that
does exist serves to narrow the price/cost differentials. In theory as a country exports its
abundant factors, that factor becomes more scarce at home and its price rises. In contrast,
as a country imports a scarce factor, it increases the abundance of that factor and its price
declines. Therefore, a nation is usually interested in attracting what it lacks and this
practice will affect the distribution of production factors.
5. Immobility is not the only item of relevance when considering the factors of
production. Another item that is very significant involves the levels of quality of the
production factors. It is important to understand that the quality of each factor should not
be assumed to be homogeneous worldwide.
6. Perhaps the most serious shortcoming of classical trade theories is that they ignore
the marketing aspect of trade. These theories are primarily concerned with commodities
rather than with manufactured goods or value-added products. It is assumed that all
suppliers have identical products with similar physical attributes and quality. This habit
of assuming product homogeneity is not likely to be made among those familiar with
marketing. Trade analysis, therefore, is not complete without taking into consideration
the reasons for product differentiation.

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7. A further shortcoming of classical trade theories is that the trade patterns as

described in the theories are in reality frequently affected by trade restrictions. The
direction of the flow of trade, according to some critics of free trade, is no longer
determined by a country's natural comparative advantage. Rather a country can create a
relative advantage by relying on out-sourcing and other trade barriers, such as tariff and
quotas.
i.e., The US trade pattern is also distorted by trade restrictions and regulations. The US
automobile emission control standards have effectively presented Brazilian cars from
entering the US market.
1.8.2. 3 Factors Endowment Theory

The principle of absolute advantage and relative advantage provide a primary basis for
trade to occur, but the usefulness of these principles is limited by their assumptions. One
basic assumption is that the advantage, whether absolute or relative, is solely determined
by labor in terms of time and cost. Other factors of production are assumed to be
 insignificant
 so evenly spread over all labor inputs that they always work in a fixed proportion
with labor
 merely representation of stored up labor. Labor then determines comparative
production costs and subsequent product prices for the same commodity.
If labor is indeed the only factor of production or even a major determinant of product
content, countries with high labor cost should be in serious trouble. It is misleading to
analyze labor cost without also considering the quality of that labor. A country may have
high labor cost on absolute basis. Yet this cost can be relatively low if productivity is
high.
Further more, the price of a product is not necessarily determined by the amount of labor
it embodies, regardless of whether the efficiency of labor is an issue or not.
Since product price is not determined by labor efficiency alone, other factors of
production must be taken into consideration including land and capital (i.e. equipment).
Together, all of these production factors contribute significantly to the creation of value
with in a particular product.

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One reason for the importance of identifying other factors of production is that different
commodities require different factor inputs and that no country is well endowed in all
production factors. The varying proportion of these factors embodied in various goods
has a great deal of impact on what a country should produce. Corn for instance is best
produced where there is an abundance of land (relative to labor and capital), even though
corn can be grown in most places in the world. Oil refining, in contrast, requires
relatively more capital and relatively less labor and land because of expensive equipment
and specialized personnel. In clothing, the most important input factor is that the
economy is labor intensive.
The varying factor inputs and proportions for different commodities together with the
uneven distribution of such factors of production in different regions of the world are the
basis of Heckscher – Ohlin theory of factor endowment. This theory holds that the
inequality of relative prices is a function of regional factor endowment and the
comparative advantage is determined by the relative abundance of such endowments.
Accordingly to Ohlin, there is a mutual interdependence among production factors, factor
movements, income, prices and trade. A change in one affects the rest. Prices of factors
and subsequent product prices in each region depend on supply and demand, which in
turn are affected by the desires of consumers, income levels, quantity of various factors,
and physical conditions of production.
Therefore, a country that is relatively abundant labor but relatively scarce in capital is
likely to have a comparative advantage in the production of labor-intensive goods and to
have deficiencies in the production of capital-intensive goods. This concept explains why
China, a formidable competitor in textile products, has to depend on US and European
firms for oil exploration within China itself.
The United States has a relative advantage in such temperate-zone agricultural

commodities as wheat, corn and soybeans as well as in high-technology manufactured
goods (e.g., capital goods). These advantages are not surprising in a country that has a
great deal of land and capital. On the other hand, the United States is a net importer of
such low-techonolgy manufactured goods as consumer products. The United States also
imports mineral fuel (e.g., oil), even though it exports other crude materials.

21
1.9 INTERNATIONAL PRODUCT LIFE CYCLE
Introducing a new product at the proper time will help maintain a company's desired level
of profit. Striving to maintain its dominant position in the market, the company has to
face that challenge often.
Though designing a new product takes its own course, even a well-made product may not
sustain in the market as expected.
1.9.1 Domestic Product Lifecycle

The Life cycle of a product consists of four stages:
Introduction, Growth, Maturity and Decline. A product life cycle consists of the
aggregate demand over an extended period of time for all brands comprising a generic
product category.
Introduction Growth Maturity Decline

Sales Value
Profit
Loss
Time in years
Characteristics of Each Stage

Management must be able to recognize what part of the life cycle its product is in at any
given time. The competitive environment and marketing strategies that should be used
ordinarily depend on the particular stage.
1. Introduction

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During the introduction stage, a product is launched into the market in a full-scale
marketing program. It has gone through product development, including idea screening
prototype and market tests. This introductory (Sometimes called pioneering) stage is the
most risky and expensive one, because substantial amount of money spent in seeking
consumer's acceptance of the product.
2. Growth
In the growth stage, or market acceptance stage, sales and profit rises, often at a rapid
rate. Competitors inter the market, often in a large numbers if the profit outlook is
particularly attractive. Mostly as a result of competition, profits start to decline near the
end of the growth stage.
3. Maturity
During the first part of the maturity stage, sales continue to increase, but at a decreasing
rate. When sales level of profits of producers and middlemen decline, the primary
reason: Intense price competition. During the latter part of this stage, marginal producers,
those with high costs or with out a deferential advantages are forced to drop out of the
market. They do so because they lack sufficient customers and /or profits.
4. Decline
For most products, a decline stage as gauged by sales volume for the total category is
inevitable for one of the following reasons:
 The need for the product disappears.

 Better or less expensive product is developed to fill the same need
 People simply tired of a product (a clothing style for instance)
 So it disappears from the market.
The concept of product life cycle is very important in modern marketing. Steps in
planning and development of products, why new product fail? And strategies used on
every stage of the life cycle is illustrated as follows:
1.9.2 International Product Life Cycle

Product life cycle is a well – known theory in marketing. But its international counterpart,
International Product Life Cycle (IPLC), is relatively unknown. The theory developed

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and verified by economists to explain international trade in a context of comparative

advantage, has been covered rather briefly in some international economics and
international marketing texts and in a few marketing articles.
The IPLC theory describes the diffusion process of an innovation across national
boundaries. The life cycle begins when a developed country, having a new product to
satisfy consumer needs, wants to exploit its technological breakthrough by selling abroad.
Other advanced nations soon start up their own production facilities, and before long
Least Developed Countries (LDCs) do the same. Efficiency/comparative advantage shifts
from developed countries to developing nations. Finally, advanced nations, no longer cost
– effective, import products from their former customers. The moral of this process could
be that an advanced nation becomes a victim of its own creation.
One reason that IPLC theory has not made a significant impact is that its marketing
implications are somewhat obscure, even though it has the potential to be a valuable
framework for marketing planning on a multinational basis. In this section, the IPLC is
examined from the marketing perspective, and marketing implications for both
innovators and imitators are discussed.
Stages and characteristics

There are five distinct stages (stage 0 through Stage 4) in the IPLC. Table 2-1 shows the
major characteristics of the IPLC stages, with the United States as the developer of the
innovation in question. Exhibit 2-2 shows three life – cycle curves for the same
innovation: one for the initiating country (i.e., the United States in this instance), one for
other advanced nations, and one for LDCs. For each curve, net export results when the
curve is above the horizontal line; if under the horizontal line, net import results for that
particular country. As the innovation moves through time, directions of all three curves
change. Time is relative, because the time needed for a cycle to be completed varies from
one kind of product to another. In addition, the time interval also varies from one stage to
the next.

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Table 2-1 IPLC stages and characteristics (for the initiating country)
Stage Import/Export Target Market Competitors Production
Costs
0 Local Innovation None USA Few: Local Initially High
Firms
1 Overseas Increasing USA & Few: Local Decline Owing
Innovation Export Advanced Firms to Economies of
Nations Scale
2 Maturity Stable Export Advanced Advanced Stable
Nations & LDCs Nations
3 Worldwide Declining LDCs Advanced Increase Owing
Imitation Export Nations to Lower
Economics of
Scale
4 Reversal Increasing USA Advanced Increase Owing
Import Nations & LDCs to Comparative
Disadvantage
IPLC Curve
Other Advanced Nations
Exporting
LDC’s
1 2 3 4
0 Time
Importing
USA (Initiating Country)
IPLC curves
1. Stage 0 – Local Innovation

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Stage 0, depicted as time 0 on the left of the vertical importing/exporting axis, represents
a regular and highly familiar product life cycle in operation within its original market.
Innovations are most likely to occur in highly developed countries because consumers in
such countries are affluent and have relatively unlimited wants. From the supply side,
firms in advanced nations have both the technological know-how and abundant capital to
develop new products. Developed countries, in addition to being the original case where
innovation take place, in all likely hood will be the place where such new products are
first introduced to the public. Introduction occurs there because marketers are familiar
with local desires and marketing conditions, making them believe that the risks in
introducing any product at home, rather than some where else, are smaller. Furthermore,
it is common for a new product to have technical problems even after market introduction
and acceptance, perhaps necessitating significant modifications. Products sold overseas
may have to be adjusted to be suitable for their intended markets. All of these
considerations together may be too complicated for innovative firms to deal with at the
beginning. Thus, it is easier and more logical for a firm to concentrate its effort in its
home market before looking to overseas markets.
Many of the products found in the world’s market where originally created in the United
States before being introduced and refined to other countries. In most instances,
regardless of whether a product is intended for later export or not, an innovation is
initially designed with an eye to capture the U.S. market, the largest consumer nation.
2. Stage 1- Overseas Innovation

As soon as the new product is well developed, its original market well cultivated, and
local demands adequately supplied, the innovating firm will look to overseas markets in
order to expand its sales and profit. Thus, this stage is known as a “pioneering” or
“International Introduction” stage. The technological gap is first noticed in other
advanced nations because of their similar needs and high income levels. Not surprisingly,
English – Speaking countries such as the United Kingdom, Canada, and Austria account
for about half of the sales of US innovations when such products are first introduced
overseas. Countries with similar cultures and economic conditions are often perceived by
exporters as posing less risk and thus are approached first before proceeding to less
familiar territories.

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Competition in this stage usually comes from US firms, since firms in other countries
may not have much knowledge about the innovation. Production cost tends to be
decreasing at this stage because by this time the innovating firm will normally have
improved the production process. Supported by overseas sales, aggregate production
costs tend to decline further because of increase economies of scale. A low introductory
price overseas is usually not necessary because of the technological breakthrough; a low
price is not desirable because of the heavy and costly marketing effort needed in order to
educate consumers in other countries about the new product. In any case, as the product
penetrates the market during this stage, there will be more export from the United States
and, correspondingly, an increase in imports by other developed countries.
3. Stage 2 – Maturity
Growing demand in advanced nations provides an impetus for firms their to commit
themselves to starting local production, often with the help of their governments’
protective measures to preserve infant industries. Thus, these firms can survive and thrive
in spite of relative inefficiency. This process may explain the changing national
concentrations of high – technology exports and the laws of the US share to Japan,
France, and perhaps the United Kingdom.
Development of competition does not mean that the initiating countrie’s export level will
immediately suffer. The innovating firm’s sales and export volumes are kept stable
because LDCs are now beginning to generate a need the product. Introduction of the
product in LDCs helps offset any reduction in export sales to advanced countries.
4. Stage 3 – World Wide Imitation

This stage means tough times for the innovating nation because of its continuous decline
in export. There is no more new demand anywhere to cultivate. The decline will
inevitably affect the US innovating firm’s economies of scale and its production costs
thus begin to rise again. Consequently, firms in other advanced nations use their lower
prices (coupled with product - differentiation techniques) to gain more consumer
acceptance abroad at the expense of the US firm. As the product becomes more and more
widely disseminated, imitation picks up at a faster pace. Toward the end of this stage, US
export dwindles almost to nothing, and any US production still remaining is basically for

27
local consumption. The US automobile industry is a good example of this phenomenon.

There are about 30 different companies selling cars in the United States, with several on
the rise. Of these, only 4 are US firms, with the rest being from Western Europe, Japan,
South Korea, Taiwan, Mexico, Brazil, and Malaysia.
5. Stage 4 – Reversal
Not only must all good things end, but also misfortune frequently accompanies the end of
a favorable situation. The major functional characteristics of this stage are product
standardization and comparative disadvantage. The innovative country’s comparative
advantage has disappeared, and what is left is comparative disadvantage. This
disadvantage is brought about because the product is no longer capital – intensive or
technology – intensive but instead has become labor – intensive - a strong advantage
possessed by LDCs. Thus, LDCs – the last imitators – establish sufficient production
facilities to satisfy their own domestic needs as well as to produce for the biggest market
in the world, the United States. US firms are now undersold in their own country. Black –
and – white television sets, for example, are no longer manufactured in the United States
because many Asian firms can produce them much less expensively than any US firm.
Consumers’ price sensitivity exacerbates the problem for the initiating country.
The IPLC is probably more applicable for products related through an emerging
technology. These newly emerging products are likely to provide functional utility rather
than aesthetic values. Furthermore, these products likely satisfy basic needs that are
universally common in most parts of the world.
Washers, for example, are much more likely to fit this theory than are dryers. Dish
washing machines are not useful in countries where labor is plentiful and cheap, and the
diffusion of this kind of innovation as described in IPLC is not likely occur.
1.9.3 Marketing Strategies

For those U.S. industries in the worldwide imitation stage or the maturity stage, things
are likely to get worse rather than better. The prospect, though bleak, can be favorably
influenced. What is critical is for U.S. firms to understand the implications of the IPLC so
that they can adjust marketing strategies accordingly.

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i) Product Policy
The IPLC emphasizes the importance of cost advantage. The innovative firm must keep
its product cost competitive. To reduce production cost,
a) Cutting labor costs through automation and robotics

b) Eliminating unnecessary options, since such options increase inefficiency and
complexity. This strategy may be critical for simple products or those at the low end of
the price scale. In such cases, it is desirable to offer standardized products with standard
package of features or options included.
c) A firm may use local manufacturing in other countries as an entry strategy. The
company not only can minimize transportation costs and entry barriers but also can
indirectly slow down potential local competition firm starting up manufacturing
facilities. Another benefit is that those countries can eventually become a springboard
for the U.S. company to market its products throughout that geographic region.
d) Manufacturers should examine the traditional vertical structure in which they make
all or most components and parts themselves, because in many instances outsourcing
may prove to be more cost – effective. Out sourcing is the practice of buying parts or
whole products form other manufacturers while allowing a buyer to maintain its own
brand name. A modification of outsourcing involves producing various components or
having them produced under contract in different countries. That production in each
country before assembling components into final products form worldwide distribution.
Once in the maturity stage, the innovator’s comparative advantage is gone, and the firm
should switch from producing simple versions to producing sophisticated models or new
technologies in order to remove itself from cut – throat competition.
ii) Pricing Strategy

Initially, an innovating firm can afford to behave as a monopolist, changing a premium
price for its innovation. But this price must be adjusted down - ward in the second and
third stages of IPLC to discourage potential newcomers and to maintain market share.
In the last stage of the IPLC, it is not practical for the innovating firm to maintain low
price because of competitions cost advantage. But the firm’s above – the – market price is

29
feasible only if it is accompanied by top – quality or sophisticated products. A high

standard of excellence should partially insulate the firm’s product from direct price
competition.
iii) Promotion Strategy

Promotion and pricing in the IPLC are highly related. The innovative firm’s initial
competitive edge is its unique product, which allows it to made a premium price. To
maintain this price in the face of subsequent challenges from imitators, uniqueness can
only be retained in the form of superior quality, style, or service.
The innovating marketer must plan for a non price promotional policy at the outset of a
product diffusion. Timken is able to compete effectively against the Japanese by offering
more services and meeting customers’ needs at all times. For instance, it offers
technological support by sending engineers to help customers design bearings in
gearboxes.
One implication that can be drawn is that a new product should be promoted as a
premium product with a high-quality image. In this case promotional goal is to sell image
rather than a specific product.
By starting out with a high- quality reputation, the innovating company can trade down
later with a simpler version of the product while still holding on to the high price, most
profitable segment of the market. One thing the company must never do is to allow its
product to become a commodity item with prices as the only buying motive, since such a
product can be easily duplicated by other firms. Product differentiation, not price, is most
important for insulating a company from the crowded, low profit market segment. A
product can be so standardized that it can be easily duplicated, but image is a much
different proposition.
iv) Place (Distribution) Policy

A strong dealer network can provide the U.S. innovating firm with a good defensive
strategy. Because of its near-monopoly situation at the beginning, the firm is in a good
position to be able to select only the most qualified agents/distributors and the
distribution network should be expanded further as the product becomes more diffused.

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A firm must also watch closely for the development of any new alternative channel that
may threaten the existing channel.
1.10 STRATEGIC MARKETING PLANNING
INTRODUCTION
The management process as applied to marketing, consists basically of :
 Planning a marketing program

 Implementing it, and
 Evaluating its performance
The Planning stage includes setting goals and designing strategies and tactics to reach
these goals. The implementation stage entails forming and staffing the marketing
organization and directing the actual operation of the organization according to the plan.
The evaluation stage consists of analyzing past performance in relation to organizational
goal.
This third stage indicates the interrelated, continuing nature of the management process.
Planning is a predetermined goal. It is deciding now what to do later, including how and
when we are going to do it. Without a plan, we cannot get things done effectively and
efficiently, because we don't know what needs to be done or how to do it.
In strategic planning, managers match an organizations resources with its market

opportunities over the long run. Market and economic conditions during the past two
decades prompted many companies to consider more formally and more frequently how
best to match their opportunities and their resources.
Most companies operate several businesses. However companies too often define their
business in terms of products. They are in the “auto business” or the “Slide business”. A
business must be viewed as a customer satisfying process, not a goods – producing
process. Products are transmit, but basic needs and consumer groups endure forever.

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A business can be defined in terms of three dimensions; customer groups, customer

needs, and technology. For example, a small company that defines its business as
designing incandescent lighting systems for televisions studios, its customer group is
television studios; the customer need is lighting; and the technology is incandescent
lighting.
The purpose of identifying the company’s strategic business units is to develop separate
strategies and assign appropriate funding. Senior management knows that its portfolio of
business usually includes a numbers of “Yesterday’s has – been as well as tomorrow’s
breadwinners.” But it cannot rely just on impressions; it needs analytical tools for
classifying its business by profit potential.
1. It is a single business or collection of related business that can be planned

separately from the rest of the company.
2. It has its own set of competitions
3. It has a manager who is responsible for strategic planning and profit performance
and who controls most of the factors affecting profits.
Two of the best-known business pert folio evaluation models are the Boston Consulting
Groups model and the General Electric Model.
1.10.1 MEANING OF STRATEGIC PLANNING
Strategic marketing planning is the managerial process of developing and maintaining

a viable fit between the organization’s objectives, skill, and resources and its
changing market opportunities. The aim of strategic planning is to shape and reshape
the company’s businesses and products so that they yield target profits and growth.
The intent of planning is to seize the opportunities and to avoid the threats associated
with changing markets. Formal strategic planning was recognized as an effective
management tool to do this.

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The basic terms used in planning phase include:
1 Mission
The organization's mission states what customers it serves, what need it satisfies, and
what types of products it offers. A mission statement indicates in general terms the
boundaries for an organization's activities.
A mission statement should be neither too broad nor vague nor too narrow and specific.
Traditionally, companies stated their mission in production-oriented terms. Today, firms

following the marketing concept express their mission in customer-oriented terms.
i.e. production - oriented mission statement
 We operate a long distance telephone company.
 We make blue jeans.
i.e. Marketing oriented mission statement
 We provide multiple forms of reliable, efficient, and inexpensive
telecommunication services.
 We offer comfort, fashion, and durability in wearing apparel.
2 Objective and Goals
Objective and goals used interchangeably. An objective is simply a desired outcome.

Effective planning must begin with a set of objectives that are to be achieved by carrying
out plans.
To be worthwhile and workable, objectives should be:

 Clear and specific
 Stated in writing
 Ambitious, but realistic
 Consistent with one another
 Quantitatively measurable wherever possible
 Tied to a particular time period
i.e. Too general (weak)
 Increase our market share

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 Improve our company's public image specific workable

 Increase our market share to 25% next year form its present 20% level.
 Receive favorable recognition awards next year from at least three consumer or
environmental groups.
3 Strategic
The term strategy originally applied to the art of military generalship. A strategy is a
broad plan of action by which an organization intends to reach its objectives.
i.e. objectives
 Increase sales next year by 10% over this year figure possible strategies.
 Intensify marketing efforts in domestic markets
 Expand in to foreign markets.
i.e. strategy
 Direct our promotion in males, ages 25-40
4 Tactic
A tactic is a means by which a strategy is implemented. A tactic is a more specific

detailed course of action plan than is a strategy. Also, tactics generally cover shorter time
periods than strategies.
Tactics i.e.
 Advertise in magazines read by this group of people.
 Advertise on television programs watched by this group.
To be effective, a tactic must coincide with and support the strategy with which it is
related.
The concepts of mission, objectives, strategies, and tactics each raise and impart question
that must be answered by an organization seeking success in business or, more
specifically, in marketing.

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Mission - What business are we in?

Objectives - What do we want to accomplish?
Strategies - In general terms, how are we going to get the job done?
Tactics - In specific terms, how are we going to get the job done?
1.10.2 STRATEGIC PLANNING PROCESS
The business unit strategic planning process consists of the eight steps as shown below:
The business strategic - planning process
External
Environment
(opportunities &
threats) analysis Goal Strategy
Business Program Implementa
Mission Formulati Formulati formulatio tion

SWOT analysis
on on n
Internal
Feedback
Environment
& control
Strength &
Weakness
analysis
1 Business Mission
Each business unit needs to define its specific mission with in the broader company
mission.
e.g. We provide various types of safe and cost effective energy.
We offer comfort, fashion, and durability in wearing apparel.
2 External Environmental Analysis (Opportunity and Threat Analysis)
Once the business unit has formulated its mission statement, the business manager knows
the parts of the environment it needs to monitor to achieve goals.

35
In general a business unit has to monitor key external macro environment forces
(demographic, economic, technological, political, legal, social & cultural) and significant
microenvironment factors (customers, competitors, distribution channel, suppliers) that
affect its ability to earn profits. The business unit should set up a marketing intelligence
system to track trends and important developments. For each trend or development,
management needs to identify the associated opportunities and threats.
Opportunities:
A marketing opportunity is an area of buyer need in which a company can perform

profitability.
Opportunities can be classified according to their attractiveness and their success

probability. The company's success probability depends on whether its business
strengths not only match the key success requirements for operating in the target market
but also exceeds those of its competitions.
Threats
An environmental threat is a challenge posed by an unfavorable trend or development

that would lead, in the absence of defensive marketing action, to deterioration in sales or
profit.
Threats should be classified according to their seriousness and probability of occurrence.

To deal with threats, the company needs to prepare contingency plans that spell out what
changes the company can make before or during the threat occurrence.
Once management has identified the major opportunities and threats facing a specific
business unit, it can characterizes that business's overall attractiveness.
Four outcomes are possible:

 An ideal business is high in major opportunities and low in major threats.
 A speculative business is high in both major opportunities and threats.
 A mature business is low in major opportunities and low in threats.
 A troubled business is low in opportunities and high in threats.
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Opportunity and threat matrixes

(a) Opportunity matrix
Success probability
Attractiveness High Low
Low 1 2
High 3 4
b) Threat matrix
Probability of occurrence
High Low
Seriousness
Low 1 2
High 3 4
3 Internal Environment Analysis (Strengths/ weakness Analysis)
Each business needs to evaluate its internal strength and weakness periodically.
Management or an outside consultant reviews the business marketing, financial,

manufacturing, and organizational competencies and rates each factor as a major
strength, minor strength, neutral factor, minor weakness, or major weakness.
Checklist for performing strengths/weakness analysis

Performance
Major Minor Neutral Minor Major
Importance
Strength strength weakness weakness Hi mid low
Marketing
1. Company Reputation
2. Market share
3. Product quality
4. Service quality
5. 4p's effectiveness
6. Sales force effect etc.

37
Finance
7. Availability of capital
8. Cash flow
9. Financial stability etc.
Manufacturing
10. Facilities
11. Economies of scale
12. Capacity
13. Technical manufacturing skill etc.
Organization
14. Leadership
15. Dedicated employees
16. Flexible/Responsive etc.
A modern tool for analysis of the situation

Today, strategy designers have been aided by a number of matrixes showing the
relationship of critical variables.
The SWOT matrix has a wider scope, and it has different emphases form those of the
Business portfolio matrix.
It has been common to suggest that companies identify their strengths and weakness, as
well as the opportunities and threats in the external environment.
Four Alternative Strategies
The strategies are based on the analysis of the external environment (threats and
opportunities) and the internal environment (weakness and strengths).
1. The WT strategy aims to minimize both weakness and threats. It may require that the
company. For example, forms a joint venture, retrench, or even liquidate.
2. The WO strategy attempts to minimize the weaknesses and maximize the

opportunities. Thus, a firm with certain weakness in some areas may either develop
those areas with in the enterprise or acquire the needed competencies (such as
technology or persons with needed skills) from the outside, making it possible to take
advantage of opportunities in the external environment.

38
3. The ST strategy is based on the organization's strengths to deal with threats in the
environment. The aim is to maximize the former while minimizing the latter. Thus, a
company may use its technological, financial, managerial, or marketing strength to
cope with the threats of a new product introduced by its competitors.
4. The most desirable situation occurs when a company can use its strength to take
advantage of opportunities. (The SO strategy). Indeed, it is the aim of enterprises to
move from other position in the matrix to this one. If they have weakness, they will
strive to overcome them, making them strengths. If they face threats, they will cope
with them so that they can focus on opportunities.
The SWOT Matrix for Strategic Formulation
Internal factors Internal strengths (s) e.g. Internal weakness (W)

External factors strengths in management, e.g. Weakness in the area
operations finance, shown in the box of
marketing R&D, strengths
engineering
External opportunities (0) So strategy maxi-maxi WO strategy mini-maxi e.g.
current & future economic potentially the most developmental strategy to
conditions, political and successful strategy, utilizing overcome weaknesses in
social changes, new the organizations strengths order to take advantage of
products, services and to take advantages of opportunities
technology consider risks opportunities
also
External Threats (T) e.g. ST strategy WT strategy
lack of energy competition, Maxi-mini Mini-mini
and areas similar to those e.g. use of strengths to cope e.g. retrenchment,
shown in the opportunities with threats or to avoid liquidation, or joint venture.
box above threats
Clearly the business does not have to correct all its weakness, nor should it gloat about all
its strengths. The big question is whether the business should limit itself to those
opportunities where it possesses the required strength or should consider better
opportunities where it might have to acquire or develop certain strength.
4 Goal Formulation

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The overall evaluation of a company's strengths, weakness, opportunities and threats is

called SWOT analysis. Once the company has performed its SWOT analysis, it can
proceed to develop specific goals for the planning period. This stage of the business
strategic planning process is called goal formulation.
Objectives must be
1. Hierarchically arranged
2. Should be stated quantitatively i.e. increase ROI by 15%
3. It should be ambitious but realistic
4. It must be consistent
Other important trade off includes short-term profit verses long-term growth, deep
penetration of existing markets versus developing new markets, profit goals versus non-
profit goals and high growth versus low risk. Each choice in this set of goals trade off
calls for a different marketing strategy.
5 Strategy Formulation
The company's plans for its existing businesses allow it to project total sales and profits.
Often projected sales and profits are less than what corporate management wants them to
be. If there is a strategic planning gap between future desired sales and projected sales,
corporate management would have to develop or acquire new business to fill it.
Evidently the company wants to grow much faster than its current businesses will permit.
How can it fill the strategic planning gap?
Three options are available. The first is to identify opportunities to achieve further
growth with in the company's current businesses (intensive growth opportunities).
The second is to identify opportunities to build or acquire businesses that are related to
the company's current business (integrative growth opportunities).
The third is to identify opportunities to add attractive businesses that are unrelated to the
company's current business (diversification growth opportunities).

40
i) Intensive Growth
Corporate management's first course of action should be a review of whether any
opportunities exist for improving its existing businesses performance. Ansoff has
proposed a useful framework for detecting new intensive growth opportunities called a
product/market expansion grid.
ii) Integrative Growth

Often a business's sales and profits can be increased through backward, forward, or
horizontal integration within its industry.
An organization might acquire one or more of its suppliers (producers) to gain more
control or generate more profit (backward integration). Or an organization might acquire
some wholesalers or retailers, especially if they are highly profitable (forward
integration). Finally an organization might acquire one or more competitors. Provided
that the government does not bar this move (horizontal integration).
Through investigating possible integration moves, the company may discover additional
sources of sales-volume increases over the next 10 years. These new sources may still
not deliver the desired sales volume. However, in that case, the company must consider
diversification.
Diversification Growth
Diversification growth makes sense when good opportunities can be found outside the
present businesses. A good opportunity is one in which the industry is highly attractive
and the company has the mix of business strengths to be successful. Three types of
diversification are possible. The company could seek new products that have
technological and/or marketing synergies with existing product lines, even though the
new products themselves may appeal to a different group of customers (concentric
diversification strategy).
Second, the company might search for new products that could appeal to its current
customers even though the new products are technologically unrelated to its current
product line (horizontal diversification strategy)

41
Finally, the company might seek new businesses that have no relationship to the
company's current technology, products, or markets (conglomerate diversification
strategy).
Major classes of Growth opportunities
Intensive Growth Integrative Growth Diversification Growth
Market Penetration Backward Integration Concentric Diversification
Market Development Forward Integration Conglomerate

Diversification
Horizontal Integration
Horizontal Diversification
Desired Sales
Diversification growth
Integrative growth
Intensive growth
Sales
Current portfolio
0 5 10
Time in years
The company first considers whether it could gain more market share with its current
products in their current markets (market penetration strategy). Next it considers whether
it can find or develop new markets for its current products (market- development

42
strategy). Then it considers whether it can develop new products of potential interest to
its current markets (product development strategy). Later it will also review
opportunities to develop new products for new markets-diversification strategy).
1 Ansoff's Product/Market Expansion Grid
Product
Current New
Markets
Market Product
Current penetration development
strategy strategy
New Market Diversification

Development strategy
strategy
The four product-market growth strategies describe in detail as follows:
i) Market Penetration:-
A company tries to sell more of its present products to its present markets. Supporting
tactics might include greater spending on advertising or personal selling. Or a company
tries to become a single source of supply by offering preferential treatment to customers
who will concentrate all their purchases with it.
ii) Market Development

A firm continues to sell its present products, but to a new market.
iii) Product Development

This strategy calls for a company to develop new products to sell to its existing markets.
iv) Diversification
A company develops new product to sell to new markets. This strategy is risky because
it doesn't rely on either the company's successful products or its position in established
markets.

43
As market conditions change over time, a company may shift product-market growth
strategies. For example, when its present market is fully saturated, a company may have
no choice other than to purse new markets.
2 Porter's Generic Strategies Model
Michael porter, a Harvard business professor, advises forms to assess two factors, scope
of target market and differential advantage, and then choose an appropriate strategy.
Porter's generic strategies model recommends three alternatives for consideration.
1. Overall cost leadership:

A company or an SBU, typically large, seeks to satisfy a broad market by producing a
standard product at a low cost and then under pricing competitors.
2. Differentiation
An organization creates a distinctive, perhaps even a unique, product through its

unsurpassed quality, innovative design, or some other feature and, as a result, can change
a higher than average price. This strategy may be used to pursue either a broad or narrow
target
3. Focus
A firm or an SBU concentrates on part of a market and tries to satisfy it with either a very
low-priced or highly distinctive product. The target market ordinarily is set apart b y
some factor such as geography or specialized needs.

44
Cost leadership
High Focus Differentiation
Profitability
Differentiation
No Differentiation
No cost leadership
No Focus
Low
Narrow Broad
Scope of target market
3 Boston Consulting Group Model

The Boston consulting Group (BCG) is a leading management consulting firm, developed
and populated the growth share matrix.
20% Stars Question mark

18% 1
Market Growth Rate
4 3
16%
14% 2
5
12%
10% Cash cows Dogs
8%
6%
4% 6 8
2%
7
1.5
0.5
0.4
0.3
0.2
0.1
4X
2X
1X
10
X
X
Relative Market Share

45
The eight circles represent the current sizes and positions of eight business units in a
hypothetical company. The dollar volume size of each business is proportional to the
circles area. Thus, the two largest businesses are 5 and 6. The location of each busyness
unit indicates its market growth rate and relative market share.
Specifically, the market growth rate on the vertical axis indicates annual growth rate of
the market in which the business operates. In the above illustration it ranges from 0% to
20%, although a larger range could be shown. A market growth rate above 10% is
considered high. Relative market share, which is measured on the horizontal axis, refers
to the SBU’s market share, relative to that of its larger competitor. It saves as a measure
of the company’s strength in he relevant market. A relative market share of 0.1 means
that the company’s sales volume is only 10% of the leaders sales volume a relative share
of 10 means that the company’s SBU is the leader and has 10 times the sales of the next
strongest competitor is that market. Relative market share is divide into high and low
share using a 1.0 as a dividing line.
The growth-share matrix is divided into four cells, each indicating a different type of
business
1. Question mark: -
Question marks are businesses that operate in high-growth markets but have low relative
market shares. Most businesses start of as a question marks as the company tries to enter
a high-growth market in which there is already a market leader. A plants, requirement,
and personnel to keep up with the fast-growing market and because it wants to overtake
the leader.
2. Stars: - If the question-mark business is successful it becomes a star is the market

leader in a high-growth market. A star does not necessarily produce a positive cash flow
for the company. The company must spend substantial funds to keep up with the high
market growth and fights of competitors attacks.

46
3. Cash Cows: - When a market’s annual growth rate falls to less than 10% the star
becomes a cash cow if it still has the largest relative market share. A cash cow produces a
lot of cash for the company. The company does not have to finance a lot of capacity
expansion because the market growth rate has a showed down. And since the business is
the market leader, it enjoys economies of scale and higher profit margin.
4. Dogs: - Dogs are business that have make market share in low-growth markets. They
typically generates low profits or losses, although they may generate some cash. The
company should consider whether it is holding on to these dog businesses for good
resource (Such as unexpected tem around in the market growth rate or a new chance at
market leadership) or for sentimental reasons. Dogs often consume more management
time than they are worth and need to be phased down or out.
After plotting its various businesses in the growth share matrix, a company must
determine whether its portfolio is healthy. An unbalanced portfolio would have too many
dogs or question marks and/or too few stars and cash cows.
The company next task is to determine what objective, strategy, and budget to assign to
each SBU.
Four stages can be passed:
1. Build: - Here the objective is to increase the SBU’s market share, even forgoing short
term earnings to achieve this objective if necessary. Building is appropriate for
question marks whose market share must grow if they are to become stars.
2. Hold: - Here the objective is to increase the SBU’s market share. This strategy is
appropriate for strong cash cous if they are to continue yielding a large positive cash
flow.
3. Harvest: - Here the objective is to increase the SBU’s short-term cash flow regardless
of long term effect. Harvesting involves a decision to eventually withdraw from a
business by implementing a program of continuous cost retirement. The company
plans to cash in on its “Crop to milk its business”. Harvesting generally involves
eliminating R is expenditures, not replacing the physical plant as it wears out, not
replacing sales people, reducing advertising expenditures, and so on.

47
The hope is to reduce costs at a faster rate than any potential drop in sales, thus
resulting in an increase in the company’s positive cash flow.
This strategy is appropriate for weak cash cows whose future is dein and form which
more cash flow is needed. harvesting can also be used with question marks and dogs.
The company coming at a harvesting strategy faces prickly social and ethical
questions over how much information to share with various stockholders.
4. Divest: - Here the objective is to sell or liquidate the business because resources can
be better used elsewhere. This strategy is appropriate for dogs and question market
that are acting as a drag on the company’s profits.
Companies must carefully decide whether harvesting or divesting is a better strategy for a
weak business. Harvesting reduces the business future value and therefore the price at
which it card later be sold if divested. An early decision to divest, in contrast, is likely to
produce fairly good bids if the business is in relatively good shape and of more value to
another firm.
6 Program Formulations
Once the business unit has developed its principal strategies, it must work out detailed
supporting programs.
Thus if the business has decided to attain technological leadership, it must plan programs
to strengthen its R & D department, gather technological intelligence, develop leading
edge products, train the technical sales force, develop ads, to communicate its
technological leadership and soon.
3.4.7 Implementation
A clear strategy and a well-thought-out supporting program may be useless if the firm
fails to implement them carefully. Indeed, strategy is only one of seven elements,
according to the Mckinsey consulting firm, that the best-managed companies exhibit.

48
The Mckinsey 7-s framework for business success is includes - Strategy, Structure, and
Systems- are considered the hardware of success. The next four - Style, Staff, Skills, and
Shared values - are the software's.
The first soft element, Style, means that company employees share a common way of
thinking and behaving.
The second staff means that a company has hired able people, trained them well, and
assigned them to the right jobs. The third, skills, means that the employees have the skills
needed to carry out the company strategy.
The fourth shared values, means that the employees share the same guiding values.
When these soft elements are present, companies are usually more successful at strategy
implementation.
8 Feedback and Control
As it implements its strategy, the firm needs to track the results and monitor new
development in the internal and external environments.
The environment will eventually change. And, when it does, the company will need to
preview and revise its implementation, programs, strategies, or even objectives.
1.11 SUMMARY
Marketing activities are targeted at market consisting of products purchasers and also
individuals and groups that influence the success of an organization. A firm moves
beyond domestic markets into international trade for several reasons:
The first is simply the existence of foreign markets. Second, as domestic markets become
saturated, producers even those with no previous international experience, look to foreign
markets. Third, some countries possess unique natural or human resources that give them
a comparative advantage when it comes to producing particular products. Another factor
in international expansion is the possession of a technological advantage. An organization

49
whose products are marketed in two or more countries is engaged in international

marketing. The AMA has defined the term international marketing as:
“International Marketing is the multinational process of planning and executing the

conception, pricing, promotion and distribution of ideas, goods, and services to create
an exchange that satisfy individual and organizational objectives. “
There is a distinction between a domestic market and international market. Some of the
distinctions include: In Domestic Market – there is One language, one nation, one culture,
Market is much more homogeneous, etc While in International Market - Many languages,
many nations, many cultures, Markets are diverse and fragmented, etc.
The nations will be benefited while engaging in to the international marketing. Some of
the benefits Include : To meet imports of industrial needs ,Debt servicing ,Rapid
economic growth, Increase in employment opportunities, Increase in the standard of
living ,International collaboration ,Closer cultural relations, etc.
Even though the international marketing provides certain benefits to the nation, the host
government may not always be hospitable. To discourage international trade, many
government imposes certain barriers, which takes the form of: Tariff, Quota, Government
Bureaucracy and entry requirement, etc. The firm may have several options while
deciding to enter in to international market. The option available to the firm includes:
direct export, Indirect export, licensing, joint venture, and foreign direct investment. With
resources, capital food, and technology unevenly distributed around the planet, and all in
short supply, an efficient instrument of quick and effective production and distribution of
a complex of goods and services is a first essential.
Several firms have passed beyond the international division – stage and have become
truly global organizations. They have stopped thinking of themselves as national
marketers who have ventured abroad and now think of themselves as global marketers.
Their top corporate management and staff plan worldwide manufacturing facilities,
marketing policies, financial flows, and logistical systems. Accordingly, These firms has
at least three significant dimensions: structural, performance and behavior.

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1

UNIT 1: AN OVERVIEW TO INTERNATIONAL MARKETING

What do we mean by international marketing?

International markets create attractive opportunities, but the competition is intense.

Compiled by Tewodros Wuhib( Asst Professor) AAU Page 1

“International Marketing is the multinational process of planning and executing the

1.3 TYPES OF MARKETING

One way to understand the concept of international / global world marketing is to

Therefore, foreign marketing encompasses the domestic operation with in a foreign

International marketing must be distinguished from international trade. International

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1.5 BENEFITS OF INTERNATIONAL MARKETING

The nation will be benefited through International Marketing, as discussed in the

 To meet imports of industrial needs

 Rapid economic growth

An expanding export trade can be a dynamic factor in a country’s development process.

The benefits include: -

 Profitable use of natural resources

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 Facing competition successfully

 Increase in employment opportunities

 Role of exports in national income

 Increase in the standard of living

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Export marketing results in international collaboration. Developed country fix their

 Closer cultural relations

 Help in political peace

1.6 BARRIERS TO INTERNATIONAL MARKETING

 Unstable governments: - high indebt-ness, high inflation, and high unemployment

 Foreign exchange problems: - high indebtedness and economic and political

 Foreign government entry requirements and bureaucracy. Government places

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 Corruption: - an official in several countries requires bribes to cooperate. They

1.7 CHARACTERISTICS OF MULTINATIONAL CORPORATION

According to Aharoni, an MNC has at least three significant dimensions: structural,

a) Ethnocentricity: - is a strong orientation toward the home country. Markets and

b) Polycentricity: - is the opposite of ethnocentricity, is or strong orientation to the host

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c) Geocentricity: - is a compromise between the two extremes of ethnocentricity and

1.8 INTERNATIONAL TRADE CONCEPT

1.8.1 PRODUCTION POSSIBILITY FRONTIER

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 Should we travel or buy a car?

Alternative Production Possibilities

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1.8.2 TRADE THEORIES

Product USA Japan

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Example: A doctor is absolutely better than a mechanic in performing surgery; whereas

1.8.2.2 Principle of Comparative Advantage

Ricardo's Analysis of Comparative Advantage

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American and European Labor Requirements for Production

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The Economic Gains From Trade