Distribution Strategy in Marketing

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					                                           CHAPTER 12
            GLOBAL MARKETING AND PRODUCT DEVELOPMENT



Chapter Outline

OPENING CASE: Procter & Gamble In Japan

INTRODUCTION

THE GLOBALIZATION OF MARKETS?

   Management Focus: MTV Rocks the World

MARKET SEGMENTATION

PRODUCT ATTRIBUTES

   Cultural Differences
   Economic Differences
   Product and Technical Standards

DISTRIBUTION STRATEGY

   A Typical Distribution System
   Differences Between Countries
   Choosing a Distribution Strategy

COMMUNICATION STRATEGY

   Barriers to International Communication
   Push Versus Pull Strategies
   Global Advertising
   Management Focus: Global Advertising at Polaroid

PRICING STRATEGY

   Price Discrimination
   Strategic Pricing
   Regulatory Influences on Prices

CONFIGURING THE MARKETING MIX

   Management Focus: Castor Ltd.

NEW PRODUCT DEVELOPMENT

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    The Location of R&D
    Integrating R&D, Marketing, and Production
    Cross-Functional Teams
    Implications for International Business

CHAPTER SUMMARY


Learning Objectives

1. Understand why and how it may make sense to vary the attributes of a product across countries.

2. Appreciate why and how a firm's distribution system might vary across countries.

3. Understand why and how advertising and promotional strategies might vary across countries.

4. Understand why and how a firm's pricing strategy might vary across countries.

5. Understand how the globalization of the world economy is affecting new-product development within
international business.

Chapter Summary

This chapter focuses on the marketing and R&D activities of global firms. The chapter begins with a
review of the four elements that constitute a firm's marketing mix: product attributes, distribution strategy,
communication strategy, and pricing strategy. A firm's marketing mix is the set of choice that if offers its
customers. Many firms vary their marketing mix from country to country depending on differences
cultures, levels of economic development, product and technical standards, the availability of distribution
channels, and so forth. The chapter discusses the strategic implications of each element of the marketing
mix for an international firm. The link between marketing and R&D is also discussed. The author stresses
the point that selling a product on a global scale may require that a firm vary its products from country to
country to satisfy local preferences. This may require a firm to establish R&D centers in different parts of
the world, and closely link R&D and marketing in each region to ensure that the company is producing
products that its overseas customers will buy.

OPENING CASE: Proctor and Gamble in Japan

Summary

The opening case describes the approach Procter and Gamble (P&G) has taken in Japan. Initially, P&G
would typically experience some success in a product category, but then find that domestic competitors
would beat it out. P&G realized that it needed to customize its marketing approach and products for the
needs of Japanese consumers and the country-specific competition it faced. The following questions can
be helpful in directing the discussion.

QUESTION 1: What was P&G’s early approach to the Japanese market? Why?



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ANSWER 1: P&G original approach was to take basic products developed in the US, and then essentially
introducing them unchanged in Japan. Some localization of advertising was done, but the general view
was that its products fulfilled universal needs. The basic utility of a diaper is not particularly culturally
determined, and the need to clean clothes and dishes is fairly similar across developed countries.

QUESTION 2: Why wasn’t this approach successful?

ANSWER 2: One reason is that needs are not entirely universal. Differences exist in washing
temperature, types of foods (cleaning needs), and preferred attributes (e.g., trim fit). The existence of local
competitors also meant that positioning needed to be localized to respond to local conditions.

QUESTION 3: How is P&G’s current approach different? What are the benefits of this approach?

ANSWER 3: P&G is much more locally responsive in its product development and marketing approach. It
is willing to develop new products specifically for individual markets. This has led not only to a higher
market share in individual markets, but P&G is also learning that products developed for one market may
prove valuable in other markets.

Chapter Outline

INTRODUCTION

A) In this chapter the focus is on how an international business can perform marketing and R&D activities
so they will reduce the costs of value creation and add value by better serving customer needs.

B) The tension that exists in most international businesses between, on the one hand, the need to reduce
costs, and on the other hand, the need to be responsive to local conditions is particularly predominant in
this chapter as we look at the development and marketing of products



THE GLOBALIZATION OF MARKETS

A) Theodore Levitt waxed lyrically about the globalization of world markets. Levitt’s arguments are worth
quoting at some length since they have become something of a lightening rod for the debate about the
extent of globalization.

B) The current consensus among academics is that although the world is moving towards global markets,
the continuing persistence of cultural and economic differences among nations acts as a major brake on any
trend toward global consumer tastes and preferences. In addition, trade barriers and differences in product
and technical standards also constrain a firm's ability to sell a standardized product to a global market.


MARKET SEGMENTATION

A) Market segmentation refers to identifying distinct groups of consumers whose purchasing behavior
differs from others in important ways. Firms must adjust their marketing mix from segment to segment.



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 B) In international business, segmentation needs to consider the existence of segments that transcend
national borders and understand differences across countries in the structure of segments.

 C) For a segment to transcend national borders, consumers in that segment must have some compelling
similarities that lead to similarities in purchasing behavior.

 D) Where such similarities do not exist, there must be some customization if the firm is to maximize
performance in the market. This customization may be in the product, the packaging, or simply the way in
which the product is marketed.

 E) Global market segments are much likely to exist in industrial products (e.g., memory chips, chemical
products, and corporate bonds) than in consumer products.

PRODUCT ATTRIBUTES

A) Products sell well when their attributes match consumer needs. If consumer needs were the same the
world over, a firm could simply sell the same product worldwide. But consumer needs vary from country
to country depending on culture and the level of economic development.

Cultural Differences

B) Countries differ along a whole range of (cultural) dimensions, including tradition, social structure,
language, religion, and education. At the same time, there is some evidence of the trends Levitt talked
about. Tastes and preferences are becoming more cosmopolitan

Economic Differences

C) Just as important as differences in culture are differences in the level of economic development. Firms
based in highly developed countries tend to build a lot of extra performance attributes into their products.
Consumers in less developed nations do not usually demand these extra attributes, where the preference is
for more basic products.

Product and Technical Standards

D) Notwithstanding the forces that are creating some convergence of consumer tastes and preferences,
Levitt's vision of global markets may still be a long way off due to national differences in product and
technological standards.

DISTRIBUTION STRATEGY

A) A critical element of a firm's marketing mix is its distribution strategy, the means it chooses for
delivering the product to the consumer.

A typical distribution system

B) Figure 12.2 in the text illustrates a typical distribution system consisting of a channel that includes a
wholesale distributor and a retailer. If the firm manufacturers it product in the particular country, it can



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sell directly to the consumer, to the retailer, or to the wholesaler. The same options are available to a firm
that manufacturers outside the country.

Differences Among Countries

C) Retail Concentration - In some countries the retail system is very concentrated, whereas in other
countries it is fragmented. In a concentrated system, a few retailers supply most of the market.

D) Channel Length - Refers to the number of intermediaries between the producer and the consumer. If
the producer sells directly to the consumer, the channel is very short. If the producer sells through an
import agent, a wholesaler, and a retailer, a long channel exists.

E) Channel Exclusivity - An exclusive distribution channel is one that is difficult for outsiders to access.
Japan's system is often help up as an example of a very exclusive system.

Choosing a Distribution Strategy

F) A choice of distribution strategy determines which channel the firm will use to reach potential
consumers. Since each intermediary in a channel adds its own markup to the products, there is generally a
critical link between channel length and the firm's profit margin. However, a long channel also has
benefits. One benefit of using a longer channel is that it economizes on selling costs when the retail sector
is very fragmented.

COMMUNICATION STRATEGY

A) Another critical element in the marketing mix is communicating the attributes of the product to
prospective customers. A number of communication channels are available to a firm; they include direct
selling, sales promotion, direct marketing, and advertising.

B) A firm's communications strategy is partly defined by its choice of channel.

Barriers to International Communication

C) International communication occurs whenever a firm uses a marketing message to sell its products in
another country. The effectiveness of a firm's international communication can be jeopardized by three
potentially critical variables:

Cultural Barriers

D) Cultural barriers can make it difficult to communicate messages across cultures. The best way for a
firm to overcome cultural barriers is to develop cross-cultural literacy.

Source Effects

E) Source effects occur when the receiver of the message (the potential consumer) evaluates the message
based upon the status or image of the sender. Source effects can be either positive or negative. The class
can be stimulated to think of some positive and negative source effects (German autos vs. German wine,
Italian cuisine vs. British cuisine)

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Noise Levels

F) Noise tends to reduce the chance of effective communication. In this context, noise refers to the amount
of other messages that are competing for a potential consumer's attention.

Push versus Pull Strategies

G) The main choice with regard to communication strategy is between a push strategy and a pull strategy.
A push strategy emphasizes personnel selling whereas a pull strategy emphasizes mass media advertising.
The choice between push and pull strategies depends upon product type and consumer sophistication,
channel length, and media availability.

Product Type and Consumer Sophistication

H) A pull strategy is generally favored by firms in consumer goods industries that are trying to sell to a
large segment of the market. In contrast, firms that sell industrial products or other complex products favor
a push strategy.

Channel Length

I) Using direct selling to push a product through many layers of a distribution channel can be very
expensive. In such circumstances, a firm may try to pull its product through the channels by using mass
advertising to create consumer demand.

Media Availability

J) A pull strategy relies on access to advertising media. A push strategy is more attractive when access to
mass media is limited.

The Push-Pull Mix

K) Push strategies tend to be emphasized more in the following circumstances; 1) for industrial products
and/or complex new products, 2) when distribution channels are short and 3) when few print or electronic
media are available. Pull strategies tend to be emphasized more in the following circumstances: 1) for
consumer goods products, 2) when distribution channels are long and when 3) sufficient print and
electronic media are available to carry the marketing message.

Global Advertising

L) In recent years there has been much discussion about the pros and cons of standardized advertising
worldwide.

For Standardized Advertising

M) The support for global advertising is threefold. 1) It has significant economic advantages. 2) There is
the concern that creative talent is scarce and that one large effort to develop a campaign will produce better
results than 40 or 50 smaller efforts. 3) Brand names are global.

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Against Standardized Advertising

N) The are two main arguments against globally standardized advertising. 1) Cultural differences among
nations are such tat a message that works in one nation can fail miserably in another. 2) Country
differences in advertising regulations may block implementation of standardized advertising.

Dealing with Country Differences

O) Some firms have been experimenting with tactics that allow them to capture some of the benefits of
global standardization while recognizing differences in countries' cultural and legal environments.

PRICING STRATEGY

A) International pricing strategy is an important component of the overall international marketing mix.

Price Discrimination

B) Price discrimination exists whenever consumers in different countries are charged different prices for
the same product. Price discrimination can assist a firm in the process of maximizing its profits.

C) For price discrimination to work the firm must be able to keep national markets separate and different
price elasticities of demand must exist in different countries.

The Determinants of Demand Elasticity

D) The elasticity of demand is determined by a number of factors, of which income level and competitive
conditions are probably the most important. In general price elasticities tend to be greater in countries with
lower income levels and greater numbers of competitors.

Strategic Pricing

E) The concept of strategic pricing has three aspects, which we will refer to as predatory pricing, multi-
point pricing, and experience curve pricing.

Predatory Pricing

F) Predatory pricing involves using the profit gained in one market to support aggressive pricing in
another market. The objective is to drive competitors out of the market.

Multi-point Pricing Strategy

G) Multi-point pricing strategy becomes an issue in those situations where two or more international
businesses compete against each in two or more distinct (national) markets.

H) The concept of multi-point pricing refers to the fact a firm’s pricing strategy in one market may have
an impact on their rival’s pricing strategy in another market. In particular aggressive pricing in one market
may elicit a competitive response form a rival in another market that is important to the firm.

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I) The managerial message in all of this is that pricing decisions around the world need to be centrally
monitored.

Experience Curve Pricing

J) Many firms pursuing an experience curve pricing strategy on an international scale price low
worldwide in attempting to build global sales volume as rapidly as possible, even if this means taking large
losses initially. A firm using experience curve pricing believes that several years in the future, when it has
moved down the experience curve, it will be making substantial profits and, moreover, have a cost
advantage over its less aggressive competitors.

Regulatory Influences on Prices

K) Firms' abilities to engage in either price discrimination or strategic pricing may be limited by national or
international regulations.

Antidumping Regulations

L) Dumping occurs whenever a firm sells a product for a price that is less than the cost of producing it.

M) From the perspective of an international business, the important point is that antidumping rules set a
floor under export prices and limit firms’ ability to pursue strategic pricing.

Competition Policy

N) Most industrialized nations have regulations designed to promote competition and to restrict monopoly
practices. These regulations can be used to limit the prices that a firm can charge in a given country.

CONFIGURING THE MARKETING MIX

A) Standardization versus customization is not an all or nothing concept. In reality most firms standardize
some things and customize others. When looking at the overall marketing mix and message, one often
finds some aspects of standardization and some aspects of customization in all products depending on local
requirements and overall cost structures.


NEW PRODUCT DEVELOPMENT

A) Firms that successfully develop and market new products can earn enormous returns. Some examples
are provided in the textbook.

The Location of R&D

B) Ideas for new products are simulated by the interactions of scientific research, demand conditions, and
competitive conditions. Other things being equal, the rate of new-product development seems to be greater
in countries where:
        i) More money is spent on basic and applied research and development.

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        ii) Demand is strong.
        iii) Consumers are affluent.
        iv) Competition is intense.

Integrating R&D, Marketing, and Production

C) The need to adequately commercialize new technologies poses special problems in the international
business, since commercialization may require different versions of a new product to be produced for
different countries.

D) A firm’s new product development efforts need to be closely coordinated with the marketing,
production, and materials management functions. This integration is critical to making certain that
customer needs are met and that the company performs all its value creation activities efficiently


Cross-Functional Teams

E) One means of achieving cross-functional integration is to have cross-functional product development
teams. Effective cross functional teams should be led by a heavyweight project manager with status in the
organization, have members from all the critical functional areas, have members located together, have
clear goals, and have an effective conflict resolution process.

F) This all becomes more difficult when developing products for multiple worldwide markets. Many large
firms have research centers in limited locations, with product development activities more dispersed.

Implications for the International Business

G) The need to integrated R&D and marketing to adequately commercialize new technologies poses special
problems in the international business, since commercialization may require different versions of a new
product to be produced for different countries.

H) Integrating R&D, marketing, and production in an international business may require R&D centers in
North America, Asia, and Europe that are closely linked by formal and informal integrating mechanisms
with marketing operations in each country in their regions, and with the various manufacturing facilities.




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