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1 Global Marketing Communications Decisions II: Sales Promotions & Personal Selling Chapter 14

2 2010 Shanghai World Expo Park
Introduction In addition to advertising, publicity and PR, the promotion mix includes: Sponsorships Sales promotion Direct marketing Personal selling Internet Infomercials In September 2005, with 150 days to go before the opening ceremonies of the 2006 Olympic Games in Torino, Italy, Lenovo Chairman Yuanqing Yang and Philippe Davy, VP Marketing, kicked off the company’s computing equipment sponsorship in New York City. It was the official computing equipment sponsorship for the 2006 Winter Games and the 2008 Games in Beijing as well. 2010 Shanghai World Expo Park

3 Sales Promotion Sales promotion refers to any paid consumer or trade communication program of limited duration that adds tangible value to a product or brand Price vs. non-price promotions Consumer vs. trade promotions Nonprice promotions may take the form of free samples, premiums, “buy one, get one free” offers, sweepstakes, and contests. Consumer sales promotions may be designed to make consumers aware of a new product, to stimulate nonusers to sample an existing product, or to increase overall consumer demand. Trade sales promotions are designed to increase product availability in distribution channels. At many companies, expenditures for sales promotion activities have surpassed expenditures for media advertising. At any level of expenditure, however, sales promotion is only one of several marketing communication tools. Sales promotion plans and programs should be integrated and coordinated with those for advertising, public relations, and personal selling.

4 Sales Promotion Provide a tangible incentive to buyers
Reduce the perceived risk associated with purchasing a product Provide accountability for communications activity Provide method of collecting additional data for database Worldwide, the increasing popularity of sales promotion as a marketing communication tool can be explained in terms of several strengths and advantages. Besides providing a tangible incentive to buyers, sales promotions also reduce the perceived risk buyers may associate with purchasing the product. From the point of view of the sponsoring company, sales promotion provides accountability; the manager in charge of the promotion can immediately track the results of the promotion. Overall, promotional spending is increasing at many companies as they shift advertising allocations away from traditional print and broadcast advertising. In addition, sweepstakes, rebates, and other forms of promotion require consumers to fill out a form and return it to the company, which can then build up information in its database for use when communicating with customers in the future. For example, the French Ministry of Agriculture recently launched a global promotion aimed at boosting exports of French wine and cheese. Aimed at showing that French cuisine can be relaxed and laid back, the agency hired Spoexa, a food-marketing company, to organize cocktail parties in 19 countries, including Canada, Spain, and the United States. House Party Inc., an American marketing firm, promoted the U.S. parties through its Web site. Would-be hosts registered online; from that applicant pool, House Party chose 1,000 people. The winners received discount coupons good for purchases of French wine; they also were entitled to free gifts when ordering French cheeses from select Web sites. Each winner also received a basket of party supplies, including a corkscrew and an apron. In return, the hosts agreed to take photos and blog about their party. After the parties, the hosts answered questionnaires to provide sponsors with feedback about the featured food and wine. Finally, in-store promotions on party-related French goods were featured at various shops and supermarkets. Home and Garden shows attract homeowners

5 Sales Promotion: Global or Local
In countries with low levels of economic development, low incomes limit the range of promotional tools available Market maturity can also be different from country to country Local perceptions of a particular promotional tool or program can vary Local regulations may rule out use of a particular promotion in certain countries Trade structure in the retailing industry can affect the use of sales promotions In countries with low levels of economic development, low incomes limit the range of promotional tools available. In such countries, free samples and demonstrations are more likely to be used than coupons or on-pack premiums. Market maturity can also be different from country to country; consumer sampling and coupons are appropriate in growing markets, but mature markets might require trade allowances or loyalty programs. Local perceptions of a particular promotional tool or program can vary. Japanese consumers, for example, are reluctant to use coupons at the checkout counter. A particular premium can be seen as a waste of money. Local regulations may rule out use of a particular promotion in certain countries. Table lists regulations governing coupon distribution in several countries. Trade structure in the retailing industry can affect the use of sales promotions. For example, in the United States and parts of Europe, the retail industry is highly concentrated, i.e., dominated by a few key players such as Wal-Mart. This situation requires significant promotional activity at both the trade and consumer level. By contrast, in countries where retailing is more fragmented—Japan is a case in point—there is less pressure to engage in promotional activities.

6 Sampling Sampling Provides consumer with opportunity to try product at no cost May be distributed in stores, in the mail, through print media, at events, or door-to-door Marc Pritchard, vice president of global cosmetics and personal care at Procter & Gamble, noted recently, “The most fundamental thing that consumers want to do is try before they buy.” The average cost-per-sample for such promotional programs can range from 10 cents to 50 cents; 2 million to 3 million samples are distributed in a typical sampling program. Cost is one of the major disadvantages associated with sampling; another problem is that it is sometimes difficult for marketing managers to assess the contribution a sampling program makes to return on investment. Today, many companies utilize event marketing and sponsorships to distribute samples at concerts, sports events, or special events such as food and beverage festivals attended by large numbers of people. In the information age, sampling may also consist of a week’s free viewing of a cable TV channel or a no-cost trial subscription to an online computer service; Internet users can also request free samples through a company’s Web site. Compared with other forms of marketing communication, sampling is more likely to result in actual trial of the product. To ensure trial, consumer products companies are increasingly using a technique known as “point-of-use” sampling. For example, Starbucks dispatches “chill patrols” in the summertime to pass out samples of ice-cold Frappuccino to overheated commuters during rush hour in busy metropolitan areas. Wine tasting in South Africa Kikkoman soy sauce launched a sampling program in supermarkets in the U.S.; today the U.S. contributes 85% of profit from international operations

7 Couponing Couponing Printed certificates entitle the bearer to a price reduction or some other special consideration for purchasing a particular product Coupons are a favorite promotion tool of consumer packaged goods companies such as Procter & Gamble and Unilever. The goal is to reward loyal users and stimulate product trial by nonusers. In the European Union, couponing is widely used in the United Kingdom and Belgium. Couponing is not as widely used in Asia where saving face is important. Although Asian consumers have a reputation for thriftiness, some are reluctant to use coupons because doing so might bring shame upon them or their families. NCH Marketing Services, which tracks coupon trends, reports that about 300 billion coupons are distributed in the United States each year; only about 1 percent are actually redeemed. Online coupon distribution is growing at a rapid rate; Google is among the players experimenting with them. Couponing accounts for 70% of consumer promotion spending in the U.S. Free-standing inserts, in-pack, on-pack, cross coupons

8 Couponing Regulations for coupon distribution for various countries.

9 Sales Promotion: Issues and Problems
Fraud Pepsi promotion with Apple Regulations vary by country Cultural dispositions to coupons and other sales promotions Malaysians see coupon usage as embarrassing Islam frowns on gambling so sweepstakes may not work During the 2004 Super Bowl broadcast, PepsiCo launched a joint promotion with Apple Computer’s iTunes Music Store. Apple planned to give away 100 million songs for free (regular price: $.99); consumers could obtain a code from the caps of Pepsi bottles and enter the code online to quality for the download. The promotion was designed so that anyone purchasing a bottle of Pepsi had a 1-in-3 chance of being a winner. However, many people discovered that, by tilting the bottles to one side, they could tell whether the bottle was a winner. Moreover, they could read the code without having to pay for the Pepsi! In some emerging markets, companies appear to be exploiting regulatory loopholes and lack of consumer resistance to intrusion. Sales promotion in Europe is highly regulated. Sales promotions are popular in Scandinavia because of restrictions on broadcast advertising, but are subject to regulations. If such regulations are relaxed as the single market develops in Europe and regulations are harmonized, companies may be able to roll out pan-European promotions. A recent study examined coupon usage and attitudes toward sweepstakes in Taiwan, Thailand, and Malaysia. According to Hofstede’s social values, all three countries in the studies are collectivist, and the researchers found that an individual’s positive attitude toward coupons and coupon usage was influenced by positive attitudes of family members and society as a whole. However, the three nations show some differences in value orientation. For example, Malaysia has a higher power distance and lower uncertainty avoidance than the others. For Malaysians, the fear of public embarrassment was a constraint on coupon usage. In all three countries, media consumption habits were also a factor; persons who were not regular readers of magazines or newspapers were less likely to be aware that coupons were available. Consumers in Taiwan and Thailand look more favorably upon coupons than sweepstakes. In Malaysia, where the population is primarily Muslim, the researchers assumed that consumers would avoid sweepstakes promotions. Sweepstakes can be compared to gambling, which is frowned on by Islam. However, Malaysians showed a preference for sweepstakes over coupons. In Taiwan, where Buddhism, Confucianism, and Taoism are all practiced, religion appeared to have little impact on attitudes.

10 Personal Selling Person-to-person communication between a company representative and a prospective buyer Focus is to inform and persuade prospect Short-term goal: make a sale Long-term goal: build a relationship Because selling provides a two-way communication channel, it is especially important in marketing industrial products that may be expensive and technologically complex. Sales personnel can often provide headquarters with important customer feedback that can be utilized in design and engineering decisions. Global marketing presents additional challenges because the buyer and seller may come from different national or cultural backgrounds. Despite such challenges, it is difficult to overstate the importance of a face-to-face, personal selling effort for industrial products in global markets. Personal selling is also a popular marketing communication tool in countries with various restrictions on advertising. As noted in Chapter 13, it is difficult to obtain permission to present product comparisons in any type of advertising in Japan. In such an environment, selling is the best way to provide hard-hitting, side-by-side comparisons of competing products. Personal selling is also used frequently in countries where low wage rates allow large local sales forces to be hired. For example, Home Box Office built its core of subscribers in Hungary by selling door-to-door. In fact, the cost effectiveness of personal selling in certain parts of the world has been a key driver behind the decision at many U.S.-based firms to begin marketing products and services overseas. A company is more likely to test a new territory or product if the entry price is relatively low. Only if the response is favorable do the firms commit major resources to a U.S. rollout.

11 Personal Selling Hurdles
Political Risks – unstable or corrupt governments change the rules for the sales team Regulatory Hurdles – Governments can set up quotas or tariffs that affect the sales force Currency Fluctuations – increase and decrease in local currencies can make certain products unaffordable Market Unknowns – lack of knowledge of market conditions, the accepted way of doing business, or positioning of the product may derail the sales team’s efforts Companies must be aware of these risks and hurdles when implementing a personal sales team in a foreign country because they may reduce the sales team’s effectiveness. Political risk: Unstable or corrupt governments can completely change the rules for the sales team. Establishing new operations in a foreign country is especially tricky if a coup is imminent or if a dictator demands certain “considerations” (which has been the case in many developing countries). For example, Colombia offers great market potential and its government projects an image of openness. However, many companies have found the unspoken rules of the cabal to be inordinately burdensome. In a country ruled by a dictatorship, the target audience and accompanying message of the sales effort tend to be far narrower and restricted because government planners mandate how business will be conducted. Firms selling in Hong Kong were concerned that China would impose its will and dramatically alter the selling environment after the transfer of power in In response to such concerns, British Telecom brought many members of its Hong Kong sales staff back to London prior to the changeover. However, to the great relief of Hong Kong’s business community, Chinese officials ultimately recognized that a policy of minimal intervention would be the wisest approach. Regulatory Hurdles: Governments sometimes set up quota systems or impose tariffs that affect entering foreign sales forces. In part, governments consider such actions to be an easy source of revenue, but, even more importantly, policymakers want to ensure that sales teams from local firms retain a competitive edge in terms of what they can offer and at what price. Regulations can also take the form of rules that restrict certain types of sales activities. In 1998, for example, the Chinese government banned door-to-door selling, effectively blocking Avon’s business model. Avon responded by establishing a network of store representatives; today, China is Avon’s fastest growing global market. CEO Andrea Jung expects that, within just a few years, China will be adding $1 billion a year to Avon’s bottom line. Currency Fluctuations: There have been many instances where a company’s sales effort has been derailed not by ineffectiveness or lack of market opportunity but by fluctuating currency values. In the mid-1980s, for example, Caterpillar’s global market share declined when the dollar’s strength allowed Komatsu to woo U.S. customers away. Then, while Caterpillar’s management team was preoccupied with domestic issues, competitors chipped away at the firm’s position in global markets. Market Unknowns: When a company enters a new region of the world, its selling strategy may unravel because of a lack of knowledge of market conditions, the accepted way of doing business, or the positioning of its in-country competitors. When a game plan is finally crafted to counter the obstacles, it is sometimes too late for the company to succeed. However, if management devotes an inordinate amount of time conducting market research prior to entry, it may discover that its window of opportunity has been lost to a fast-moving competitor that did not fall victim to the “analysis paralysis” syndrome. Thus, it is difficult to make generalizations about the optimal time to enter a new country.

12 The Strategic/Consultative Selling Model
This figure illustrates that when these five strategies, from the strategic/consultative selling model, are integrated with an appropriate personal selling philosophy, the result is a high-quality partnership.

13 Evolved in response to: Increased competition
More complex products More emphasis on customer needs Long-term relationships The model consists of five interdependent steps, each with three prescriptions that can serve as a checklist for sales personnel. Many U.S. companies have begun developing global markets and have established face-to-face sales teams either directly, using their own personnel, or indirectly, through contracted sales agents. As a result, the Strategic/Consultative Selling Model is increasingly utilized on a worldwide basis. The key to ensuring that the model produces the desired outcome—building quality partnerships with customers—is to have it implemented and followed on a consistent basis. This is far more difficult to achieve with international sales teams than it is with U.S.-based units that are much more accessible to corporate headquarters. The major categories are discussed on the next two slides.

14 The Strategic/Consultative Selling Model
Personal Selling Philosophy – commitment to the marketing concept and a willingness to adopt the role of problem solver/partner Relationship Strategy – game plan for establishing and maintaining high-quality relationships with prospects/customers Product Strategy – plan that can assist the sales representative in selecting and positioning products to satisfy customer needs

15 The Strategic/Consultative Selling Model
Customer Strategy – plan that ensures that the sales professional will be maximally responsive to customer needs Presentation Strategy – consists of setting objectives for each sales call and establishing a presentation plan to meet those objectives

16 The Presentation Plan Approach Presentation Demonstration Negotiation
Close Servicing the sale

17 Approach Initial contact with the customer/prospect
Must completely understand the decision-making process and the roles of each participant In some societies, it is difficult to identify the highest-ranking individual based on observable behavior during group meetings. This crucial bit of strategic information often is uncovered only after the rep has spent considerable time developing rapport and getting to know the overall customer organization from various perspectives and in various contexts.

18 Presentation Prospect’s needs are assessed and matched to the company’s products The style and message of the presentation must be tailored to the audience In the United States, the presentation is typically designed to sell and persuade, whereas the intent of the international version should be to educate and inform. High-pressure tactics rarely succeed in global selling, despite the fact that they are natural components of many American sales pitches. The message is equally critical because what may be regarded as fully acceptable in U.S. discussions may either offend or confuse the overseas sales audience. A humorous example of this occurred during a session between representatives from Adolph Coors Company and a foreign prospect. The first slide in the presentation contained a translation of Coors’s slogan “Turn It Loose,” but within seconds of this slide being shown, the audience began to chuckle. As translated, the slogan described diarrhea—obviously something that the presenter had no desire to convey to this group!

19 Demonstration Salesperson has the opportunity to tailor the communication effort to the customer Can show how the product can meet the customer’s needs This step represents one of selling’s important advantages as a promotional tool. The prospect’s senses become involved, and he or she can actually see the product in action, touch it, taste it, or hear it, as the case may be.

20 Negotiation Ensures that both the customer and the salesperson come away from the presentation winners Experienced American sales reps know that persistence during the negotiation stage is one tactic often needed to win an order in the United States. However, American-style persistence inferring tenacity or arm-twisting can be considered rude and offensive by some foreign customers. This can end the negotiations quickly—or, in the worst case, such behavior can be taken as a display of self-perceived American superiority, which then must be countered aggressively or brought to an immediate end. Inappropriate application of American-style negotiation tactics has plagued some U.S. sales reps attempting to assertively close deals with Canadian companies. Conversely, in other countries, persistence often means endurance, a willingness to patiently invest months or years before the effort results in an actual sale. For example, a company wishing to enter the Japanese market must be prepared for negotiations to take from 3 to 10 years.

21 Close Ask for the sale Must be culturally sensitive
In Latin America, a bold closing statement is respected, whereas in Asia, it is something that must be done with more deference toward the decision maker. As with objection handling and negotiation, the close is a selling skill that comes with both knowledge and experience in global business and sales.

22 Servicing the Sale To ensure customer satisfaction
Implementation process must be outlined Customer service program established Implementation can be complicated because of logistical and transportation issues as well as potential problems with the in-country resources to handle all the necessary steps. Transportation alternatives were discussed in Chapter 12. There are cost benefits to using in-country nationals for implementation, but quality control is more difficult to guarantee. Establishing expatriates for the primary function of implementation is costly and normally cannot be justified until international operations are more mature and profitable. However, sending an implementation team to the host country creates a variety of expense and regulatory concerns. Even when implementation has been adequately addressed, the requirement for solid customer service raises all of the same questions again: in-country nationals, expatriates, or third-country nationals?

23 Sales Force Nationality
Expatriates Host-country nationals Third-country nationals Other options A basic issue for companies that sell globally is the composition of the sales force in terms of nationality. It is possible to utilize expatriate salespersons, hire host-country nationals, or utilize third-country sales personnel. The staffing decision is contingent upon several factors, including management’s orientation, the technological sophistication of the product, and the stage of economic development exhibited by the target country. Not surprisingly, a company with an ethnocentric orientation is likely to prefer expatriates and adopt a standardized approach without regard to technology or the level of economic development in the target country. Polycentric companies selling in developed countries should opt for expatriates to sell technologically sophisticated products; a host-country sales force can be used when technological sophistication is lower. In less-developed countries, host-country nationals should be used for products in which technology is a factor; host-country agents should be used for low-tech products. The widest diversity of sales force nationality is found in a company in which a regiocentric orientation prevails. Except in the case of high-tech products in developed countries, third-country nationals are likely to be used in all situations.

24 Expatriates Advantages Disadvantages Superior product knowledge
Demonstrated commitment to service standards Train for promotion Greater HQ control Disadvantages Higher cost Higher turnover Cost for language and cross-cultural training Maintaining expatriate sales personnel is extremely expensive; the average annual cost to U.S. companies of posting employees and their families overseas exceeds $250,000. In addition to paying expat salaries, companies must pay moving expenses, cost-of-living adjustments, and host-country taxes. Despite the high investment, many expats fail to complete their assignments because of inadequate training and orientation prior to the cross-border transfer. In addition, studies have shown that one-quarter of U.S. expats leave their companies within a year of returning home.

25 Host-Country Nationals
Advantages Economical Superior market knowledge Language skills Superior cultural knowledge Fast implementation Disadvantages Needs product training May be held in low esteem Language skills may not be important Difficult to ensure loyalty Locals offer several advantages, including intimate knowledge of the market and business environment, language skills, and superior knowledge of local culture. The last consideration can be especially important in Asia and Latin America. In addition, because in-country personnel are already in place in the target country, there is no need for expensive relocations. However, host-country nationals may possess work habits or selling styles that do not mesh with those of the parent company. Furthermore, the firm’s corporate sales executives tend to have less control over an operation that is dominated by host-country nationals. Headquarters executives may also experience difficulty cultivating loyalty, and host-country nationals are likely to need hefty doses of training and education regarding both the company and its products.

26 Third-Country Nationals
Advantages Cultural sensitivity Language skills Economical Allows regional sales coverage Disadvantages May face identification problems May be blocked for promotions Income gaps Needs product and/or company training Loyalty not assured A third option is to hire persons who are not natives of either the headquarters country or the host country; such persons are known as third-country nationals. For example, a U.S.-based company might hire someone from Thailand to represent it in China. This option has many advantages in common with the host-country national approach. In addition, if conflict, diplomatic tension, or some other form of disagreement has driven a wedge between the home country and the target sales country, a sales representative from a third country may be perceived as sufficiently neutral or at “arm’s length” to enable the company to continue its sales effort. However, there are several disadvantages of the third-country option. For one thing, sales prospects may wonder why they have been approached by someone who is neither a local national nor a native of the headquarters country. Third-country nationals may lack motivation if they are compensated less generously than expats or host-country sales personnel; also, they may find themselves passed over for promotions as coveted assignments go to others.

27 Other Options Sales agents Exclusive license arrangements
Contract manufacturing or production Management-only agreements Joint ventures Sales agents: From a global perspective, it often makes a great deal of sense to set up one or more agent entities to at least gain entry to a selected country or region. In some cases, because of the remoteness of the area or the lack of revenue opportunity (beyond servicing satellite operations of customers headquartered elsewhere), agents are retained on a fairly permanent level. To this day, the majority of U.S., Asian, and European companies with an Africa-based sales presence maintain agent groups to represent their interests. Exclusive license arrangements: A firm will pay commissions to an in-country company’s sales force to conduct personal selling on its behalf. For example, when Canada’s regulatory agency prevented U.S. telephone companies from entering the market on their own, AT&T, MCI, Sprint, and other firms crafted a series of exclusive license arrangements with Canadian telephone companies. Contract manufacturing or production: Offers a degree of personal selling made available through warehouses or showrooms that are open to potential customers. Sears has employed this technique in various overseas markets, with the emphasis placed on the manufacturing and production but with the understanding that opportunities for some sales results do exist. Management-only agreements: A corporation will manage a foreign sales force in a mode that is similar to franchising. Hilton Hotels has these types of agreements all over the world; not only for hotel operations but also for personal selling efforts aimed at securing conventions, business meetings, and large group events. Joint ventures with an in-country (or regional) partner. Because many countries place restrictions on foreign ownership within their borders, partnerships can serve as the best way for a company to obtain both a personal sales capability as well as an existing base of customers.

28 Special Forms of Marketing Communications
Direct Marketing Direct mail Catalogs Infomercials, teleshopping Event Sponsorship Concerts, sporting events Product placement in movies Internet Communications The Direct Marketing Association defines direct marketing as any communication with a consumer or business recipient that is designed to generate a response in the form of an order, a request for further information, and/or a visit to a store or other place of business. Companies use direct mail, telemarketing, television, print, and other media to generate responses and build databases filled with purchase histories and other information about customers. By contrast, mass marketing communications are typically aimed at broad segments of consumers with certain demographic, psychographic, or behavioral characteristics in common. The United States is home to a well-developed mailing list industry. A company can rent a list to target virtually any type of buyer; naturally, the more selective and specialized the list, the more expensive it is. The availability of good lists and the sheer size of the market are important factors in explaining why Americans receive more direct mail than anyone else. However, on a per capita basis, German consumers are world-leader mail-order shoppers, buying more than $500 each in merchandise annually. Americans rank second, with annual per capita spending of $379.

29 Direct Marketing Any communication with a consumer or business recipient that is designed to generate a response in the form of: An order Request for further information A visit to a store or other place of business Worldwide, the popularity of direct marketing has been steadily increasing in recent years. One reason is the availability of credit cards—widespread in some countries, growing in others—as a convenient payment mechanism for direct response purchases. (In fact, Visa, American Express, and MasterCard generate enormous revenues by sending direct mail offers to their cardholders.) Another reason is societal: Whether in Japan, Germany, or the United States, dual-income families have money to spend but less time to shop outside the home. Technological advances have made it easier for companies to reach customers directly. MTV reaches hundreds of millions of households. To reach businesspeople, companies can buy time on CNN, Fox News, or CNBC.

30 Direct Marketing vs. Mass Marketing

31 Catalogs Catalog: magazine-style publication that features photographs, illustrations, and extensive information about a company’s products U.S. 1/3 of world market, 17 billion mailed in 2008 EU: Elimination of barriers has led to a boom German supermodel Yvonne Catterfeld with Otto Catalog

32 Infomercials and Teleshopping
An infomercial is a form of paid TV in which a particular product is demonstrated, explained, and offered for sale to viewers who call a toll-free number on the screen Teleshopping on channels like HSN and QVC is exclusively devoted to demonstration and selling Thomas Burke, president of Saatchi & Saatchi’s infomercial division, calls infomercials “the most powerful form of advertising ever created.” The cost of producing a single infomercial can reach $3 million; advertisers then pay as much as $500,000 for time slots on U.S. cable and satellite systems and local TV channels. Because infomercials are typically 30 minutes in length and often feature studio audiences and celebrity announcers, many viewers believe they are watching regular talk show-type programming. Although originally associated with personal care, fitness, and household products such as those from legendary direct-response pitchman Ron Popeil, infomercials have gone up-market in recent years. For example, Lexus generated more than 40,000 telephone inquiries after launching its used-car program with an infomercial; two percent of respondents ultimately purchased a Lexus automobile. Infomercials are also playing a part in the development of China’s market sector. The government has given its blessing by allowing China Central Television, the state-run channel, to air infomercials and give Chinese consumers access to Western goods. Despite low per capita incomes, Chinese consumers are thought to achieve a savings rate as high as 40 percent because housing and health care are provided by the state. China Shop-A-Vision is in the vanguard, signing up 20,000 “TV shopping members” in its first year of airing infomercials. As these and other pioneers in Chinese direct-response television have learned, however, many obstacles remain, including the limited number of private telephones, low penetration of credit cards, and problems with delivery logistics in crowded cities such as Shanghai.

33 Interactive Television
ITV allows viewers to interact with the programming content they are viewing In the U.K., more than half of pay-TV subscribers use ITV Remote controls have buttons to push to order products shown on screen The remote control units provided by pay-TV service providers in the United Kingdom have a red button that viewers press to order products from home-shopping channels, choose different camera angles during sports broadcasts, vote during audience participation shows such as “Big Brother,” or order free samples of advertised products. In 2005, Diageo tested an interactive ad for Smirnoff vodka; after the first 60 seconds, viewers must press the button two more times to see the ad in its entirety. Comparing traditional TV ads with the new format, James Pennefather, Smirnoff brand manager for the U.K. noted, “Interactive advertising is a lot more unproven and untested, and it is a calculated risk for us. We have to do this kind of thing to learn if it will be a success or not.”

34 Sponsorships A company pays a fee to be associated with an event, team, athletic association, or sports facility Combines elements of PR and sales promotion Draws media attention Sony recently became an official U.S. sponsor of the National Basketball Association with the signing of a $10 million per year deal. One part of the deal calls for recordings by musicians on the Sony Music label—Aerosmith, Pearl Jam, and Mariah Carey, for example—to get priority consideration for air time during games. Hoping to achieve higher levels of brand awareness in the United States, Nokia sponsors the Sugar Bowl; Ericsson paid to have its name emblazoned on the new stadium where the Carolina Panthers football team plays. In 1997, Fila and Adidas engaged in a bidding war for sponsorship rights to the New York Yankees baseball team. Adidas eventually won a 10-year deal with a total value of $100 million; although that deal sets a record for sponsorship of an American sport, it is dwarfed by Nike’s $200 million deal to sponsor the Brazilian national soccer team.

35 Product Placement Arranging to have the company’s products and brand names appear in TV shows, movies, and other types of entertainment Marketers also lend or donate products to celebrities and other public figures Placements can be arranged in several different ways. Sometimes companies pay a fee for the placement; alternatively, a show’s producers will write the product into the script in exchange for marketing and promotion support of the new production. A brand’s owners can also strike a barter agreement whereby the company (Sony, for example) supplies the filmmakers with products that serve as props in exchange for licensing rights to the James Bond name in retail promotions. Product placement agencies such as Propaganda, Hero Product Placement, and Eon function like talent agencies for products. As such, the agencies fulfill several important functions such as obtaining legal clearances from a brand’s owners, promoting their clients’ products to producers, and arranging for products to be delivered to a soundstage.

36 Looking Ahead to Chapter 15
Strategic Elements of Competitive Advantage

37 Strategic Elements of Competitive Advantage
Global Marketing Global Marketing Warren J. Keegan Mark C. Green Warren J. Keegan Mark C. Green Strategic Elements of Competitive Advantage Chapter 16

38 Introduction This chapter looks at: Factors that shape competition
Competitive advantage at the industry and national levels

39 Industry Analysis: Forces Influencing Competition
Industry – group of firms that produce products that are close substitutes for each other Michael Porter identifies five forces that influence competition In any industry, competition works to drive down the rate of return on invested capital toward the rate that would be earned in the economist’s “perfectly competitive” industry. Rates of return that are greater than this so-called competitive rate will stimulate an inflow of capital either from new entrants or from existing competitors making additional investment. Rates of return below this competitive rate will result in withdrawal from the industry and a decline in the levels of activity and competition. According to Michael E. Porter of Harvard University, a leading theorist of competitive strategy, there are five forces influencing competition in an industry: the threat of new entrants, the threat of substitute products or services, the bargaining power of buyers, the bargaining power of suppliers, and the competitive rivalry among current members of the industry.

40 Porter’s Force 1: Threat of New Entrants
New entrants mean downward pressure on prices and reduced profitability Barriers to entry determines the extent of threat of new industry entrants New entrants to an industry bring new capacity, a desire to gain market share and position, and, quite often, new approaches to serving customer needs. The decision to become a new entrant in an industry is often accompanied by a major commitment of resources. New players mean prices will be pushed downward and margins squeezed, resulting in reduced industry profitability in the long run. Porter describes eight major sources of barriers to entry, the presence or absence of which determines the extent of threat of new industry entrants. These barriers will be discussed in the next two slides.

41 Threat of New Entrants: Barriers to Entry
Economies of Scale Refers to the decline in per-unit product costs as the absolute volume of production per period increases Product differentiation The extent of a product’s perceived uniqueness Capital requirements Required investment for manufacturing, R&D, advertising, field sales and service, etc. Switching costs Costs related to making a change in suppliers or products Economies of scale: Although the concept of scale economies is frequently associated with manufacturing, it is also applicable to R&D, general administration, marketing, and other business functions. Honda’s efficiency at engine R&D, for example, results from the wide range of products it produces that feature gasoline-powered engines. When existing firms in an industry achieve significant economies of scale, it becomes difficult for potential new entrants to be competitive. Product differentiation: Differentiation can be achieved as a result of unique product attributes or effective marketing communications, or both. Product differentiation and brand loyalty “raise the bar” for would-be industry entrants who would be required to make substantial investments in R&D or advertising. For example, Intel achieved differentiation and erected a barrier in the microprocessor industry with its “Intel Inside” advertising campaign and logo that appear on many brands of personal computers. Capital requirements: Capital is required not only for manufacturing facilities (fixed capital) but also for financing R&D, advertising, field sales and service, customer credit, and inventories (working capital). The enormous capital requirements in such industries as pharmaceuticals, mainframe computers, chemicals, and mineral extraction present formidable entry barriers. Switching costs are caused by the need to change suppliers and products. These might include retraining, ancillary equipment costs, the cost of evaluating a new source, and so on. The perceived cost to customers of switching to a new competitor’s product may present an insurmountable obstacle preventing industry newcomers from achieving success. For example, Microsoft’s huge installed base of PC operating systems and applications presents a formidable entry barrier.

42 Porter’s Force 2: Threat of Substitute Products
Availability of substitute products places limits on the prices market leaders can charge High prices induce buyers to switch to the substitute The availability of substitute products places limits on the prices market leaders can charge in an industry; high prices may induce buyers to switch to the substitute. Once again, the digital revolution is dramatically altering industry structures. In addition to lowering entry barriers, the digital era means that certain types of products can be converted to bits and distributed in pure digital form. For example, the development of the MP3 file format for music was accompanied by the increased popularity of peer-to-peer (p-to-p) file swapping among music fans.

43 Porter’s Force 3: Bargaining Power of Buyers
Buyers=manufacturers and retailers, not consumers Buyers seek to pay the lowest possible price Buyers have leverage over suppliers when: They purchase in large quantities (enhances supplier dependence on buyer) Suppliers’ products are commodities Product represents significant portion of buyer’s costs Buyer is willing and able to achieve backward integration In Porter’s model, “buyers” refers to manufacturers (e.g., GM) and retailers (e.g., Wal-Mart), rather than consumers. The ultimate aim of such buyers is to pay the lowest possible price to obtain the products or services that they require. Usually, if they can, buyers drive down profitability in the supplier industry. To accomplish this, the buyers have to gain leverage over their vendors. One way they can do this is to purchase in such large quantities that supplier firms are highly dependent on the buyers’ business. Second, when the suppliers’ products are viewed as commodities—that is, as standard or undifferentiated—buyers are likely to bargain hard for low prices, because many firms can meet their needs. Buyers will also bargain hard when the supplier industry’s products or services represent a significant portion of the buying firm’s costs. A fourth source of buyer power is the willingness and ability to achieve backward integration. Because it purchases massive quantities of goods for resale, Wal-Mart is in a position to dictate terms to any vendor wishing to distribute its products at the retail giant’s stores. This includes the recorded music industry; Wal-Mart accounts for approximately 10 percent of the market for CD sales. Wal-Mart refuses to stock CDs stickered with parental advisories for explicit lyrics or violent imagery. Artists who want their recordings available at Wal-Mart have the option of altering lyrics and song titles or deleting offending tracks. Likewise, artists are sometimes asked to change album cover art if Wal-Mart deems it offensive.

44 Bargaining Power of Buyers

45 Porter’s Force 4: Bargaining Power of Suppliers
When suppliers have leverage, they can raise prices high enough to affect the profitability of their customers Leverage accrues when Suppliers are large and few in number Supplier’s products are critical inputs, are highly differentiated, or carry switching costs Few substitutes exist Suppliers are willing and able to sell product themselves Supplier power in an industry is the converse of buyer power. Microsoft and Intel are two excellent examples of companies with substantial supplier power. Because about 90 percent of the world’s nearly 1 billion plus PCs use Microsoft’s operating systems and 80% use Intel’s microprocessors, the two companies enjoy a great deal of leverage relative to Dell, Compaq, and other computer manufacturers. In fact, it was precisely because Microsoft became so powerful that the U.S. government and the European Union launched separate antitrust investigations. As the trend toward tablets, smartphones, and netbooks continue, Apple and Android or Linux OS will diminish the market share of MS.


47 Porter’s Force 5: Rivalry Among Competitors
Refers to all actions taken by firms in the industry to improve their positions and gain advantage over each other Price competition Advertising battles Product positioning Differentiation To the extent that rivalry among firms forces companies to rationalize costs, it is a positive force. To the extent that it drives down prices, and therefore profitability, and creates instability in the industry, it is a negative factor. Several factors can create intense rivalry. Once an industry becomes mature, firms focus on market share and how it can be gained at the expense of others. Second, industries characterized by high fixed costs are always under pressure to keep production at full capacity to cover the fixed costs. Once the industry accumulates excess capacity, the drive to fill capacity will push prices—and profitability— down. A third factor affecting rivalry is lack of differentiation or an absence of switching costs, which encourages buyers to treat the products or services as commodities and shop for the best prices. Again, there is downward pressure on prices and profitability. Fourth, firms with high strategic stakes in achieving success in an industry generally are destabilizing because they may be willing to accept below-average profit margins to establish themselves, hold position, or expand.

48 Competitive Advantage
Achieved when there is a match between a firm’s distinctive competencies and the factors critical for success within its industry Broad market strategies Cost Leadership—low price Product Differentiation—premium price Narrow market strategies Cost Focus—low price Focused Differentiation—premium price Any superior match between company competencies and customers needs permits for the firm to outperform competitors. There are two basic ways to achieve competitive advantage. First, a firm can pursue a low-cost strategy that enables it to offer products at lower prices than competitors. Competitive advantage may also be gained by a strategy of differentiating products so that customers perceive unique benefits, often accompanied by a premium price. Note that both strategies have the same effect: They both contribute to the firm’s overall value proposition. Two different models of competitive advantage have received considerable attention. The first offers “generic strategies,” four routes or paths that organizations choose to offer superior value and achieve competitive advantage. According to the second model, generic strategies alone did not account for the astonishing success of many Japanese companies in the 1980s and 1990s. The more recent model, based on the concept of “strategic intent,” proposes four different sources of competitive advantage.

49 Cost Leadership Based on a firm’s position as the industry’s low-cost producer Must construct the most efficient facilities Must obtain the largest market share so that its per unit cost is the lowest in the industry Only works if barriers exist that prevent competitors from achieving the same low costs Cost leadership advantage can be the basis for offering lower prices (and more value) to customers in the late, more-competitive stages of the product life cycle. In Japan, companies in a range of industries—35mm cameras, consumer electronics and entertainment equipment, motorcycles, and automobiles—have achieved cost leadership on a worldwide basis. Cost leadership, however, is a sustainable source of competitive advantage only if barriers exist that prevent competitors from achieving the same low costs. In an era of increasing technological improvements in manufacturing, manufacturers constantly leapfrog over one another in pursuit of lower costs. Cost leadership advantage can be the basis for offering lower prices (and more value) to customers in the late, more-competitive stages of the product life cycle. In Japan, companies in a range of industries—photography and imaging, consumer electronics and entertainment equipment, motorcycles, and automobiles—have achieved cost leadership on a worldwide basis. Cost leadership, however, is a sustainable source of competitive advantage only if barriers exist that prevent competitors from achieving the same low costs. In an era of increasing technological improvements in manufacturing, manufacturers constantly leapfrog over one another in pursuit of lower costs.

50 Cost Leadership

51 Product Differentiation
Product that has an actual or perceived uniqueness in a broad market has a differentiation advantage Extremely effective for defending market position Extremely effective for obtaining above-average financial returns; unique products command a premium price Differentiation advantage. This can be an extremely effective strategy for defending market position and obtaining above-average financial returns; unique products often command premium prices. Examples of successful differentiation include Maytag in large home appliances, Caterpillar in construction equipment, and almost any successful branded consumer product. Nike has a unique array of product features.

52 Product differentiation

53 Cost Focus Firm’s lower cost position enables it to offer a narrow target market and lower prices than the competition Sustainability is the central issue for this strategy Works if competitors define their target market more broadly Works if competitors cannot define the segment even more narrowly Cost focus. In the shipbuilding industry, for example, Polish and Chinese shipyards offer simple, standard vessel types at low prices that reflect low production costs. Aldi, a German-based no-frills “hard discounter” with operations in numerous countries, offers a very limited selection of household goods at extremely low prices. IKEA, the Swedish furniture company described in the chapter introduction, has grown into a successful global company by combining both the focused differentiation and cost focus strategies.

54 Cost Focus

55 Focused Differentiation
The product not only has actual uniqueness but it also has a very narrow target market Results from a better understanding of customer’s wants and desires Ex.: High-end audio equipment The world of “high-end” audio equipment offers another example of focused differentiation. A few hundred small companies design speakers, amplifiers, and related hi-fi gear that costs thousands of dollars per component. While audio components represent a $21 billion market worldwide, annual sales in the high-end segment are only about $1.1 billion. American companies such as Audio Research, Conrad-Johnson, Krell, Mark Levinson, Martin-Logan, and Thiel dominate the segment, which also includes hundreds of smaller enterprises with annual sales of less than $10 million. The state-of-the-art equipment these companies offer is distinguished by superior craftsmanship and performance and is highly sought after by audiophiles in Asia (especially Japan and Hong Kong) and Europe. Industry growth is occurring as companies learn more about overseas customers and build relationships with distributors in other countries.

56 Global Competition and National Competitive Advantage
According to Porter, the presence or absence of particular attributes in individual countries influences industry development, not just the ability of individual firms to create core competences and competitive advantage. Porter describes these attributes—factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry—in terms of a national “diamond” which is illustrated on this slide. The diamond shapes the environment in which firms compete. Activity in any one of the four points of the diamond impacts on all the others and vice versa. The following slides will discuss the various subsections of the model.

57 Factor Conditions Human Resources – the quantity of workers available, skills possessed by those workers, wage levels, and work ethic Physical Resources – the availability, quantity, quality, and cost of land, water, minerals, and other natural resources Knowledge Resources – the availability within a nation of a significant population having scientific, technical, and market-related knowledge Human Resources: Countries with a plentiful supply of low-wage workers have an obvious advantage in the production of labor-intensive products. On the other hand, such countries may be at a disadvantage when it comes to the production of sophisticated products requiring highly skilled workers capable of working without extensive supervision. Physical Resources: The availability, quantity, quality, and cost of land, water, minerals, and other natural resources determine a country’s physical resources. A country’s size and location are also included in this category, because proximity to markets and sources of supply, as well as transportation costs, are strategic considerations. These factors are obviously important advantages or disadvantages to industries dependent on natural resources. Knowledge Resources: The presence of this factor is usually a function of the number of research facilities and universities—both government and private—operating in the country. This factor is important to success in sophisticated products and services, and to doing business in sophisticated markets. This factor relates directly to Germany’s leadership in chemicals; for some 150 years, Germany has been home to top university chemistry programs, advanced scientific journals, and apprenticeship programs.

58 Factor Conditions Capital Resources – the availability, amount, cost, and types of capital available; also includes savings rate, interest rates, tax laws, and government deficit Infrastructure Resources – this includes a nation’s banking, healthcare, transportation, and communication systems Capital Resources: The advantage enjoyed by industries in countries with low capital costs versus those located in nations with relatively high capital costs is sometimes decisive. Firms paying high capital costs are frequently unable to stay in a market where the competition comes from a nation with low capital costs. The firms with the low cost of capital can keep their prices low and force the firms paying high costs to either accept low returns on investment or leave the industry. Infrastructure Resources: Infrastructure includes a nation’s banking system, healthcare system, transportation system, communications system, as well as the availability and cost of using these systems. More sophisticated industries are more dependent on advanced infrastructures for success.

59 Demand Conditions Composition of Home Demand – determines how firms perceive, interpret, and respond to buyer needs Size and Pattern of Growth of Home Demand – large home markets offer opportunities to achieve economies of scale and learning in familiar, comfortable markets The nature of home demand conditions for the firm’s or industry’s products and services is important because it determines the rate and nature of improvement and innovation by the firms in the nation. These are the factors that either train firms for world-class competition or that fail to adequately prepare them to compete in the global marketplace. Three characteristics of home demand are particularly important to the creation of competitive advantage: the composition of home demand, the size and pattern of growth of home demand, rapid home market growth, and the means by which a nation’s home demand pulls the nation’s products and services into foreign markets.

60 Related and Supporting Industries
The advantage that a nation gains by being home to internationally competitive industries in fields that are related to, or in direct support of, other industries Downstream industries will have easier access to these inputs and the technology that produced them, and to the managerial and organizational structures that have made them competitive. Access is a function of proximity both in terms of physical distance and cultural similarity. It is not the inputs in themselves that give advantage. It is the contact and coordination with the suppliers, the opportunity to structure the value chain so that linkages with suppliers are optimized. These opportunities may not be available to foreign firms. Similar advantages are present when there are internationally competitive, related industries in a nation. Opportunities are available for coordinating and sharing value chain activities. Consider, for example, the opportunities for sharing between computer hardware manufacturers and software developers. Related industries also create “pull through” opportunities as described previously. For example, non-U.S. sales of PCs from Compaq, Dell, IBM, Acer, and others have bolstered demand for software from Microsoft and other U.S. companies.

61 Firm Strategy, Structure, and Rivalry
Domestic rivalry in a single national market is a powerful influence on competitive advantage The absence of significant domestic rivalry can lead to complacency in the home firms and eventually cause them to become noncompetitive in the world markets Differences in management styles, organizational skills, and strategic perspectives also create advantages and disadvantages for firms competing in different types of industries The personal computer industry in the United States is a good example of how a strong domestic rivalry keeps an industry dynamic and creates continual pressure to improve and innovate. The rivalry between Dell, Gateway, Compaq, Apple, and others forces all the players to develop new products, improve existing ones, lower costs and prices, develop new technologies, and continually improve quality and service to keep customers happy. Rivalry with foreign firms may lack this intensity. Domestic rivals have to fight each other not just for market share, but also for employee talent, R&D breakthroughs, and prestige in the home market. Eventually, strong domestic rivalry will push firms to seek international markets to support expansions in scale and R&D investments, as Japan amply demonstrates. The absence of significant domestic rivalry can lead to complacency in the home firms and eventually cause them to become noncompetitive in the world markets.

62 Firm Strategy, Structure, and Rivalry
Capital markets and attitudes toward investments are important components of the national environments Chance events are occurrences that are beyond control; they create major discontinuities Government is also an influence on determinants by virtue of its roles as a consumer, policy maker, and commerce regulator Capital markets and attitudes toward investments are important components of the national environments. For example, U.S. laws prohibit banks from taking an equity stake in companies to which they extend loans. This drives a short-term focus on quarterly and annual gains and losses. This focus is carried into equity markets where low profits produce low share prices and the threat of a takeover. As a result, U.S. firms tend to do well in new-growth industries and other rapidly expanding markets. They do not do well in more mature industries where return on investment is lower and patient searching for innovations is required. Many other countries have an opposite orientation. Banks are allowed to take equity stakes in the customer companies to which they loan, which therefore take a long-term view and are less concerned about short-term results. Chance includes such things as wars and their aftermaths, major technological breakthroughs, sudden dramatic shifts in factor or input cost, like an oil crisis, dramatic swings in exchange rates, and so on. Governments devise legal systems that influence competitive advantage by means of tariffs and nontariff barriers and laws requiring local content and labor. In the United States, for example, the dollar’s decline over the past decade has been due in part to a deliberate policy to enhance U.S. export flows and stem imports. In other words, government can improve or lessen competitive advantage, but it cannot create it.


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