MODE OF ENTRY SELECTION IN INTERNATIONAL BUSINESS
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 5
The decision to enter a market, including the mode of entry, must take into account
factors such as the business environment and the firm's core capabilities. Entry modes can be
defined as institutional agreements or arrangements through which a firm can bring products,
technology, skills or other resources into a particular market. The choice of entry mode can
be influenced by various factors, including the firm's experience, the manager's wishes and
the size of the potential market. This chapter discusses four types of entry modes comprising
exports, imports and returns, cooperation contracts, strategic alliance partnerships and direct
investment.
14.1 First Mode of Entry: Exports, Imports and Yields (Countertrade):
The first mode of entry consists of export activities (export, import and countertrade. Peru-
Companies generally import with the aim of obtaining production factors at a lower price or
production factors that are not available in the local market. On the other hand, companies
export when the international market has a great opportunity to increase sales and profits.
Thus, there are three reasons why firms export. First, firms export to expand total sales when
the domestic market has become saturated. With the increasing sales volume, it can help the
company to achieve economies of scale. Second, export activities can help companies
diversify sales. In this case, if there is a decline in sales in one market, it can be covered by
sales in other markets. Third, companies can utilize export activities to increase the
company's business experience. In building an export strategy, companies can use the four-
step model as follows.
1. Identify a Potential Market:
To identify whether there is demand in a particular market, a company must conduct
market research and interpret the results of that research. Companies that are new to
exporting should focus on a limited number of markets. The company can then expand into
different markets as the company gains experience.
2. Match Needs to Abilities:
The next step is to determine whether the company has sufficient ability to meet the
needs of consumers in that market. In this case, the company's products should match the
needs of consumers. Thus, before carrying out production activities, the company must first
ascertain whether the company has sufficient resources to produce the appropriate type of
product.
3. Initiate Meetings:
At this stage, the company conducts direct meetings with various parties involved in the
company's business activities. This meeting aims to build a sense of trust and cooperation
between the various parties. At this stage, the company must pay attention to the various
cultural differences that exist. In addition to building trust, these meetings also aim to
estimate the potential for future business success.
4. Commit Resources:
In the last stage, after the meeting, negotiation, and signing of the contract, the company
can use all of its resources. These resources can include human, financial, and physical
resources. The first thing to do is to set the objectives of the export activity for at least the
next three to five years. This can be done by the company's export division or department.
Firms of any size and scale can engage in exporting, but not all firms have the same level
of involvement. Some small and medium-sized firms use the services of intermediaries to
bring their products into specific markets. But other firms can do all of their exporting
without the help of intermediaries. In this case, there are two types of export engagement
levels consisting of direct exporting and indirect exporting.
Direct exporting occurs when a company directly exports sell their products to the target market
without going through a middleman. In this case, the company has a high level of involvement in
product exporting. Direct export does not necessarily mean that companies sell their products to end-
users. Direct export rather describes a situation where companies take full responsibility for getting
their products to a specific target market without going through intermediaries. Instead, companies
may use sales representatives or distributors.
A sales representative can be defined as an individual or organization that only
represents (sells and promotes) products from one company. In this case, products are
promoted by participating in various bazaars or by visiting wholesalers directly. Sales
representatives do not own the rights to the company's products, but they are hired by the
company. As such, they will be rewarded with a fixed salary plus a commission from sales.
On the other hand, distributors have product ownership rights. In this case, the distributor is
responsible for all risks associated with the product. The distributor will make a profit in the
form of the difference between the purchase price and the price of the product sold.
In addition to direct exporting, companies can also use the indirect exporting model,
which uses intermediaries to sell the company's products in the target market. In this case,
companies can choose to use agents, export management companies (EMC) or export trading
companies (ETC). Agents can be defined as individuals or organizations that represent more
than one exporting company. Generally, they are compensated with a commission based on
the value of sales. Agents are the most commonly used form of indirect exporting due to their
low cost. Furthermore, EMC is a company that export of products from exporters on a contract basis.
These EMCs can take the form of agents or distributors. In addition to exporting products, EMCs also
offer other services such as collecting market information, developing promotional strategies,
organizing delivery systems, and coordinating export documents. On the other hand, ETCs can be
defined as companies that provide other services in addition to activities directly related to export
activities. Unlike EMCs that only offer a variety of services related to export activities, ETCs have a
broader scope and consist of export, import and rebate activities; development and expansion of
distribution channels; goods storage services and so on.
The first mode of entry also relates to countertrade, which is the sale of products or
services that are partially or fully paid for using other goods or services. This is done when
companies cannot import their goods in exchange for certain financial payments. This can be
because a particular country does not have enough hard currency or the government
deliberately limits the convertibility of currencies.
Figure 14.1 shows five types of returns consisting of barter, counterpurchase, offset,
switch trading and buyback. Barter is a trading system where goods or services are directly
exchanged for other goods or services. Counterpurchase is the sale of products or services by
a certain company that promises to buy back certain products from that country. On the other
hand, an offset is an agreement where a company will compensate for certain sales by
purchasing the same amount of hard-currency in the future. Offset differs from
counterpurchase in that it does not specify the type of goods to be bought or sold, but only
the amount of currency to be compensated.
Furthermore, there is switch trading which is a return system where one company sells
bonds to make purchases in a particular country to another company. For example, a
company that wants to enter a certain market makes an agreement to buy a certain product
from that country. However, since the company does not need the product, it can sell its
bonds to another company. In addition, there is buyback, which is the export of industrial
equipment in exchange for the products produced from the equipment. This system generally
requires a long-term cooperative relationship.
14.2 Second Mode of Entry: Contract Work same
Not all company products can be traded in the open market. The products of some firms
cannot be traded in the market because they are intangibles. In this case, the firm cannot use
imports, exports, or returns to capitalize on these intangibles capitalize on existing business
opportunities in the target market. Fortunately, in this case, there is another type of entry
mode that the company can use, which is the contractual entry mode.
Figure 14.2 shows four types of contract-based modes of entry. These are licensing,
franchising, management contracts and turnkey projects. Licensing is a contract-based mode
of entry where one company that owns intangible property grants another company the right
to use that property. Franchising, on the other hand, is a practice where one company grants
the right to use certain intangible goods and other management assistance to another
company. Companies that license and franchise will receive compensation in the form of
royalty payments. More details on licensing and franchising are discussed in Chapter 7.
Management contracts and turnkey projects are explained below.
1. Management Contracts
In a management contract agreement, one company provides another company with
managerial expertise for a specified period of time. The company providing the managerial
expertise is generally compensated with a certain amount of payment or a fee based on sales
volume. These management contracts are commonly found in the public facilities sector in
developing countries. There are two types of knowledge that can be transferred through
management contracts: technical management knowledge and business management skills.
Contract management can provide benefits to both organizations and countries. First,
companies that offer management contracts to other companies can take advantage of
international business opportunities with less risk. This is because companies under
management contracts do not need to bring their (physical) assets to the country. In this case,
the company can put the company's capital into other more profitable investments. Second,
companies that operate and build public facilities under management contracts generally
receive compensation (rewards) from the government. Third, the government can use
contract management to develop the skills of local workers and managers.
However, contract management has two major drawbacks with regard to management
service provider companies. First, while contract management reduces the level of exposure
of a company's assets in another country, it does not apply to the company's employees
directly assigned to that country. Thus, political and social turmoil can still threaten the
company's employees and managers. Secondly, the company that receives the management
contract services may potentially become a competitor of the management contract service
provider in the future. In this case, the company must considering the financial rewards
received and potential future issues.
2. Turnkey Project
Turnkey (build-operate-transfer) projects are agreements where one company designs,
builds and tests a specific production facility for a client company. In this case, the company
awarded the turnkey project will provide all the facilities or equipment needed to run the
project. Similar to management contracts, turnkey projects are generally large in scale and
involve government agencies. However, unlike management contracts, turnkey projects
require the transfer of certain facilities or technology to the client company. Turnkey projects
can be projects to build factories, airports, ports, tele-communication systems or other
facilities.
Turnkey projects have various advantages, both to providers and recipients. First,
turnkey projects enable companies to specialize in their core competencies and take
advantage of business opportunities. Secondly, turnkey projects also help the government to
obtain designs for infrastructure projects from reputable companies. However, turnkey
projects also have some drawbacks. First, companies may accept projects based on political
reasons rather than technological know-how. This is because most projects involve a large
monetary value and involve the government. In addition, similar to contract management,
turnkey projects also have the potential to create competitors in the future.
14.3 Third Mode of Entry: Strategic Alliance Partners
Strategic alliances are the third type of entry mode that takes the form of investment.
This investment-based mode of entry involves direct investment activities in a country. In this
case, the investing company will have direct involvement in business operations in a
particular location. This category of investment-based entry generally requires a high level of
commitment from the company.
International strategic alliances take many forms, from simple license agreements
between two parties to market-based alliances, business operations and logistics. The main
characteristic of strategic alliances is characterized by the common goals of the parties
involved. The decision to form a strategic alliance instead of a simpler cooperation agreement
actually depends on the objectives to be achieved. Technological developments in
communications, the Internet and transportation have demanded a more permanent form of
inter-firm cooperation. This is why strategic alliances are often used instead of mergers and
acquisitions. The important aspects of strategic alliances are discussed in Chapter 8.
14.4 Fourth Entry Capital: Direct Investment
Apart from strategic alliances, investment-based modes of entry can also take the form
of wholly owned subsidiaries and joint ventures (JVs). The following is an explanation of the
two modes of entry.
1. Wholly Owned Subsidiaries
Wholly owned subsidiaries are facilities that are wholly owned and managed by a single
holding company. Companies can form wholly owned subsidiaries by establishing a new
company. In addition, a company can also establish wholly owned subsidiaries by purchasing an
existing company and then inter- nalizing its facilities such as factories, offices, and equipment. In
addition, companies can also establish wholly owned subsidiaries by purchasing an existing company
and then inter- nalizing the facilities owned by the company.
The decision to build a new production facility or buy an existing company can be
influenced by various factors. For example, if a company wants to produce products using the
latest technology, it generally has to build a new facility. The main drawback of building a
new production facility is that the company has to recruit and train new employees and find a
new distribution system. On the other hand, by purchasing an existing production facility, the
company can benefit from the availability of various facilities (production, sales, and
marketing) that already exist.
There are two main advantages of using wholly owned subsidiaries as a mode of entry.
First, through wholly owned subsidiaries, the manager has full rights to manage and oversee
operations in the target market. The manager also has full access to the company's technology
and intangible properties. This full control over the company's activities further reduces
competitors' access to the company's competitive advantage. Secondly, wholly owned
subsidiaries can be a suitable mode of entry if the company wants to coordinate the activities
of all its subsidiaries.
Despite these advantages, wholly owned subsidiaries also have disadvantages. First,
wholly owned subsidiaries have high investment costs. This is because the company requires
a large amount of investment funds. In this case, the company can use the company's internal
financing or obtain funds from the financial market. However, small and medium-sized
companies generally have difficulties in obtaining loans. Secondly, wholly owned
subsidiaries are a high-risk form of investment. As such, social and political instability can
pose a major threat to the company's assets and employees.
2. Joint Ventures
In some circumstances, the company does not want to have full rights to the operations
in the target market. In this case, the company prefers to share the ownership proportion with
another company. A company that is built and jointly owned by two or more entities to
achieve a common goal is known as joint ventures (JVs). Joint ventures can be divided into
four types, namely forward integration joint venture, backward integration joint venture,
buyback joint venture, and multistage joint venture. The following is an explanation of each
type of joint venture.
a. Forward Integration Joint Venture
Forward integration joint venture is a type of joint venture characterized by two or more
companies working together to invest in downstream activities, namely business activities
that are at the front of the value system (downstream) which were originally carried out by
other parties.
Figure 14.3 shows a simplified form of a forward integration joint venture where two
companies work together to perform a task or business activity that was originally performed
by a diligence, wholesaler or distributor.
b. Backward Integration Joint Venture:
Backward integration joint venture is a type of joint venture when two or more
companies cooperate in upstream business activities, namely business activities that are at the
back of the value system (upstream activities) that were originally carried out by other parties.
Figure 14.4 shows a simple example of a backward integration joint venture where two
companies work together to perform an activity that was originally carried out by a supplier.
c. Joint Venture Buyback
Buyback joint ventures are formed when two or more companies need the same input
components in their production activities. Buyback joint ventures are commonly used when a
production facility of a certain size is required to achieve economies of scale, but none of the
companies are able to build the facility on their own. As a result, they can work together and
combine their resources to build the production facility. An illustration of this type of joint
venture is shown in Figure 14.5.
Figure 14.5 Joint Venture Buyback.
d. Multistage Joint Venture
Multistage joint venture is a combination of forward integration and backward
integration. This type of joint venture is formed when one company produces an output that
is needed by another company in its activities production. An illustration of this type of
multistage joint venture is shown in the following figure.
Joint venture mode of entry has several advantages. Firstly, joint ventures have less risk
than wholly owned subsidiaries. Second, companies can use joint ventures to enter markets
that are otherwise inaccessible (restricted by the government). This is achieved through
working with local companies. Thirdly, companies can also gain access to channels or
distribution networks from other companies through joint ventures. In addition, companies
can form joint ventures as a form of protection from the government. On the other hand, the
main drawback of joint ventures is the potential for inter-company conflicts that can be fatal
to business operations. Furthermore, companies may also lose control of their business
activities if they form a joint venture with the government.
Study 14
Recent studies have recognized the role of business type on entry mode. One form of
business type is the family business. There are several arguments regarding how family
businesses can influence the mode of entry. The risk aversion characteristic of family
businesses increases their preference for a joint venture mode of entry over a wholly owned
subsidiary. In addition, the reluctance to hire managers from an external environment limits
the access of these businesses to international experience and increases the preference for
sharing risks with partners through joint ventures. However, when looking at control and
assurance of independence from external parties, wholly owned subsidiaries can also offer
more benefits than joint ventures.
When family firms own local assets, the dynamics of the entry mode are affected. Ownership
of company assets in another country influences the mode of entry chosen. When both firms
(investment and local firm) are family firms, forming a joint venture is recommended. This is
because both partners are family firms, and since family is an important but non-tradable
asset, the optimal solution is to maintain the family status of both partners with a greenfield
joint venture or partial acquisition. Whereas if only the investing company is a family
company, then a wholly owned subsidiary is likely to be chosen.
Family Companies and the Choice of Mode of Entry
14.5 Conclusion
Import-export and returns are the simplest forms of entry modes. Before exporting,
companies can strategize by following the four-step model. The four-step model consists of
identifying potential markets, matching buyers' needs with the company's capabilities,
conducting meetings, and mobilizing the company's resources. Furthermore, there are other
types of contract-based modes of entry. Some types of contract-based modes of entry are
licenses, franchises, turnkey projects, and management contracts. In addition, there are
investment-based modes of entry. These types of entry modes include strategic alliances,
wholly owned subsidiaries, and joint ventures; one can choose any of these entry modes to
enter a particular target market. The choice of entry mode involves various considerations,
including the company's resources and environmental conditions.
14.6 Important Terms
⚫
Export
⚫
Import
⚫
Yields
⚫
Offset
⚫
Barter
⚫
Buyback
⚫
Switch trading
⚫
Direct exporting
⚫
Indirect exporting
⚫
Sales representative
⚫
Distributors
⚫
Agents
⚫
Export management companies (EMC)
⚫
Export trading companies (ETC)
⚫
Strategic alliances
⚫
Wholly owned subsidiaries
⚫
Joint venture
⚫
Forward integration joint venture
⚫
Backward integration joint venture
⚫
Buyback joint venture
⚫
Multistage joint venture
⚫
Turnkey projects
⚫
Contract management
14.7 Review Concept
1. Why do companies export? Explain!
2. Explain why companies import!
3. What is meant by yield? Explain!
4. Explain the difference between direct and indirect exporting!
5. When does the company use direct exporting?
Explain!
6. What is a management contract? Explain!
7. Explain the difference between turnkey projects and
contract management!
8. Explain the difference between joint ventures and wholly owned subsidiaries!
9. What are the advantages of wholly owned subsidiaries?
Explain!
10. Explain the meaning of the four-step model in export strategy!
14.8 Problem- Problem
1. Explain the benefits of exporting and importing for a country! How do exports and imports
help companies achieve competitive advantage? Explain!
2. Explain the various benefits of joint ventures! What is the role of joint ventures in inter-
national business activities? Explain with examples of companies that do joint ventures!
3. Find one management contracting activity in Southeast Asia. Explain how the management
contract was executed! What are the benefits of the management contract? Explain!
PRODUCT DEVELOPMENT AND MARKETING
Consumers in different markets generally have different needs and product preferences.
These consumer preferences are strongly influenced by cultural, political, legal and economic
characteristics. In this case, companies must make various adjustments to the products and
marketing systems used. This chapter discusses various important elements in product
development and marketing activities. It also covers important factors in product distribution
and pricing strategies.
15.1 International Marketing Activities
International marketing activities are very different from marketing activities in the
domestic market. Managers must determine the use of marketing media appropriate to the
company's products and the characteristics of local consumers. Cultural similarities mean that
the company only needs to make minor modifications to the product and marketing system.
On the other hand, if there are significant cultural differences, it can encourage companies to
design new marketing systems.
Most product marketing systems or styles in one particular country are customized to the
characteristics of the target buyers in that country. When companies want to market their
products in different markets, they must determine which aspects of marketing can be
standardized and which aspects must be customized. Companies that conduct international
business activities in different countries tend to standardize various aspects of marketing with
the aim of saving marketing costs. However, it is rare for companies to standardize all aspects
of marketing due to cultural and regulatory differences.
Companies that standardize their marketing activities generally oversee all marketing
campaigns directly. This aims to maintain consistency in the company's brand name and
ensure the same promotional message across all markets. Companies can achieve this
consistency through standardization of promotional messages, marketing concepts, and
information content.
15.2 Manager Types in Building Product Strategy International
There are generally two types of managers in developing international product strategies,
those who standardize products and those who adapt products. The type of managers who
standardize products tend to offer products with the same features in all types of markets. Not
only that, this type of manager also tends to have the same product marketing style or system.
On the other hand, the type of manager who Product adaptation tends to localize products and
marketing styles according to the characteristics of local buyers or those in specific markets.
However, the decision to standardize or adapt products can also be influenced by various
other factors.
One of the factors that influence the selection of a company's product strategy is the laws
and regulations that apply in the country or place where the company conducts business
activities. In this case, companies have to make various changes to their products to meet
certain legal requirements. However, some developing countries have fewer regulations on
consumer protection to keep production costs and consumer prices stable. In addition,
managers can also adapt products to suit buyers' preferences that are reflected in culture. In
this case, the company will first identify consumer needs and preferences. Next, companies
will make various adjustments to their products to meet these needs and preferences.
15.3 Key Factors of Promotion Strategy International:
Promotional mix consists of various company efforts to reach distribution channels and
target customers through communication. These communication activities can be in the form
of personal selling, advertising, public relations, and direct marketing. There are two types
of promotional strategies commonly used by companies, namely push strategy and pull
strategy. Companies can use one or a combination of both types of strategies. Pull strategy is
a promotional strategy that aims to increase the amount of product supply available in various
distribution channels through creating or increasing the amount of consumer demand. In this
case, the company seeks to increase the number of products available in various distribution
channels through the creation or increase in consumer demand. A push strategy is a type of
promotional strategy that encourages or uses various parties involved in the distribution
channel to promote the company's products to end buyers. On the other hand, push strategy is
a type of promotional strategy that encourages or uses various parties involved in the
distribution channel to promote the company's products to end buyers.
There are various environmental conditions that can determine which strategy is most
suitable or should be used by the company. The following is an explanation of some of these
factors.
1. Distribution System
Push strategy is very difficult to implement if the parties involved in the distribution
channel have relatively more power than the company. This strategy can also be ineffective if
the company has a very long distribution channel. This is because the more parties involved
in the company's distribution channel, the more parties the company has to convince to
support their products. In this case, pull strategy can be a more effective alternative.
2. Access to Mass Media
Some developing countries or countries with emerging markets generally have fewer
mass media facilities needed to carry out a pull strategy. This certainly makes it difficult for
companies to be able to increase consumer awareness of the company's products. Many
consumers in developing countries cannot afford to buy various mass media facilities. In
addition, some of the available media also have narrow coverage.
3. Type of Product
Pull strategy is suitable when the company has a consumer base that is loyal to the
company's brand. On the other hand, push strategy is suitable for consumer product
categories with relatively low prices and consumers do not show loyalty to a particular brand.
In addition, push strategy can also be used for industrial product categories. This is because
consumers or buyers must know information about the features or benefits of a particular
product.
15.4 Managerial Elements for an Inter- national Distribution Strategy
Distribution activities include various processes of planning, implementing and
monitoring the flow of products starting from the point of origin of the product to the point of
consumption. The physical path that the product takes to the customer or end user is referred
to as the distribution channel. All parties or companies involved in this distribution process
are known as intermediaries (channel members or intermediaries). This distribution channel
is needed by both manufacturing companies and companies engaged in the service sector. In
the international distribution strategy, there are various managerial elements that must be
considered by the company. The following is an explanation of each of these elements.
1. Designing Distribution Channels
There are two factors that managers must consider in establishing distribution channels.
They are the amount or level of market exposure and the cost of distribution. In promoting
their products, the company, especially the marketing department, must determine the level
of exposure required by the product. The company can use an exclusive channel, which gives
the right to sell the product to a small number of resellers. In this case, the company can more
easily monitor product sales made by the resellers. This exclusive distribution channel can
also help the company in building barriers for other parties (competitors) who want to enter
its distribution channel.
In addition to exclusive distribution channels, companies can also use intensive channels,
by giving the right to sell the company's products to as many resellers as possible. This type
of distribution channel provides convenience for consumers in obtaining the company's
products because they are available in many places. However, the use of intensive
distribution channels cannot create barriers to entering the distribution channel. In other
words, it is easy for other parties, including competitors, to enter the company's distribution
channel.
The second factor that companies should consider relates to channel length and
distribution costs. Channel length can be defined as the number of parties that act as
intermediaries between producers and buyers. Companies can use zero-level channels, also
known as direct marketing, by selling their products directly to end buyers. Alternatively,
companies can also use a one-level channel, which uses one intermediary between the
company and the buyer. Companies can also use two-level channels, three-level channels and
so on. The more the number of intermediaries, the higher the distribution cost. This is
because each additional intermediary will add service costs to the total cost of the product.
2. Influence of Product Characteristics
The value of a product relative to its weight or volume is referred to as value density.
Value density is an important factor that companies must consider in forming distribution
channels. The lower the value density of a product, the more localized the distribution system.
Most commodities such as iron ore, crude oil and cement have a low value density ratio. This
is because these commodities are heavy and have high transportation costs, but relatively low
value. As a result, most of these products are processed at locations close to their original
location. On the other hand, some products that have a high value density ratio consist of
diamonds and premium perfumes. These products have much lower transportation costs
compared to their value or price. Thus, the product production activities can be carried out in
the most optimal location.
3. Distribution Issues
A country's distribution system will evolve over time and reflect its cultural, political,
legal and economic uniqueness. Each country has its own strengths and weaknesses in its
distribution channels. However, there are two main problems that often occur in distribution
channels, namely the lack of market understanding and the risk of kidnapping and corruption.
Lack of understanding of the local market can have a negative impact on the company,
including financial losses. In addition, the risk of kidnapping and corruption also affects the
company's distribution system.
15.5 Elements of Pricing Strategy International
The pricing strategy must be adjusted to the overall international strategy adopted by the
company. Companies that operate as low-cost leaders generally cannot set high prices for
their products. This is because their products generally have fewer features and emphasize
functionality over uniqueness. On the other hand, companies that run a differentiation
strategy generally set higher price levels. There are generally two types of pricing policies
that can be used by international companies, namely worldwide pricing and dual pricing.
Worldwide pricing is a policy where the company sets only one price and applies to all
international markets. This type of strategy is very difficult to implement as there are
differences in production costs between different countries. As a result, the product prices set
generally reflect different production costs. In addition, a company that conducts production
activities in one location cannot guarantee the same product pricing in all target markets.
Another reason this policy is difficult to implement is due to differences in purchasing power
in local markets. Fluctuations in exchange rates also affect product pricing in various
markets.
Due to various shortcomings of the worldwide strategy, the company can use another
strategy known as dual pricing. Dual pricing strategy is a policy where the company sets
different prices between products sold in the domestic market and the price of products sold
in the export market. If a product has a higher price in the export market compared to the
local market, then this condition is known as price discrimination escalation. This can be
caused by export costs and exchange rate fluctuations. However, the price of products in the
export market may also be lower than in the domestic market. In this case, the company uses
domestic sales to cover all production costs. Thus, the price of the product in the export
market only takes into account the costs directly related to the export activity.
To properly implement a dual price strategy, the company must separate local buyers
from international buyers. This is because buyers in one particular market may cancel the
purchase activity if they know there is a price difference. Furthermore, a company's pricing
decisions are also influenced by various factors, namely transfer prices, arm's length pricing,
price controls, and dumping. The following is an explanation of these factors.
1. Transfer Prices
Transfer prices are the transfer costs imposed on a firm's products. These transfer costs
are generally related to the cost of taxes or tariffs imposed on the company's products. These
transfer fees may be levied on products shipped from one subsidiary to another subsidiary in
a different country.
2. Arm's Length Pricing
Increased regulation of transfer pricing practices has reduced the freedom to manipulate
transfer pricing. This has prompted governments to set transfer pricing policies based on the
free-market price of the product. Thus, most of the international transfer costs between one
subsidiary and another are based on the free-market price of the product companies in other
countries occurs at the arm's length price, which is the market price charged for a particular
product. One of the factors driving the use of the arm's length price system is that some
international companies attempt to manipulate tariff costs.
3. Price Controls
Product pricing strategies must also take into account the government's ability to
influence prices (price controls) through the setting of upper (maximum) and lower
(minimum) limits of certain product prices. Setting an upper limit on product prices aims to
maintain price stability in the economy. In this case, if a company wants to increase the price
from the predetermined limit, it must obtain permission from the government. On the other
hand, setting a lower limit on product prices aims to prevent prices from falling below a
certain limit. The government may set a lower limit on product prices in order to protect
domestic firms from imported goods.
4. Dumping
Dumping is when the price of a product in the export market is lower than its price in the
domestic market. The practice of dumping is illustrated by the influx of imported products at
lower prices and in large quantities. If a government reports a company in another country for
dumping, the company may be subject to antidumping tariffs.
Study 15
Big Data-based strategy orientation in international marketing
In an increasingly borderless global economy, big data plays a critical role in seizing
business opportunities. A total of 91.6% of Fortune 1,000 companies are investing in big
data-related mechanisms as these investments are necessary to remain agile and competitive
in the market. Big data plays an important role in the transformation of the business
environment as it can provide insights into emerging trends by capturing information on
product service performance, customer preferences, and feedback. 75% of the total world
population will be connected to digital data by 2025, where every 18 seconds, at least one
data interaction will occur through every connected person. A new multinational or e-
commerce company can introduce or expand its marketing activities globally by acquiring
and disseminating data in the market. One example of a company is Netflix, which generates
a large pool of data from consumer behavior patterns through their digital platform and uses
the data to implement TV series around the world successfully. Netflix's recommendation
engine has worked through big data and analytics to detect and suggest suitable objects based
on customer preferences. Big data helps identify the items that customers choose and the
alternatives that they do not choose and provides a picture of customer behavior for further
decision-making in the international market. Companies can use information from big data to
better understand the market and create a competitive advantage.
15.6 Conclusion
In carrying out international marketing activities, there are various factors that must be
considered by companies. These factors are closely related to the cultural, economic, political
and legal aspects that affect the company consumer behavior and preferences. In this case, the
company can choose to standardize or modify the company's products and marketing style.
Furthermore, there are two types of promotional strategies that can be used by companies,
namely push and pull strategies. To choose between the two strategies, companies consider
various factors such as the distribution system, the availability of mass media and the type of
product. Similarly, in choosing a distribution strategy, companies must also consider, namely
the level of market exposure, production costs, and product characteristics. In addition, there
are two types of pricing strategies, namely worldwide pricing and dual pricing. The
company's pricing policy is further influenced by various factors including transfer prices,
arm's length pricing, price controls, and dumping.
15.7 Important Terms
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Promotional mix
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Pull strategy
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Push strategy
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Distribution channel
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Intermediaries
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Channel length
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Value density
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Zero-level channel
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One-level channel
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Free market price
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Price control
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Transfer price
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Arm's length price
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Dumping
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Worldwide pricing
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Dual pricing
15.8 Review Concept
1. Explain what factors a company must consider in carrying out international marketing
activities!
2. Why are international marketing activities different from domestic marketing activities?
Explain!
3. What is the promotional mix? Explain!
4. Explain the difference between push and pull strategy!
5. What factors should companies consider in carrying out promotional activities in the
international market? Explain!
6. What is a sual pricing strategy? Explain!
7. What are the disadvantages of the worldwide pricing strategy?
Explain!
8. What is a zero-level channel? Explain!
9. Explain the meaning of arm's length price!
10. What does dumping mean? Explain!
15.9 Problem- Problem
1. Find a case of a company price dumping. Explain the impact of the dumping on the
company's image!
2. Describe the distribution strategy used by Indofood. Do you think the strategy is effective?
Explain why!
3. If you have the same business as Indofood in the consumer food sector, what distribution and
pricing strategies would you use? Explain!
