Predatory pricing and experience curve pricing do not violate antidumping regulations.

chapter 16 Global Marketing and R&D

LEARNING OBJECTIVES

1 Explain why it might make sense to vary the attributes of a product from country to country.

2 Recognize why and how a firm's distribution strategy might vary among countries.

3 Identify why and how advertising and promotional strategies might vary among countries.

4 Explain why and how a firm's pricing strategy might vary among countries.

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

opening case Burberry's Global Brand Strategy

Burberry, the icon British luxury apparel retailer famed for its trench coats and plaid patterned accessories, has been on a roll in recent years. In the late 1990s, one critic described Burberry as “an outdated business with a fashion cache of almost zero.” By 2012, Burberry was widely recognized as one of the planet's premier luxury brands with a strong presence in many of the world's richest cities, more than 560 retail stores, and revenues in excess of $2.2 billion.

Two successive American CEOs have been behind Burberry's transformation. The first, Rose Marie Bravo, joined the company in 1997 from Saks Fifth Avenue. Bravo saw immense hidden value in the Burberry brand. One of her first moves was to hire world-class designers to reenergize the brand. The company also shifted its orientation toward a younger hipper demographic, perhaps best exemplified by the ads featuring supermodel Kate Moss that helped to reposition the brand. By the time Bravo retired in 2006, she had transformed Burberry into what one commentator called an “achingly hip,” high-end fashion brand whose raincoats, clothes, handbags, and other accessories were must-have items for younger, well-healed, fashion-conscious consumers worldwide.

Bravo was succeeded by Angela Ahrendts, whose career had taken her from a small town in Indiana and a degree at Ball State University, through Warnaco and Liz Claiborne, to become the CEO of Burberry at age 46. Ahrendts realized that for all of Bravo's success, Burberry still faced significant problems. The company had long pursued a licensing strategy, allowing partners in other countries to design and sell their own offerings under the Burberry label. This lack of control over the offering was hurting its brand equity. The Spanish partner, for example, was selling casual wear that bore no relationship to what was being designed in London. So long as this state of affairs continued, Burberry would struggle to build a unified global brand.

Ahrendts's solution was to start acquiring partners and/or buying licensing rights back in order to regain control over the brand. Hand in hand with this, she pushed for an aggressive expansion of the company's retail store strategy. The company's core demographics under Ahrendts remained the well-healed, younger, fashion-conscious set. To reach this demographic, Burberry has focused on 25 of the world's wealthier cities. Key markets include New York, London, and Beijing, which according to Burberry, account for more than half of the global luxury fashion trade. As a result of this strategy, the number of retail stores increased from 211 in 2007 to 563 in 2011.

Another aspect of Burberry's strategy has been to embrace digital marketing tools to reach its tech-savvy customer base. Indeed, there are few luxury brand companies that have utilized digital technology as aggressively as Burberry. Burberry has simulcast its runway shows in 3-D in New York, Los Angeles, Dubai, Paris, and Tokyo. Viewers at home can stream the shows over the Internet and post comments in real time. Outerwear and bags are made available through a “click and buy” technology, with delivery several months before they reach the stores. Burberry had more than 10 million Facebook fans as of early 2012. At “The Art of the Trench,” a company-run social media site, people can submit photos of themselves in the company's icon rainwear.

The global marketing strategy seems to be working. Between 2007 and 2011, revenues at Burberry increased from £859 million to £1,501 million, and this against the background of a global economic slowdown. Over the same period, retail sales increased from 48 percent of the total to 64 percent of the total. By March 2012, 72 percent of Burberry's sales came through retail establishments. •

  Sources: Nancy Hass, “Earning Her Stripes,” The Wall Street Journal, September 9, 2010; “Burberry Shines as Aquascutum Fades,” The Wall Street Journal, April 17, 2010; Peter Evans, “Burberry Sales Ease from Blistering Pace,” The Wall Street Journal, April 17, 2010; and “Burberry Case Study,” Market Line, www.marketline.com, January 2012.

Introduction

The previous chapter looked at the roles of global production and logistics in an international business. This chapter continues our focus on specific business functions by examining the roles of marketing and research and development (R&D) in an international business. We focus on how marketing and R&D can be performed so they will reduce the costs of value creation and add value by better serving customer needs.

In Chapter 12, we spoke of the tension existing in most international businesses between the need to reduce costs and, at the same time, respond to local conditions, which tends to raise costs. This tension continues to be a persistent theme in this chapter. A global marketing strategy that views the world's consumers as similar in their tastes and preferences is consistent with the mass production of a standardized output. By mass-producing a standardized output, whether it be soap, semiconductor chips, or high-end apparel, the firm can realize substantial unit cost reductions from experience curve and other economies of scale. However, ignoring country differences in consumer tastes and preferences can lead to failure. Thus, an international business's marketing function needs to determine when product standardization is appropriate and when it is not, and to adjust the marketing strategy accordingly. Even if product standardization is appropriate, the way in which a product is positioned in a market and the promotions and messages used to sell that product may still have to be customized so that they resonate with local consumers.

As described in the opening case, the luxury fashion retailer Burberry has been dealing with these issues. Burberry's core demographic has been the affluent, younger, fashion-conscious set. Burberry has come to view this demographic as sharing a lot of the same tastes and preferences worldwide. Accordingly, it has devoted considerable attention to building a unified global brand with a consistent marketing message and the same product offering worldwide. As part of this strategy, Burberry has bought back licensing rights from partners around the world in order to regain control over its brand, and it has aggressively expanded its own retail presence in many of the world's richer cities, where the company's core target demographic lives. The global marketing strategy has worked for Burberry, but it might not work for others. It depends on the extent to which consumer tastes and preferences are homogenous, and as we will see, they are often not.

We consider marketing and R&D within the same chapter because of their close relationship. A critical aspect of the marketing function is identifying gaps in the market so that the firm can develop new products to fill those gaps. Developing new products requires R&D—thus, the linkage between marketing and R&D. A firm should develop new products with market needs in mind, and only marketing can define those needs for R&D personnel. Also, only marketing can tell R&D whether to produce globally standardized or locally customized products. Research has long maintained that a major contributor to the success of new-product introductions is a close relationship between marketing and R&D.1

In this chapter, we begin by reviewing the debate on the globalization of markets. Then, we discuss the issue of market segmentation. Next, we look at four elements that constitute a firm's marketing mix: product attributes, distribution strategy, communication strategy, and pricing strategy. The marketing mix is the set of choices the firm offers to its targeted markets. Many firms vary their marketing mix from country to country, depending on differences in national culture, economic development, product standards, distribution channels, and so on.

Marketing Mix

Choices about product attributes, distribution strategy, communication strategy, and pricing strategy that a firm offers its targeted markets.

The chapter closes with a look at new-product development in an international business and at the implications of this for the organization of the firm's R&D function.

The Globalization of Markets and Brands

In a now-classic Harvard Business Review article, the late Theodore Levitt wrote lyrically about the globalization of world markets. Levitt's arguments have become something of a lightning rod in the debate about the extent of globalization. According to Levitt,

A powerful force drives the world toward a converging commonalty, and that force is technology. It has proletarianized communication, transport, and travel. The result is a new commercial reality—the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude.

Gone are accustomed differences in national or regional preferences. The globalization of markets is at hand. With that, the multinational commercial world nears its end, and so does the multinational corporation. The multinational corporation operates in a number of countries and adjusts its products and practices to each—at high relative costs. The global corporation operates with resolute consistency—at low relative cost—as if the entire world were a single entity; it sells the same thing in the same way everywhere.

Commercially, nothing confirms this as much as the success of McDonald's from the Champs Élysées to the Ginza, of Coca-Cola in Bahrain and Pepsi-Cola in Moscow, and of rock music, Greek salad, Hollywood movies, Revlon cosmetics, Sony television, and Levi's jeans everywhere.

Ancient differences in national tastes or modes of doing business disappear. The commonalty of preference leads inescapably to the standardization of products, manufacturing, and the institutions of trade and commerce.2

This is eloquent and evocative writing, but is Levitt correct? The rise of the global media phenomenon from CNN to MTV, and the ability of such media to help shape a global culture, would seem to lend weight to Levitt's argument. If Levitt is correct, his argument has major implications for the marketing strategies pursued by international business. However, many academics feel that Levitt overstates his case.3 Although Levitt may have a point when it comes to many basic industrial products, such as steel, bulk chemicals, and semiconductor chips, globalization in the sense used by Levitt seems to be the exception rather than the rule in many consumer goods markets and industrial markets. Even a firm such as McDonald's, which Levitt holds up as the archetypal example of a consumer products firm that sells a standardized product worldwide, modifies its menu from country to country in light of local consumer preferences. In the Middle East, for example, McDonald's sells the McArabia, a chicken sandwich on Arabian-style bread, and in France, the Croque McDo, a hot ham and cheese sandwich.4

ANOTHER PERSPECTIVE Toyota's Ambitious Plan for No 1 Global Market

Yundong, or Cloud Action, is Toyota China's first-ever strategic plan for its business in China. China is the “most important” market in the world, but the Japanese carmaker has less than 10 percent of the auto market, far behind global rivals such as General Motors and Volkswagen. The auto giant aims to become a company “that is beyond consumers' expectations and creates happiness and fortune for consumers and the regions where it operates” emphasizing local responsiveness to Chinese customers, but still maintaining a global strategy. The Yundong plan combines the company's global strategy and local marketing operation which will bring advanced technologies to the local market, improve the local management and marketing system, and build “exciting” products “that touch the hearts of Chinese consumers and are beyond their expectations” according to company officials.

  Source: www.chinadaily.com.cn/bizchina/2012-03/05/content_14757469.htm.

On the other hand, Levitt is probably correct to assert that modern transportation and communications technologies are facilitating a convergence of certain tastes and preferences among consumers in the more advanced countries of the world, and this has become even more prevalent since he wrote. The popularity of sushi in Los Angeles; hamburgers in Tokyo; hip-hop music; Burberry apparel among young, affluent, fashion-conscious consumers worldwide; and global media phenomena such as MTV all support this contention. In the long run, such technological forces may lead to the evolution of a global culture. At present, however, the continuing persistence of cultural and economic differences between nations acts as a brake on any trend toward the standardization of consumer tastes and preferences across nations. Indeed, that may never occur. Some writers have argued that the rise of global culture doesn't mean that consumers share the same tastes and preferences.5 Rather, people in different nations, often with conflicting viewpoints, are increasingly participating in a shared “global” conversation, drawing upon shared symbols that include global brands from Nike and Dove to Coca-Cola and Sony. But the way in which these brands are perceived, promoted, and used still varies from country to country, depending on local differences in tastes and preferences. Furthermore, trade barriers and differences in product and technical standards also constrain a firm's ability to sell a standardized product to a global market using a standardized marketing strategy. We discuss the sources of these differences in subsequent sections when we look at how products must be altered from country to country. In short, Levitt's globally standardized market is some way off in many industries.

Market Segmentation

Market segmentation refers to identifying distinct groups of consumers whose purchasing behavior differs from others in important ways. Markets can be segmented in numerous ways: by geography, demography (sex, age, income, race, education level, etc.), sociocultural factors (social class, values, religion, lifestyle choices), and psychological factors (personality). Because different segments exhibit different patterns of purchasing behavior, firms often adjust their marketing mix from segment to segment. Thus, the precise design of a product, the pricing strategy, the distribution channels used, and the choice of communication strategy may all be varied from segment to segment. The goal is to optimize the fit between the purchasing behavior of consumers in a given segment and the marketing mix, thereby maximizing sales to that segment. Automobile companies, for example, use a different marketing mix to sell cars to different socioeconomic segments. Thus, Toyota uses its Lexus division to sell high-priced luxury cars to high-income consumers, while selling its entry-level models, such as the Toyota Corolla, to lower-income consumers. Similarly, personal computer manufacturers will offer different computer models, embodying different combinations of product attributes and price points, precisely to appeal to consumers from different market segments (e.g., business users and home users).

Market Segmentation

Identifying groups of consumers whose purchasing behavior differs from others in important ways.

When managers in an international business consider market segmentation in foreign countries, they need to be cognizant of two main issues: the differences between countries in the structure of market segments and the existence of segments that transcend national borders. The structure of market segments may differ significantly from country to country. An important market segment in a foreign country may have no parallel in the firm's home country, and vice versa. The firm may have to develop a unique marketing mix to appeal to the purchasing behavior of a certain segment in a given country. An example of such a market segment is given in the accompanying Management Focus, which looks at the African Brazilian market segment in Brazil, which as you will see is very different from the African American segment in the United States. In another example, a research project identified a segment of consumers in China in the 50-to-60 age range that has few parallels in other countries.6 This group came of age during China's Cultural Revolution in the late 1960s and early 1970s. This group's values have been shaped by their experiences during the Cultural Revolution. They tend to be highly sensitive to price and respond negatively to new products and most forms of marketing. Thus, firms doing business in China may need to customize their marketing mix to address the unique values and purchasing behavior of the group. The existence of such a segment constrains the ability of firms to standardize their global marketing strategy.

In contrast, the existence of market segments that transcend national borders clearly enhances the ability of an international business to view the global marketplace as a single entity and pursue a global strategy—selling a standardized product worldwide and using the same basic marketing mix to help position and sell that product in a variety of national markets. For a segment to transcend national borders, consumers in that segment must have some compelling similarities along important dimensions—such as age, values, lifestyle choices—and those similarities must translate into similar purchasing behavior. Although such segments clearly exist in certain industrial markets, they are somewhat rarer in consumer markets. As the opening case illustrates, however, they do exist. Thus, Burberry has been successful by gearing its offering toward a young, affluent, fashion-conscious, tech-savvy demographic. Burberry believes that consumers in this target segment clearly have much in common with each other, whether they live in Beijing, London, or New York.

One emerging global segment that is attracting the attention of international marketers of consumer goods is the so-called global youth segment. Global media are paving the way for a global youth segment. Evidence that such a segment exists comes from a study of the cultural attitudes and purchasing behavior of more than 6,500 teenagers in 26 countries.7 The findings suggest that teens and young adults around the world are increasingly living parallel lives that share many common values. It follows that they are likely to purchase the same kind of consumer goods and for the same reasons.

Product Attributes

LEARNING OBJECTIVE 1

Explain why it might make sense to vary the attributes of a product from country to country.

A product can be viewed as a bundle of attributes.8 For example, the attributes that make up a car include power, design, quality, performance, fuel consumption, and comfort; the attributes of a hamburger include taste, texture, and size; a hotel's attributes include atmosphere, quality, comfort, and service. Products sell well when their attributes match consumer needs (and when their prices are appropriate). BMW cars sell well to people who have high needs for luxury, quality, and performance, precisely because BMW builds those attributes into its cars. If consumer needs were the same the world over, a firm could simply sell the same product worldwide. However, consumer needs vary from country to country, depending on culture and the level of economic development. A firm's ability to sell the same product worldwide is further constrained by countries' differing product standards. This section reviews each of these issues and discusses how they influence product attributes.

CULTURAL DIFFERENCES

We discussed countries' cultural differences in Chapter 4. Countries differ along a whole range of dimensions, including social structure, language, religion, and education. These differences have important implications for marketing strategy. For example, “hamburgers” do not sell well in Islamic countries, where the consumption of ham is forbidden by Islamic law (the name is changed). The most important aspect of cultural differences is probably the impact of tradition. Tradition is particularly important in foodstuffs and beverages. For example, reflecting differences in traditional eating habits, the Findus frozen food division of Nestlé, the Swiss food giant, markets fish cakes and fish fingers in Great Britain, but beef bourguignon and coq au vin in France and vitéllo con funghi and braviola in Italy. In addition to its normal range of products, Coca-Cola in Japan markets Georgia, a cold coffee in a can, and Aquarius, a tonic drink, both of which appeal to traditional Japanese tastes.

MANAGEMENT FOCUS Marketing to Black Brazil

Brazil is home to the largest black population outside of Nigeria. Nearly half of the 195 million people in Brazil are of African or mixed race origin. Despite this, until recently businesses have made little effort to target this numerically large segment. Part of the reason is rooted in economics. Black Brazilians have historically been poorer than Brazilians of European origin and thus have not received the same attention as whites. But after a decade of relatively strong economic performance in Brazil, an emerging black middle class is beginning to command the attention of consumer product companies. To take advantage of this, companies such as Unilever have introduced a range of skin care products and cosmetics aimed at black Brazilians, and Brazil's largest toy company has introduced a black Barbie-like doll, Susi Olodum, sales of which quickly caught up with sales of a similar white doll.

But there is more to the issue than simple economics. Unlike the United States, where a protracted history of racial discrimination gave birth to the civil rights movement, fostered black awareness, and produced an identifiable subculture in U.S. society, the history of blacks in Brazil has been very different. Although Brazil did not abolish slavery until 1888, racism in Brazil has historically been much subtler than in the United States. Brazil has never excluded blacks from voting nor had a tradition of segregating the races. Historically, too, the government encouraged intermarriage between whites and blacks in order to “bleach” society. Partly due to this more benign history, Brazil has not had a black rights movement similar to that in the United States, and racial self-identification is much weaker. Surveys routinely find that African Brazilian consumers decline to categorize themselves as either black or white; instead, they choose one of dozens of skin tones and see themselves as being part of a culture that transcends race. Indeed, only 7.4 percent of Brazil's population classify themselves as “Afro-Brazilian,” while 42.6 percent classify themselves as “Pardo” or brown Brazilians of mixed-race ancestry including white, African, and Amerindian descent.

This subtler racial dynamic has important implications for market segmentation and tailoring the marketing mix in Brazil. Unilever had to face this issue when launching a Vaseline Intensive Care lotion for black consumers in Brazil. The company learned in focus groups that for the product to resonate with nonwhite women, its promotions had to feature women of different skin tones, excluding neither whites nor blacks. The campaign Unilever devised features three women with different skin shades at a fitness center. The bottle says the lotion is for “tan and black skin,” a description that could include many white women considering that much of the population lives near the beach. Unilever learned that the segment exists, but it is more difficult to define and requires more subtle marketing messages than the African American segment in the United States or middle-class segments in Africa.

  Source: M. Jordan, “Marketers Discover Black Brazil,” The Wall Street Journal, November 24, 2000, pp. A11, A14. Copyright 2000 by Dow Jones&Co. Inc. Reproduced with permission from Dow Jones&Co. Inc. in the format textbook by the Copyright Clearance Center.

For historical and idiosyncratic reasons, a range of other cultural differences exist among countries. For example, scent preferences differ from one country to another. SC Johnson, a manufacturer of waxes and polishes, encountered resistance to its lemon-scented Pledge furniture polish among older consumers in Japan. Careful market research revealed the polish smelled similar to a latrine disinfectant used widely in Japan. Sales rose sharply after the scent was adjusted.9 In another example, Cheetos, the bright orange and cheesy-tasting snack from PepsiCo's Frito-Lay unit, do not have a cheese taste in China. Chinese consumers generally do not like the taste of cheese because it has never been part of traditional cuisine and because many Chinese are lactose-intolerant.10

Tastes and preferences vary from country to country. To suit its global customers, Coca-Cola has a wide variety of products, such as Georgia, which is sold in Japan.

There is some evidence of the trends Levitt talked about. Tastes and preferences are becoming more cosmopolitan. Coffee is gaining ground against tea in Japan and Great Britain, while American-style frozen dinners have become popular in Europe (with some fine-tuning to local tastes). Taking advantage of these trends, Nestlé has found that it can market its instant coffee, spaghetti bolognese, and Lean Cuisine frozen dinners in essentially the same manner in both North America and western Europe. However, there is no market for Lean Cuisine dinners in most of the rest of the world, and there may not be for years or decades. Although some cultural convergence has occurred, particularly among the advanced industrial nations of North America and western Europe, Levitt's global culture characterized by standardized tastes and preferences is still a long way off.

ECONOMIC DEVELOPMENT

Just as important as differences in culture are differences in the level of economic development. We discussed the extent of country differences in economic development in Chapter 3. Consumer behavior is influenced by the level of economic development of a country. Firms based in highly developed countries such as the United States tend to build a lot of extra performance attributes into their products. These extra attributes are not usually demanded by consumers in less developed nations, where the preference is for more basic products. Thus, cars sold in less developed nations typically lack many of the features found in developed nations, such as air-conditioning, power steering, power windows, radios, and CD players. For most consumer durables, product reliability may be a more important attribute in less developed nations, where such a purchase may account for a major proportion of a consumer's income, than it is in advanced nations.

Contrary to Levitt's suggestions, consumers in the most developed countries are often not willing to sacrifice their preferred attributes for lower prices. Consumers in the most advanced countries often shun globally standardized products that have been developed with the lowest common denominator in mind. They are willing to pay more for products that have additional features and attributes customized to their tastes and preferences. For example, demand for top-of-the-line four-wheel-drive sport utility vehicles—such as Chrysler's Jeep, Ford's Explorer, and Toyota's Land Cruiser—has been largely restricted to the United States. This is due to a combination of factors, including the high income level of U.S. consumers, the country's vast distances, the relatively low cost of gasoline, and the culturally grounded “outdoor” theme of American life.

PRODUCT AND TECHNICAL STANDARDS

Even with the forces that are creating some convergence of consumer tastes and preferences among advanced, industrialized nations, Levitt's vision of global markets may still be a long way off because of national differences in product and technological standards.

Differing government-mandated product standards can rule out mass production and marketing of a standardized product. Differences in technical standards also constrain the globalization of markets. Some of these differences result from idiosyncratic decisions made long ago, rather than from government actions, but their long-term effects are profound. For example, DVD equipment manufactured for sale in the United States will not play DVDs recorded on equipment manufactured for sale in Great Britain, Germany, and France (and vice versa). Different technical standards for television signal frequency emerged in the 1950s that require television and video equipment to be customized to prevailing standards. RCA stumbled in the 1970s when it failed to account for this in its marketing of TVs in Asia. Although several Asian countries adopted the U.S. standard, Singapore, Hong Kong, and Malaysia adopted the British standard. People who bought RCA TVs in those countries could receive a picture but no sound!11

• QUICK STUDY

1. What do we mean when we say that a product is a bundle of attributes?

2. How might cultural differences across countries affect a company's choice of product attributes to emphasize?

3. How might differences in economic development across countries affect a company's choice of which product attributes to emphasize?

4. How might differences in technical standards across countries affect a company's choice of which product attributes to emphasize?

Distribution Strategy

LEARNING OBJECTIVE 2

Recognize why and how a firm's distribution strategy might vary among countries.

A critical element of a firm's marketing mix is its distribution strategy: the means it chooses for delivering the product to the consumer. The way the product is delivered is determined by the firm's entry strategy, discussed in Chapter 13. This section examines a typical distribution system, discusses how its structure varies between countries, and looks at how appropriate distribution strategies vary from country to country.

Figure 16.1 illustrates a typical distribution system consisting of a channel that includes a wholesale distributor and a retailer. If the firm manufactures its product in the particular country, it can sell directly to the consumer, to the retailer, or to the wholesaler. The same options are available to a firm that manufactures outside the country. Plus, this firm may decide to sell to an import agent, which then deals with the wholesale distributor, the retailer, or the consumer. Later in the chapter we will consider the factors that determine the firm's choice of channel.

FIGURE 16.1 A Typical Distribution System

DIFFERENCES BETWEEN COUNTRIES

The four main differences between distribution systems are retail concentration, channel length, channel exclusivity, and channel quality.

Retail Concentration

In some countries, the retail system is very concentrated, but it is fragmented in others. In a concentrated retail system, a few retailers supply most of the market. A fragmented retail system is one in which there are many retailers, none of which has a major share of the market. Many of the differences in concentration are rooted in history and tradition. In the United States, the importance of the automobile and the relative youth of many urban areas have resulted in a retail system centered on large stores or shopping malls to which people can drive. This has facilitated system concentration. Japan, with a much greater population density and a large number of urban centers that grew up before the automobile, has a more fragmented retail system, with many small stores serving local neighborhoods and to which people frequently walk. In addition, the Japanese legal system protects small retailers. Small retailers can try to block the establishment of a large retail outlet by petitioning their local government.

Concentrated Retail System

A few retailers supply most of the market.

Fragmented Retail System

Many retailers supply a market with no one having a major share.

There is a tendency for greater retail concentration in developed countries. Three factors that contribute to this are the increases in car ownership, number of households with refrigerators and freezers, and number of two-income households. All these factors have changed shopping habits and facilitated the growth of large retail establishments sited away from traditional shopping areas. The last decade has seen consolidation in the global retail industry, with companies such as Walmart and Carrefour attempting to become global retailers by acquiring retailers in different countries. This has increased retail concentration.

In contrast, retail systems are very fragmented in many developing countries, which can make for interesting distribution challenges. In rural China, large areas of the country can be reached only by traveling rutted dirt roads. In India, Unilever has to sell to retailers in 600,000 rural villages, many of which cannot be accessed via paved roads, which means products can reach their destination only by bullock, bicycle, or cart. In neighboring Nepal, the terrain is so rugged that even bicycles and carts are not practical, and businesses rely on yak trains and the human back to deliver products to thousands of small retailers.

Channel Length

Channel length refers to the number of intermediaries between the producer (or manufacturer) and the consumer. If the producer sells directly to the consumer, the channel is very short. If the producer sells through an import agent, a wholesaler, and a retailer, a long channel exists. The choice of a short or long channel is, in part, a strategic decision for the producing firm. However, some countries have longer distribution channels than others. The most important determinant of channel length is the degree to which the retail system is fragmented. Fragmented retail systems tend to promote the growth of wholesalers to serve retailers, which lengthens channels.

Channel Length

The number of intermediaries that a product has to go through before it reaches the final consumer.

The more fragmented the retail system, the more expensive it is for a firm to make contact with each individual retailer. Imagine a firm that sells toothpaste in a country where there are more than a million small retailers, as in rural India. To sell directly to the retailers, the firm would have to build a huge sales force. This would be very expensive, particularly because each sales call would yield a very small order. But suppose a few hundred wholesalers in the country supply retailers not only with toothpaste but also with all other personal care and household products. Because these wholesalers carry a wide range of products, they get bigger orders with each sales call, making it worthwhile for them to deal directly with the retailers. Accordingly, it makes economic sense for the firm to sell to the wholesalers and the wholesalers to deal with the retailers.

Because of such factors, countries with fragmented retail systems also tend to have long channels of distribution, sometimes with multiple layers. The classic example is Japan, where there are often two or three layers of wholesalers between the firm and retail outlets. In countries such as Great Britain, Germany, and the United States, where the retail systems are far more concentrated, channels are much shorter. When the retail sector is very concentrated, it makes sense for the firm to deal directly with retailers, cutting out wholesalers. A relatively small sales force is required to deal with a concentrated retail sector, and the orders generated from each sales call can be large. Such circumstances tend to prevail in the United States, where large food companies may sell directly to supermarkets rather than going through wholesale distributors.

Another factor that is shortening channel length in some countries is the entry of large discount superstores, such as Carrefour, Walmart, and Tesco. The business model of these retailers is, in part, based on the idea that in an attempt to lower prices, they cut out wholesalers and instead deal directly with manufacturers. Thus, when Walmart entered Mexico, its policy of dealing directly with manufacturers, instead of buying merchandise through wholesalers, helped to shorten distribution channels in that nation. Similarly, Japan's historically long distribution channels are now being shortened by the rise of large retailers, some of them foreign owned, such as Toys “R” Us, and some of them indigenous enterprises that are imitating the American model, all of which are progressively cutting out wholesalers and dealing directly with manufacturers.

Channel Exclusivity

An exclusive distribution channel is one that is difficult for outsiders to access. For example, it is often difficult for a new firm to get access to shelf space in supermarkets. This occurs because retailers tend to prefer to carry the products of established manufacturers of foodstuffs with national reputations rather than gamble on the products of unknown firms. The exclusivity of a distribution system varies among countries. Japan's system is often held up as an example of a very exclusive system. In Japan, relationships among manufacturers, wholesalers, and retailers often go back decades. Many of these relationships are based on the understanding that distributors will not carry the products of competing firms. In return, the distributors are guaranteed an attractive markup by the manufacturer. As many U.S. and European manufacturers have learned, the close ties that result from this arrangement can make access to the Japanese market difficult. However, it is possible to break into the Japanese market with a new consumer product. Procter & Gamble did during the 1990s with its Joy brand of dish soap. P&G was able to overcome a tradition of exclusivity for two reasons. First, after two decades of lackluster economic performance, Japan is changing. In their search for profits, retailers are far more willing than they have been historically to violate the old norms of exclusivity. Second, P&G has been in Japan long enough and has a broad enough portfolio of consumer products to give it considerable leverage with distributors, enabling it to push new products out through the distribution channel.

Exclusive Distribution Channel

A channel that outsiders find difficult to access.

ANOTHER PERSPECTIVE Spotify and Coca-Cola Form Marketing Partnership

Swedish music-streaming service Spotify gains access to Coca-Cola's global marketing engine, and Coca-Cola can use Spotify tunes in its online marketing. Spotify is hoping that Coke will teach the world to click its play button. The Swedish digital music service on Wednesday announced a broad-ranging marketing deal with Coca-Cola Co. that could help turbocharge the number of people who are exposed to, and ultimately sign up for, Spotify. Although the partnership does not involve any money changing hands, both parties describe it as invaluable to their efforts to market their products. For Spotify, the burgeoning music-streaming service that launched in the United States in July, getting access to Coca-Cola's formidable global marketing engine will come in handy as it expands its international footprint. Spotify operates in 13 countries, mostly in Europe, but has said it plans to launch its service in additional markets. In return, Coca-Cola can now use Spotify's service to instantly add music to its online marketing repertoire. For instance, the drink giant can add songs to its Facebook page via Spotify without having to negotiate licenses for each tune. (Spotify already has financial agreements with major record labels to pay royalties for every song that is played on its digital service.)

  Source: From Alex Pham, “Spotify and Coca-Cola Form Marketing Partnership,” Los Angeles Times, April 18, 2012. Copyright © 2012. Los Angeles times. Reprinted with permission. http://articles.latimes.com/2012/apr/18/business/la-fi-ct-spotify-coca-cola-20120419.

Channel Quality

Channel quality refers to the expertise, competencies, and skills of established retailers in a nation and their ability to sell and support the products of international businesses. Although the quality of retailers is good in most developed nations, in emerging markets and less developed nations from Russia to Indonesia, channel quality is variable at best. The lack of a high-quality channel may impede market entry, particularly in the case of new or sophisticated products that require significant point-of-sale assistance and after-sales services and support. When channel quality is poor, an international business may have to devote considerable attention to upgrading the channel, for example, by providing extensive education and support to existing retailers, and in extreme cases by establishing its own channel. Thus, after pioneering its Apple retail store concept in the United States, Apple opened retail stores in several nations—including the United Kingdom, France, Germany, Japan and China—to provide point-of-sales education, service, and support for its popular iPod, iPad, iPhone, and iMac products. Apple believes that this strategy will help it to gain market share in these nations.