UNIT 1

Unit 1 Introduction
Structure
1.1 International Marketing
1.2 Driving Forces of International Business
1.2.1 Comparative Costs
1.2.2 International Product Life Cycle
1.3 Stimuli for International Business
1.3.1 Limited Growth in Domestic Markets
1.3.2 Technological Change
1.3.3 Global Competition
1.3.4 Access to Resources
1.4 Definition of International Marketing
1.5 Domestic Marketing Versus International Marketing
1.6 Benefits of International Marketing
1.6.1 Survival
1.6.2 Growth of Overseas Market
1.6.3 Sales and Profits
1.6.4 Diversification
1.6.5 Inflation and Price Moderation
1.6.6 Employment
1.6.7 Standard of Living
Learning objectives:
After studying this unit you will be able to
 Understand what is international business
 Understand what forces companies to do international business
 Understand various theories explaining international business evolution
 Differentiate between domestic and international marketing
 Understand the benefits of international marketing.


1.1 International Marketing
International marketing is the application of marketing orientation and marketing
techniques to international business.
1.2 Driving Forces of International Business
Economists have provided some theoretical explanations for the described
evolution of international business. The most well-known are the theory of
comparative costs and the related concept of international product life cycles.


1.2.1 Comparative Costs
In simple terms theory of comparative costs suggests that each country, owing to
its available resources and the efficiency of their use, has or can develop specific
advantages compared with other countries. If each country specialises in
products and services it can produce or perform comparatively better than others
and exchanges them for products and services in which other countries have
advantages, all exchange partners will profit. The standard of living will increase
in all economics.
Economic reality shows, however that resources as well as their efficient use
underlie a dynamic process which leads to continual changes in comparative
advantages and, as a consequence, continuing changes in production sites. For
example, because of technical expertise required, the production of TV sets first
started in the USA and Europe. From there most of the production sites went to
Southeast Asia, where mass production costs for labour - intensive production
were much lower. But production was not lost for western countries for ever. On
the one hand, economic success led to increasing labour costs in countries such
as Japan, Taiwan, Hong Kong or Singapore. On the other, the fierce cost
competition from those countries led to heavy restructuring of industrial
organisation and processes in Europe and in the USA. As a result, some of the
production came back to the highly industrialised countries, because there existed a sufficient number of highly trained workers who could ensure the
expected level of high-quality output.

1.2.2 International Product Life Cycle
International product life cycle theory claims to explain the process of
dissemination of innovations across national borders. Following this theory, an
economically developed country which possesses the ability to provide a new
way of satisfying customer needs, that is, a product or service innovation, will try
to profit from the resulting advantages by selling the new product or service to
other countries. Soon other economically developed countries will follow. They
will create their own production capacities for the new product or service. Next,
the less developed countries will follow when they have gained the needed
production know-how in one way or another. Finally, more and more of the
economically advanced countries which, in the meantime, have lost their
comparative advantage to the less developed countries will start importing the
product or service from their former customers.
This process can be visualised by three overlapping life cycle curves

They show development of innovation in the three types of countries, the

innovating country, the highly developed early followers and the less developed
late followers. Each curve is characterised by net exports when it is situated
above the time axis. Below the time axis more products are imported than
exported.
Phase 1 starts with the export of the local innovation to other markets, for
example, when a French company which has successfully introduced an
electronic telephone terminal starts exporting it to other European markets,
Phase 2 is characterised by relative stability. Demand in the markets served so
far continues to grow, but is increasingly satisfied by local production. In phase 3
the exports of innovator start decreasing. Demand for the new good in the less
economically developed countries is rising, but is increasingly satisfied by the
production capacities installed by the early followers. Finally in phase 4, the
picture changes completely. The product or service is no longer an innovation. It
has become common to an intent where companies in economically less
developed countries are able to provide a perhaps simplified, version at very low
cost.
The duration of each of the phases may vary. High tariffs or transportation costs,
high production volumes needed to be cost efficient, high capital investment
intensity, or patents can extend the cycles. Culture-dependent innovations may
not even experience the process described at all because no demand for the
product or service can be created in other markets.

1.3 Stimuli for International Business
There are four major driving forces which have made companies to go
international:

1.3.1 Limited Growth in Domestic Markets
In order to remain financially healthy, most companies must grow. However,
many product-markets in the industrialised nations are saturated. For many small to medium sized forms, growth through additions to the existing product line is
difficult. Diversification into new areas of business as a growth alternative is
always risky. The most viable way to grow may be to enter less saturated foreign
markets.
According to a study by management consultants McKinsey in 1991, US firms
depended on home sales for 70 percent of turnover, but sales growth from the
domestic market for the period 1991 to 1996 was expected to reach only 5
percent. In contrast, sales to foreign markets were expected to grow by 10 to 20
percent during the same period. US companies have been successful in
diversifying into emerging markets in Asia and Latin America. In 1990, such
markets accounted for 35 percent of US merchandise exports, compared with 42
percent going to Europe and Japan. But by 1995, the emerging - market share
was up 42 percent versus 34 percent for Europe and Japan.


1.3.2 Technological Change
Important drivers for international business are technological improvement and
change in the areas of transportation and communication. The number of direct
airline connections inside Europe, to Asia and from many different points in the
USA to overseas destinations has dramatically increased.
Telecommunications have revolutionised the economic and political world, and
changed the way business is conducted. A seemingly simple invention like the
fax machine has permitted real-time global communication without the difficulties
involved in taking time zone differences into account.
In a more advanced way, computers are increasingly hooked to each other
online, around the world. An internal memo with attachments can therefore be
shared by e-mail with all managers at the same time, for example such
connections have improved the international logistics and shipment of goods.
Satellite TV has also changed the way business is conducted, for example
advertising. Commercials broadcast in USA may be seen in India, increasing the need to understand cultural differences and the effects of communication standardisation.

1.3.3 Global Competition
For many firms, the primary driving force to start international business is
competition. Both local and national firms are confronted with foreign competitors
in their home markets. For example, more than 70 percent of all goods produced
in USA have faced direct competition from non-domestic sources.
Competition can be local/national, regional or global competition is purely local or
national when the companies serving a country market are all based in that
market. Competition is regional when competitors serving a country-market come
from different neighbouring countries. Global competition exists when the
companies competing for customers in a country-market come from all over the
world. This is the case for an increasing number of products, such as consumer
electronics, food products, cars, machinery, pharmaceuticals, industrial
engineering, bank or insurance services, especially in the highly developed
industrial countries.

1.3.4 Access to Resources
Companies that operate internationally treat the world as a source of supply as
well as demand. They obtain the resources they need wherever they can buy
them at the best price. Co-operation with firms in other nations can reduce costs
and increase management knowledge, further enhancing the competitiveness of
global firms relative to other.
In many industries the rate of innovation is not very dramatic. As a consequence,
domestic as well as global competition for market share often boils down to a
race to lower prices. The firm with non-domestic business has an advantage. It
has access to cheaper source of raw-material, capital and labour.


1.4 Definition of International Marketing
According to American Marketing Association, international marketing is the
multinational process of planning and executing the conception, pricing,
promotion and distribution of ideas, goods and services to create exchanges that
satisfy individual and organisational objectives.

1.5 Domestic Marketing Versus International Marketing
Domestic marketing involves one set of uncontrollables derived from the
domestic market. International marketing is much more complex because a
marketer faces two or more sets of uncontrollable variables originating from
various countries. The marketer must cope with different cultural, legal, political
and monetary systems.


1.6 Benefits of International Marketing


1.6.1 Survival
Most countries lack market size, resources and opportunities and hence they
must trade with others to survive.


1.6.2 Growth of Overseas Markets
Developing countries inspite of economic and marketing problems, are excellent
markets. The world market is four times larger than the US market. Hence many
US companies grow by going international. For example in case of Amway Corp.,
a privately held US manufacturer of cosmetics, soaps and vitamins Japan
represents a larger market than the United States.


1.6.3 Sales and Profits
Foreign markets constitute a larger share of the total business of many firms that
have wisely cultivated markets abroad. IBM and Compaq, for example sell more
computers abroad than at home. In the case of Coca-Cola, international sales
account for more than 80 percent of the firm’s operating profits.


1.6.4 Diversification
Demands for most products is affected by such cyclical factors as recession and
such seasonal factors as climate. The unfortunate consequence of these
variables is sales fluctuations, which can frequently be substantional enough to
cause layoffs of personnel. One way to diversify a company’s risk is to consider
foreign markets as a solution for variable demand.

1.6.5 Inflation and Price Moderation
Imports can also be highly beneficial to a country because they constitute
reserve capacity for local economy. Without imports, there is no incentive for
domestic firms to moderate their prices. The lack of imported product alternatives
forces consumers to pay more, resulting in inflation and excessive profits for local
firms.

1.6.6 Employment
Trade restrictions in US in 1930s contributed significantly to the great depression
and caused widespread unemployment. Unrestricted trade, on the other hand,
improves the world’s GNP and enhances employment generally for all nations.

1.6.7 Standard of Living
Trade affords countries and their citizens higher standard of living than otherwise
possible. Without trade, product shortages force people to pay more for less.
Trade also makes it easier for industries to specialise and gain access to rawmaterials,
while at the same time fostering competition and efficiency. A diffusion
of innovations across national boundaries is a useful by product of international
trade.


Exercise
1. Define international marketing.
2. What are the driving forces of international business ?
3. Why companies engage in international business ?
4. How does international marketing differ from domestic marketing ?
5. What are the benefits of international marketing ?