Chapter 2
International
Marketing Environment
Environmental forces,
both internal and external, have a significant impact on the marketing
strategies of organizations. While management has control over internal forces,
they have limited control over external influences.
Ø The success of marketing efforts relies on
effectively managing marketing programs within the given environment. Marketing
executives have a crucial role in identifying, monitoring, and responding to
environmental trends.
Ø This involves the process of environmental
monitoring, or scanning, which includes gathering information, analyzing it,
and forecasting the potential impact of external factors.
Ø Key external forces that influence marketing
activities include cultural forces, economic conditions, political and
legal forces, and technological forces. These uncontrollable
factors necessitate ongoing environmental monitoring in the international
marketing landscape.
1. Cultural
environment
Culture encompasses the
traditional beliefs and values that are transferred and shared within a specific
society. Additionally, culture encompasses the entirety of a way of life and
patterns of thinking that are inherited and passed down from one generation to
the next.
Characteristics of culture
A.
Culture is prescriptive: Culture prescribes acceptable behavior within a
society, while certain behaviors are not acceptable in some countries.
Ø It simplifies consumer decision-making by limiting
choices to socially acceptable products. However, this characteristic poses
challenges for products that do not align with cultural beliefs.
B.
Culture is socially shared: Culture
relies on social interaction and cannot exist in isolation. Members of a
society, influencing cultural norms and preferences, reinforce it.
C.
Culture facilitates communication: Culture
establishes common habits of thought and feeling within a group, making
communication easier among its members.
Ø However, differences in cultural values can impede
communication across groups, making standardized advertisements less effective
in foreign countries.
D.
Culture is learned: Culture
is acquired through socialization or enculturation, rather than being
genetically inherited. Individuals can learn and adapt to new cultural trends
through the process of acculturation.
E.
Culture is subjective: Different
cultures may have different interpretations and ideas about the same object or
phenomenon. Cultural norms and practices can vary, leading to diverse
perspectives and understanding of certain behaviors or customs.
F.
Culture is enduring: Culture
is relatively stable and permanent because it is shared and passed down from
generation to generation.
Ø Despite a changing world, people tend to maintain
their cultural heritage. For example, countries like India and China, despite
facing overcrowding, have difficulties with birth control due to cultural
beliefs and practices.
G.
Culture is cumulative: Culture
is built upon accumulated circumstances over hundreds or thousands of years.
Ø Each generation adds something new to the culture,
expanding its breadth. New ideas are incorporated into the culture while some
old ideas may be discarded.
H.
Culture is dynamic: Although
culture is passed down through generations, it is not static or immune to
change. Culture constantly adapts to new situations and sources of knowledge.
Ø For instance, the length of hair can serve as an
example of cultural change. The dynamic nature of culture can render certain
products obsolete and introduce new buying habits. Marketers must stay updated
with changes in cultural tastes to capitalize on new trends.
Influence of culture
A.
Influence of culture on consumption: Culture
has a significant influence on consumption patterns, living styles, and the
priority of needs.
Ø Cultural norms dictate how people satisfy their
desires, leading to diverse consumption habits.
Ø For example, Thai and Chinese cultures do not
consume beef because they believe it is improper to eat cattle that work on
farms, which provide other essential foods like rice and vegetables.
Ø Cultural preferences also influence food preparation
methods and can determine what should not be purchased.
B.
Influence of culture on thinking
process: Culture not only shapes consumption habits but also
affects the thinking processes of individuals.
Ø When exposed to foreign cultures, people tend to
interpret and understand them based on their own cultural values, a phenomenon
known as the self-reference criterion (SRC). The SRC can create biases and
distort perceptions of overseas events.
Ø It is crucial for travelers and business
professionals to recognize the influence of the SRC and be aware of how it can
impact their understanding and decision-making in cross-cultural situations.
C.
Influence of culture on the
communication process: Cultures can be classified as either high-context or
low-context based on the depth of background information conveyed in
communication. This classification helps understand cultural orientations and
how communication is transmitted and interpreted.
2. Economic
environment
The economic
environment plays a crucial role in shaping the marketing activities of
organizations. Firms are highly sensitive to economic factors and must consider
them when formulating their marketing strategies.
Characteristics of the World Economy
The world economy can
be characterized based on the following criteria:
A.
Less developed: These
countries have primarily agricultural and/or extractive economies. They have
low per capita incomes due to factors such as high birth rates and limited
infrastructure.
B.
Early developing: These
countries have started developing their infrastructure and may have infant
industries, including cottage manufacturers. While per capita incomes are still
modest, certain economic sectors may experience high growth rates.
C.
Semi-developed: These
countries have undergone accelerated expansion of infrastructure and broad
industrial diversification. As a result, per capita incomes are growing
rapidly.
D.
Developed: Developed
countries have well-developed infrastructures, high per capita incomes, and
extensive industrial diversification. They typically have low rates of
population and economic growth and have shifted their focus from manufacturing
to service industries such as transportation, communication, and information
systems.
E.
Centrally planned: The
categorization of centrally planned economies does not imply a higher or lower
stage of economic development. These countries could fall into any of the above
four categories.
Market characteristics
A.
Population: The
size of the population is a fundamental indicator of market potential. It
reflects the potential demand for staple items that have universal appeal and
affordability.
Ø Population figures need to be analyzed further by
breaking them down into meaningful categories to understand the implications
for market entry decisions.
B.
Income: Markets
require not only a population but also purchasing power, which is determined by
income, prices, savings, and credit availability.
Ø Income is a significant indicator of market
potential for most consumer and industrial products and services.
C.
Consumption Patterns: Understanding
the consumption patterns in a market provides insights into the level of market
development and the amount of disposable income available for different types
of purchases.
Ø Analyzing the share of income spent on necessities
versus discretionary items helps gauge consumer behavior.
D.
Inflation: is
a challenge for marketers as it affects both industrial customers' purchasing
power and consumer buying habits.
Ø Varying inflation rates in international markets
introduce uncertainty and may require adjustments in product offerings,
promotional strategies, and distribution channels to meet customer needs and
maintain demand.
E.
Infrastructure: The
availability and quality of infrastructure, including transportation,
communication, and energy, play a crucial role in evaluating marketing
operations abroad.
Ø A reliable and efficient infrastructure is essential
for smooth business operations and market accessibility.
F.
Stages of the Business Cycle: The
business cycle consists of four stages - prosperity, recession, depression, and
recovery. Each stage has implications for marketing strategies. During
prosperity, organizations expand marketing efforts, while recession and
depression periods require adjustments and cost-cutting measures. Recovery is a
transitional phase where companies aim to improve sales and profits as economic
conditions improve.
G.
Interest Rates: influence
consumer behavior, particularly in long-term purchases such as housing.
Ø High-interest rates may discourage such purchases,
while offering below-market interest rates can be used as a promotional tool to
stimulate business.
H.
Balance of Payments: The
balance of payments reflects economic transactions between a country and the
rest of the world.
Ø It consists of the current account (merchandise and service trade) and the capital account (capital flows).
Ø A favorable balance of payments (exports exceeding
imports) indicates a positive economic situation, while a deficit balance
(imports exceeding exports) suggests challenges.
Ø The balance of payments can influence foreign
investment decisions.
Economic system
A.
Command
Economy:
Ø In a command economy, all decisions regarding
production and distribution are made by the government.
Ø The government owns significant portions of the
means of production (land and capital) and directs operations in most industries.
Ø It is the employer of the majority of workers,
determining their roles and tasks.
Ø The government also decides how the society's output
is allocated among different goods and services.
B.
Market
Economy:
Ø In a market economy, individuals and private firms
are key decision-makers in production and consumption.
Ø Decisions are influenced by a system of prices,
markets, profits and losses, incentives, and rewards.
Ø Firms produce commodities yielding the highest
profits and employ cost-effective production techniques.
Ø Consumption is driven by individual decisions on
spending wages and property incomes.
C.
Mixed
Economy:
Ø Most economies today are mixed, combining elements
of both market and command systems.
Ø While market forces largely determine decisions, the
government plays a crucial role in modifying market functioning.
Ø The government establishes laws and rules regulating
economic activities, provides essential services like education and policing,
and regulates production and business.
Trade barrier
Trade barriers are
measures imposed by governments to restrict international trade. They can be
classified into two main categories: tariff barriers and non-tariff barriers.
Tariff barriers include
·
import tariffs,
·
export tariffs,
·
revenue tariffs,
and
·
special duties.
Non-tariff barriers encompass
·
administrative
guidance,
·
subsidies,
·
licenses or
permits, and
·
health and
safety regulations.
3.
Political and legal environment
Political environment
The political
environment in international business can be complex and consists of three
types of political environments: foreign politics, domestic politics, and
international politics.
A.
Foreign politics: refer
to the politics of the host country where a company operates. The political
climate in the host country can range from favorable and friendly to hostile
and dangerous.
Ø The host country's political and economic
circumstances influence the political environment faced by a company.
Ø Governments may view imports negatively, especially
luxury or non-essential products that compete with local production.
Ø Foreign investment may be encouraged or discouraged
based on considerations of balance of payments and economic development.
Ø Sensitive political situations can lead to
restrictions on foreign ownership of vital industries.
B.
Domestic politics: refers
to the politics in the company's home country. Even though a company might
expect minimal problems at home, it can face challenges.
Ø Criticism of a company's international activities
often comes from labor unions and political organizations, accusing the company
of exporting capital and jobs.
Ø Government regulations and actions motivated by
political considerations can interfere with the flow of trade.
C.
International politics: involve
the interaction of environmental factors between two or more countries.
Ø The complexity of the political environment
increases when the interests of the company, host country, and home country do
not align.
Ø Political relationships between countries can change
over time, and a favorable investment climate can disappear if political
conditions deteriorate.
Government types
A.
Political System: Governments
can be classified as either parliamentary (open) or absolutist (closed).
Ø Parliamentary
governments consult with citizens and aim to reflect the desires
of the majority of the society. Most industrialized and democratic nations fall
into this category.
Ø Absolutist
governments, such as monarchies and dictatorships, dictate
government policies without considering citizens' needs or opinions.
B.
Number of Parties: Governments
can also be classified based on the number of political parties. This
classification results in four types of governments: two-party, multi-party,
single-party, and dominant one-party systems.
Ø In a two-party system, two strong parties take
turns controlling the government.
Ø In a multi-party system, several parties exist, but
none is strong enough to gain control individually, leading to the formation of
coalitions.
Ø Single-party
systems have several parties, but one party dominates,
limiting opportunities for other parties.
Ø Dominant
one-party systems allow no opposition and often transform into
dictatorships.
C.
Economic Systems: provide
another basis for classifying governments.
Ø In communism, the government controls all
productive resources and industries, and resources are shared for the benefit
of society.
Ø Socialism
involves less government control
than communism, with the government owning and operating major industries while
allowing private ownership of small businesses.
Ø Capitalism is a free-market system with competition and
private ownership, where individuals produce goods or services for public
consumption.
Political risk
Political risks in
international marketing can have significant implications for businesses operating
in foreign markets.
Charles De Gaulle identified several political risks
that marketers need to contend with, including
A.
Confiscation refers to a government taking ownership of a
property without compensation. An example is the Chinese government's seizure
of American property after the communist revolution in 1949.
B.
Expropriation is similar to confiscation but involves some form
of compensation, although not necessarily just compensation. In expropriation,
a company may be implicitly or explicitly coerced into selling its operations
to the government.
C.
Nationalization occurs after confiscation or expropriation when the
government takes ownership of a business and operates it. This action usually
affects an entire industry rather than a single company.
D.
Domestication, on
the other hand, involves foreign companies relinquishing control and ownership
to local entities who are then allowed to operate the confiscated or
expropriated property.
Another
classification system of political risk, as proposed by Root, includes
A.
General instability risk pertains
to uncertainty about the future viability of a host country's political system.
B.
Ownership/control risk involves
the possibility of a host government restricting an investor's ownership and
control of a subsidiary.
C.
Operation risk arises
from the uncertainty that a host government might constrain a company's
business operations.
D.
Transfer risk relates
to the potential limitations on transferring payments, capital, or profit out
of the host country.
Indicators of political risk
There are various
indicators of political risks that companies should consider when assessing a
potential marketing environment. These include
A.
Social unrest can
disrupt business operations due to economic hardship, internal dissension,
insurgency, or ideological, religious, racial, and cultural differences.
B.
Negative attitudes toward foreign
enterprises may arise from concerns about exploitation and
colonialism.
C.
Government policies can
affect business operations, both internally and externally.
Measures to curb political risk
A.
Stimulation of the local economy: By
purchasing local products and raw materials, MNCs can develop alliances with
local firms and demonstrate their commitment to the host country's economic
development.
Ø Investing in local production facilities can further
strengthen this commitment.
B.
Employment of nationals: Hiring
local workers not only fills labor positions but also demonstrates the
company's trust in the local workforce.
Ø It helps dispel assumptions about the local
population and fosters positive relationships with the host country.
C.
Sharing ownership: Sharing
ownership with local companies or forming joint ventures can reduce exposure
and make it more difficult for a host government to take over the business.
Ø It can also be beneficial to have co-owners from
other nations to diversify risk.
D.
Being civic-minded: Undertaking
civic projects alongside investment projects can enhance the company's image
and contribute to local communities.
Ø It demonstrates a long-term commitment to the host
country's development.
E.
Political neutrality: It
is essential for MNCs to avoid becoming involved in local political disputes
and maintain a clear stance of being focused on economic objectives.
Ø This helps prevent the perception of interference in
local affairs.
F.
Behind-the-scenes lobbying: Companies
may engage in lobbying activities in their own country or in the host country
to protect their interests.
Ø Governments can also be approached to apply pressure
on foreign governments when necessary.
G.
Observation of political mood and
reduction of exposure: Marketers should closely monitor changes in the
political climate and be prepared with contingency plans in case the political
environment becomes hostile.
Ø Reducing exposure may involve scaling back
operations or investments to mitigate risks.
Legal environment
The legal environment
plays a crucial role in shaping business activities and ensuring societal
well-being. Understanding and complying with government rules and regulations
is essential for firms to operate successfully. The legal forces that impact
marketing can include:
i.
Monetary and fiscal policies: Government
spending, tax legislation, etc.
ii.
Social legislation and regulation: Anti-pollution
law
iii.
Government relationship with
industries: Tariffs, import quotas etc.
The legal system in
different countries can be categorized into two major types: common law and
statute law.
A.
Common law system: relies
heavily on precedent and previous court decisions, and judges
have the freedom to interpret laws based on the circumstances. Countries
like the United States, Great Britain, Canada, India, and other British
colonies follow this system.
B.
Statute law system: Countries
with a statute law system, such as most continental European countries and
Japan, rely on legislative codes where laws are clearly spelled out. Judges have a lesser role in interpreting laws and
must strictly follow the written law.
There are multiple legal environments
that businesses need to consider:
A.
Domestic legal environment: Businesses
must abide by the laws of their home country, which can impact both imports and
exports.
Ø Each country has its own legal system and
regulations governing business activities.
B.
Foreign legal environment: When
products cross national borders, they become subject to the laws and
enforcement systems of the foreign country.
Ø Different countries may have specific regulations
and requirements for imported goods.
C.
International legal environment: Agreements
between nations, such as treaties and trade agreements, govern international
business activities.
Ø International laws are complex, and companies
operating in multiple countries may face conflicting legal requirements.
4. Technological
environment
The technological
environment refers to the impact of technological factors on business
operations and the market.
Technological factors
can pose challenges for businesses. Companies that fail to cope with
technological changes may struggle to survive.
Ø Different markets or countries may have varying
technological environments, necessitating product modifications.
Ø For example, electrical appliances designed for 110
volts in the United States may require conversion to 240 volts in countries
with a different power system.
Ø Technological advancements can increase the demand
for existing products or lead to the introduction of new ones.
5. Regional
economic integration
Regional economic
integration refers to agreements between groups of countries in a specific
geographic region to reduce and eliminate trade barriers, including tariffs and
non-tariff barriers.
Economic cooperation
Economic cooperation is
a strategy employed by countries to reduce trade barriers and improve trade.
There are various forms of economic cooperation, including:
A.
Free Trade Area: Member
countries eliminate tariffs among themselves while maintaining their own
tariffs against non-members.
Ø The purpose is to facilitate trade among member
nations.
Ø However, the lack of coordination in tariffs against
non-members can allow non-members to direct their exports to enter the free
trade area through the point of lowest external tariff.
B.
Customs Union: A
customs union extends the concept of a free trade area by requiring member
countries to agree on a common schedule of identical tariff rates.
Ø The objective is to harmonize trade regulations and
establish common barriers against non-members.
Ø Uniform tariffs and a common commercial policy
against non-members are necessary to prevent them from taking advantage of the
situation.
C.
Common Market: A
common market is a higher level of economic integration than a free trade area
or a customs union.
Ø In a common market, countries remove all customs and
other restrictions on the movement of factors of production (such as services,
raw materials, labor, and capital) among member countries.
Ø Business laws are standardized to ensure undistorted
competition.
D.
Economic and Monetary Union: An
economic and monetary union involves the establishment of a single currency and
close coordination of economic policies.
Ø It includes total and irreversible convertibility of
currencies, freedom of capital movements, and fixed exchange rates with no
fluctuation margins between member currencies.
Ø The European Monetary Union (EMU) is an example of
an economic and monetary union.
E.
Political Union: A
political union represents the highest level of economic cooperation, involving
integration of both economic and political policies.
Ø It may include common defense and foreign policies,
a centralized parliament, and adoption of a common social policy.
International economic cooperation
A.
GATT-WTO (General Agreement on Tariffs
and Trade - World Trade Organization):
Ø The GATT-WTO is an international organization that
provides a framework for multilateral trade negotiations and promotes the
expansion of world trade.
Ø It operates based on principles such as
nondiscrimination and consultation.
Ø The WTO has about 130 member countries and aims to
reduce trade barriers and facilitate trade among nations.
B. IBRD
(International Bank for Reconstruction and Development - World Bank):
Ø The IBRD, also known as the World Bank, was
established in 1944 with the goal of providing funds and technical assistance
to support the economic development of its member countries.
Ø It focuses on helping the poorest people and
countries and obtains funds from member countries, loan repayments, and
earnings.
C.
IMF (International Monetary Fund): The
IMF was created in 1944 to promote international monetary
cooperation, expand international trade, and ensure exchange rate stability.
Ø It assists member countries in maintaining balance
of payments stability and provides short-term liquidity.
Ø it works to promote global economic stability
through financial assistance and policy advice.
D. UNCTAD
(United Nations Conference on Trade and Development):
Ø UNCTAD is a permanent organ of the United Nations
General Assembly that aims to promote the development of emerging nations through
trade and other means.
Ø It focuses on improving the prices of primary goods
exports through commodity agreements and establishing a tariff preference
system to support the export of manufactured goods from less developed
countries.
Ø UNCTAD has over 160 member countries and works to
address the concerns and promote the interests of developing nations in
international trade.