Onkvisit S., Shaw J. International Marketing: Analysis and Strategy
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Table 12.1 Reactive strategies to combat gray market activity
Does it Does it provide
curtail immediate
gray market relief to Legal risks to
Type of Implemented Cost of Difficulty of activity at authorized Long-term manufacturers Company
strategy by implementation implementation source? dealers? effectiveness or dealers examples
Strategic Dealer with Moderate Requires No Relief in the Effective Low risk Creative mer-
confrontation manufacturer planning medium term chandizing by
support
Caterpillar and
car dealers
Participation Dealer Low Not difficult No Immediate Potentially Low risk Dealers wishing
relief damaging to remain
reputation of anonymous
manufacturer
Price cutting Jointly by man- Costly Not difficult No, if price Immediate Effective Moderate to Dealers and
ufacturer and cutting is relief high risk manufacturers
dealer temporary remain
anonymous
Supply Either party can Moderate at Moderately No Immediate relief Somewhat Moderate risk IBM, Hewlett-
interference engage the wholesale difficult
or slightly effective if at at wholesale Packard, Lotus
level; high at delayed wholesale level; level; low risk Corp., Swatch
the retail level not effective at at retail level Watch USA,
retail level Charles of the
Ritz Group Ltd.,
Leitz, Inc., NEC
Electronics
Promotion Jointly, with Moderate Not difficult No Slightly delayed Somewhat Low risk Komatsu,
of gray market manufacturer
relief effective Seiko, Rolex,
product leadership
Mercedes-Benz,
limitations
IBM
Collaboration Dealer Low Requires careful No Immediate Somewhat Very high risk Dealers wishing
negotiations relief effective to remain
anonymous
Acquisition Dealer Very costly Difficult No Immediate Effective if other Moderate to No publicized
relief gray market high risk cases
brokers don’t
creep up
Note
Company strategies include, but are not limited to, those mentioned here.
Source:
S.Tamer Cavusgil and Ed Sikora,“How Multinationals can Counter Gray Market Imports,”
Columbia Journal of World Business
23 (winter 1988): 78.
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Table 12.2 Proactive strategies to combat gray market activity
Does it Does it provide
curtail immediate
gray market relief to Legal risks to
Type of Implemented Cost of Difficulty of activity at authorized Long-term manufacturers Company
strategy by implementation implementation source? dealers? effectiveness or dealers examples
Product service Jointly, with Moderate to Not difficult Yes No; impact felt Very effective Very low risk General Motors
differentiation manufacturer high
in medium to Ford, Porsche
and availability leadership
long term Kodak
Strategic Manufacturer Moderate to Complex; Yes Slightly delayed Very effective Low risk Porsche
pricing high impact on
overall prof-
itability needs
monitoring
Dealer Jointly, with Moderate to Not difficult; No No; impact felt Very effective No risk Caterpillar,
development manufacturer high requires dealer in long term Canon
leadership participation
Marketing Jointly, with Moderate to Not difficult; No No; impact Effective No risk IBM, Caterpillar
information manufacturer high requires dealer felt after Yamaha, Hitachi,
system leadership participation implementation Komatsu, Lotus
Development,
insurance
companies
Long-term Jointly Moderate Not difficult No No; impact felt Effective No risk Most manu-
image
in long term facturers with
reinforcement
strong dealer
networks
Establishing Manufacturer High Difficult Yes, No Uncertain Low risk COPIAT,
legal if fruitful Coleco, Charles
precedence
of the Ritz
Group, LTD.
Lobbying Jointly Moderate Difficult Yes, No Uncertain Low risk COPIAT,
if fruitful Duracell, Porche
Note
Company strategies include, but are not limited to, those mentioned here.
Source:
S.Tamer Cavusgil and Ed Sikora,“How Multinationals can Counter Gray Market Imports,”
Columbia Journal of World Business
23 (winter 1988): 82.
there is a question of whether anything can be done
to rectify the situation.When Canon stopped ship-
ments to the Netherlands, Dutch dealers simply
imported Canon cameras from Germany instead.
Furthermore, any overt and concerted action
against gray market dealers may be construed as
an illegal restraint of domestic and international
commerce. Another strategy involves educating
consumers. Minolta ran advertisements to inform
consumers that gray market cameras have inferior
warranty.This strategy is risky because the message
implies that something is wrong with the manufac-
turer’s own products.
The most effective way to eliminate the gray
market is to eliminate the cause–price discrepancy
between markets. Price matching can put gray
retailers out of business overnight, but this method
requires the manufacturer to reduce prices in the
most profitable markets.Another problem with this
strategy is that it adversely affects the product’s
prestige image and brand value. Certain brands are
successful due to their snob and exclusivity appeal,
and they have to be promoted as luxury articles that
must be expensive. In the case of automobiles, price
cutting would disrupt both insurance rates and
resale values, creating a peculiar situation by making
new cars less expensive than used ones.
To resolve some of the problems pointed out
above, the strategy of product differentiation should
be used. Porsche makes its cars for the US market
more powerful and better equipped in order to
reflect the higher price.The assumption here is that
the differences in features are noticeable and justify
the price differential. Multiple brands may also be
employed for the same product, with each brand
assigned to a certain market. Like other strategies,
however, the use of multiple brands affects the
economies of scale and increases the production,
inventory, and marketing costs.
One study uses the gray market activity as an
independent variable, and strategic export perform-
ance and economic export performance as the
dependent variables. Gray marketing does not hurt
exporters’ economic performance much because
it also generates sales of its own. However, gray
marketing interferes with exporters’ efforts to
achieve their strategic goals. Contrary to traditional
thinking, foreign currency and inflation rate fluctu-
ations do not appear to spur gray marketing.
Likewise, it is often assumed that a company’s expo-
sure to overseas markets should give it internal skills
to create an organizational environment that is
capable of combating gray marketing. However,
according to the empirical evidence, a company’s
international experience and the number of its
markets have insignificant relationships with unau-
thorized imports. On the other hand, the low level
of gray marketing is associated with distribution
control, integrated channels, centralization, and
product standardization.
22
DISTRIBUTION OF SERVICES
Services, like products, also need distribution. As
such, service providers need to design their distri-
bution channels.The various determinants and deci-
sions discussed above should apply to the marketing
of services as well.
In general, services can be exported through four
distinct modes: cross-border, consumption abroad,
commercial presence, and movement of person-
nel.
23
The first mode is cross-border. This mode
occurs when neither the producer nor the consumer
physically moves. Instead the services are provided
through a common channel such as the Internet.
Education and training (i.e. distance learning), and
professional services such as accounting are typical
cross-border supply services.
Consumption abroad is the second mode. It takes
place when the consumer/buyer is in the supplier’s
country.Tourism is a good example of this mode of
delivery.
Commercial presence, as the third mode, occurs
when the supplier establishes a local office in the
country where the service is to be provided.Typical
services that employ this mode include financial and
consulting services.
Finally, movement of personnel consists of staff of
the service company moving to the country where
the service export is provided.Temporary ventures,
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CHANNELS OF DISTRIBUTION
such as engineering or construction projects, are
examples of this type of service delivery. Employees
of the firm travel to and provide contracted services
for the duration of the project.
Let us consider the case of the education and
training sector (see Figure 12.7).
24
The sector
includes services defined at the level of post-
secondary education, and it includes education ser-
vices ranging from diploma and certificate through
doctoral and post-doctoral degrees. Regarding
distribution, the four modes of supply mentioned
above certainly apply to the export of post-
secondary education and training. A US institution
may deliver online courses to foreign students based
in their home countries. A more familiar form is
for foreign students to travel to an American or
European university for consumption abroad.
Several European and American universities have
now established commercial presence by opening a
branch campus/training facility in a foreign country
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CHANNELS OF DISTRIBUTION
Figure 12.7
Distribution of
education
through which they offer their courses and pro-
grams. Last but not least, Western institutions and
corporations have also relied on movement of per-
sonnel in the sense that their faculty and trainers are
sent abroad to deliver a course to consumers in
another country.
CONCLUSION
A product, no matter how desirable, must be made
accessible to buyers. A manufacturer may attempt
to use a direct distribution channel by selling
directly to end users abroad. The feasibility of this
channel depends on the type of product involved.
Generally, the sales opportunity created by direct
selling is quite limited. Intermediaries are usually
needed to move the product efficiently from the
manufacturer to the foreign user.
This chapter has discussed the roles of domestic
and overseas middlemen.The manufacturer has the
option of selling or assigning sales responsibility
to intermediaries in its own country and letting
them decide about reselling the product elsewhere.
Another option for the manufacturer involves
bypassing intermediaries and dealing directly with
foreign buyers, assuming that the manufacturer has
enough expertise, market familiarity, resources, and
commitment.With the myriad intermediaries avail-
able,it is impossible to prescribe a single distribution
method that is ideal for all products and markets.
A number of factors – such as product type, reg-
ulations, customs, and intermediary loyalty – must
be taken into account in designing and developing
an international channel of distribution. These
factors determine how long, how wide, and how
many channels are appropriate. Ordinarily, those
intermediaries that fail to add some value to the
product as it moves through them are likely to be
bypassed or dropped from the channel. But the
manufacturer cannot afford to dictate terms, since
an intermediary will carry a manufacturer’s product
only if the manufacturer minimizes channel conflict
as well as providing some value to these sales inter-
mediaries in return.
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CHANNELS OF DISTRIBUTION
CASE 12.1 THE INTERNATIONAL RECORD INDUSTRY
Peter Spang Goodrich, Providence College
The international music recording industry is in a crisis. Internet piracy downloading of songs to MP3 format
rampages. How can the industry recoup these lost revenues? Sales are off. There is ample evidence of fiscal
difficulties among the major record labels.
The July 7, 2003 issue of
New Yorker
asked “Can the Record Business Survive?” Author John Seabrook notes:
“Sales of recorded music in the USA have dropped by more than a million units in the past few years, falling
well below seven hundred million. . . .
“Around the globe, the record business is sixteen percent smaller than it was in 2000. Record labels blame
the fans, for lacking the long-term loyalty to pop acts which record buyers used to have, and for engaging in
wholesale ‘piracy’ of music, either by copying CDs or by downloading music illegally from the Internet. . . .
“Everything depends on getting people to pay for music that they now get for free.”
Two opposing international marketing strategies with strong contrasts have been adopted to try to save the
industry. Each uses a different promotional strategy to compete in a challenging legal environment. On the one
hand, record executive Jason Flom advocates the continuation of the star system. Ninety-nine percent of the artists
earn a pittance. Stars subsidize the major labels. Record companies thrive on the star system.
Flom is promoting his 17-year-old diva protégée Cherie. Flom presented Cherie to the Warner Brothers Group
(WBG) in Barcelona. Normally, singers build a local base first before expanding their market nationally and
globally. Flom reversed this. He wanted to market Cherie as an international star right away. At the WBG
Barcelona meeting, Cherie was a big hit.The keen interest even among affiliates representing countries that Flom
had assumed had no record market astounded him. So Cherie’s first album will have French and Spanish tracks
in addition to English.
Travel and relentless appearances are needed to sustain a hit record. Established stars do not appreciate these
upheavals to their personal lives. Since Cherie is only 17 years old and craves stardom, she is eager to promote
her record.The attitude of the major record labels is revealed at the November 2002 marketing meeting to “blow
up Cherie.” Aaron Simon is in charge of “product” management. It just so happens that the “product” is a human
being.
On the other hand, many artists are hitting back against a perceived “plantation accounting” system. An
increasing number of artists are going independent. Recording star Joni Mitchell said in
Rolling Stone
: “I would
never take another deal in the record business . . . I’ll be damned if I’ll line their pockets . . . I hope it all goes
down the crapper.” In
W
, she called the recording industry a “corrupt cesspool” where “record companies are
not looking for talent.They’re looking for a look and a willingness to cooperate.”
Consider the most striking case of folk-rock-country-blues-gospel singer-songwriter Michelle Shocked. She suc-
cessfully sued Mercury Records on the grounds of violating the 13th Amendment to the US Constitution barring
slavery or involuntary servitude. Mercury had turned down her proposed album because it did not fit their mar-
keting model for her. In addition, it would not allow her to produce the album for another label. Effectively, her
means of livelihood was stopped.
Shocked won the case in 1996 and is now the first major artist to own her entire body of work to market
independently as she sees fit through Mighty Sound. Many other artists such as Jimmy Buffet (Mailboat Records),
Ani Di Franco (Righteous Babe), and Joni Mitchell have rejected the major labels.They are marketing their own
work through the Internet and direct marketing. In addition, these independents’ work never goes “out of print.”
Of course, such independent production may be best suited to record sales runs of between 5000 and 10000. It
will probably work best on niche markets such as jazz, folk, Latin, and world music.
Points to consider
1 How is the incredibly rapid growth of the Internet (which occupied but one paragraph in the 1997 edition
of this text) helping the Shocked/Di Franco marketing method?
2 Is it the legal responsibility of the governments to control illegal music downloading over the Internet? What
are the difficulties posed by the international nature of the internet? Consider one of the major download-
ing People-to-People (P2P) programs, KaZaA, commissioned by two Scandinavians and programmed by
Estonians. How do governments shut down a P2P site which has no central location? How would the US
government prosecute a downloader who lives in Canada? Can any one country effectively stop this prac-
tice? Would it help if prosecutions ceased but the government adopted an annual Internet use license of, say
$5, to compensate the music industry for lost revenue?
3 Should the industry adopt Internet marketing such as the strategy of Apple Computer’s iTunes Music Store
which sells downloaded songs for 99 cents? An alternative might be selling MP3 players preloaded with an
artists music together with cut-rate options to all future works. For example, Michelle Shocked might enter
into a partnership with Apple to sell preloaded iPods for a premium of $50 over the costs of an empty iPod.
Since Shocked has produced over 100 songs, the costs per track would be a nominal 50 cents.The rights to
all future tracks could also be sold for the same 50 cents.Thus, if Shocked produced a CD with sixteen tracks
that might sell for $15.99, those who bought the preloaded iPod could own the tracks from only $8. Would
this scheme work? Would you consider it yourself?
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CHANNELS OF DISTRIBUTION
4 What is the potential for self-promotion versus major record company sales? If one is entrepreneurial, what
are the benefits and risks of this international marketing approach?
5 In 2002, the top ten bestselling albums accounted for 33.5 million copies. This was only half of the 2000
sales figures.These big sellers subsidize lesser selling albums and the development of new artists. The record
industry cites this as proof that Internet piracy is killing the industry. Do you think that this is true or
have sales merely diversified as a result of increased information about alternative artists provided by new
technology?
6 Which of the two approaches – the star system or independent entrepreneurs – will provide the future for
the international music industry?
CASE 12.2 SCHWARZKOPF, INC. DISTRIBUTION NETWORK
Daniel M. Evans, San José State University, and Heinz Bieler, Schwarzkopf Professional
Schwarzkopf is one of the leading hair care companies in the world. The “Professional Product” lines office is
based in Hamburg, Germany. Professional Products are sold solely to beauty salons and beauty schools world-
wide (see Figure 12.8).
An enterprising merchant named Hans Schwarzkopf established a chemist’s shop on a bustling street in Berlin,
Germany. He produced medicinals, perfumes, and the beauty care products favored by men and women of his day.
In 1898, he compounded the world’s first formula for shampooing hair. The news spread rapidly of the new
Schwarzkopf powder shampoo, and the House of Schwarzkopf grew and became known throughout Europe as a
maker of distinctive hair and beauty products.
Today, Schwarzkopf offers, worldwide, everything needed for beautiful hair, such as hair color, shampoos, con-
ditioners, permanent waves, and styling products.
In 1978, Schwarzkopf was introduced into the USA for the first time. Schwarzkopf decided to follow tried
and true European distribution methods. In Europe, especially in Germany, it is customary to offer products
through direct sales to the clientele; in this case the beauty salons. Schwarzkopf has its own sales force
which visits all the salons in Germany. Considering the size of Germany, the direct sales system works well.
Furthermore, since the salon owners and workers are themselves products of the extensive German occupational
training system, the direct sales force does not need to engage in fundamental training in the use of the hair care
products.
Schwarzkopf established one warehouse in Los Angeles, and hired a few “educators” to call on prospective
buyers. Schwarzkopf became an instant success in the Los Angeles area, but it proved difficult to service prospec-
tive customers in the rest of the USA. Schwarzkopf tried until 1993 to service customers directly as in Germany,
but realized that the German distribution methods were not adequate for the USA market. Furthermore, sales
personnel reported frustration in the ability of salons to use the professional products properly.
Points to consider
1 Why do you think it was difficult for Schwarzkopf to achieve satisfactory distribution throughout the USA?
2 In what other way did German assumptions about the USA market prove inadequate?
3 If you were responsible for Schwarzkopf in the USA, what changes in the distribution system would you
recommend?
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CHANNELS OF DISTRIBUTION
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Figure 12.8 Schwarzkopf’s product line
QUESTIONS
1 Distinguish between direct and indirect selling channels.What are the advantages and disadvantages of these
channels?
2 Explain these types of direct channel intermediaries: foreign distributor and state-controlled trading company.
3 Explain these types of indirect channel agents: EMC, cooperative exporter, and purchasing agent.
4 Explain these types of indirect channel merchants: export merchant, export drop shipper, export distributor,
and trading company.
5 Explain hot, moderate, and cold countries as classified by the country temperature gradient. What are the
channel implications of this classification system?
6 What are the factors that affect the length, width, and number of marketing channels?
7 Why is it difficult – financially and legally – to terminate the relationship with overseas middlemen? What
should be done to prevent or minimize such difficulties?
8 What are gray market products? Are they legal?
DISCUSSION ASSIGNMENTS AND MINICASES
1 Do you think that the US ETCs can compete effectively with Japanese trading companies?
2 How should Japan be classified: hot, moderate, or cold? Do you think this classification may change in the
future?
3 Should the distribution channels of Volkswagen and Porsche be the same?
4 Honda created a separate dealer network for its Acura brand. Is there a need for this expensive strategy?
5 Sony Corp. of America, in an effort to include retailing in its operations, runs its own licensed stores in Japan
and Europe. In the USA, Sony has opened the Sony Gallery of Consumer Electronics in Chicago. Inside the
store,“boom boxes” and camcorders are displayed on pedestals as if they were art objects, and the Walkman
is displayed on trendy mannequins. The gallery includes a life-size mock-up of an apartment with a built-in
Sony home theater system. Some retailers are concerned that Sony might turn out to be both their supplier
and competitor. How should Sony deal with this concern?
6 Do gray marketers serve useful marketing functions – for consumers and manufacturers?
7 US Customs regulations require watches to have a small inked stamp on the movement. Seiko thus charged
that the gray market Seiko watches imported into the USA were unfit because the opening for marking
harmed dust- and water-resistant seals and contaminated the watch movement.
■ Do you feel that gray marketers’ marking to comply with customs regulations is harmful to the product?
■ Since Seiko is a popular brand and gray market Seiko watches are carried by a number of discounters
and catalog showrooms, what should Seiko do to alleviate the problem of unauthorized imports?
NOTES
1 Mike W. Peng and Anne S. York, “Behind Intermediary Performance in Export Trade: Transactions, Agents
and Resources,”
Journal of International Business Studies
32 (second quarter, 2001): 327–46.
2 Harald Trabold, “Export Intermediation: An Empirical Test of Peng and Ilinitch,”
Journal of International
Business Studies
33 (second quarter, 2002): 327–44.
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CHANNELS OF DISTRIBUTION
3 Kelly Hewett and William O. Bearden, “Dependence, Trust, and Relational Behavior on the Part of Foreign
Subsidiary Marketing Operations: Implications for Managing Global Marketing Operations,”
Journal of
Marketing
65 (October 2001): 51–66.
4 Richard Barovick and Patricia Anderson,“EMCs/ETCs:What They Are, How They Work,”
Business America
,
July 13, 1992, 2–5.
5 “Small Companies Look to Cultivate Foreign Business,”
Wall Street Journal
, July 7, 1994.
6 Isaiah A. Litvak and Peter M. Banting,“A Conceptual Framework for International Business Arrangements,”
in
Marketing and the New Science of Planning
, ed. Robert L. King (Chicago, IL: American Marketing
Association, 1968), 460–7.
7 “Carrefour Forced to Cut Stakes,”
Bangkok Post
, June 13, 2002.
8 R. Scott Marshall and David M Boush, “Dynamic Decision-Making: A Cross-Cultural Comparison of US and
Peruvian Export Managers,”
Journal of International Business Studies
32 (fourth quarter, 2001): 873–93.
9 Harry G. Broadman,“Competition and Business Entry in Russia,”
Finance & Development
, June 2001, 22–5.
10 David A. Griffith and Michael G. Harvey, “A Resource Perspective of Global Dynamic Capabilities,”
Journal
of International Business Studies
32 (third quarter, 2001): 597–606.
11 “Vin and Sprit Sets Venture for Absolut Distribution,”
San José Mercury News
, March 21, 2001.
12 Daniel C. Bello and Ritu Lohtia, “Export Channel Design: The Use of Foreign Distributors and Agents,”
Journal of the Academy of Marketing Science
23 (spring 1995): 83–93.
13 Eric Michael Kennedy, “The Japanese Distribution System,”
Business America
, May 17, 1993, 20–1.
14 Hesna Genay, “Japan’s Corporate Groups,”
Economic Perspectives
15 (January/Febraury 1991): 20–30.
15 “Closing the Door on Malls,”
San José Mercury News
, April 24, 2000.
16 “Warehouse Giant Costco Growing in Crowded Japan,”
San José Mercury News
, September 22, 2002.
17 Vincenzo Sinisi and Thomas M. Federman,“Commercial Aspects of Italian Law,”
Business America
, October
5, 1992, 12–14.
18 John T. Masterson, Jr., “Drafting International Distributorship and Sales Representative Agreements,”
Business America
, November 21, 1988, 8–9.
19 “Dark Days for a Black Market,”
Business Week
, October 15, 2001, 60–1.
20 “Canadian Maker Charged with Fraud,”
San José Mercury News
, March 1, 2003.
21 S. Tamer Cavusgil and Ed Sikora, “How Multinationals Can Counter Gray Market Imports,”
Columbia
Journal of World Business
23 (winter 1988): 75–85.
22 Matthew B. Myers, “Incidents of Gray Market Activity Among US Exporters: Occurrences, Characteristics,
and Consequences,”
Journal of International Business Studies
30 (first quarter, 1999): 105–26.
23 Tony Michalski,“Going Global With Services Exports: A Guide to Available Support,”
Export America
(May
2001): 17–19.
24 Jennifer R. Moll, Susan Gates, and Lesley Quigley, “International Education and Training Services: A Global
Market of Opportunity for US Providers,”
Export America
, May 2001, 19–21.
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