Global market segmentation and international licensing strategy

Global Market Segments

The widespread of the globalisation phenomenon forced more and more companies to compete on global level. The segmentation of global markets is a great challenge for any corporation, but it is essential as it is correlated to the marketing strategy, namely the product positioning (Hassan & Craft, 2005). However, companies must take under consideration the local content of each market. Thus, brands may be global, but the marketing activity has to be adapted to each region, age segment or gender in order to truly understand the consumers (Barron & Hollingshead, 2004).

Geographically, the main global segments can be defined as follows:

High-income, developed countries with subsegments: U.S.&Canada, Europe, Australia and Asia-Pacific.

Mid-income emerging markets, with subsegments: South America, Central and Eastern Europe, Asia-Pacific and emerging African countries.

Low-income underdeveloped countries, with subsegments: Asia-Pacific, Africa and South America.

The usage of income, as social component, together with the geographical distribution makes the segmentation to be more meaningful for global brands positioning.

From the demographic point-of-view, the segmentation can be on gender - male/female; age - old individuals (over 65 years old)/seniors (45-65 years old)/mature (25-45 years old)/young and teens (15-25)/children (0-15 years old); ethnic group - Caucasian/Asian/African-American or European/African/Native Americans. This last segmentation is likely to change from one region to another, depending on each region ethnic mix.

2. International licence case study

International licensing is one of the many ways of internationalization. It is a way that is characterized by low foreign market commitment, low control over the overseas operation and rather low gains, because in this case the gains are proportional to the risks (Anderson & Gatignon, 1986).

The risks of doing business abroad are related to the lack of knowledge about the foreign markets, also known as the "liability of foreignness" (Zaheer, 1995). Therefore, in the beginning of the internationalization process, companies tend to enter foreign markets through ways that help them reduce these risks, such as: joint-ventures, international license, franchising or the acquisition of an already existing company.

The suggestion of whether to take advantage of the licence proposal coming from the company in Osaka, Japan depends on the specific characteristics of XYZ Manufacturing Company of Buffalo, New York. Thus, if XYZ doesn't have international experience, but is exploring the possibility of extending its operations abroad, this could be a good opportunity to gain some insight of doing business overseas. Conversely, if XYZ is not interested in international operations, 5% of the factory price of all products sold with its patent in Japan may not be worth the effort, especially when there's the risk of exposing the patents and know-how to a market that is famous for its copy-cat habits. Another scenario would be if XYZ is interested in servicing those markets itself. This third option is more compatible with an international joint-venture or acquisition of an already existing company in the Japanese market, where the degree of control over the overseas operations is larger. In this case, the international licence option is not as good as the other two.

5. Local, national, international, and global product or brand

Brand management complexity has increased in the last years and it ranges from local brand level to global. The degree of brand development depends on how firms expand internationally and the type of organization they adopt while doing so (Craig & Nijssen, 2001).

Some companies created global brands, while expanding to international markets, such as Coca-Cola and Nike. Global brands exist in different countries and different cultures. Managing global brands is not an easy task given that the corporate social responsibility (CSR) and social reporting reach a global dimension. However, studies show that global companies don't allocate the right amount of effort to the importance of these features, risking to compromise their impact on the business's social results (Knox et.al., 2005).

International brands exist in many countries, but they are not popular among many cultures, such as Chevrolet. The brand is well-known outside America, but is most within the continent, and not as popular in the European countries for instance.

The national brands are quite popular among one nation, but the national cultural content is so strong that if fails to reach consumers outside national boundaries. The following products can be quoted as national: Budweiser, Crest or State Farm Insurance.

Finally, local brands are popular in a restricted region within the national boundaries. These brands cover products that have a strong local content. Companies as Nestle or Unilever often create products that target the local public. Acquiring local companies is part of their internationalization strategy. For instance, Nestle bought Green's to make its presence on the Australian market more visible. Green's has two brands: Supercoat and Poppin that have a strong local content.

6. Alternative approaches to global pricing

Setting prices globally is a very difficult task because this is the only marketing mix component that generates revenues. The other 3 component generate costs.

Thus, a company has three alternative approaches:

Have the same price in every country

Adopt the prices to the local customer's buying power

Use the same cost mark-up everywhere

Global pricing strategy has to take under consideration the type of product the company sells - good or service and the product's price positioning - low/medium/high price. For instance, having the same price in every country may not be very easy given that, especially in the service industry, price perception varies across market segments (Erramilli, 1992). Thus, in one part of the world, a product may be perceived as medium priced and in another part of the world, it could be perceived as high priced. Following this argument, it can be concluded that market segmentation is crucial for companies that want to adopt a standard price for all countries. A good market segmentation can reduce operational costs by efficiently allocating the resources to the most suitable segments, while taking under careful consideration the differences across different cultures (Hofstede et.al., 1999). The main alternative to this pricing strategy is by establishing the prices according to the local buying power. However, the customers from those countries where the company adopts a higher price may feel that this strategy is not very fare to them. Finally, the last approach is probably the one that fits better the current manufacturing global market trends. Thus, in those countries where is cheap to produce, the products will have a low price and vice-versa.

7. Factors that influence channel structures and strategies available to global marketers

Channels can be organised as networks, hierarchies and markets. Williamson (1991a, b) divided the channels into hierarchies - the companies internalize activities along the value chain - or choose not to do so and let the market to follow its course. The notion of networks was later introduced as an intermediate way between the other two (Thorelli, 1986). The most important factor to influence channel structures and related strategies is the cost incurred for including an extra member along the value chain. The cost refers to the functions performed by the new member. There is also a cost that can be incurred if the extra member is not included, which is actually the opportunity cost of integrating a new member.

One other factor that influence channel structures and related strategies is the customer. This one may need a variety of product assortments, such as tooth paste, shampoo and other products as such within the toiletry category. Also, when products are bought in small volume, the manufacturer may choose to integrate more members along the value chain, rather than sell directly to the customer.

In some instances, the channel structure is changed in situations in which intermediaries have sets of special skills that manufacturers lack and integrating the intermediaries would be cost effective.

However, besides cost consideration, there are time considerations, while choosing a given channel structure. For instance the distribution channels for perishable products are very short and not as cost efficient as for other products. However, making those longer would lead to a lot of product losses until those reach the final customer.

8. Global brands and global advertising campaigns

There are several advantages that companies get for having global brands and running global adverting campaigns, such as:

Economies of scale from, manufacturing, distribution and promotional activities. However, the advertising -related economies of scale may turn out to be tricky, because not all companies benefit if they run the same advertising campaigns in more countries, such as IBM or Visa. In some instances, it may be cheaper to have distinct advertising campaign in each country, than importing one campaign in every place (Aaker & Joachimstaler, 1999).

Lower marketing-related costs. The media reach is becoming larger, especially now that the internet is spreading so fast.

Easier to maintain a brand image. The products tend to be more homogenous than before. However, companies have to take under consideration that as products become more homogenous, individuals become more heterogeneous from the cultural point-of-view, due to emigration/immigration process.

Global brands usually imply global networks. Companies can benefit from knowledge diffusion in while being integrated in global networks (Ernst & Kim, 2002).

Although global advertising campaigns have to take under consideration the cultural and mental characteristics of the different societies that constitute the markets, a global approach may turn out to strengthen the brand. For instance, Benetton is worldwide famous for its controversial campaigns, however, these constitute the company's competitive advantage.

9. Sales promotions for consumer and industrial products

Generally speaking, the role of sales promotion in the marketing mix is the 'active' one that stimulates the consumers to buy the products. Sales promotions can be directed towards the ultimate consumer - 'pull strategy' that encourage buying - or towards the distribution channel - 'push strategy' that encourage channels to stock products.

Ultimate consumers are of two different types: industrial and individual. These two types differentiate themselves from the nature of their markets, the products commercialized and the demand, but also the determinants behind the purchasing decision (Webster, 1978).

Companies that commercialize industrial products have a different approach of sales promotions than those that commercialize consumer products. Studies have suggested that industrial product companies are more focused to have a sales orientation, whereas the consumer product companies are usually building a market orientation (Avlonitis & Gounaris, 1997). Industrial products are usually designed for a small number of customers, whereas consumer products are designed for a wide range of consumers, which determines the consumer product companies to focus more on other parts of the marketing mix within the marketing strategy. Also, the competition is likely to be tighter for this type of products, which makes sales activity less efficient than other marketing activities, such as product design. The market for industrial products is less concentrated and customers don't face so many choices. Therefore, a good sales force is likely to turn into success in this case. Also, the sales activity is likely to be more specialized for industrial products are those are more complex than consumer products. Conversely, the sales activity is likely to be more diversified for consumer products.

10. The "network effect" and its strategic marketing implications

The network effect refers to the situation in which the value of a product for a given customer depends on the number of other customers using the same product. Network effect can be either direct or interactive. The direct effects refer to the effects of a customer base on the demand, whereas the interactive ones refer to the interaction between a customer base with more marketing mix variables, such as price or advertising. The last type of effect is important for companies from the marketing point-of-view as it has to do with the company's marketing strategy and the firm's network strength has a direct impact on its individual direct and interactive effects (Shankar & Bayus, 2002).

A customer base can influence demand in a positive way if the utility of using a given product increased with the number of users in the network. In the same way a customer base can influence the effectiveness of a company's marketing mix decisions, namely price and advertising. For example, some customers are willing to pay a premium price to use Microsoft's spreadsheet product called Excel with a very large pool of consumers (Brynjolfsson & Kemerer, 1996). In this case, with a limited advertising budget, a promotional campaign can turn out to be very effective. It can be concluded that the customer reaction to a given marketing mix depends a lot on the firm's customer network.

The network effect also has an impact on the company's product strategy, because the effect seems to be stronger as more customers use the product. This implies that proprietary knowledge has to be very well preserved and the product design has to be customer friendly. Microsoft's Excel application is a good example in this case as well, because it is one of the most user-friendly products of this type.

11. Global marketing audit

According to the definition given Oxford University Press, global marketing is "a technique aimed at evaluating and improving an organization's global marketing operations." The success of a global audit depends on the data availability, on the quality of data sources, on its objectives and the time span of the actual audit. In global operations, the success is a difficult task because problems arise while trying to gather data, problems of cultural, political or language context.

The cultural distance (Hofstede, 1984), which implies differences in language, culture and mentalities, together with differences arising from business practices generate communications problems within global firms or their interaction with other firms. The anticipation of these problems often determines companies to internationalize in countries with similar cultures to the home market (Dunning, 1995).

The global marketing audit is a useful tool through which, on one hand, global companies evaluate the performance of global marketing activity - marketing strategies and policies and, on the other hand, they identify existing and potential problems and market opportunities and threats.

An effective audit is run annually to prevent big problems from becoming bigger or even fatal for companies. Also, it involves a systematic and formal component. The audit process has a given number of steps that have to be followed in the right order to insure the results quality.

The marketing audit can be focused on a given task (e.g. An activity) or it can be done at a general, broad level, depending on the objectives that were set in the beginning of this process.

12. Economic democracy (free markets) and political democracy

Economic democracy, synonym with the freedom in markets is characterized by the market demand of supply establishing the quantity of goods sold in the economy and their price.

Economic democracy is usually connected to the economic growth. The countries that gain economic freedom usually have good economic growth rates immediate after getting the freedom and the growth rhythm slows down, as these countries catch up with their neighbors in terms of GDP/capita, quality of life or standard of living in general. Empirical evidence suggests that the increase of economic democracy, in conditions of low political freedom generates positive economic growth (Helliwell, 1994). Later on, as countries raise their standard of living and political democracy is at a moderate or high level, the economic growth is slowed down and the economic democracy can even lead to the depression of economic growth. Moving further with this argument, some authors suggested that the improvement of the standard of living raises profitability and implicitly political freedom (Barro, 1996) and even generate predictions about which countries will become more democratic, based on the evolution of their standard of living.

The theorists may be right because when the standard of living improves, the population has better conditions in terms of education, health status and people get used to a better living in general, which they'll be reluctant to let go. It is easier to have low political freedom if people never had good conditions, because they can tolerate and evil they have no comparison for, but if people have to opportunity to live better they are no longer easy to control and since they account for the majority, they become more powerful together and slowly the power is all transferred to them, which translates into democracy.

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