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Global Market

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Chapter 7
Operating in Global Markets

“Globalisaton is clearly a double-edged sword. The advantages of being a transnational corporation in emerging markets have declined dramatically in recent times. Smart local companies have used the benefits of globalization to close gaps in technology capital and talent with their rivals from the developed world.”
- Arindam K Bhattacharya, David C Michael,
Harvard Business Review, March 2008.

Introduction
Global companies operate across the world. In different markets, customer requirements may vary. The temptation to customise for each market, has to be tempered by the need to keep costs down through standardisation. As discussed before, the logical approach would be to identify and analyse the various value chain activities that make up the marketing function and decide which of these must be performed on a global basis and which localised. This chapter covers product management, pricing, sales and distribution and customer relationship management. Global branding, which merits a separate treatment is covered in Chapter 8.

Product management
Should the same product be offered across overseas markets? Or should it be customized according to the specific needs of different markets? A globally standardised product can be made efficiently and priced low but may end up pleasing few customers. On the other hand, excessive customisation for different markets across the world may be too expensive. The trick, as in the case of other value chain activities, is to identify those elements of the product which can be standardised across markets and those which need to be customised. Thus, a standard core can be developed, around which customised features can be built to suit the requirements of different segments.

Before we proceed further, it is important to emphasise that few products are offered in exactly the same version across the world. P&G’s Pringles potato chips seems to be one of the rare exceptions. Coke classic varies in sweetness across the world. Lux is offered in more than 100 variants. Microsoft’s recently launched Vista operating system has had to take into account the unique requirements of languages such as Hebrew and German.

Where customer preferences vary across countries, a globally standardized product may not work. Indeed, a product developed on the basis of some ‘average’ preference may well end up pleasing no one. At the same time, in some circumstances, “global” products may make sense. Japanese companies such as Sony and Matsushita have been quite successful in marketing standardised versions of their consumer electronics products. Handicapped by limited resources during their early days of globalisation, these companies cleverly identified features, which were universally popular in all parts of the world. Global economies of scale helped them to price their products competitively. At the same time, they laid great emphasis on quality. Consequently, their products appealed to customers across the world. Many of Sony’s consumer electronics products are highly standardised except for components that have to be designed according to national electrical standards. This is also the case with Matsushita.

Balancing standardization & customisation
Global product management involves making trade offs. Canon offers an interesting example of a Japanese company that took into account global considerations at the cost of domestic requirements while developing a new product. In its domestic market, customer requirements were quite different, photocopiers being expected to copy all sizes of paper. Canon felt that to emerge as a global player, the design had to be built around the requirements of the US, the largest market for photocopiers in the world. The company deliberately overlooked some of the features required by Japanese customers, to keep its development costs under control.

Some products tend to be more global than the others. These include cameras, watches, pocket calculators, premium fashion goods and luxury automobiles.

In industries characterised by high product development costs (as in the pharmaceuticals industry) and great risk of obsolescence (as in the case of fashion goods), there may be no option but to develop globally standardised products and services. By serving large markets, costs can be quickly recovered.

Even in industries such as food, where tastes are largely local, companies can look for opportunities to standardise as developing different products for individual markets can be prohibitively expensive. Though identical offerings cannot be made in different markets, companies can develop a core product with the necessary customisation, (like a different blend of coffee), to appeal to local tastes. Starbucks the coffee chain is a good example.

Starbucks[1]has identified globalization as the only sustainable way to generate faster growth and satisfy investors. Currently (mid-2007) Starbucks has 4000 coffee chains outside the US but it wants to increase that number to 20,000 in the near future. Russia is one market Starbucks is betting heavily on. Although Russians prefer to drink tea and instant coffee, Starbucks hopes that its brand will have a strong consumer pull. The company believes the sheer experience of sipping coffee at its outlet will be enough to make a splash in the Russian market. Starbucks plans to use the same colour scheme and other design aspects as its locations in other parts of the world. The chain is likely to customize its coffee with flavours such as cinnamon, which are popular with Russians. Like in other overseas markets, Starbucks may also offer more food items such as croissants and sandwiches. But many of the product’s core attributes will not change. The drink menu will feature most of the lattes and other beverages as in other parts of the world and will be priced similarly to the US.

Meanwhile, in Japan, Starbucks has stood firm on one of its core values, “no smoking”. Many argued that the ban on smoking would put off chain smoking Japanese businessmen who like to visit coffee parlours. But by sticking to its guns, Starbucks has succeeded in attracting a new segment - women who did not like to visit coffee parlours earlier.

In the case of industrial products, standardisation may become unavoidable if customers coordinate globally their purchases. (See the separate section on Global Customer Relationship Management later in the chapter). This seems to be true in the PC industry. Companies such as Dell are taking full advantage of the trend among global customers towards integration of their corporate information systems across their global network. Global companies often choose to replicate the computer system in their headquarters across their worldwide network to minimise training and software development costs.

More generally, in the case of many industrial products, since purchase decisions are normally taken on the basis of performance characteristics, considerable scope exists for global standardisation. But local customisation may be required in engineering, installation, sales, service and financing schemes. In the same industry, different segments may have different characteristics. Institutional financial services, tend to be more global than retail ones. Ethical (prescription) medicines tend to be more global than OTC drugs.

Exhibit 7.1
Product functionality

Source: Based on the work of John Fayerbrother

Exhibit 7.2
Different ways to group markets

Source: Pankaj Ghemawat, “Redefining Global Strategy.”

Within a given product, some features lend themselves to global standardisation. Consider a product like cars. Traditionally, car manufacturers have developed hundreds of models to meet the needs of different markets without exploring the opportunities for standardisation. This has resulted in unused capacity and various inefficiencies. Faced with excess capacity, car manufacturers have been looking for ways to cut costs. One approach has been to build models of different shapes for different markets around standardised platforms. The idea here is that the basic functionality of a car can be extended globally while the features and shape must be customised to appeal to varying consumer tastes in different parts of the world. Ford, Honda, Toyota and Volkswagen have made a lot of progress in standardising their platforms. Let us take up Honda as a specific case.

Honda’s approach[2] to its well known car model, Accord is a classic example of how transnational companies attempt to strike an optimum balance between standardisation and customization while developing new products. The trigger point in Honda's product development efforts came during President Nobunhiko Kawamoto’s visit to the US in 1994. When US customers complained that the Accord was too small, Honda responded by making efforts to ‘lengthen its nose and bulk up its rear end.’ Though Honda incurred substantial expenditure, the move paid off and the Accord almost overtook Ford’s popular model, Taurus. Unfortunately, the new model did not find acceptance among Japanese customers. Honda realised that a truly global car had to gain popularity not only in the US but also in Japan and Europe. At the same time, designing separate models for each market would be prohibitively expensive.

Soon, Honda began coordinated efforts to develop a platform which could be shrunk, stretched or bent to offer different shapes of the overlying car for different markets. The development efforts were closely monitored by Kawamoto, who wanted different models for different markets but within a tight budget. Chief Engineer Takefumi Hirematsu, who was made in charge of the project, realised the need for a fresh approach. His solution was to develop radically different vehicles based on a single frame. Hirematsu decided to move the car’s gas tank back between the rear tires, so that he could design a series of special brackets that would allow him to hook the wheels to the car’s more flexible inner subframe. These brackets allowed Honda to push the wheels together or pull them apart, easily and cheaply.

Exhibit 7.3
How design helps reduce the cost of customisation

Partitioning : Separate elements that can be varied across countries from those that cannot.

Platform : Standardise the base around which features can be customized.

Flexibility : Reduce the fixed costs for producing customized goods.

Modularity : Define standardized interfaces among different elements.
Source: Pankaj Ghemawat, “Redefining Global Strategy.”
Honda’s flexible global platform resulted in three Accords which cost 20% less to develop compared to the single Accord model it had developed four years back. Honda saved approximately $1200 per car enabling it to take on competing models, Camry (Toyota) and Taurus (Ford). For the US market, the Accord was 189 inches long and 70 inches wide with a higher roof and a roomy interior consistent with its positioning as a family car. For the Japanese market, the model not only had a lower roof compared to the US model, but was also six inches shorter and four inches thinner and incorporated high tech accessories in line with the tastes of Japanese customers. For the European market, the model had a short narrow body for easy navigation on narrower roads and to provide a ‘stiffer, sportier ride.’

Ford, under Alan Mulally who took over as CEO in 2006, is laying a renewed emphasis on platform standardization. Mulally has been telling his engineers to develop vehicles that with minor customization, to take into account local tastes, will be popular in Europe as in North America and Asia. Mulally is laying his bets on the well known Fiesta model developed by Ford’s European operations. With only some minor changes in its features, the Fiesta will be made in China from 2009 and in the US from 2010.

The platform approach, however, may not succeed in all industries. In the late 1990s, the global home appliances company, Whirlpool tried unsuccessfully, to reduce by half the number of product platforms that it offered worldwide. But the limited scale economies meant that the projected cost reduction was only 2% of revenues. On the other hand, standardization led to a significant loss of flexibility. Consequently, Whirlpool quickly abandoned this strategy.

Regional variations in customer tastes can often be addressed through minor customisation. The Economist magazine throughout the world, has developed a reputation for its dispassionate and objective reporting and analysis of various global political and economic issues. The magazine is a global publication rather than a set of regional or local editions. However, (since 1994) readers in Britain receive two or three pages more each week containing articles on their country. Otherwise all editions carry all the same articles, albeit with the regional sections published in a different order. Covers of the Economist often vary from region to region in order to provide a different emphasis for newsstand buyers, but the editorial content remains identical. This way the magazine ensures that the product is aligned with its global image.

The popular television channel, Discovery is another good example. The channel knows that nature and science documentaries can be shown across the world without too much customization. Neither is there significant cultural/political bias nor are there any dubbing or subtitling requirements. However, tastes do vary across the world. Discovery takes this into account in its programming.

While on the subject of television programs, it is difficult not to make a reference to India’s own run away success, Kaun Banega Crorepati, the Hindi language adaptation of the famous show, “Who wants to be a millionaire?” When launching the show in India, Star TV decided that the same basic set, music and rules would be used as in the original version but the host, questions and marketing would be customized to local needs. Star roped in the famous Indian movie star, Amitabh Bacchan and flew him to London to watch the British version of the show. Key catch phrases were then developed that would work in Hindi. The novelty of the program, Amitabh’s personal appeal and the unprecedented marketing blitz combined to make the program a run away success. In the ultimate analysis, what won the day was a combination of production expertise and specific knowledge of customer preferences.

Pricing
Marketing literature mentions different pricing strategies a firm can pursue. Penetration pricing involves a low price backed by aggressive advertising. The aim clearly is to capture quickly a large market share. In contrast, skimming involves premium pricing often for a higher quality version of an established product. Products are designed to appeal to affluent consumers by offering extra features, greater comfort, or greater sophistication. Cost plus pricing involves a mark up over all the anticipated fixed and variable costs. The last option is life cycle pricing. The price is varied according to the stage in the product’s life cycle. For example, a high price may be set initially to cover development and advertising costs. Later, the price can be lowered to expand the market.

A few examples will illustrate how companies take into account global as well as local factors while setting the price. Consider the virtual bookstore Amazon.com, which sells books - essentially branded products. Customers typically have a distinct preference for a particular book, i.e., they have a strong brand preference. There are no “substitutes” for a management book by Michael Porter or a novel by Harold Robbins. So global pricing makes sense except in cases where cheaper reprints are available for developing countries.

On the other hand, in the car industry, pricing has to take into account local factors. Companies such as Ford and General Motors are realising that purchasing power varies across the world. Indian customers are unwilling to pay Rs. 8-9 lakhs (based on an exchange rate of Rs. 40/$) for the same models which cost $20 – 22,000 in the US and Western Europe. This is putting pressure on them to look for ways to cut costs, indigenise and offer cheaper models. The Ford Ikon and Opel Corsa are the outcome of these efforts. Fiat’s success in Brazil has been largely due to its ability to design and offer value-for-money cars.

Global companies are realising that multiplying the home country price by the exchange rate to arrive at the price in the overseas market may not always be appropriate. Very often, there is a significant difference between the market exchange rate and the exchange rate calculated on the basis of the relative purchasing power of the two currencies. The Indian rupee currently trades at about Rs. 40 to the dollar but based on relative purchasing power, the rate is closer to Rs. 10.

Sometimes, global pricing becomes difficult because of different levels of competition in different markets. A company like GE which follows global pricing for its jet engines, makes suitable adjustments to take into account local competitive factors. Using a uniform price relative to competitors appears to make sense in many cases as it protects market share while maintaining a consistent positioning.

Sales & Distribution
International distribution differs from domestic distribution in that it is more complex, with a wider range of available options. While configuring an international distribution system, delays and hold ups at various points must be considered. Ultimately, an effective distribution system should be reliable, cost effective, ensure effective geographical coverage and minimize the possibility of stock out. Major challenges are involved as distribution channels in global marketing are typically longer than for domestic operations.

In general, while entering a new market, a global company can either set up its own distribution system or may use the available local channels. Usually, it is difficult to standardize distribution procedures across countries. So companies often use a combination of directly owned sales subsidiary, wholesalers, import agents, retailers and various other intermediaries.

In deciding whether to handle distribution directly or depend more on intermediaries, various factors must be considered:

▪ The larger the sales volume, the more directly the company may like to control the distribution network. ▪ In case of high tech items, the company may want to be directly involved, since independent distributors may not have the required expertise to handle the products. ▪ If sophisticated distribution outlets are available locally, intermediaries may play a more important role. ▪ If local distributors are good at channelising customer feedback, the firm can minimize its direct involvement.

International distribution has to take into account the local infrastructure and cultural factors. In some countries like India, ‘mom and pop’ stores proliferate, while in others, like the US, large departmental stores carrying several items under one roof are popular. In some countries, intermediaries handle credit sales, while in others, cash transactions are the norm. Supply chains can vary across the world, making sourcing/logistics requirements unique for each market. Where the road/rail network is weak, moving goods across large distances can be a major challenge.

Even in the developed world, supply chains can vary significantly across countries, posing special challenges for marketers. As it enters the US, the UK grocery retailer, Tesco is facing such a situation. Tesco is a master of supply chain management. It is largely due to this expertise that Tesco has established a strong competitive position in the UK just like Wal-Mart has done in the US. But Tesco is realizing that the US is a different ball game. Distributing ready-to-eat foods will involve major challenges.
American supermarkets make two kinds of food[3]. The first type lasts long because it has been dried, canned, frozen or otherwise preserved. The second type is prepared from raw ingredients on site. (This approach makes sense because labour is cheaper in America). British supermarkets, in contrast, operate on a small, crowded island with restrictive planning laws. Whereas American stores are good at moving items over long distances cost effectively, British retailers specialise in regular, frequent deliveries to city-centre stores. Their supply chains are more flexible. The small stores in the UK have to switch from selling sandwiches at lunchtime to selling ready-made suppers in the afternoon. Expensive labour and a shortage of space have discouraged British retailers from preparing food on site. Instead, they make a wide range of meals at centralised locations to generate economies of scale. Such food must typically last for at least a couple of days. Transferring these competencies to the US will pose major challenges for Tesco.
Italian eyewear marker[4], Luxottica illustrates how distribution can generate a sustainable competitive advantage while globalizing. Sunglasses are today less of a functional device and more of a fashion statement. Indeed, sunglasses are the third fastest growing category in luxury goods after shoes and handbags. Luxottica has won major contracts to supply glasses to fashion houses such as Burberry (UK) and Polo Raph Lauren (USA). But Luxottica has also attempted to control the distribution network. The company made a bold move by buying Lens Crafters, America’s biggest optical retailer in 1995. It followed this up by buying two other retailers Sunglass Hut and Cole National. (Luxottica also acquired the Ray-Ban brand in 1999 and more recently got access to a portfolio of brands when it purchased Oakley, California.) Luxottica is also planning to expand its new retail chain, ILORI in the US. Over the next two to three years, Luxottica is expected to roll out 150 ILORI shops in the US. ILORI will target the upmarket segments with prices ranging from $250 to $10,000. Luxottica demonstrates how companies are taking advantage of a global trend in which fashion conscious customers are prepared to pay whatever it takes to possess the goods they cherish. And in the case of such goods, taking direct control of distribution often makes sense so that the shopping ambience is just right for discerning customers.

Approaches to personal selling can vary from country to country. In some markets, door-to-door selling is very popular while in others, people prefer to shop at retail stores. Telemarketing is quite popular in the US but not so in many developing countries. Yet opportunities to standardise should not be ignored. Dell Computer has replicated its direct selling practices across the world. To be closer to overseas customers in Europe and Asia, Dell has set up plants in other locations like Limerick, Ireland and Penang, Malaysia. In Ireland, Dell’s facilities are very close to the plants of its suppliers such as Intel (microprocessors), Maxtor (hard drive) and Selectron (motherboard). Such arrangements facilitate the smooth execution of Dell’s direct selling, build-to-order, just-in-time model. Dell’s sales persons directly target large institutional accounts. Retail customers can dial toll free one of its call centres in Europe and Asia. If a customer in Portugal makes a local call, it might be forwarded to the call center in France where a Portuguese speaking sales representative answers the customer’s questions.
Distribution in Japan
Many MNCs have struggled in Japan faced with a distribution system quite unlike that in the west. To start with, it is much longer. A product typically passes through layers of wholesalers before reaching the retailer. Compared to the West, there is a larger number of small retailers[5] typically dominated by large manufacturers.

Relations among channel partners in Japan are also quite unlike those encountered in the west. Each distributor typically functions as a dedicated and exclusive channel partner for a manufacturer, in a particular product category. Often, a distributor does not stock competing brands. Primary wholesalers show tremendous loyalty and strongly believe that their livelihood is linked to the manufacturer’s ability to provide products that can compete with similar offerings by other players. The manufacturers on their part consider the distribution network to be an extension of their own company. Frequent exchanges of visits between the manufacturer’s executives and the distributor’s staff are common. With so much emphasis on relationship building, disputes are resolved informally rather than on the basis of formal contracts.

Most Japanese manufacturers actively support their retailers in areas such as after sales service, advertising and handling consumer complaints. Retailers also receive different kinds of rebates for placing bulk orders, making early payments, achieving sales targets, performing services, keeping inventory, promoting sales, being loyal to the supplier, etc. Another commonly accepted practice Henpin is the no-questions-asked return of unsold goods by retailers to manufacturers. Henpin, is particularly popular in the case of apparel, books and pharmaceuticals. Channel members also use tegatas or promissory notes that offer buyers very generous credit terms. Wholesalers handle the financing, physical distribution, warehousing, inventory and payment collection functions. There is little risk for the retailers, who not only get generous financial assistance, but as mentioned earlier, can also return unsold goods.

Supply chain management in Japan calls for a different approach altogether. Since land is very expensive, stores are small. Most retailers keep limited inventory and wholesalers are expected to deliver products fast, frequently and in small quantities to the stores. Wholesalers also provide sales people to the retailers and call on the bigger retailers, at least once a day.

The Japanese diet typically consists of fish and other perishable items. As freshness is an important parameter, buyers often buy in quantities that last only for the day. So daily shopping is common. Due to congested roads and difficulties in driving and parking, Japanese customers also prefer to shop in their own locality. As a result, small independent stores, where sales staff provide excellent service, have emerged as an integral part of the distribution system. In 1997, mom and pop retail stores, with a limited selection of goods and high prices, accounted for 56% of retail sales, compared to 3% in the US and 5% in Europe.

Small stores depend on the patronage of local clients and make special efforts to develop close relationships with their customers. Even for small purchases, these stores provide home delivery. Sales personnel also visit the homes of customers to collect gift orders during festive seasons. All products are checked meticulously before being packed and handed over to customers. Courtesy to customers is given utmost importance. When a shop opens in the morning, senior staff members stand at the entrance to welcome customers. During normal times of the day, staff members bow before the customers and thank them for their patronage.

The Japanese distribution system is based on trust rather than contractual relationships, with the terms not being negotiated explicitly. According to Pirog, Schneider and Lam[6], “The exchange experience creates a mutual obligation between the parties to carry out future exchanges with each other, resulting in increased bonds of trust and development of more accurate expectations.” Channel partners in Japan are usually prepared to make short-term sacrifices and in turn expect help when they are in trouble. Consequently, small and inefficient channel members are often tolerated. The Japanese distribution system also meets larger social objectives such as employment generation. As Martin[7], Howard and Herbig put it: “It is a flexible make work device, acting as a buffer to absorb excess workers, especially those of retirement age or to absorb labour during economic downturns.”
The implications for Western companies trying to enter Japan are very clear. Attempts to penetrate an existing channel may not be successful due to a conflict of interest between existing members and the new entrant. Consequently, western MNCs would do well to target partners whose allegiance to an existing distribution network is not very strong. As Pirog, Schneider and Lam suggest[8], “The socio- cultural framework suggests that westerners should look for Japanese affiliates that have low status within the distribution power structure, as these firms have the least dependence on others in the system and are most prone to cooperating with outsiders.”

Western companies can also take heart from the changing customer preferences in Japan. Following the prolonged recession of the 1990s, many Japanese customers have become price sensitive and more demanding. According to a senior executive of one of Japan’s leading retailers, Fast Retailing[9]: “Japanese consumers used to believe that cheap meant bad. Now that perception has changed. They are learning that they can have good quality at low prices.” According to Fahy and Taguchi[10], “In the past, a consumer who bought inexpensive products lost face, whereas now a consumer who buys high quality products at low prices is admired, a trend emphasised by discount stores’ significant gains in the past two years.” Shorter working days and growing affluence mean that families are also prepared to travel by car to shop in suburban areas rather than visit nearby stores located near train stations.

Customer Relationship Management
A key issue for many companies which have a presence all over the world is how to take care of a global customer’s needs effectively. Global account management (GAM) treats a customer’s operations worldwide as one integrated account, with consistent pricing, product specifications and service. The practice was initially introduced by technology companies like Hewlett Packard, IBM and Xerox whose customers in the automotive, financial services and petrochemicals industries wanted compatible and consistent products and services across locations. The trend has now spread to other industries.

Global customers are driving the use of GAM for various reasons. When purchasing is centralised, pricing becomes transparent. By consolidating orders, not only can better discounts be negotiated but also product specifications managed more effectively. For suppliers, the attractiveness of GAM is a larger share of the business and the possibility of becoming a strategic partner with bigger opportunities. To make GAM more effective, Yip and Bink[11] suggest that three issues need to be carefully addressed – whether GAM is appropriate at all, which customers are suitable candidates and what form GAM should take.

GAM is appropriate if the products and services being offered need global coordination, key multinational customers are insisting on GAM and there are competitive pressures. Prime candidates for GAM are complex products and services such as computers, process controls and value added commodities such as specialty chemicals and food ingredients.

A company’s offerings must command a good margin to justify the additional costs of GAM. When important customers expect GAM, there may be no option but to provide it. Such customers may insist on a single point of contact, coordinated resources for servicing them, globally uniform/consistent prices, uniform terms for volume discounts, and transportation, standardized products and services, consistent service quality and performance. The importance of multinational customers is the next issue. Measures of importance include the share of revenues and profits. Lastly, GAM may be a way of generating competitive advantage over strong regional players or global rivals.

Exhibit 7.4
Integration capabilities of a global company: The different dimensions

Source: Yip, Bink, “Managing global accounts,” Harvard Business Review, September 2007.

What type of customers are ideally suited for GAM? The size of an existing account is clearly an important factor. Here, future sales potential must be considered along with current revenues. When a customer has businesses in several countries, GAM may make sense. The customer should ideally have the structure, processes and information systems it needs to integrate, or centrally coordinate global purchases. This would be so if its strategies are developed mostly at the global level, most businesses have global P&L accounts, country heads largely focus on servicing the activities of global business lines, most processes span countries and regions, global teams manage key activities, information is shared seamlessly across the organization and a truly global culture exists in the company.

Other characteristics of customers who are ideally suited for GAM include strategic importance, cultural & geographic fit and a close and trusting relationship. GAM clearly makes sense for a strategic customer. Cultural and geographical fit strengthen the case for GAM. To take an example, it is difficult to visualize a highly methodical and process-oriented supplier forming a smooth working relationship with a highly flexible and innovative customer. Similarly, a supplier with a presence restricted to a few locations may find it difficult to offer GAM to a customer with operations spread across the world. Trust is enhanced when the supplier makes heavy investments to offer customized products/services to customers and customers decide to sail with a single supplier rather than appoint multiple suppliers.

GAM, according to Yip and Bink, can take three forms. In Coordination GAM, the national sales organizations retain a lot of power. However, GAM managers are expected to take the lead when launching new product lines or entering new regions. GAM effectively coordinates the activities of national sales operations. Such an approach is appropriate when local relationships are important and integration is difficult. Coordination GAM is easy to implement, is less costly and requires fewer people. But the problem is that there is lot of scope for disagreement between the GAM group and national operations.

Exhibit 7.5

Source: Yip, Bink, “Managing global accounts,” Harvard Business Review, September 2007.

A second approach is Control GAM. Here the responsibility for global customers is divided between GAM and national operations. But GAM with the upper hand, has the ultimate responsibility for the account. GAM can enforce actions worldwide and has the final say when disputes with national managers arise. This kind of an approach usually involves a matrix organization. Employees serving a global account report to both the national organization and the GAM group. Control GAM usually has a dedicated support team. Consequently, costs are higher. Control GAM calls for modification of the existing structure but the advantage is that there is a better balance between global integration and local autonomy, compared to coordination GAM. This approach is suitable when the product and customer attributes point to a strong need for GAM but there are compelling reasons for anchoring the account in the national organization.

The third approach is a Separate GAM, i.e., separate business unit with total responsibility for global accounts. All the frontline employees serving the global account are part of the GAM setup. The GAM unit has various functional specialists with the expertise and authority needed to use the company resources needed to serve the global account. However, some back end functions such as R&D may be excluded. This approach results in an unified control of the customer relationship. The friction between global and local operations is avoided, leading to better customer service. This approach demands a major reorganization. It is ideally suited when the supplier has customers whose business is large and profitable to support the extra costs. The supplier and customers must also have the capabilities to centrally coordinate their transactions and other activities.

For different types of customers, should different forms of GAM be offered? Even if relationships with individual customers vary, as also their capabilities, it may be too expensive to offer different forms of GAM to different customers. Instead, the better approach may be to offer one form of GAM but customize it to suit the needs of individual customers. For example, the global agreement can cover more or fewer items. The terms and conditions, the level of service and involvement of national operations can all be varied across customers.
Tesco in the US
In the recent past [12] Tesco, the largest retailer in the UK and the third-largest retailer in the world, after America's Wal-Mart and France's Carrefour has opened several stores across the US in Phoenix, Las Vegas, San Diego and Los Angeles. It has announced plans to add its Fresh & Easy local groceries at a rate of three a week. Tesco has identified as many as 100 sites to begin with.

Tesco dominates the UK market where its share of the grocery market in Britain has climbed above 30% Growing criticism of its market power and saturation in the domestic market have prompted Tesco to look overseas. Leveraging its core competencies developed in its home market, Tesco is seriously exploring global expansion.

Tesco has developed an uncanny ability to respond quickly to trends. For example, the retailer has introduced trucks with internal partitions for frozen, chilled and ordinary goods enabling it to replace three deliveries with one. This has made it possible for the retailer to sell groceries profitably in small stores at supermarket prices. Tesco has also been highly innovative in the way it collects and uses customer data from its Clubcard, a loyalty programme. The Tesco scheme mails discount vouchers to customers to encourage them to return. More importantly, it tracks every purchase and maintains one of the world's largest databases. By analysing correlations between purchases, Tesco can finely tune the product range in each store. Thus Asian areas of Britain offer Bollywood movies, curry spices and large sacks of rice and flour, while London's wealthiest parts are stocked with items like ripe organic avocados, and steaks in fancy sauces.
Tesco has already expanded in places like eastern Europe and China, where it has tailored merchandise to suit local conditions. In its next frontier America, Tesco seems to be facing a dilemma. If it starts small and tries to expand gradually, competitors will have time to copy it before it reaches critical mass. Placing a big bet is more dangerous, but rapid scaling up into thousands of stores may be the best way to pre empt competition.
The American market poses unique challenges for Tesco. [pic][pic][pic][pic][pic][pic][pic]American stores are getting polarised into those that sell luxury goods and those that sell cheap ones. Both Whole Foods Market (luxury) and Wal-Mart (cheap) are among America's fastest-growing stores. Retailers catering to the mid-market such as Kroger, Safeway and Albertson, three of America's biggest grocers, have been squeezed. Their prices and margins typically come under pressure when Wal-Mart moves into the area. And they are simultaneously pressed to upgrade the ambience and product range to stop their richer customers moving to posher places.
Tesco seems to be making a bold move not only in terms of positioning but also the store format. Hoping to repeat its success in attracting shoppers from various segments in Britain, Tesco is positioning its Fresh & Easy stores squarely for the middle market. Tesco is also experimenting with its store format. The Fresh & Easy outlets will have an area of about 10,000 square feet. Most food retailers in America are either much bigger (Six Fresh & Easy stores would fit into a typical supermarket and ten into the average Wal-Mart), or much smaller (Each is about three times the size of a 7-Eleven convenience store).
American shoppers typically live just a few minutes' drive from large supermarkets which have large parking spaces, are open all night and have a good selection of products. Tesco is betting that there is demand for smaller stores closer to home with fewer products, making it easier to find things. People in too much of a rush to stop at a supermarket use tiny outlets such as 7-Eleven. But their range is limited. Tesco is also betting on a range of preservative-free “ready meals”. Such meals are familiar to British consumers but have not really taken off in large parts of America.
Can Tesco attract American customers in big numbers? At least one reason behind the success of Tesco's convenience stores in the UK is public transport. Many stores are near, or sometimes even inside, underground and railway stations, making it easy for commuters to enter a store to grab a meal on their way home. Tesco is hoping Americans will be as willing to stop their cars to grab a ready meal on the way home as Britishers are when they jump off the Tube. Tesco is also hoping to take full advantage of America’s shopping habits. Americans shop at many outlets, because no one retailer gives them all that what they want. Tesco is planning to provide more of what people want in one place.
Tesco will have to proceed with caution. Sainsbury's, Marks & Spencer and Carrefour have all failed in America. This is partly because food retailing, is still a local industry. Economies of scale in grocery distribution are mostly local. Food tastes and shopping habits differ vastly from country to country.
Even if Tesco’s understanding of the American market turns out to be correct, it will still face stiff competition from American supermarkets which will try to copy Tesco's ideas. Meanwhile, there are thousands of fast-food outlets also to be dealt with. Clearly, Tesco has a big task ahead of it.
Conclusion
Global marketing strategies have to respond to the twin needs of global standardisation and local customisation. In their quest to improve local responsiveness, companies should not overlook opportunities to standardise and cut costs. On the other hand, an excessive emphasis on standardization and cost cutting may result in the loss of flexibility and insensitivity to customer tastes. The challenge for global marketers is to build a core product around the features which can be standardised. Then customised offerings can be designed around the core product for different markets. In real life, striking the right balance between standardisation and customisation can be extremely challenging. A classic example is Volkswagen, which faced major problems while trying to market its best selling model, Golf in the US. CEO, Carl Hahn, who had been leading the company's globalisation efforts admitted[13] "Our basic mistake was to trust the design adaptation of the Golf to American thinking: too much attention to outward appearances, too little to engineering detail.... We were not true to our heritage. We gave American customers a car that had all the handling characteristics - one might say the smell - of a US car. We should have restricted ourselves to our traditional appeal, aiming at customers, who were looking not for American style but for a European feel. Instead, we gave them plush, colour coordinated carpeting on the door and took away the utility pocket. We gave them seats that matched the door but were not very comfortable."

In a highly insightful recent article[14], Aridam K Bhattacharya and David C Michael explain why multinationals struggle in emerging markets. MNCs tend to assume that emerging markets lag behind developed ones and will one day catch up. But the reality is that emerging markets lag behind in some ways and lead in other ways in relation to develop economies. Under such circumstances, a deep understanding of the local environment becomes critical. Based on this understanding, customized products, developed in a cost effective way, must be offered. Bhattacharya and Michael argue that the MNCs have much to learn from the local companies in this regard: “They (the local companies) know people’s preferences by region or even city, by income level, by age group, and by gender. These companies also grasp the structures of the raw materials, components and finished goods markets in which they operate. They are therefore able to provide customers with a low level of customization inexpensively. These local leaders develop offering tailored to several niche markets and learn to create a large variety of products or services cost effectively.” The clear message is that transnationals must never underestimate the challenges of emerging markets. In many cases, local companies have taken full advantage of globalization to close gaps in technology, capital and talent with their much larger and traditionally more powerful rivals from the developed world.

-----------------------
[1] Janet Adamy, “Starbucks invasion has Russians on the go,” The Wall Street Journal, September 4, 2007.
[2] Read Keith Naughton’s interesting article, “Can Honda build a world car?”, Business week, September 8, 1997.
[3] “Fresh, but far from easy,” The Economist, Jun 21st 2007.
[4] “Spectacular results,” The Economist, August 18, 2007, p. 53
[5] Fahy and Taguchi (Sloan Management Review, Winter 1995) have correctly pointed out that aggregate statistics conceal sectoral differences. While Japan has a significantly larger number of food stores compared to the US, this is not so in the case of non food stores. Also, while products such as fresh food pass through long complex channels, others such as electronic goods take a much shorter route.

[6] International Marketing Review, Vol 14, Issue 2, 1997
[7] European Business Review, Vol 98, Issue 2, 1998.
[8] International Marketing Review, Vol 14, Issue 2, 1997.
[9] The Economist, June 1, 2000.
[10] Sloan Management Review, Winter 1995.
[11] George S Yip and Audrey J M Bink, “Managing global accounts,” Harvard Business Review, September 2007, pp. 83-91.
[12] This box items draws heavily from the article, “Fresh, but far from easy,” The Economist, Jun 21st 2007
[13] Harvard Business Review, July – August, 1991.
[14] “How local companies keep multinationals at bay,” Harvard Business Review, march 2008, pp. 71-81.

-----------------------

Coordination
GAM

Separate
GAM

Control
GAM

Need for major reorganization

Need for global integration

Global strategies

Global culture Seamless information sharing

Cross country processes

Global P&L Accounts

Global teams Client industries Countries

Channels

Global accounts Regions

Product characteristics

Method of Operation

Durability
&
Quality

Maintenance

Primary
Function

Secondary Function

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