Marios Theodosiou, Constantine S Katsikeas. Journal of International Marketing. Chicago: 2001. Vol. 9, Iss. 3; pg. 1, 18 pgs
Abstract (Summary)
In response to certain important gaps identified in the global marketing literature, a study investigates the pricing strategies followed by manufacturing subsidiaries of multinational corporations. Specifically, it attempts to identify the factors that play an important role in determining the degree of international pricing strategy standardization. The findings suggest that the extent to which multinationals standardize their international pricing strategies depends on the level of similarity between home and host countries in terms of customer characteristics, legal environment, economic conditions, and stage of the product life cycle. The study highlights implications of the findings for business practitioners and discuss future research directions along with the limitations.
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Full Text(6445 words)Copyright American Marketing Association 2001
[Headnote]ABSTRACT
[Headnote]
In response to certain important gaps identified in the global marketing literature, the focus of this inquiry is an investigation of the pricing strategies followed by manufacturing subsidiaries of multinational corporations. Specifically, the authors attempt to identify the factors that play an important role in determining the degree of international pricing strategy standardization. The findings suggest that the extent to which multinationals standardize their international pricing strategies depends on the level of similarity between home and host countries in terms of customer characteristics, legal environment, economic conditions, and stage of the product life cycle. The authors highlight implications of the findings for business practitioners and discuss future research directions along with the limitations of the study.
Increasing liberalization, interdependence, and competition in world economies have accelerated the need for multinational corporations (MNCs) to develop effective global strategies in their endeavor to achieve sustainable competitive advantage in international markets (Samiee and Roth 1992). Marketing has played a significant role in the advancement of the field of international business; marketing strategy constitutes a critical component of a firm's global strategy (Zou and Cavusgil 1996). The development of optimal programs for global markets is of vital interest to business managers who view international operations as a means of boosting corporate growth, improving competitive position, strengthening financial performance, and ensuring company survival and long-term viability in a highly globalized marketplace.
In this context, the extent to which elements of the marketing program should be standardized across markets or adapted in order to accommodate different foreign market conditions, requirements, and preferences has received focal research attention at both the conceptual and the empirical level. The approach an MNC adopts has important implications because (1) it influences the MNC's ability to match its offerings effectively with the overseas market environments in which it operates, (2) it affects its long-term direction with respect to international operations, and (3) it determines the areas that should be prioritized in global resource allocation decisions (Jain 1989).
Notwithstanding the long-standing interest in and many articles published on the topic, a review of the pertinent literature illustrates that scant attention has been devoted to investigating drivers of international pricing strategy standardization (Samli and Jacobs 1994). The vast majority of studies have focused on promotion (e.g., Harris 1994; Harvey 1993), product (e.g., Hill and Still 1984; Walters and Toyne 1989), and to a lesser extent distribution (e.g., Rosenbloom, Larsen, and Mehta 1997) aspects of the international marketing program. However, understanding the elements that influence the extent of standardization of international pricing strategy is vital, because standardization can affect firms' revenue and profitability levels and determine a product's foreign market positioning (Czinkota and Ronkainen 1998). Furthermore, previous standardization studies have commonly been conducted at the headquarters level, and the perceptions and attitudes of subsidiary managers have largely been ignored. Nevertheless, subsidiaries play an important role in international marketing strategy formulation and implementation as a result of their closeness to the market and better understanding of local conditions.
In view of these limiting empirical considerations, the primary interests of this investigation focus on the pricing strategies MNCs follow. Because the key consideration in international business operations is whether the marketing strategy should be standardized or adapted, we consider international pricing strategy along the standardization-adaptation continuum (Cavusgil and Zou 1994). Specifically, this empirical inquiry aims to investigate the factors that play an important role in influencing the degree of international pricing strategy standardization from the standpoint of subsidiary managers. The study begins with an overview of the standardization versus adaptation debate. This is followed by an examination of the factors that are potentially associated with pricing standardization and the development of specific research hypotheses. Next, we specify the research method employed, and then present and discuss the results of the study. Finally, we highlight managerial implications of the findings and limitations of the study, along with directions for further research.
The degree to which international marketing programs must be standardized or customized has been a contentious issue for more than three decades now. A review of the pertinent literature identifies three schools of thought: the two extreme opposites of complete standardization versus complete adaptation and the "middle-of-the-road," or contingency perspective. These perspectives are examined next.
The arguments in favor of marketing program standardization emphasize two main aspects. The first involves the drivers of standardization, defined as the developments in the international business environment that make standardization a feasible, or even inescapable strategy. The second aspect refers to the potential advantages that may result for a company that pursues a strategy of international marketing program standardization, advantages that make standardization a desirable alternative.
Technological developments in the areas of communication and transportation, as well as increasing international travel by tourists and businesspeople, are considered driving forces behind the creation of a global village and thus a global marketplace (e.g., Elinder 1965). In a controversial article, Levitt (1983, p. 95) claims that in this new commercial reality, people around the world have the same needs and desires and that "almost everyone, everywhere, wants the things they have heard about, seen or experienced through the new technologies." Similarly, Ohmae (1985) refers to the emergence of the Tridians: the residents of Japan, the United States, and the European Union. These people have similar academic backgrounds, income levels, lifestyles, uses of leisure time, and aspirations; as a result, 600 million consumers in all parts of the Triad have strikingly similar needs and preferences. Other drivers of standardization discussed in the literature include the need of international firms to serve their multinational customers (Buzzell 1968; Douglas and Wind 1987), regional economic integration (e.g., North America and the European Union) (Walters and Toyne 1989), and the growth of international market segments with similar needs and preferences (Yavas, Verhage, and Green 1992).
Proponents of standardization also emphasize several important benefits associated with the pursuit of this strategy. The most significant advantage of standardization is its contribution to the achievement of economies of scale and cost savings in production, research and development, and marketing (e.g., Keegan 1969). By fully exploiting the potential for economies of scale in all value-adding activities through marketing program standardization, international firms will be in a position to gain a significant advantage over their competitors by selling high quality products at lower prices (Levitt 1983). Other advantages of standardization proposed in the literature include the potential for rapid introduction of new products in international markets (Samiee and Roth 1992; Walters and Toyne 1989), the presentation of a consistent image across markets (Harvey 1993), the ability for worldwide exploitation of new and innovative ideas (Buzzell 1968; Quelch and Hoff 1986), and better coordination and control of international operations (Douglas and Craig 1986).
The adaptation school of thought emerged essentially as a reaction to the arguments put forward in favor of standardization. First of all, many academics expressed their disagreement with Levitt's (1983) argument about a worldwide homogenization in needs and preferences, viewing it as overly simplistic, myopic, and contrary to the marketing concept (e.g., Boddewyn, Soehl, and Picard 1986; Douglas and Wind 1987). According to these authors, no hard evidence can be produced in support of Levitt's thesis (Douglas and Craig 1986; Onkvisit and Shaw 1990; Wind 1986). Cross-cultural empirical research has found significant differences in customer characteristics, preferences, and purchasing behavior among different countries (e.g., Diamantopoulos, Schlegelmilch, and Du Preez 1995).
Second, critics of standardization have questioned the significance of economies of scale and the cost savings underlying this approach. On the one hand, technological developments in flexible manufacturing systems and computer-aided design and manufacturing facilitate production of customized products without major cost implications and reduction in the minimum efficient scale of production (Douglas and Wind 1987; Walters and Toyne 1989). On the other hand, it has been suggested that certain industries (e.g., packaged consumer goods) are less susceptible to manufacturing and research and development economies (Quelch and Hoff 1986). Moreover, several authors have claimed that even when cost savings can be made, their effect may not be significant if a large proportion of the total cost is determined by factors on which standardization has no impact (e.g., cost of raw materials and labor) (Douglas and Craig 1986).
Third, according to critics of standardization, there is no evidence to suggest that customers have become more price conscious or that they are willing to trade off specific product features for lower prices. It has been argued that low price positioning is a vulnerable strategy that may not lead to the achievement of sustainable competitive advantage (Douglas and Wind 1987; Wind 1986).
Fourth, the decision whether to standardize does not depend on managerial discretion alone. Certain external (e.g., environmental, market, industry) and internal (e.g., organizational structure and processes) factors may limit the degree of standardization that a firm is able to apply (Boddewyn, Soehl, and Picard 1986). Such factors are responsible for mandatory adaptations, defined as the adaptations a company is obliged to make, because of either legislation and allied governmental regulations or inescapable and uncontrollable marketplace realities (Hill and Still 1984).
Furthermore, some authors have indicated several important benefits that are likely to result from adapting international marketing programs to local market conditions. These include deeper penetration of foreign markets and thus increased market share and sales volume for the firm (Cavusgil, Zou, and Naidu 1993); enhanced motivation and morale of local managers (Douglas and Wind 1987; Quelch and Hoff 1986); and augmentation of firms' capabilities in analyzing and understanding foreign markets, monitoring market developments overseas, and quickly responding to shifts in customer preferences (Craig and Douglas 1996).
Recent standardization literature has followed a more fruitful research avenue by supporting the contingency perspective of international marketing (e.g., Cavusgil, Zou, and Naidu 1993). According to this perspective, the difference between standardization and adaptation is in degree rather than in kind, and the two perspectives are viewed as occurring along a continuum on a bipolar scale (Onkvisit and Shaw 1987). Therefore, the challenge facing international marketing managers is to decide which marketing-mix elements they should standardize or adapt, under what conditions, and to what degree (Buzzell 1968; Jain 1989).
The critical issue in designing international marketing strategies in the framework of contingency theory is to identify contextual factors that determine the appropriate degree of marketing program standardization and determine which individual marketing-mix elements are influenced by each factor and to what extent. In response to this challenge, academic researchers have examined the factors that play an important role in the determination of marketing program standardization, and several classificatory schemes have been proposed (e.g., Cavusgil, Zou, and Naidu 1993; Jain 1989; Johnson and Aruthanes 1995).
A review of the extant literature suggests that these factors can be organized into four broad categories: (1) macroenvironmental factors, including economic, legal, cultural, physical, and demographic elements (Douglas and Wind 1987; Jain 1989); (2) microenvironmental factors, such as customer characteristics, attitudes, and behavior (Jain 1989); the structure and nature of competition (Cavusgil, Zou, and Naidu 1993; Ozsomer, Bodur, and Cavusgil 1991); and the availability, cost, and competencies of marketing intermediaries (Harvey 1993; Wind and Douglas 1986); (3) firm-specific factors, including the degree of centralization in decision making (Quelch and Hoff 1986; Ozsomer, Bodur, and Cavusgil 1991), the relationship between headquarters and local subsidiaries (Jain 1989), corporate orientation (Perlmutter 1969), the firm's experience in international operations (Cavusgil, Zou, and Naidu 1993; Craig and Douglas 1996), and the subsidiary's ownership structure (Rau and Preble 1987); and (4) product and/or industry factors, such as the nature of product (Cavusgil, Zou, and Naidu 1993), stage of product life cycle (PLC) (Baalbaki and Malhotra 1995; Rau and Preble 1987), cultural specificity of the product (Cavusgil and Zou 1994; Quelch and Hoff 1986), product uniqueness (Cavusgil, Zou, and Naidu 1993), conditions and patterns of product use (Hill and Still 1984), product familiarity of foreign customers (Cavusgil, Zou, and Naidu 1993), and industry technology orientation (Quelch and Hoff 1986; Samiee and Roth 1992).
In investigating the factors influencing the degree of international pricing strategy standardization, we attempted to include the largest possible number of relevant contingency variables. However, that the present study represents the first systematic endeavor to examine this issue using a descriptive, hypothetico-deductive research approach was a serious obstacle to this end. Although a large number of potentially important variables have been proposed by various authors at the conceptual level (as discussed in the previous section), only a limited number of these have been empirically tested. We therefore deemed it appropriate, from a methodological point of view, to limit our effort to the examination of contingency variables whose relevance had been established in previous standardization studies and that could be linked specifically to the degree of international pricing strategy standardization pursued by MNCs.
Accordingly, a review of the limited empirical evidence, combined with relevant conceptual work, revealed five factors that are potentially important in influencing the extent to which MNCs standardize their international pricing strategy: economic environment, legal environment, distribution infrastructure, customer characteristics and behavior, and stage of PLC. The relevance of each factor is considered next. The economic conditions prevailing in a host country can influence pricing decisions in several ways, because they determine demand potential for a particular product and have a significant impact on a firm's cost structure. On the demand side, the overall level of economic and industrial development of a country determines customers' priorities in terms of the products they consider essential, in addition to the prices they are able and willing to pay for certain products (Jain 1989). For example, a product considered essential in a developed country may be viewed as less necessary or even as a luxury item in a less developed country (Hill and Still 1984). Moreover, demand for a product at different price levels is a function of the purchasing power of targeted customers, which is determined by the level of economic development of the country (Jain 1989). On the cost side, the economic environment of the host country determines the cost of raw materials, labor, energy, and other resources a firm needs to purchase or hire in order to carry out its everyday operations (Douglas and Wind 1987; Samli and Jacobs 1994). The level of such costs has a direct impact on the overall cost structure of local subsidiaries. Thus, the pricing policy pursued by an international firm in a particular foreign market should reflect these factors. We therefore advance the following:
H1: The greater the similarity in the economic environment between an MNC's home and host countries, the higher is the degree of pricing standardization.
Empirical research has shown that differences in government laws and regulations across markets are among the major obstacles to standardization (Baalbaki and Malhotra 1995; Cavusgil, Zou, and Naidu 1993). A common law found in many countries that directly influences pricing is retail price maintenance, which requires firms to sell certain products at specified prices. The purpose of such laws is either to protect customers from unfair exploitation or to ensure that certain sensitive products (e.g., pharmaceuticals) are easily accessible to almost everybody in the population. Governments may also impose price controls on certain products to protect local producers from international competition that is deemed unfair. Furthermore, pricing is influenced indirectly by laws and regulations that necessitate product modifications in compliance with different technical specifications; health and safety standards; environmental protection acts; electric, weight, and measurement systems; and the like that may prevail in foreign markets (Buzzell 1968; Cavusgil, Zou, and Naidu 1993; Douglas and Wind 1987). To make the required modifications, firms incur extra costs, which forces them either to charge higher prices or to compress their profit margins. We therefore expect the following:
H2: The greater the similarity in government laws and regulations between an MNC's home and host countries, the higher is the degree of pricing standardization.
International firms often must rely on existing distribution channels to distribute their products in foreign markets. Therefore, the number, type, competencies, costs, and margins of the intermediaries involved in the process of transferring the product from the point of production to the end user have a significant effect on a firm's cost structure-particularly if the distribution cost constitutes a significant proportion of the total cost. This, in turn, may influence price levels, profit margins, and allied international pricing policy elements (Buzzell 1968). For example, if the distribution channel used in a particular foreign market involves a greater number of intermediaries or channel members are less competent and efficient than those in the domestic market, a significantly higher cost will be added to the product by the time it reaches the end user. The additional cost incurred is likely to result in higher final selling prices and/or reduced profit margins for the firm. Under such circumstances, a firm may also decide to modify other elements of its international pricing policy, including sales and credit terms and discounts offered. It is therefore possible to hypothesize the following: