14 June 2005

The Marketing Mix

The marketing mix is one of the dominant ideas in modern marketing. Philip Kotler in his co-authored book "Principles of Marketing" defines marketing mix as "the set of controllable tactical marketing tools that the firm blends to produce the response it wants in the target market". The marketing mix consists of everything the firm can do to influence the demand for its product. The many possibilities gathered into four groups of variables known as the 'four Ps'.

Product - Anything that can be offered to a market for attention, aquisition, use or consumption that might satisfy a want or need. It includes physical objects, services, persons, places, organisations and ideas.
Price - The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
Place - All the company activities that make the product or service available to target customers.
Promotion - Activities that communicate the product or service and its merits to target customers and persuade them to buy.

The four Ps represent the sellers' view of the marketing tools available for influencing buyers. From a customer viewpoint, each marketing tool must deliver a customer benefit. One marketing expert suggested that companies should view the four Ps as the customer's 'four Cs':

Four Ps - Four Cs
Product - Customer needs and wants
Price - Cost to the customer
Place - Convenience
Promotion - Communication

10 June 2005


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09 June 2005

International Trade Theories

An international trade theory can be seen as a measure to address problems in a country with a weak macro economy, high unemployment and inflation. International commitment to a free market economy will bring prosperity to the world economic system. Since 1970, the time of Adam Smith, economists have shown that free trade is efficient and leads to economic welfare.

Mercantilism – This trade theory suggested that a government can improve economic well being of the country by increasing exports and reducing imports, but turned out to be a flaw strategy.

Absolute Advantage – A country has an absolute advantage over it trading partners if it is able to produce more of a good or service with the same amount of resources or the same amount of a good or service with fewer resources. In the case of Zambia, the country has an absolute advantage over many countries in the production of copper. This occurs because of the existence of reserves of copper ore or bauxite. We can see that in terms of the production of goods, there are obvious gains from specialisation and trade, if Zambia produces copper and exports it to those countries that specialise in the production of other goods or services.

Comparative Advantage – A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners. Some countries have an absolute advantage in the production of many goods relative to their trading partners. Some have an absolute disadvantage. They are inefficient in producing anything, relative to their trading partners. The theory of comparative costs argues that, put simply, it is better for a country that is inefficient at producing a good or service to specialise in the production of that good it is least inefficient at, compared with producing other goods.

Factor Endowment Theory - ‘Hecksher Ohlin’ theory powerfully supplements the theory of comparative advantage by bringing consideration to the endowment and cost of factors of production. The theory states that countries like China with big labour force will focus on labour intensive goods, and Sweden with more capital will focus on producing goods that are capital intensive. However the theory is criticised when taken the following into consideration:

1. Other factors – like minimum wage laws which leads to higher prices for relatively abundant labour - therefore making it cheaper to import rather than export.
2. Leontiff paradox – The United States makes export more labour intensive, this is due to the high tech products with high labour quality input rather than man hours of work e.g. level of education will also affect a country's advantage rather than its scarcity or abundance.

International Product Life-Cycle Theory (Verrons) - This theory states how a country's export can later become its import through different stages:

1. New Product stage – Initial consumption in home countries where price is inelastic and profits are high, which then go on to being sold to those willing to pay a premium price. This then goes on to being exported once local consumption runs out.

2. Maturing Product stage – Sales achieved through exports, and substitutes are being produced by local competitors. As substitute’s come into to the market, the demand for original product will fall. The firms with the new product switch from production to market protection, and tapping markets in less developed countries.

3. Standardized Product stage – Technology becomes widely diffused and available. Production shifts to low cost locations. Product becomes generic and price will become the sole determinant for demand. It is very likely that the same product may be at different stages with different versions for example cars (Japanese Toyota Avensis cars being imported into Japan).

Other considerations are government regulations, monetary valuation, currency for reporting profits, consumer tastes and branding.

Foreign Direct Investment (FDI) (Part III)

FDI Theories

Why do firms undertake FDI compared to exports? FDI is expensive due to costs of establishing production facility and risky due to problems related to doing business in an unfamiliar environment. However, firms still engage in FDI because of market imperfections related with exports such as:

• Transportation costs
• Trade barriers/government intervention
• Opportunistic behaviour of firms
• Bounded rationality
• Tight control needed for strategic reasons
• Tacit nature of knowledge

The most widely acclaimed theory on FDI is by John Dunnings - "Eclectic Paradigm", sometimes also referred to as the "OLI Theory".

John Dunnings Eclectic Paradigm

This theory ties together location advantage, ownership advantage, and internalisation advantage. “Eclectic” meaning deriving ideas from various sources. John Dunnings paradigm states that a firm will engage in FDI when all of the following three conditions are present:

• First, it must be more profitable to undertake a business activity in a foreign location than in a domestic location (location advantage). Examples of types of location-specific factors are markets, resources, production costs, political conditions, cultural/linguistic affinities, concentration of knowledge development.

• Second, the firm must own some unique competitive advantage that overcomes the disadvantages of competing with foreign firms in their own market (ownership advantage) such as technology, knowledge, patent, know-how, size.

• Third, the firm must benefit from controlling the foreign business activity, rather than hiring an independent local company to provide the service (internalisation advantage). This way the company can maintain their ownership advantages.

The more OLI advantages a firm possesses the greater the propensity of adopting an entrymode with a high control level such as wholly owned venture.

The OLI model was widely applied in the past to explain entry mode decisions and its basic ideas were supported by several empirical studies. But in spite of its eclecticism, its improved measurability, and its great explaining power the OLI model is solely a static one. It intends to explore all important factors impacting entry mode decisions but in fact fails to do so due to the neglect of strategic factors, characteristics of and situational contingency surrounding the decision maker, and competition.

This theory can be written in great detail, therefore anyone who is interested in this theory, please let me know as i would do my best to post more information as soon as possible.

Foreign Direct Investment (FDI) (Part II)

Reasons for FDI for a Business – Why businesses are interested?

1. Increase sales and profits – SME’s are interested with growth of MNE’s providing a need for local suppliers who may go on to supplying just locally in the long run. Better sales and profits opportunities for MNE’s as global markets offer more lucrative opportunities.

2. Enter rapidly growing markets – For example China, high economic growth and GDP. If a country continues to move towards a ‘market-driven’ economy, will allow entry for MNE’s which will result in the demand for goods and services not profitable by local firms. MNE’s are also trying to gain a foothold in Eastern European Countries.

3. Reduce costs – Labour costs and costs of producing. This depends on how labour intensive the business activities are. Materials, supply factor, and distance from supply source if too far may be a reason for a business to relocate closer to raw materials and resources. Costs of energy in some countries are lower than others, and transportation costs. For example US now goes to Mexico for textiles as a result of distance, and less and reduced transport costs. Lastly development of twin factories/maquiladoras which is where production operations are setup in both sides of the border (US and Mexican)

4. Gain a foothold in Economic Blocks – MNE’s that acquire a company in one of the three major blocks get additional benefits of less restriction and the ability to sell without import duties. A balance between blocks. Policies creation of new blocks will stimulate economies and provide a competitive stance for business operating under their umbrella.

5. Protect domestic markets – MNE’s entering international markets to attack competitors and prevent them from expanding overseas as they will be less inclined to expand overseas while busy trying to defend its home market position from MNE’s. Sometimes to bring pressure on a company that has already challenged overseas markets, for example when Fuji expanded to the US, Kodak expanded to Japan.

6. Protect foreign markets – If MNE’s can attract more customers and increase market share, they will be more able to move products directly to consumers. A possible joint venture could increase market share, protecting investments in the foreign market, otherwise local competitors will erode away firms position

7. Acquire technological and managerial know-how – Managerial and technological expertise. Relocating next to competitors to monitor, recruit scientists and specialists from local universities, for example Kodak’s expansion into Japan

Foreign Direct Investment (FDI) (Part I)

Types of FDI

Market seeking FDI: FDI undertaken to satisfy a particular or a set of foreign markets

Resource seeking FDI: FDI undertaken to gain access to natural resources such as minerals, oil, natural gas and agricultural products in some particular countries

Rationalised or efficiency seeking FDI: FDI undertaken to promote a more efficient division of labour or specialisation of an existing portfolio of foreign and domestic assets by MNEs

Strategic asset seeking FDI: FDI undertaken to protect or augment the existing ownership specific advantages of the investing firms or to reduce those of their rivals