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Environmental Factors in Marketing

Environmental Factors in Marketing


Introduction

MNCs usually invest in foreign countries to improve their global competitive position in the international market in accordance with the company's long-run strategic mission, to meet tariff and quota restrictions in selling their products, and to secure otherwise unobtainable raw materials. Another important reason is to take advantage of differences in taxation, capital markets, product costs, and product selling markets. To achieve these objectives, management must have an attitude of globalization that makes it as concerned and involved with each of its foreign operations around the world as with its U.S. operations, and that makes it attempt to rationalize and manage its operations on a global rather than domestic basis within the constraints of the international social, economic, political, legal, and educational conditions.

However, MNCs may have relatively little influence and no direct control over environmental factors. Therefore, an MNC needs a separate set of measurements for planning, control, and evaluation of its managers' performance, a set that is substantially different from the one utilized by domestic business units. Traditionally, performance evaluation systems have been used to compare actual performance of foreign subsidiaries with expected performance, to facilitate measurement of subsidiaries in meeting some predetermined set of criteria, to help top management in making resource allocation decisions so that corporate resources are directed to subsidiaries where expected returns are the highest, and to motivate decision makers to achieve their goals and overall corporate objectives. Traditional performance evaluation measures used by Lockheed and Rolls Royce engines in managing their foreign subsidiaries and their managers need to be examined first.


Business Environmental Factors

Currency of quotations and exchange rate risk.
A most important decision is whether to use one's own currency or that of the buyer's country when quoting. Some companies consider that to quote in one's own currency is good careful management. In practice, it shifts the exchange risk from the seller to the buyer, which is a denial of customer orientation and makes it hard for the customer to compare the seller's quotation with competitors' offers made in his own country currency. While it is desirable to quote in a customer's own currency and to deliver to a customer's premises duty paid, there will be occasions when the supplier's or a third currency may be preferred. For example, for some products it is the custom of the trade to quote in the currency of the supplier's country. Payment is made in dollars when trading in hydro-carbon fuels or aircraft, or in a third country currency by agreement of the parties to suit their purposes.

Risk is removed by the use of forward contracts which enables an exporter to receive, at the time of the contract with the bank, payment in his own currency. The bank, using its knowledge of offsetting risk, recovers the sales contract value when the money is realized at a future date. In this way, the bank carries the exchange risk and the exporter obtains funds at a cost which, normally, will be taken into account when setting a price. Larger global marketing organizations with substantial operations in a number of countries usually have arrangements in place to cover exchange rate variations such as centralized global hedging and swap.


Impact of technology

There is a technology available to all those involved in exchange transactions to protect them against adverse exchange movements and help them profit from this specialist knowledge (Stone & Mccall, 2004). When the interest rates of country A are noticeably greater than those in country B, it is possible for a company in country A to invoice in the currency of country B. By doing this and either (1) earning the premium by selling forward the country B money, or (2) funding the sale by way of borrowing country B foreign holdings of a country's currency available for purchase at the lower interest rate, it brings the cost of money to the country B level. It might be difficult to do this form of invoicing in countries where customers are reluctant to accept quotations and invoices in their own currency. Such was the case in Germany and Japan when their currencies had been appreciating over the years. It had become a rule of thumb for organizations to ask for quotation and invoice in the supplier country currency which gave them the advantage of any reduction in the value of the supplier country's currency as the Deutschmark and the yen became stronger and stronger over the years. A common currency with common interest rates as in the case of the euro in the EU reduces the necessity of doing this between member countries.


Inflation rates

When price conditions are unstable in the supply market and longer term contracts are envisaged, it is necessary to insure against increases in production/purchasing and labor costs.


Rolls Royce aero engine

Having a good contract price adjustment clause, will not be sufficient protection if the starting price is too low. Rolls Royce aero engine division nearly did not survive because of three factors that made nonsense of its calculations:

1. Lockheed failed to sell as many aircraft as it had hoped and Rolls Royce had calculated to recover its development costs over the projected sales of the aircraft.
2. Carbon fiber fan blades, which were used to give the engine a technical edge over competitors, failed to stand up to requirements in practice. More costly and heavier material was incorporated which gave a poorer power to weight ratio and exposed the company to performance penalties.
3 Rolls Royce engineers failed to solve the problems of an entirely new engine design in the almost impossibly short time agreed in the contract. They failed to meet delivery commitments and further exposed the company to liquidated damages (Abdallah, 2004).

If the quoted price is not always the contract price, neither is the contract price necessarily the price of settlement. Not every product is sold on extended terms when a price adjustment clause, as in the case above, may be included. On goods sold on shorter terms, a limit - say 30 days - is sometimes put on the validity of an offer, which means the price offered may legitimately be adjusted after that time. This may be an important consideration when costs are volatile (Lazer, 1971).


Managerial Decision Factors

Marketers are largely in control of their own destinies despite the vagaries of commercial and environmental factors. Pricing is no exception. There are various approaches at their disposal for making pricing decisions, some of which are more appropriate than others in an international context. The marketing decision-maker has an important role to play.


Cost-based pricing

Usually cost-based pricing is taken to mean starting to price from known fixed costs and adding all variable costs as well as the costs of getting the goods to the customer. This is likely to include the profit margins in the channels of distribution, transport and associated costs and any tariffs and taxes imposed in the process.


Importance of Social Responsibility and Ethics

Great, business enterprises like Lockheed and Rolls Royce, meet the test, both of social performance and of competitive market performance, when they first fulfill the requirements of the open competitive market system. From this basis of performance and the comprehension of these broad interrelations, business can and should participate with government, labor, education, and all other elements of our society in the search for better political and social solutions, but without arrogating to itself the exact nature and direction of social action. Inevitably, large, diversified national and multinational corporations interlinked so broadly and deeply at so many levels carry very heavy social responsibilities. They, above all, must be solidly based, however, in the efficient, competitive production of wanted goods and services. From this base, they have innumerable vantage points and linkages for broad, creative social interpretation and participation in efforts at solution and amelioration.






Bibliography

Stone, Marilyn A. Mccall, J. B.; International Strategic Marketing. Routledge, 2004

Abdallah, Wagdy M.; Critical Concerns in Transfer Pricing and Practice. Praeger, 2004

Lazer, William; Marketing Management: A Systems Perspective. John Wiley & Sons, 1971
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Posted by: Jeffrey J. Thomson

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