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multinational corporations
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.
[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.
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.
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).
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).
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).
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:
H3: The greater the similarity in the distribution infrastructure between an MNC's home
and host countries, the higher is the degree of pricing standardization.
The extent to which an MNC will achieve its objectives in a particular foreign market
will depend largely on its ability to satisfy the needs and preferences of target customers.
Therefore, a careful examination of overseas customer characteristics and purchasing
behavior is essential in selecting an appropriate pricing strategy for a specific foreign
market. Price level is among the most important criteria used by customers in evaluating
competing products (Levitt 1983). However, not all customers are price sensitive; other
criteria (e.g., product quality and performance) may be equally or even more important to
certain customers (Douglas and Wind 1987). Therefore, in developing its pricing policy,
an MNC must be aware of foreign customers' preferences, perceptions, and purchasing
behaviors with respect to various price levels. A standardized pricing policy is more
appropriate if domestic and foreign customers place an equal emphasis on and have
similar perceptions of price. This is more likely to happen when a company is targeting
similar customer segments in domestic and foreign markets (Jain 1989). Therefore, we
suggest the following:
H4: The greater the similarity in customer characteristics and purchasing behavior
between an MNC's home and host countries, the higher is the degree of pricing
standardization. The stage of PLC is a fundamental variable affecting business strategy
(Anderson and Zeithaml 1984). The life cycle of a product consists of four major stages--
introduction, growth, maturity, and decline--and marketing strategy programs
differentiate across the various stages. Several empirical studies demonstrate the
important role PLC plays in determining the degree of international marketing strategy
standardization (Baalbaki and Malhotra 1995; Johnson and Aruthanes 1995). Because of
possible differences in economic and market development levels among countries, some
products may be at different stages of their life cycles in different countries (Buzzell
1968). As a result, MNCs may need to modify their pricing programs to take account of
particular local market conditions (Rau and Preble 1987). The significance of such an
approach diminishes in circumstances in which there is no difference in a product's life
cycle stage between the domestic and international markets (Sorenson and Wiechmann
1975). We therefore hypothesize the following:
H5: The greater the degree of similarity in the stage of PLC between an MNC's home and
host countries, the higher is the degree of pricing standardization.
We gathered data for this study from a mail survey of manufacturing subsidiaries of
MNCs operating in the United Kingdom. We developed the sampling frame for this study
using the Financial Analysis Made Easy electronic database of U.K. firms. We identified
706 manufacturing subsidiaries of MNCs, which originated mostly from the United
States, Germany, and Japan. We then contacted each of these firms by telephone to
ensure that the correct address of each company was available, discover whether there
was a product or product line that both the parent firm and its U.K. subsidiary produced
and marketed in their home markets, identify the person in each company who was the
most qualified to provide the required information (i.e., the key informant), and
encourage respondent participation in the survey.
Upon completion of the telephone contacts, we excluded 201 firms for a variety of
reasons, including an absence of common products in the portfolios of the parent firm
and its U.K. manufacturing subsidiary, a company policy of not taking part in external
research studies, a change in the firm's status as a result of a merger or acquisition, or the
unavailability of correct contact details. In 505 of the 706 (72%) firms, we identified
individuals who met the knowledgeability criterion for key informants and were willing
to participate and whose companies had a product or product line that the parent firm also
manufactured and marketed in its own domestic market. All these firms were targeted in
this research.
Cavusgil and Zou (1994) argue that any study on international marketing strategy
standardization conducted at the overall company level is likely to result in confounded
and thus unreliable findings. This is because international firms often employ different
marketing strategies across countries and product-markets. Therefore, in addressing this
problem in the study of pricing strategy standardization of MNCs, we adopt the product
or product line as the unit of analysis. Specifically, we ask respondents to answer the
questions of the research instrument with reference to a particular product or product line
their company (i.e., the subsidiary) is manufacturing and marketing in the United
Kingdom but that is also manufactured and marketed by the parent firm in its home
market.
The extent of international pricing strategy standardization was measured on the basis of
five items (see Table 1). Respondents were asked to compare the pricing policy followed
by the subsidiary with that pursued by the parent company in its home market. A seven-
point rating scale, anchored by "very different" (1) and "very similar" (7), was used to
capture individual responses. Regarding the factors that potentially influence pricing
strategy standardization, a set of items was used to measure the degree of similarity in
economic and legal environments, customer characteristics and behavior, and distribution
infrastructure between the U.K. market and that in which the parent firm was based (see
Table 2). Again, responses were captured on a seven-point scale ranging from "very
different" (1) to "very similar" (7). Following Kotabe and Omura (1989) and Johnson and
Aruthanes (1995), a single item was employed to assess the extent to which the focal
product or product line is in the same life cycle stage in both the United Kingdom and the
parent firm's home market. A seven-point scale, anchored by "strongly disagree" (1) and
"strongly agree" (7), was used to measure participant responses.
The guidelines of the total design method (Dillman 1978) were followed to enhance
respondent participation in this mail survey. A copy of the questionnaire, together with a
self-addressed, postage-paid envelope and a cover letter, was personally mailed to the key
informant in each target firm who had been identified during the telephone contacts.
Table 1.
Table 2.
Scatter diagrams and bivariate correlation analyses pertaining to (1) the international
pricing strategy standardization indicators and (2) the external elements that potentially
influence the degree of pricing standardization indicated that certain items were highly
correlated. Principal components analysis was thus employed in each set of items to
explore the presence of an underlying structure in the data.
Table 1 exhibits the results of principal components analysis for the international pricing
strategy standardization items. When we used an eigenvalue of one or greater as the
factor selection criterion along with the screen test, a single-factor solution emerged that
explained nearly 70% of the total variance. Table 2 shows the principal components
analysis results with respect to the environmental elements that potentially influence the
degree of pricing standardization. A four-factor solution emerged that accounted for
approximately 67% of the total variance. The solution featured strong individual loadings
on each factor, enabling straightforward interpretation. The four factors have been
labeled legal environment, customer characteristics, economic conditions, and
distribution infrastructure. Factor scores were then computed for all five factors that
emerged for use in subsequent analysis.
Despite the substantial amount of research attention devoted to the subject of marketing
program standardization in international markets, little empirical work has been
undertaken examining the issue of standardization within the context of MNCs' pricing
strategy. To contribute toward filling this void in the global marketing literature, the
focus of the present study is the nature of pricing strategies followed by MNC
manufacturing subsidiaries and the identification of the factors that drive the extent of
international pricing strategy standardization.
The study found that the majority of the participant MNC subsidiaries adopt a relatively
high degree of pricing strategy standardization. This is signified by the mean scores,
standard deviations, and one-sample t-test results for the items used to measure the
pricing standardization construct (see the Appendix). This evidence may be attributed to
the fact that the vast majority of the sample firms originate in the United States,
Germany, Japan, or another developed nation. These countries have considerable
resemblance to the United Kingdom in their levels of economic, industrial, and market
development, and this similarity is conducive to the pursuit of international pricing
standardization. However, previous research shows that a high level of pricing
standardization is uncommon among MNCs that operate in less developed host market
contexts compared with their home market bases (e.g., Ozsomer, Bodur, and Cavusgil
1991). Notably, our findings appear to suggest that the opposite is true for MNCs
domiciled in a developed country and operating in another developed country.
Regarding the determinants of pricing standardization, the results indicate that the extent
to which MNCs standardize their international pricing strategies depends on certain
environmental and market conditions-the degree of similarity between a firm's home and
host markets in terms of economic conditions, legal environment, customer
characteristics, and stage of PLC. These findings are consistent with earlier research
efforts that have examined determinants of standardization, but within the framework of
an overall marketing strategy (e.g., Douglas and Wind 1987; Jain 1989; Johnson and
Aruthanes 1995; Samiee and Roth 1992; Samli and Jacobs 1994).
However, the level of similarity in the distribution infrastructure between home and host
countries was found, contrary to expectations, not to play an important role in the
determination of the degree of international pricing standardization. One possible
explanation for this result is that distribution costs represent a minor component of the
product's total cost and, in turn, have no significant effect on the international pricing
strategies of the participant MNCs. Nevertheless, this is an issue that warrants further
empirical investigation.
The results of the present study substantiate the conclusion drawn in previous empirical
research (Cavusgil and Zou 1994) that success in international markets is within the reach
of management. Despite the existence of a large and complex set of factors that influence
international business activities, managers may be able to enhance the performance of
their firms by formulating and implementing marketing programs that match the
environmental and market conditions of each foreign market targeted (see Venkatraman
and Prescott 1990). It should be remembered that because pricing affects the revenue side
of the profitability equation, the ultimate long-term objective of managers in setting
international pricing policy centers on revenue maximization. This objective can be
achieved through either premium pricing when market conditions are favorable (i.e.,
demand is strong and competition is weak) or competitive pricing when they are hostile
(i.e., demand is weak and competition is intense). Sometimes, however, firms may be
forced to adopt uniform pricing across markets as a defensive measure against the gray-
market imports of unauthorized intermediaries that are completely out of their control
(Cavusgil 1996).
Table 3.
Certain limitations evident in the explication of this study should be taken into account.
First, the empirical inquiry focused on a specific international market framework (i.e., the
United Kingdom), which suggests that the results may suffer from limited external
validity. Therefore, readers should exercise caution in attempting to generalize from this
investigation, especially if making inferences to other significantly different economic
settings such as former Eastern Bloc or newly industrialized regions. Testing the external
validity of the present evidence requires an examination of the issues addressed in this
study within other international business contexts.
Second, the study employed a cross-sectional research design that prevents us from
making cause/effect inferences. Future research efforts may consider the use of a
longitudinal methodology that, though costly and time consuming, can help track
dynamic phenomena such as the relationships of extent of international pricing strategy
standardization with its determinants.
Third, because of the descriptive nature of the present study, combined with the limited
amount of available empirical evidence, a relatively limited number of potential
independent variables have been examined. Further research should investigate the
significance and relative importance of other contingency factors. For example, more
emphasis should be placed on investigating the influence of various firm characteristics
and product- and/or industry-specific factors on the degree of international pricing
strategy standardization. Given the absence of pertinent empirical evidence, there is a
need for more exploratory research to gain insights into the interrelationships among
these variables and how they affect international pricing programs.
Fourth, the present study looked only into the content aspect of standardization with
reference to pricing. Another relevant aspect could be process standardization, which
involves the use of uniform structures and processes for the design, implementation, and
control of marketing programs in overseas markets (Jain 1989). Future research efforts
could add to the body of existing knowledge by exploring the extent of standardization of
the process MNCs follow in formulating their pricing strategies across different foreign
markets.
ACKNOWLEDGMENTS
The authors received a Best Paper Award for this article at the 2000 American Marketing
Association International Conference, Marketing Strategy for Global Organizations, in
Buenos Aires, Argentina. The authors thank the anonymous JIM and conference
reviewers for their constructive comments and helpful suggestions.
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[Author Affiliation]
Marios Theodosiou and Constantine S. Katsikeas
[Author Affiliation]
(c) Journal of International Marketing Vol. 9, No. 3, 2001, pp. 1-18 ISSN 1069-031X
[Author
Affiliation]
THE AUTHORS
[Author Affiliation]
Marios Theodosiou is Lecturer in Marketing, School of Economics Fy Management,
University of Cyprus.
[Author Affiliation]
Constantine S. Katsikeas is Sir Julian Hodge Chair in Marketing Fr International
Business, Cardiff Business School, Cardiff University.