MB0037 – International Business Management

FNote: Each question carries 10 Marks. Answer all the questions.

Q.1 Evaluate the monetary system and currency markets in international

business management.
Ans:
The IMF is an international organization of 185 member countries. It was established to
promote international monetary cooperation, exchange stability, and orderly exchange
arrangements; to foster economic growth and high levels of employment; and to provide
temporary financial assistance to countries to help ease balance of payments
adjustment.
The International Monetary Fund (IMF) is the intergovernmental organization that
oversees the global financial system by following the macroeconomic policies of its
member countries, in particular those with an impact on exchange rate and the balance
of payments. It is an organization formed with a stated objective of stabilizing
international exchange rates and facilitating development through the enforcement of
liberalising economic policies[1][2] on other countries as a condition for loans,
restructuring or aid.[3] It also offers highly leveraged loans, mainly to poorer countries. Its
headquarters is in Washington, D.C., United States.

Organization and purpose

IMF "Headquarters 1" in Washington, D.C.
The International Monetary Fund was created in July 1945, originally with 45
members,[4] with a goal to stabilize exchange rates and assist the reconstruction of the
world's international payment system. Countries contributed to a pool which could be
borrowed from, on a temporary basis, by countries with payment imbalances (Condon,
2007). The IMF was important when it was first created because it helped the world
stabilize the economic system. The IMF works to improve the economies of its member
countries.[5]
The IMF describes itself as "an organization of 187 countries (as of July 2010),[6][7]
working to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable economic growth, and
reduce poverty". With the exception of Cuba (left in 1964),[8] Taiwan (expelled in
1980),[9] North Korea, Andorra, Monaco, Liechtenstein, Tuvalu and Nauru, all UN
member states participate directly in the IMF. Member states are represented on a 24-
member Executive Board (five Executive Directors are appointed by the five members
with the largest quotas, nineteen Executive Directors are elected by the remaining
members), and all members appoint a Governor to the IMF's Board of Governors.[1

Data dissemination systems

In 1995, the International Monetary Fund began work on data dissemination standards
with the view of guiding IMF member countries to disseminate their economic and
financial data to the public. The International Monetary and Financial Committee (IMFC)
endorsed the guidelines for the dissemination standards and they were split into two
tiers: The GDDS and the SDDS.

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The International Monetary Fund executive board approved the SDDS and GDDS in
1996 and 1997 respectively and subsequent amendments were published in a revised
"Guide to the General Data Dissemination System". The system is aimed primarily at
statisticians and aims to improve many aspects of statistical systems in a country. It is
also part of the World Bank Millennium Development Goals and Poverty Reduction
Strategic Papers.
The IMF established a system and standard to guide members in the dissemination to
the public of their economic and financial data. Currently there are two such systems:
General Data Dissemination System (GDDS) and its superset Special Data
Dissemination System (SDDS), for those member countries having or seeking access to
international capital markets.
The primary objective of the GDDS is to encourage IMF member countries to build a
framework to improve data quality and increase statistical capacity building. This will
involve the preparation of meta data describing current statistical collection practices
and setting improvement plans. Upon building a framework, a country can evaluate
statistical needs, set priorities in improving the timeliness, transparency, reliability and
accessibility of financial and economic data.

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Q.2 a. Mention the different entry strategies to enter international markets.

Ans:
Entry Strategies:
With rare exceptions, products just don’t emerge in foreign markets overnight – a firm
has to build up a market over time. Several strategies, which differ in aggressiveness,
risk, and the amount of control that the firm is able to maintain, are available:
· Exporting is a relatively low risk strategy in which few investments are made in the new
country. A drawback is that, because the firm makes few if any marketing investments
in the new country, market share may be below potential. Further, the firm, by not
operating in the country, learns less about the market (What do consumers really want?
Which kinds of advertising campaigns are most successful? What are the most effective
methods of distribution?) If an importer is willing to do a good job of marketing, this
arrangement may represent a "win-win" situation, but it may be more difficult for the firm
to enter on its own later if it decides that larger profits can be made within the country.
· Licensing and franchising are also low exposure methods of entry – you allow
someone else to use your trademarks and accumulated expertise. Your partner puts up
the money and assumes the risk. Problems here involve the fact that you are training a
potential competitor and that you have little control over how the business is operated.
For example, American fast food restaurants have found that foreign franchisees often
fail to maintain American standards of cleanliness. Similarly, a foreign manufacturer
may use lower quality ingredients in manufacturing a brand based on premium contents
in the home country.
· Contract manufacturing involves having someone else manufacture products while
you take on some of the marketing efforts yourself. This saves investment, but again
you may be training a competitor.
· Direct entry strategies, where the firm either acquires a firm or builds operations
"from scratch" involve the highest exposure, but also the greatest opportunities for
profits. The firm gains more knowledge about the local market and maintains greater
control, but now has a huge investment. In some countries, the government may
expropriate assets without compensation, so direct investment entails an additional risk.
A variation involves a joint venture, where a local firm puts up some of the money and
knowledge about the local market.

b. How has E-commerce helped in international marketing? (6 marks)

Ans:
Electronic Commerce
1 Prospects for electronic commerce
Electronic commerce – usually in the form of sales, promotion, or support through the
Internet – is a hot topic at the moment, evidenced by the high market capitalization of
firms involved in this kind of business. Growth rates have been considerable over the
last two years and are expected to persist, at least to some extent, for at least the next
several years. Yet, it should be recognized that so far, sales over the Internet account
for only a small portion of sales – especially outside the U.S.
2 Obstacles to diffusion
Obstacles to the diffusion of Internet trade come both from enduring sources and
temporary roadblocks which may be overcome as consumer attitudes change and

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technology is improved. Currently, Internet connections are slower than desired so that
downloading pictures and other information may take longer than consumers are willing
to wait. "Glitches" in online ordering systems may also frustrate consumers, who are
unable to place their orders at a given time or have difficulty navigating through a
malfunctioning site. The lack of non-English language sites in some areas may also be
off-putting to consumers, and registering domain names in some countries is difficult.
Further, shipping small packages across countries may be inefficient due to high local
postage rates and inefficiencies in customs processing. Most of these obstacles may be
overcome within next few years.
Other obstacles may, however, have considerably greater staying power. First, there
are legal problems, as several different countries may seek to impose their jurisdiction
on advertising and laws of product assortment and business practices. Further, the
maintenance of databases, which are essential to delivering on the promises of e-
commerce, may conflict with the privacy rules of some countries – this is currently a hot
issue of contention between the United States and the European Union. Finally, there
are issues of taxation and collection. While the Clinton Administration has sought to get
the WTO to go along with a three year tax "moratorium" on Internet purchases much
like the one observed in the U.S., strong opposition is expected. A great attraction of e-
commerce in Europe is that people may order from other countries and thus evade local
sales taxes, which can be prohibitive (e.g., 25% in Denmark and 16% in Germany).
Some firms will ship to customers in neighbouring countries without collecting sales
taxes or duties, with the responsibility of paying falling on the consumer. Although most
consumers who order and do not arrange to pay for these taxes get away with it, fines
for those caught through random checks can be severe.
3 Locus of the site
Some firms have chosen to maintain a global site, with reference only to local sales or
support offices; others, in contrast, have unique sites for each country. In some cases,
global sites will hyperlink surfers to a country or region relevant to the site. Note that
some confusion exists since many sites outside the U.S. maintain the ".com"
designation rather than their countries’ respective suffix (e.g., ".de" for Germany, ".se"
for Sweden, and ".au" for Australia). Some firms have experienced problems getting
their banks to accept credit card charges in more than one currency, and thus it may be
difficult to indicate precise prices in more than one denomination (one site based in
Britain offered its American customers to be as accurate as possible, based on current
exchange rates, although the charge could be off "by a few pennies.")
4 Lifecycle stages across the World
It has been suggested that Europe runs some five years behind the U.S. in electronic
commerce, but some sources dispute this, suggesting that lack of success among
American retailers may have other origins, such as inadequate adaptation (for example,
some British users are put off by American English). There are, however, some factors
which cause most countries run behind. Even in Europe, Internet access penetration
rates are lower than they are in the U.S., and the slower speed associated with
downloading Asian characters is discouraging. In some countries, credit card
penetration is lower, and even in European countries with high penetration rates,
consumers are reluctant to use them. Further, the fact that consumers in most countries
have to pay a per minute phone charge discourages the essential casual and relaxed

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browsing common in the U.S. so long as unlimited cable or hardwired access is not
offered.

Q.3 a. Explain Bill of Lading and Letters of credit.

Ans:
A bill of lading (sometimes referred to as a BOL,or B/L) is a document issued by a
carrier to a shipper, acknowledging that specified goods have been received on board
as cargo for conveyance to a named place for delivery to the consignee who is usually
identified. A thorough bill of lading involves the use of at least two different modes of
transport from road, rail, air, and sea. The term derives from the verb "to lade" which
means to load a cargo onto a ship or other form of transportation.
A bill of lading can be used as a traded object. The standard short form bill of lading is
evidence of the contract of carriage of goods and it serves a number of purposes:
• It is evidence that a valid contract of carriage, or a chartering contract, exists, and
it may incorporate the full terms of the contract between the consignor and the
carrier by reference (i.e. the short form simply refers to the main contract as an
existing document, whereas the long form of a bill of lading (connaissement
intégral) issued by the carrier sets out all the terms of the contract of carriage);
• It is a receipt signed by the carrier confirming whether goods matching the
contract description have been received in good condition (a bill will be described
as clean if the goods have been received on board in apparent good condition
and stowed ready for transport); and
• It is also a document of transfer, being freely transferable but not a negotiable
instrument in the legal sense, i.e. it governs all the legal aspects of physical
carriage, and, like a cheque or other negotiable instrument, it may be endorsed
affecting ownership of the goods actually being carried. This matches everyday
experience in that the contract a person might make with a commercial carrier
like FedEx for mostly airway parcels, is separate from any contract for the sale of
the goods to be carried; however, it binds the carrier to its terms, irrespectively of
who the actual holder of the B/L, and owner of the goods, may be at a specific
moment.
• A standard, commercial letter of credit is a document issued mostly by a
financial institution, used primarily in trade finance, which usually provides an
irrevocable payment undertaking.
• The letter of credit can also be source of payment for a transaction, meaning that
redeeming the letter of credit will pay an exporter. Letters of credit are used
primarily in international trade transactions of significant value, for deals between
a supplier in one country and a customer in another. They are also used in the
land development process to ensure that approved public facilities (streets,
sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit
are usually a beneficiary who is to receive the money, the issuing bank of
whom the applicant is a client, and the advising bank of whom the beneficiary is
a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or
canceled without prior agreement of the beneficiary, the issuing bank and the

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confirming bank, if any. In executing a transaction, letters of credit incorporate

functions common to giros and Traveler's cheques. Typically, the documents a
beneficiary has to present in order to receive payment include a commercial
invoice, bill of lading, and documents proving the shipment was insured against
loss or damage in transit. However, the list and form of documents is open to
imagination and negotiation and might contain requirements to present
documents issued by a neutral third party evidencing the quality of the goods
shipped, or their place of origin.

b. What is UNCITRAL and what it does?

Ans:
The United Nations Commission on International Trade Law (UNCITRAL) was
established by the United Nations General Assembly by its Resolution 2205 (XXI) of 17
December 1966 "to promote the progressive harmonization and unification of
international trade law.
When world trade began to expand dramatically in the 1960s, national governments
began to realize the need for a global set of standards and rules to harmonize national
and regional regulations, which until then governed

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Q.4. Explain the importance of STP in international markets. (10 marks)

Sol.
The importance of STP
Segmentation is the cornerstone of marketing – almost all marketing efforts in some
way relate to decisions on who to serve or how to implement positioning through the
different parts of the marketing mix. For example, one’s distribution strategy should
consider where one’s target market is most likely to buy the product, and a promotional
strategy should consider the target’s media habits and which kinds of messages will be
most persuasive. Although it is often tempting, when observing large markets, to try to
be "all things to all people," this is a dangerous strategy because the firm may lose its
distinctive appeal to its chosen segments.
In terms of the "big picture," members of a segment should generally be as similar as
possible to each other on a relevant dimension (e.g., preference for quality vs. low
price) and as different as possible from members of other segments. That is, members
should respond in similar ways to various treatments (such as discounts or high service)
so that common campaigns can be aimed at segment members, but in order to justify a
different treatment of other segments, their members should have their own unique
response behaviour.

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Q. 5 a. Write a short note on branding and trademarks. (6 marks)

Sol.
Branding and trademarks
it is difficult to protect a trademark or brand, unless all countries are members of a
convention. Brand "piracy" is widespread in many developing countries.
Other aspects of branding include the promotional aspects. A family brand of products
under the Zeneca (ex ICI) label or Sterling Health are likely to be recognised worldwide,
and hence enhance the "subjective" product characteristics.
Warranty
Many large value agricultural products like machinery require warranties. Unfortunately
not everyone upholds them. It is common practice in Africa that if the original equipment
has not been bought through an authorized dealer in the country, that dealer refuses to
honour the warranty. This is unfortunate, because not only may the equipment have
been legitimately bought overseas; it also actually builds up consumer resistance to the
dealer. When the consumer is eventually offered with a choice, the reticent dealer will
suffer, for example, with the new dealers coming up.
Cotton Production/Marketing Interface
Spinners
Machines are highly flexible, that is they can usually switch to a variety of yarn
requirements. The machines are geared to high production, are automated and are of a
precision for constant quality provision. There are strict process controls and built – in
quality control. Poor raw material, especially when contaminated with metal particles,
damages opening mills, grid knives, fans and card clothing. Previous devices employed
to remove these (magnets) are becoming less effective. The consequences are damage
in the blow room and carding and danger of fire. Quality is therefore defined as
properties of the end use (clothing etc.), efficiency of weaving and knitting and the
efficient running of the spinning plant. Spinners require raw cotton which is free of trash;
dust, sugar and honey dew contamination, seed coats, bark and foreign fibres and, will
not nep the cloth. Further requirements are a certain length (could be short, medium or
long), uniformity of length, strength, fineness, maturity and a certain elongation and
colour.
Suppliers
In order to meet these high quality demands, the growers have to ensure that the
production, picking and ginning is of a very high standard.
Cotton grading

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The Liverpool Cotton exchange, for one, relied on the skills of its experts to manually
classify raw fibre purchases for its clients. It still holds the "standards" for length, colour
and trash content. As well as the demands of modem machinery, the lack of
standardised measuring and cotton classification procedures has resulted in
commercial conflict and legal disputes about the true nature of traded cotton. Now,
computer based high volume instrument listing systems of raw cotton (HVI systems) are
available. The system can handle large numbers of bales, reduce variation in
classification and the need for highly trained bate classifiers.
For cotton exporters the system offers the following advantages:
· enhanced objectivity in classification
· improve communication if similar systems are used by sellers or buyers
· reduced conflict and need for arbitration
· enhanced competitiveness against synthetic fibres
· improved integration with modern spinning machines
· reduced costs on training of experts and in measuring time.
The system can process 2000 bales per day and give a printout on the seven
parameters of grading. These include length and length uniformity, strength and
elongation, micronaire or fineness, leaf and colour. Manufacturers include SPINLAR
INC. of Knoxville, USA.
Service
In agricultural machinery, processing equipment and other items which are of
substantial value and technology, service is a prerequisite. In selling to many
developing countries, manufacturers have found their negotiations at stake due to the
poor back-up service. Often, this is no fault of the agent, distributor or dealer in the
foreign country, but due to exchange regulations, which make obtaining spare parts
difficult. Many organisations attempt to get around this by insisting that a Third World
buyer purchases a percentage of parts on order with the original items. Allied to this
problem is the poor quality of service due to insufficient training. Good original
equipment manufacturers will insist on training and updating as part of the agency
agreement. In order to illustrate the above points, cotton can be used as an example.
Cotton is a major foreign exchange earner for Zimbabwe. In 1990/91, 52,000 tons were
sold overseas at a value of Zim $ 238 million. As the spinners, particularly those in the
export market are in a highly competitive industry, it is essential that the raw material is
as clean as possible. Also today’s spinning equipment is highly technical and the
spinner wishes to avoid costly breakdowns by all means.
Product strategies
There are five major product strategies in international marketing.
Product communications extension
This strategy is very low cost and merely takes the same product and communication
strategy into other markets. However it can be risky if misjudgements are made. For
example, CPC International believed the US consumer would take to dry soups, which
dominate the European market. It did not work.
Extended product – communications adaptation
If the product basically fits the different needs or segments of a market it may need an
adjustment in marketing communications only. Again this is a low cost strategy, but

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different product functions have to be identified and a suitable communications mix

developed.
Product adaptation – communications extension
The product is adapted to fit usage conditions but the communication stays the same.
The assumption is that the product will serve the same function in foreign markets under
different usage conditions.
Product adaptation – communications adaptation
Both product and communication strategies need attention to fit the peculiar need of the
market.
Product invention
This needs a totally new idea to fit the exclusive conditions of the market. This is very
much a strategy which could be ideal in a Third World situation. The development costs
may be high, but the advantages are also very high.
Table given below summarizes the strategic alternatives with examples.
The choice of strategy will depend on the most appropriate product/market analysis and
is a function of the product itself defined in terms of the function or need it serves, the
market defined in terms of the conditions under which the product is used, the
preferences of the potential customers and the ability to buy the product in question,
and the costs of adaptation and manufacture to the company considering these product
– communications approaches.
International strategic alternatives
Product Communications Product/ Conditions Examples
strategy strategy functions of product
Met use
1. Extension Extension Same Same Pepsi
2. Extension Adaptation Different Same Soups
3. Extension Same Different Agriculture
Adaptation chemicals
4. Adaptation Different Different Farm
Adaptation implements
5. Invention New Same – Tyson
turbine
water pump
Thailand
tuna

b. What are the features of exchange and currency markets? (4 marks)

Sol.
The exchange rate regimes adopted by countries in today’s international monetary and
financial system, and the system itself, are profoundly different from those envisaged at
the 1944 meeting at Bretton Woods establishing the IMF and the World Bank. In the
Bretton Woods system:
· exchange rates were fixed but adjustable. This system aimed both to avoid the undue
volatility thought to characterize floating exchange rates and to prevent competitive
depreciations, while permitting enough flexibility to adjust to fundamental disequilibrium
under international supervision;

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· private capital flows were expected to play only a limited role in financing payments
imbalances, and widespread use of controls would prevent instability in such flows;
· temporary official financing of payments imbalances, mainly through the IMF, would
smooth the adjustment process and avoid unduly sharp correction of current account
imbalances, with their repercussions on trade flows, output, and employment.
In the current system, exchange rates among the major currencies (principally the U.S.
dollar, the euro, and Japanese yen) fluctuate in response to market forces, with short-
run volatility and occasional large medium-run swings (Figure 1). Some medium-sized
industrial countries also have market – determined floating rate regimes, while others
have adopted harder pegs, including some European countries outside the euro area.
Developing and transition economies have a wide variety of exchange rate
arrangements, with a tendency for many but by no means all countries to move toward
increased exchange rate flexibility (Figure 2).
This variety of exchange rate regimes exists in an environment with the following
characteristics:
· partly for efficiency reasons, and also because of the limited effectiveness of capital
controls, industrial countries have generally abandoned such controls and emerging
market economies have gradually moved away from them. The growth of international
capital flows and globalization of financial markets has also been spurred by the
revolution in telecommunications and information technology, which has dramatically
lowered transaction costs in financial markets and further promoted the liberalization
and deregulation of international financial transactions;
· international private capital flows finance substantial current account imbalances, but
the changes in these flows appear also sometimes to be a cause of macroeconomic
disturbances or an important channel through which they are transmitted to the
international system;
· developing and transition countries have been increasingly drawn into the integrating
world economy, in terms of both their trade in goods and services and of financial
transactions.
Lessons from the recent crises in emerging markets are that for such countries with
important linkages to global capital markets, the requirements for sustaining pegged
exchange rate regimes have become more demanding as a result of the increased
mobility of capital. Therefore, regimes that allow substantial exchange rate flexibility are
probably desirable unless the exchange rate is firmly fixed through a currency board,
unification with another currency, or the adoption of another currency as the domestic
currency (dollarization).
Flexible exchange rates among the major industrial country currencies seem likely to
remain a key feature of the system. The launch of the euro in January 1999 marked a
new phase in the evolution of the system, but the European Central Bank has a clear
mandate to focus monetary policy on the domestic objective of price stability rather than
on the exchange rate. Many medium-sized industrial countries, and developing and
transition economies, in an environment of increasing capital market integration, may
also continue to maintain market-determined floating rates, although more countries
could may adopt harder pegs over the longer term. Thus, prospects are that:
· exchange rates among the euro, the yen, and the dollar are likely to continue to exhibit
volatility, and schemes to reduce volatility are neither likely to be adopted, nor to be

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desirable as they prevent monetary policy from being devoted consistently to domestic
stabilization objectives;
· several of the transition countries of central and eastern Europe, especially those
preparing for membership in the European Union, are likely to seek to establish over
time the policy disciplines and institutional structures required to make possible the
eventual adoption of the euro.
The approach taken by the IMF continues to be to advise member countries on the
implications of adopting different exchange rate regimes, to consider the choice of
regime to be a matter for each country to decide and to provide policy advice that is
consistent with the maintenance of the chosen regime (Box 3).

Q. 6 Discuss the various International product and pricing decisions. (10 marks)
Sol.Merchant banking unit-8 page 180
Production decisions
In decisions on producing or providing products and services in the international market
it is essential that the production of the product or service is well planned and
coordinated, both within and with other functional area of the firm, particularly
marketing. For example, in horticulture, it is essential that any supplier or any of his "out
grower" (sub-contractor) can supply what he says he can. This is especially vital when
contracts for supply are finalized, as failure to supply could incur large penalties. The
main elements to consider are the production process itself, specifications, culture, the
physical product, packaging, labelling, branding, warranty and service.

pricing decisions :Price has become one of the most important marketing variables.
Despite the increased role of non-price factors in the modern marketing process, price
is a critical marketing element, especially in markets characterized by monopolistic
competition or oligopoly. Competition and buyers that are more sophisticated has forced
many retailers to lower prices and in turn place pressure on manufacturers. Further,
there has been increasing buyer awareness of costs and pricing, and growing
competition within the channels, which in turn provides the consumer with even more
awareness of the pricing process.

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In setting the price of a product, the company should follow a six-step procedure. First,
the company carefully establishes its marketing objective(s), such as survival, maximum
current profit, maximum current revenue, maximum sales growth, maximum market
skimming or product-quality leadership. Second, the company determines the demand
schedule, which shows the probable quantity purchased per period at alternative price
levels. The more inelastic the demand, the higher the company can set its price. Third,
the company estimates how its costs vary at different output levels, production levels,
different marketing strategies, differing marketing offers, and target costing based on
market research. Fourth, the company examines competitors’ prices as a basis for
positioning its own price. Fifth, the company selects one of the following pricing
methods: markup pricing, target return pricing, perceived-value pricing, value-pricing,
going-rate pricing, and sealed-bid pricing. Sixth, the company selects its final price,
expressing it in the most effective psychological way, coordinating it with the other
marketing mix elements, checking that it conforms to company pricing policies, and
making sure it will prevail with distributors and dealers, company sales force,
competitors, suppliers, and government.

Companies will adapt the price to varying conditions in the marketplace. Geographical
pricing is one marketplace adjustment based on a company decision related to pricing
distant customers. Price discounts and allowances are a second area for adjustment
where the company establishes cash discounts, quantity discounts, functional
discounts, seasonal discounts, and allowances. Promotional pricing provides a third
marketplace option, with the company deciding on loss-leader pricing, special-event
pricing, cash rebates, low interest financing, longer payment terms, warranties and
service contracts and psychological discounting. Discriminatory pricing, the fourth
option, enables the company to establish different prices for different customer
segments, product forms, brand images, places, and times. Lastly, product-mix pricing,
enables the company to determine price zones for several products in a product line, as
well as differential pricing for optional features, captive products, byproducts, and
product bundles.

When a firm considers initiating a price change, it must carefully consider customer and
competitor reactions. Customer reactions are influenced by the meaning customers see
in the price change. Competitor reactions flow either from a set reaction policy or from a
fresh appraisal of each situation. The firm initiating the price change must also
anticipate the probable reactions of suppliers, middlemen, and governments.

The firm encountering a competitor-initiated price change must attempt to understand

the competitor’s intent and the likely duration of the change. If swiftness of reaction is
desirable, the firm should preplan its reactions to different possible competitor price
actions.

To summarize, pricing involves the customer demand schedule, the cost function, and
competitors’ prices. The question is how should a company integrate cost-, demand-,
and competition-based pricing considerations? In setting a price, a firm, for example

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Kodak, will have to consider the following cost-, demand-, and competition-based
pricing decisions:

Cost-based pricing decisions: Marginal analysis and break-even analysis are the two
primary methods in cost-based pricing decisions:

· What is the impact of a 5 percent cost increase in the price of silver on film costs?

· Should Kodak attempt to purchase silver futures to reduce the volatility of silver costs?

· What is the impact on film manufacturing and marketing costs of a 10 percent demand
reduction?

Demand-based pricing decisions: Among the variables, here are the type of demand for
the product (prestige, price-oriented, etc.), changes in buyer attitude toward price with
changes in the economic environment (uncontrollable variables), and the elasticity of
demand.

· What is the elasticity of demand by market segment (amateur photographer,

professional photographer, and X-ray market)?

· Are the short- and long-range effects of price increases the same?

· Will consumers switch to slow-speed films that contain less silver?

Competition-based pricing decisions: To set prices effectively, an organization must be

aware of the prices charged by competitors.

· Among the major questions here are: Will all competitors raise their prices by the same
percentage? Will competitors react to cost increases more slowly to try to increase their
market share? Will some competitors try to absorb much of the cost increases to induce
brand switching?

The pricing of services is a very tough decision. In the absence of a tangible and
quantifiable product, it is very difficult to arrive at a logical pricing decision. Hence, when
setting a price, you have to consider eight objectives:

1. Survival- Adjust price levels so that the firm can increase sales volume to match
expenses.

2. Profit- Identify cost and price levels that allow the firm to maximize the profit.

3. Return On Investment (ROI)- Identify price levels that enable the firm to yield targeted
ROI.

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4. Market share- Adjust price levels so that the firm can maintain or increase sales
relative to competitors sales.

5. Cash Flow- Set price levels to encourage rapid sales.

6. Status quo- Identify price levels that help stabilize demand and sales.

7. Product quality- Set prices to recover research and development expenditure and
establish high quality image.

8. Communicate an image- In case of certain services the quality is determined by the

price level.

AMBRISH CODE-MB0037 SET-2 Page 15