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Management International Review
Abstract
■ Direct distribution channels may help firms to achieve a high level of central
control over final prices.
Key Results
Authors
Prof. Dr. Wolfgang Gaul and Dipl.-Wi.-Ing. Ulrich Lutz, both at Institute of Decision Theory and
Management Science, University of Karlsruhe, Germany.
Economic Background
In the second half of the eighties the European Community (EC) Internal
Market, planned for 1993, was in the centre of media and public discussions.
Then, the political change in Eastern Europe led many enterprises to focus their
attention on conceivable activities in this part of the world. However, many of
the initial attempts of firms to establish themselves, e.g., in the form of trade or
direct investment in Eastern European Markets were disappointing. Some
enterprises had to experience that the way towards the building of a workable
market economy based on the remnants of the planned economy was, to an
unexpectedly great extent, connected with obstacles. Accordingly, the main part
of the trade within the European sphere takes place as ever amongst the Western
European neighbouring countries.
The opening of borders between the former two Germanies temporarily led
to a push in economic activity because together with the German reunification
an additional sales market was established. Demand resulting from this event
could also be perceived in Germany's Western European neighbouring coun-
tries. Therefore, the German reunification can be seen as a further example how
levels of business activities in individual countries influence each other and to
what extent Western European countries rely on each other for a brisk exchange
of goods and services.
Besides the developments mentioned, the creation of a Common Market,
which was laid down in the Single European Act of 1986, continued. Not all real
barriers of trade had been removed by 1993, and some bureaucratic barriers
- e.g., with respect to the collection of data on trade for tax purposes within the
Common Market - have even been replaced by new acts of administration.
Nevertheless, within the survey to be described below the answers of the re-
sponding firms with respect to the statement - "A uniform market including the
majority of countries in Western Europe" - "is at present perceptibly in forma-
tion" (37.6%) - "will develop during the next few years" (29.0%) - "developed
in the last few years" (14.8%) - "has existed for a long time" (12.2%) - "will
not even exist in the future" (6.3%) - show to what extent the process of Western
European Economic Integration is taken into consideration in managerial deci-
sion making.
Even though - in the course of a debate about the Maastricht Treaty - there
was a lot of talk about some mood of "crisis" with respect to the continuation
of Western European Economic Integration, the EC Internal Market has be-
come reality - at least formally - since January 1, 1993. A gradual coming-
together with the economies of the European Free Trade Association (EFTA),
either by applying principles of the EC Internal Market to an extended Euro-
pean Economic Area (EEA) which comprises the EC and the EFTA or by an
entry of EFTA countries into the EC, is irreversible.
pricing (Already Arpan (1972/73) found that U.S. as well as English, French
and Japanese firms predominantly used cost-orientated transfer pricing systems
while Canadian and Scandinavian firms preferred market-orientated alterna-
tives, and Italian, German and Dutch companies tended to use a combination
of both. As more recent contributions see, e.g., Hackmann (1984) for results of
4 additional studies and Al-Eryani/Alam/Akhter (1990) for a characterization
of 7 surveys), consideration of the extent of international marketing standard-
ization where pricing is one of the elements of the whole marketing mix (Already
Sorenson/Wiechmann (1975) stated that "Price is probably the marketing mix
element which is most difficult to standardize because of country-to-country
differences." As more recent contributions see, e.g., Kreutzer (1989) and Bolz
(1992) for comparisons of 4 and 5 surveys, respectively), evaluation of factors
of success in exporting with findings related to international pricing (General
overviews referring to research on factors of success in exporting are given by,
e.g., Kamath/Rosson/Patton/Brooks (1987) and Gemunden (1991). Price-relat-
ed results are put together in Table 1), and collection of mainly pricing-related
Hirsch (1971) DK, NL, Among ten different factors for export success or failure,
Israel "Price" is, for several sectors of industry most often mentioned
as the most important one.
Tesar (1975) USA Heavy exporters perceive to a lesser extent that their prices are
a competitive advantage than light exporters or even non-
exporters do.
Fenwick/Amine GB Among 12 factors under consideration, the feature "Flexibility
(1979) of pricing policy" is, after "Years of export experience" and
"Product adaption", the third best for discriminating successfu
from unsuccessful exporters in terms of export share.
Bilkey (1982) USA Firms that charge higher prices for products exported than
those sold in the domestic market tend to perceive high relativ
profitability with respect to exporting.
Madsen (1989) DK "Price competitiveness" correlates significantly with export
growth, but it does so to a lesser extent than factors such as
"Planning and control intensity" or "Product strength".
Koh (1991) USA In consistence with Bilkey's (1982) results, exporters, who
charge relatively high prices abroad, state that profitability
from exporting is also high. Relative profitability tends to be
lower for competition-orientated pricing than for cost-plus
pricing.
Thach/Axinn USA The hypothesis that successful exporters (in terms of export
(1991) share) perceived their prices as more competitive than less suc-
cessful exporters was not confirmed at a statistically significant
level.
In the survey, British, French as well as German enterprises (from the old
federal states) were investigated. (German firms in the new federal states were
not included. Their situation was mostly characterized by reorganization, result-
ing from the transition to market economy, and therefore often not comparable
with that of firms who have always acted within the framework of free enter-
prises). 416 out of the 898 firms considered (46.3%) responded to the mailing
of our questionnaire. 110 of these firms informed us that they were unwilling to
take part in the survey. Thus, a total of 306 questionnaires were filled in and sent
back for assessment. The response rate amounts to 34.1% in total (20.0% for
British firms, 22.4% for French firms, and 45.4% for German firms). Consider-
ing the fact that the questionnaire was rather extensive and that - despite the
promise of discretion - firms may wish to keep information about pricing secret
(Already in their "State-of-the-Art in International Marketing" article Cavus-
gil/Nevin (1981) write: "A special problem in conducting research on pricing is,
of course, the secrecy which generally surrounds the pricing practices of interna-
tional marketers."), the response reached may be characterized as satisfactory.
The categories of industrial sectors used in the questionnaire were derived
from a common statistical classification (e.g., Statistisches Bundesamt 1991), to
ensure that a comparison of the portions of firms from different industrial
sectors in the sample with the real distribution of firms in the underlying
population was possible. In Figure 1 (a) the portions of firms from industrial
sectors belonging to the manufacturing sector in Britain, France and Germany
(old federal states) are shown. It can be seen that the profiles of these three
countries do not differ widely from each other. For this reason, considerations
on representativeness with respect to industrial sectors are, in this report, given
on the basis of the whole sample. In Figure 1 (b) the portions of the firms from
the industrial sectors in the assessed questionnaires were compared with those
from the whole population in the three countries. Even though certain devia-
tions can be observed, the distribution of the firms with respect to different
industrial sectors sufficiently approaches representativeness. (Different com-
parisons on the basis of a representative partial sample, which are not described
here, indicated only minor deviations with respect to the questions considered.
Therefore, for the purpose of "stability" of results, which is influenced by the
size of the sample, the following assessments were carried out on the basis of the
whole sample.)
With respect to firm size, we chose to concentrate this survey on firms whose
number of employees ranged from 100 to 5,000. According to the corresponding
answers in the questionnaires, this was indeed the case for 92.1% of the firms.
Thus, for the most part, the sample covers larger medium-sized and smaller
Figure l(a). Portions of firms from industrial sectors in Britain, France and Germany (old federal
states)
Figure l(b). Comparison of the portions in the overall population with the portions in the sample
under consideration
Table 3. Factors concerning Western European Economic Integration which are connected with
aspects of international pricing (Principal components factor loadings after Varimax rota-
tion)
Short forms of the statements used in the questionnaire Factor 1 Factor 2 Factor 3
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the factor 2 -factor 3 subspace positionings can easily the determined but inter-
pretation would be the same: Firms within industrial sectors such as food, drink
and tobacco, textiles, clothing, leather goods, and paper, printing and publish-
ing are more aware of developments which are described by the factor "Re-
moval of trade barriers" than others. For firms within a second cluster of indus-
trial sectors, "Cost reduction and concentration" becomes, to a more than
average extent, apparent (This seems to be particularly true in the case of firms
involved in the office machines, electronic data processing industry.). Within
this cluster, firms from the electrical engineering industry see themselves, to a
rather great extent, exposed to an "Increase in competition" (This factor does
not discriminate sharply between the clusters shown.). Firms within a third
cluster of industrial sectors preceive the developments connected with the three
factors mentioned to a well-balanced or lesser extent.
Figure 3. Assessments of the extent to which selected areas of managerial decision-making are
affected by Western European Economic Integration
2 3 4
Areas of decision-making related to marketing
Pricing and terms policy 3,57 • *
Structures of distribution 3,31 * J
Information gathering and market research 3,22 ■ /
Marketing communication 3,08 ' f
Product assortment and design 3,07 T
Covering of markets by region 3,06 f
Degree of centralization of marketing decisions 3,01 • j
Scale of agreem
Pricing
ed aspects with respect to the EC Internal Market and does not contain hints
concerning existing price differences by way of example. The parent organiza-
tion of the European consumer protection organizations BEUC (Bureau Euro-
peen des Unions de Consommateurs) based in Brussels, and also the IFAV
(Institut fur angewandte Verbraucherforschung) in Cologne, regularly publish
results of corresponding investigations in various product areas.
Figure 4 shows, for the industrial sectors under consideration, the average
extent of present price differentiation, the average extent of current product
differentiation (in both cases various variables are combined in one factor) and
the average assessment by the firms of the sample with respect to the suitability
of a policy of deliberate price harmonization. The positionings of the majority
of the industrial sectors in question reflect a positive correlation between exist-
ing price and product differentiation. According to the firms' own assessments,
in industrial sectors such as timber processing, paper, printing and publishing,
and textiles, clothing, leather goods, markets are relatively homogeneous with
respect to product policy and pricing.
Figure 4. Average positioning of the firms participating in the survey per industrial sector with
respect to the extent of product and price differentiation and the perceived suitability of
price harmonization
- Suitability of
price harmonization Chemicals* A Office machines,
electronic data processing
Extent of product
differen Nation /
/ Roa d vehicl *s A
/ and pa ts
/ Extent of price
/ [ differentiation
"Indirect export" most frequently occurs in markets which are relatively unim-
portant. The use of alternatives, which require direct investment (especially
"Sales office, branch, agency", "Subsidiary" and "Company-owned retail
structure"), clearly increases when the relative importance of the target market
(in terms of sales), increases. While a "Travelling salesperson" employed by the
firm frequently looks after relatively important target markets, countries where
sales are not so high are often left in the hands of a "Self-employed agent".
There is a tendency that the use of the distribution forms "Indirect export",
"Self-employed agent", sales through "Trading companies in country of desti-
nation" (e.g. chain stores, wholesalers) and through a "Co-operation for distri-
bution purposes" increases when the size of firm decreases; as a rule, this also
applies - with exception in particular for firms with 2000 to 4999 employees -
to the distribution forms "Direct contact with final customers" and "Travelling
salesperson". On the other hand, the forms "Subsidiary" and - even though on
a by and large lower level - "Company-owned retail structure" only gain
significance within larger companies.
In Figure 5, forms of distribution are shown in relation to the extent to which
control of final prices is feasible. It can be seen that final prices are mostly
determined "centrally by the company or negotiated with final customers" if
forms of distribution such as "Direct contact with final customers", "Self-
employed agent" or - to a lesser extent - "Travelling salesperson" are employed.
Contrary to this, the application of distribution forms such as, e.g., "Co-oper-
Figure 5. Extent of central control of final prices in Western European countries depending on
forms of distribution
ation for distribution purposes" and "Indirect export" more often than for the
other possibilities means that final prices are determined "solely and indepen-
dently by foreign distribution authorities". It is plausible that a rather far-reach-
ing control of final prices can be exerted by way of a "Company-owned retail
structure". (For this form of distribution the items "Final prices are deter-
mined" . . . "centrally by the company or negotiated with final customers", "in
co-ordination with foreign distribution authorities" and "by foreign distribu-
tion authorities, your company giving a price structure or recommendation"
alone were chosen in more than 95% of the answers. Contrary to all other listed
variants, the item "Final prices are determined solely and independently by
foreign distribution authorities" was not at all mentioned in this case.) Of
course, one must take into consideration the fact that not all of the listed forms
of distribution might seem to be practicable for every industrial sector or prod-
uct category. Nevertheless, with the help of the assessments at hand, coming
from companies experienced in foreign business, plain tendencies can be realized
with respect to the valuation of forms of distribution in foreign countries.
Firms were also asked to rate the importance of various methods of gaining
information on competitive prices and on price expectations of final customers.
Again, factor analysis was used for structuring possible sources of information.
In Table 4 the principal components factor pattern after Varimax rotation is
given (4 factors explain about 63% of the variance).
For firms with 200 employees or more, "Information gathering via dist
tion authorities" plays the most important part in the price-related inform
gathering process. Admittedly - as an analysis, separate from this, revea
this source of information provides price-related information regarding c
tition rather than information regarding final customers but it can be use
collecting data on final price setting. The importance of most of the acti
listed in the field "Own, direct information gathering" is, on average, esti
to be "moderate" to "strong"; the exception here is "Own questioning of
users", which rather gains popularity by firms of 5000 employees or
Firms assessed "Information gathering via secondary sources" to be of
importance (where "Competitors' price quotations" was given a much h
approval than "Periodicals and other publications"). Finally, within the fo
price-orientated information gathering process, least importance was attri
by companies to "Information gathering via external institutions". (The i
tance of all variables strongly represented in this factor is, on average, ra
be between "none at all" and "a little"). Certainly, the assessment must be
in connection with the size of the firms participating in this survey, as th
ations in favour of market research agencies and consultants clearly incr
in the case of firms with 5000 employees or more.
As can be seen in Figure 6, statements can be made on the corresponde
between the importance of individual approaches of gaining information
83
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