International Marketing

Description

For ALL of the assignments, please use the information from Country Manager Simulation and/or theAsia case which is uploaded on Canvas. Please do NOT use any external information (e.g., googling)!Your first big decision in Country Manager Simulation is to identify which market to enter first. Themarket you select should meet two criteria: (1) enable you to build a strong brand in the country,especially in terms of brand equity (i.e., BEI), and (2) provide the base for subsequent regional expansion.To do this, you need to identify criteria for measuring country attractiveness and use the criteria to rateeach of the countries in the region

Unformatted Attachment Preview

BUS ADM 465
Spring 2024
Market Entry Group Exercise
International Marketing
Professor Charles Kang
Due: 3/13 Wednesday before the class starts
Please submit the assignment on Canvas Dropbox
Team Members:
❖ For ALL of the assignments, please use the information from Country Manager Simulation and/or the
Asia case which is uploaded on Canvas. Please do NOT use any external information (e.g., googling)!
Your first big decision in Country Manager Simulation is to identify which market to enter first. The
market you select should meet two criteria: (1) enable you to build a strong brand in the country,
especially in terms of brand equity (i.e., BEI), and (2) provide the base for subsequent regional expansion.
To do this, you need to identify criteria for measuring country attractiveness and use the criteria to rate
each of the countries in the region.
1. A regional marketing goal will provide a roadmap for your team to follow going forward. Setting a
specific performance goal will help the team because it will make every team member be on the same
page. In this Country Manager Simulation, your major goal is to make your brand strong in the Asia
region. Practically speaking, your goal is to achieve the highest brand equity index.
a) What is the meaning of brand equity? (0.5 points)
b) What are the five criteria of country-wise BEI measurement in Country Manager Simulation? (0.5
points)
1) ____________________ 2) ____________________ 3) ___________________
4) ____________________ 5) ____________________
2. Please identify up to five criteria for evaluating the attractiveness of countries in the region. Why do
you think these criteria are important? In other words, what are the critical factors for your
brand/product to (1) achieve high BEI and (2) provide the base for subsequent regional expansion,
and why? (Please look at the list of country indicators in the appendix) (1 point)
Country Indicator
1.
2.
3.
4.
5.
Higher is More Attractive? (Y/N)
1
Why is This Indicator Important?
BUS ADM 465
Spring 2024
3. Please weigh each indicator’s importance. Again, the importance of each criterion should be in line
with your answer to Q2 and your goal. (Note: Weights should add to 100) (1 point)
Country Indicator
Weights
1.
2.
3.
4.
5.
%
%
%
%
%
Total
100%
Briefly explain how you assign the importance weights to country indicators (i.e., why?).
4. Please rate six Asian countries (i.e., China, Japan, South Korea, India, Philippines, and Thailand) on a
scale from 1-10 (‘1: Not attractive at all’ to ‘10: Extremely attractive’) for each of the criteria. For the
1-10 ratings, you can use either ‘M2 Raw Data Formula Conversion’ or ‘M3 Raw Data VLOOKUP
Conversion’ sheet in the Country Attractiveness Spreadsheet. (Alternatively, you can use your own
rating scheme. Enter the ratings in the table and calculate the weighted rating total for each country.
Please use the data from Country Manager Simulation at Period 0. (1 point)
* Which rating scheme are you using? Please highlight or underline the rating scheme that you used.
M2 Raw Data Formula Conversion
M3 Raw Data VLOOKUP Conversion Our own rating scheme
If you decide to choose your own rating scheme, please explain/justify your rating scheme below.
Criterion
1.
2.
3.
4.
5.
Weighted Score
China
Japan
India
2
S. Korea
Philippines
Thailand
BUS ADM 465
Spring 2024
* To calculate the weighted score, you can either use the ‘Asia Subjective Rating sheet’ in the Country
Attractiveness Spreadsheet or calculate the weighted score manually.
* Your final weighted score should be between 1 and 10. If the weighted rating is not in the 1-10 range,
please re-do the calculation.
5. Which country is most attractive based on the weighted score? Is this country the same as the country
that you initially thought (in your assignment 2 question 4)? Why / Why not are they the same? (1
point)
3
BUS ADM 465
Spring 2024
Appendix
Demand Related
Supply Related
Competition Related
Others
Population
Population average growth
Manufacturer toothpaste sales
(last six years)
Manufacturer toothpaste sales
Number of competitors (in
Table 7)
Number of MNC competitors
GDP
Sales per capita
Market concentration rate
(e.g., Herfindahl Index) **
Tariffs, duties, and
fees*
Political risk***
(international disputes)
Exchange rate
fluctuation****
GDP/Capita
The decrease in manufacturing
costs*
GDP growth
CPI (Consumer Price Index)
increase
% below the poverty line
% population w/ access to safe
water
Infant mortality / 1000 births
International shipping rates*
Advertising expenditure
Promotion expenditure
Retail sales
* Decrease in manufacturing costs (Table 10), International shipping rates (Table 11), and Tariffs, duties,
and fees (Table 12) depend on the plant location. By default, All Smile produces toothpaste at the home
plant. However, you can choose to build a plant in one of six Asian countries. Note that the plant location
does not have to be the same country that you decide to enter. When you build a factory in one of six
countries, shipping rates, tariffs, duties, and fees will change.
2
** Herfindahl index = ∑
=1( ℎ ) ; the Higher Herfindahl index indicates a
highly concentrated market, while the lower Herfindahl index indicates a highly competitive market.
*** You can check transnational issues such as an international dispute on the Simulation page
(Introduction -> “2. Read the country background” -> click each country)
**** Note that the exchange rate itself is not relevant to the attractiveness of the foreign market. For
example, in Table 6 of the Asia case, the exchange rate of Japanese Yen (against US $) is 111.10, and the
exchange rate of Korean Won (against US $) is 1130.48. This fact does not mean that Japan is a more
favorable/attractive country than Korea, nor Korea is more attractive than Japan. Meanwhile, the
exchange rate fluctuation (i.e., appreciated or devalued) is relevant to the attractiveness of the foreign
market. For example, currency appreciation against US $ is a good situation for U.S. exporters such as
Allstar Brands.
Country
China
Japan
India
S. Korea
Philippines
Thailand
Currency
Yuan (CNY)
Yen (JPY)
Rupee (INR)
Won (KRW)
Peso (PHP)
Bhat (THB)
Exchange Rate (per $1.00)
Period ‘-1’
Period ‘0’
7.46
7.76
108.00
111.10
67.19
65.17
1,160.41
1,130.48
47.49
50.40
35.29
34.34
4
Sheldon B. Lubar College of Business
International Marketing
Market Entry Group Exercise
3/6/2024
Course Announcement
• “Market Entry” group exercise
• Market Entry exercise assignment is due on 3/13
Wednesday before the class starts
• Please submit on Canvas dropbox
• Only one submission per group is required
• Feel free to write down “Team Members” names who
“did” participate / contribute
2
Market Entry Group Exercise
• International market selection
Identify set of country
indicators critical for the
business
•Q1: Understand company & its goal
•Q2: Identify country indicators
Determine the
importance weights of
the country indicators
•Q3: Assign the importance
weights of each indicator
Rate the countries in the
pool on each indicator
•Q4: Rate countries by using ‘M2
Raw Data Formula Conversion’ or
‘M3 Raw Data Vlookup Conversion’
Compute overall score for
each country
•Q4 & Q5: Calculate
weighted rating by using
‘Asia Subjective Rating’
3
Market Entry Group Exercise
• Step 1 & 2: Identify set of country indicators
critical for the business & Assign weights
• Think about the importance of country indicators in
the Appendix
Q: Are GDP/capita and per capita income
important for toothpaste sales? How
about for Apple MacBook sales?
4
Market Entry Group Exercise
• Step 3: Rate the countries on each indicator
Q: I understand ‘1: least favorable’ and ‘10: most favorable.’ But,
how can I “reasonably” rate the countries?
Rating A
Rating B
10
10
9
3
8
2
7
2
6
2
5
1
4
1
3
1
2 seems 1to be more
• Which rating
“reasonable”?
(10 point-scale)
1
1
5
Market Entry Group Exercise
• How to use ‘M2 Raw Data Formula Conversion’
(or ‘M3 Raw Data VLOOKUP Conversion’)
1. Enter the county indicator name on ‘Criteria’ part
6
Market Entry Group Exercise
2. Find out which part of the table to use
▪ Please use ‘higher number is more attractive’ part when higher is better.
For example, large population is more attractive than small population
because it represents pie size.
▪ In case ‘lower number is more attractive’ (e.g., number of competitors),
please use the second part with title “Lower is More Attractive”
7
Market Entry Group Exercise
3. Find the raw data from the Asia case (or Country
Manager simulation site), and put the data under
‘Raw Data’ column
Fill this column with
the data you found
▪ ‘Standardized’ column & ‘Rating’ column will be automatically filled
8
Market Entry Group Exercise
4. Put the ‘Rating’ in Q4 for each indicator for each
country
9
Market Entry Group Exercise
• How to use ‘Asia Subjective Rating’
1. Enter your county indicators on the second column
(It is NOT necessary to distinguish indicators into
different criteria such as ‘demand’ vs. ‘supply’)
10
Market Entry Group Exercise
2. Enter importance weight for each indicator on the
third column based on your Q3 answer
11
Market Entry Group Exercise
3. Enter the ratings of each country for each indicator
from your Q4 answer
12
Market Entry Group Exercise
4. After you enter all numbers from Q4, the weighted
rating will be calculated automatically. Put the
TOTAL in Q4 ‘Weighted rating’ part
Make sure the weights
add up to 100%
13
5
COUNTRYMANAGER
Asia Case
6
Kay Pasah, head of the consumer healthcare division of Allstar Brands, looked across the table at
her category and brand managers. She had a determined look. “Our sales in our traditional
markets of Western Europe, North America, and Australia are performing well. But these markets
are mature with lots of competition and aging, slow growing populations. On the other hand,
we’ve been too slow in developing our business in the newly emergent economies around the
world, such as the BRIC nations (Brazil, Russia, India and China). Our board believes, and I agree,
that to generate the kind of growth needed to drive our stock price, we need to develop a
stronger market presence in these types of countries. Our plans will be rolled out on a regional
basis, with Latin America and Asia being the first two regions to consider. What I need from you
is an analysis of these regional markets and a plan of entry. You need to tell me where we should
be, when we should be there, and how we will need to manage the business. I want us to be in
at least one country in the region next year. Each of you has been assigned one of these regions
and I’ve provided you with some background information to get you started.”
Allstar Brands
Allstar Brands is a multi-national consumer products company that produces and sells ethical
(prescription) pharmaceuticals, OTC (over-the-counter or nonprescription) drugs, and consumer
products. It is an $10.9 billion firm that was formed in 1924 and competes with a variety of larger
and smaller firms, depending on the product market. It has a number of leading brands in various
product categories, including (in the OTC division) Allround, the leading liquid cold remedy in
North America, and Zemlef, a heartburn remedy soon to be converted from prescription to OTC
status. The consumer products division includes various types of packaged goods: hand and
beauty soaps, laundry detergent, shampoo, toothpaste, shaving cream, etc. Over the years, it has
expanded its product category width through internal new product development and acquisition
of brands and companies around the globe.
The company had been historically organized into three divisions (Ethical Pharmaceuticals,
Consumer Products, and International), but recently reorganized into a global product
management structure with three major divisions (Ethical Drugs, Consumer Healthcare, and
Consumer Products). A group of category managers exists within each division. For example, the
Consumer Healthcare division has an oral care category manager, a vision care category manager,
etc. Most major brands also have their own brand manager who reports to the category manager.
Under the new structure, each division is responsible for its own international operations and, to
some extent at least, can pick the products and categories to pursue internationally. The country
managers are responsible for the selection and marketing of products in a particular country.
Figure 1 illustrates this organizational structure.
7
Figure 1: Organizational Structure of Allstar Brands
ALLSTAR BRANDS
Ethical Drugs
Consumer Healthcare
Product
Categories
Consumer Products
International
Operations
Oral
Category
Europe
Toothpaste
Asia
Home Operations
Latin America
Finance
Production
Accounting
MIS
Country Management
World Toothpaste Market
Current world toothpaste sales total approximately $20 billion. The largest country market for
toothpaste is the United States, with $3.4 billion spent during the past year. A number of firms
produce and/or market toothpaste in the world market. Table 1 lists the five major producers of
toothpaste for the world market, including Allstar Brands. Not all global brands or global
competitors will be represented in every market, and some markets might include brands
produced by local firms. These local brands may have a minor or major share of the market,
depending on the country.
Table 1: World Toothpaste Producers with Major Brands
COMPANY NAME
Allstar Brands
WORLD SALES
(% of world market)
13
B & B Healthcare
15
Caremore Company
21
Driscol Corporation
Evers Consumer
10
7
BRANDS
Allsmile
Britesmile
Bancav
Clean & White
Caregate
Dentacare
Eversmile
Toothpaste is available in a number of sizes, delivery systems, textures (paste or gel), and
formulations. The basic toothpaste product is a paste or gel with flavoring and one or more active
8
ingredients that provide specific benefits to consumers. Research has identified four key
consumer segments in markets around the world based on benefits sought:
1) Economy: basic cavity protection at a low price
2) White: seeks whiter teeth
3) Healthy: tartar control and disease prevention for healthy teeth
4) Kids: seeks a good tasting product that appeals to children
Consumers purchase different formulations based on the benefits they seek and their purchasing
ability. The benefit segments also link to demographics. For example, families with children often
focus on decay prevention; young singles are typically more interested in whiteness; those in
middle age are concerned with tartar and gingivitis; and children find taste of the toothpaste to
be a primary feature. Similarly, the appeal of certain attributes may differ among consumer
groups. For example, pump dispensers add convenience and may be a novelty for children but
are more expensive to produce than tubes. Also, single people might prefer the convenience of
smaller package sizes, whereas families may prefer a larger package which is typically more
economical on a cost per gram basis.
A general description of these variations in the United States market is listed below. Not all
companies produce all possible combinations.
Table 2: Toothpaste Packaging and Formulation Variations
Sizes (grams)
Small
(25g)
Medium
(75g)
Large
(150g)
Delivery
Systems
Texture
Tube
Paste
Pump
Gel
Descriptions (Benefit /Ingredient)*
Economy is a basic formulation for prevention of dental
cavities.
White formulation contains hydrogen peroxide for whitening
and prevention of gingivitis.
Healthy contains baking soda for tartar control.
Kids contains special flavorings to appeal to children.
* All formulations contain fluoride
Country Analysis
Asia has witnessed explosive economic growth in the past generation as much of the world’s
manufacturing base is now located in Eastern Asia and countries such as India have become IT
powerhouses. In the 20th century, Japan and Hong Kong were the early leaders in the modern
expansion, followed quickly by Singapore, South Korea and Taiwan. Now, however, China and
India, with their huge population base have become the economies to watch as their GDP per
capita and middle class continue to grow at impressive rates.
9
With a population of over 4.6 billion people, Asia is home to over 60% of the world’s population,
with China and India alone accounting for a majority of that figure. Politically, the region has a
mix of democracies and centralized planning systems. Most of the economies, however, would
be characterized as pro-commerce, regardless of their political system. There is no dominant
language across the region, as most countries have their own language, or a mix of multiple
dialects.
Kay’s team scoured the Internet for additional sources of data and came across a site maintained
by the CIA. “Our tax dollars at work!” Kay exclaimed. Tables 3 and 4 (shown next) compare
economic and social characteristics of the home market and the scenario markets under
consideration.
Table 3: Market Comparison on Economic Considerations (CIA World Factbook 2019)
Population
(Millions)
China
1385.0
Japan
126.2
India
1297.0
S. Korea
51.4
Philippines
105.9
Thailand
68.6
Regional Avg. 505.7
Home
329.3
* Purchasing Power Parity
Country
GDP
(Billions)*
$23,210
$5,443
$9,474
$2,035
$877
$1,236
$7,046
$19,490
GDP/Capita*
$16,758
$43,130
$7,305
$39,591
$8,281
$18,017
$22,180
$59,186
GDP
Growth
6.9%
1.7%
6.7%
3.1%
6.7%
3.9%
4.8%
2.2%
CPI
Increase
1.6%
0.5%
3.6%
1.9%
2.9%
0.7%
1.9%
2.1%
% Below
Poverty
3.3%
16.1%
21.9%
14.4%
21.6%
7.2%
14.1%
12.0%
Table 4: Market Comparison on Social Characteristics (CIA World Factbook 2019)
COUNTRY
Pop
Aged 65+
China
Japan
India
S. Korea
Philippines
Thailand
Home
11.3%
28.4%
6.4%
14.6%
4.6%
11.0%
12.8%
Urban
Pop.
60.3%
91.7%
34.5%
81.4%
47.1%
50.7%
82.0%
Pop. in 3
Largest
Cities
5.4%
57.0%
5.8%
33.7%
16.1%
19.7%
8.4%
Pop. Avg.
Growth
0.4%
-0.2%
1.1%
0.4%
1.6%
0.3%
0.8%
% Pop.
w/access to
Safe Water
95.5%
100.0%
94.1%
97.8%
91.8%
97.8%
100%
Infant
Mortality
/1000 births
11.8
2.0
37.8
3.0
20.9
9.0
6.2
The ASEAN Free Trade Area (AFTA) is a trade bloc agreement by the Association of Southeast
Asian Nations supporting local manufacturing in all ASEAN countries and includes the countries
of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and
Vietnam. The Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA)
and sometimes shortened to (CERTA) is a free trade agreement between Australia and New
Zealand. ASEAN—Australia —New Zealand Free Trade Area (AANZFTA) is a free trade area
10
between ASEAN and ANZCERTA. In addition, ASEAN also has entered into free trade agreements
with China, India, Japan, and Korea.
Toothpaste sales in the region have been growing in recent years. The trends by country are
shown in the table below. Amounts in the table are shown in dollars.
Table 5: Manufacturer Toothpaste Sales by Country Market, last six years (Millions of $)
COUNTRY
China
Japan
India
S. Korea
Philippines
Thailand
5 Years
Ago
$809.4
$597.7
$376.2
$47.6
$181.9
$91.7
4 Years
Ago
$1,639.5
$795.4
$574.8
$81.6
$408.6
$212.2
3 Years
Ago
$2,041.8
$1,460.8
$519.3
$110.5
$388.3
$180.5
2 Years
Ago
$2,618.0
$1,075.4
$549.6
$222.3
$385.4
$218.3
Previous
Year
$3,493.2
$1,632.7
$978.4
$292.1
$738.2
$312.5
Current
Year
$4,105.5
$1,586.0
$912.9
$368.2
$725.9
$330.8
Sales per
Capita
$2.96
$12.57
$0.73
$7.16
$6.85
$4.82
Although the numbers in the table show the underlying change in demand, some fluctuations are
caused by changes in currency exchange rates. The relative value of different currencies affects
many of the decisions facing Kay’s team, as well as the data used in their analysis. For accounting
purposes at Allstar’s corporate offices, revenues and costs are converted into dollars. Therefore,
fluctuations in the exchange rate will affect consolidated reports directly. However, pricing and
spending budgets are set in local currency, so Kay’s team must manage in the local culture and
currency but remain aware of the effects of exchange rates. Table 6 shows the current rate of
exchange for each country in the region.
Table 6: Currency Exchange Rates
COUNTRY
Currency
China
Japan
India
S. Korea
Philippines
Thailand
Yuan (CNY)
Yen (JPY)
Rupee (INR)
Won (KRW)
Peso (PHP)
Bhat (THB)
Exchange Rate
(per $1.00)
7.7600
111.1000
65.17
1,130.48
50.3999
34.3400
The Asia markets have traditionally been served by local and regional companies, but global
competitors have already begun entering the region. The next table shows total manufacturer
sales in each country, with competitive market share:
11
Table 7: Competitive Market Share (%)
COUNTRY
China
Japan
India
S. Korea
Philippines
Thailand
Overall
Mfr.
Sales
(Mill. $)
$4,105.5
$1,586.0
$912.9
$368.2
$725.9
$330.8
$8,063.7
Allstar
B&B
7.3%
16.1%
Caremore
30.5%
14.9%
36.9%
10.2%
7.7%
Driscol
Evers.
Loc.
Reg.
15.6%
5.3%
9.5%
29.7%
15.5%
37.9%
4.5%
82.4%
20.6%
48.3%
52.0%
37.3%
28.7%
10.3%
10.5%
10.6%
33.3%
2.7%
45.6%
23.3%
14.8%
18.3%
19.8%
Your job as the first country manager for the region is to determine which of the scenario
countries recommended by Kay’s team is the most attractive for Allsmile. You are expected to
build the Allsmile business in one market and expand into two or more other regional markets.
For each market that you enter, you will need to determine Allsmile’s target market and
positioning strategies, products to launch, production location, channels of distribution, pricing,
advertising, and promotion. As country manager, you are responsible for the performance of
your operations, including revenues, market share, and profitability. Therefore, you must
develop and implement strategies that are attractive to customers and profitable for Allstar
Brands.
Products
Allsmile is a key asset of Allstar Brands. It is one of the company’s most recognized brands in the
United States. It is produced in the United States, Germany, and Australia for the North American,
European, and Australia / New Zealand markets, respectively. A large number of stock keeping
units (SKUs) are produced. There have been reformulations of the brand, but as of today, the
product formulations are essentially the same across all markets for a given SKU (although there
are slight differences in packaging and in the type and intensity of flavoring that are thought to
reflect regional preferences).
Overall toothpaste market growth in the more mature markets such as the United States,
Western Europe, and Australia, is very slow, matching the slow growth of the population, so that
increases in sales of a brand are due to reductions in share of competitors. Much of the shift in
market share in toothpaste has resulted from aggressive product development and
reformulation supported by promotion to create interest in the brand. For example, product
management has developed three line extensions of the original Allsmile brand for the United
States market: Allsmile Whitening, Allsmile Tarter Control, and Allsmile Kids. These line
extensions focus on particular benefit and demographic segments.
12
Management of Allstar Brands has made the decision that market entry in Asia is to be done
using the most popular existing SKU formulations. For each market entered, the country manager
must decide which of the 12 available Allsmile SKUs to use in the chosen market. Next is a
summary of the current choices. Note that the pump delivery system is not available at startup,
though those and other SKUs may become available as the simulation progresses.
Table 8: Allsmile Available SKUs
TYPE
Economy
White
Healthy
Kids
S
X
X
X
X
SIZE
M
X
X
X
X
L
X
X
X
X
DELIVERY
TUBE PUMP
X
X
X
X
TEXTURE
PASTE
GEL
X
X
X
X
FORMULATION
original fluoride formula
fluoride plus hydrogen peroxide
fluoride plus abrasive material
fluoride plus special flavoring
The usual approach for market entry in the past has been to introduce just four SKUs and review
early performance before investing additional resources. Appropriate language packaging
(depending on country) is essential for consumer acceptance.
Goals and objectives will be set with your instructor at the beginning of the simulation. Your
instructor may also provide guidance as to regional rollout timelines. After initial entry into a
regional market with a limited number of SKUs, expansion in the region will likely proceed as
follows:
•
After successful entry into one market, the country managers can expand their
operations into other countries in a similar fashion. The products can be the same as
those marketed in the initial country, or they may be entirely different SKUs.
•
Periodically, market penetration and growth rates for each country will be reviewed.
Based on achieving these goals, additional SKUs may be introduced in each market.
Production
Toothpaste manufacturing and delivery is reasonably flexible. Product can be sourced from
existing facilities in the home country, or can be manufactured locally at a company-owned
facility. Location of manufacture has important implications for Allsmile’s overall costs as well as
COGS. Three sources of costs exist: manufacturing costs dependent on plant location and
production volume; international shipping costs (ISC) based on the location of the manufacturing
plant and the served market; import taxes and duties in certain cross-border situations.
The parent firm charges a transfer price for product that is purchased by the subsidiary. The total
amount (units x transfer price) appears as the cost of goods sold (COGS) in the subsidiary’s
income statement. Estimates from the parent firm indicate that there is sufficient productive
capacity in the existing plant to meet potential demand in the new region. This may be a good
13
short-term source of capacity, but unit costs are likely to be higher, and when combined with
tariff and shipping considerations, overall cost will be significantly higher than a locally produced
product. On the other hand, the existing plant offers reliable productive capacity and a
historically stable currency.
Table 9 shows some typical production costs associated with each size, delivery system, texture,
and formulation level of toothpaste when produced in the existing manufacturing plant. The base
case is a 75-gram tube of fluoride toothpaste that costs approximately $0.70 to produce. These
costs incorporate labor, materials, and an allocation for manufacturing fixed costs.
Table 9: Approximate Home Region Manufacturing Costs by Component
COMPONENT
DESCRIPTION
25 gram (small)
SIZE 75 gram (medium)
150 gram (large)
Tube
DELIVERY
SYSTEM Pump
COST
–30%
—
+30%
—
+10%
COMPONENT
DESCRIPTION
Paste
TEXTURE
Gel
Fluoride
Hydrogen Peroxide
FORMULATION
Baking Soda
Special Flavoring
COST
—
+5%
—
+5%
+5%
+5%
Another approach is to produce the product locally. If you desire to produce locally, the
corporation will approve building a single plant in one of the scenario countries under
consideration. Building a plant or expanding its capacity are expected to take one year to
complete and require some one-time upfront costs for design and construction. Plant and
capacity costs are estimated at $1 million for each 1 million units of capacity, and capacity can be
increased by up to 500 million units per period. These costs are depreciated over a 10-year
period, resulting in annual charges of approximately $100,000 per million units of annual
production.
Unit manufacturing costs are expected to be lower with local production after achieving
reasonable volume. Table 10 shows the percentage reduction in COGS (unit costs) that can be
expected when products are manufactured in a regional plant. These cost savings over home
production are based on 100 million units of cumulative production in the local plant.
Table 10: Decrease in Manufacturing Costs (based on initial 100 million units of production)
COUNTRY
Approximate Unit Cost Reduction
(relative to Home Market)
China
Japan
11%
5%
India
11%
S. Korea
Philip.
Thailand
7%
15%
11%
In addition to lower base costs, experience effects in the new plant in the region are expected to
result in cost reductions of 4–6% with each doubling of cumulative production. While there are
experience effects in the home plant as well, due to the already large volumes produced there,
the effect is likely to be negligible when sourcing from the home country.
14
Finally, be aware of the effects of inflation and exchange rates on manufacturing cost. The two
tend to be related, and will depend on the economic conditions in each country. While future
changes in inflation and exchange rates cannot be foreseen, current instabilities in a country can
be an indicator of future problems.
Size (weight/volume), distance, and mode of shipment affect shipping costs. Within particular
contiguous regions, trucks are used primarily to ship products across borders and from ports to
destinations. Table 11 provides per unit costs for shipping toothpaste from various
manufacturing locations, assuming the usual shipping mode for each origin – destination
combination.
Table 11: International Shipping Rates (per unit – medium size – based on 20’ containers)
Home
China
Plant
Plant
China
0.040
0.010
Japan
0.060
0.020
India
0.020
0.060
S. Korea
0.060
0.020
Philippines
0.030
0.030
Thailand
0.040
0.020
Approx. Shipping Cost per UNIT in $
COUNTRY
Japan
Plant
0.020
0.010
0.060
0.020
0.030
0.020
India
Plant
0.060
0.060
0.010
0.060
0.040
0.060
S.Korea
Plant
0.020
0.020
0.060
0.010
0.030
0.030
Philip.
Plant
0.030
0.030
0.040
0.030
0.010
0.030
Thai.
Plant
0.020
0.020
0.060
0.030
0.030
0.010
Circumstances vary on a country-by-country basis with respect to cross-border taxes and duties.
No import duties or tariffs are incurred within regional trading blocs. Where import costs are
incurred, they are determined based on the value of the imported good, where value = CIF [COGS
+ Insurance + Freight (ISC)] as shown in Table 12.
Table 12: Tariffs, Duties, and Fees as a Percentage of CIF
COUNTRY
China
Japan
India
S. Korea
Philippines
Thailand
Home
Plant
10.0%
0.0%
10.0%
8.0%
0.0%
0.0%
China
Plant
0.0%
10.0%
8.0%
10.0%
10.0%
Japan
Plant
10.0%
10.0%
8.0%
10.0%
10.0%
India
Plant
10.0%
0.0%
8.0%
10.0%
10.0%
S.Korea
Plant
10.0%
0.0%
10.0%
10.0%
10.0%
Philip.
Plant
10.0%
0.0%
10.0%
8.0%
0.0%
Thai.
Plant
10.0%
0.0%
10.0%
8.0%
0.0%
These different sources of costs (manufacturing costs, shipping, and tariffs) interact to affect the
total cost basis for the firm. Therefore, the management team must consider the long-term
consequences of sourcing choices on the viability of their strategy with regard to cost. The plant
location decision should take into consideration not only the initial market entry, but also
subsequent expansion in the regional market. If your local plant is in a country whose market you
are serving, production for that country will automatically default to the local plant. For all other
15
markets, you may choose to use the local plant or the home plant as your primary source of
production, with demand above local capacity sourced from the home plant. Keep these factors
in mind as you decide on the best mix for sourcing your product.
Distribution
The type of retailer that stocks toothpaste varies by country. In general, distribution in Asia is
undergoing rapid development. Also, while there is increasing consolidation of retailing globally,
it is reasonable to generalize that there is less concentration in most of the rest of the world
compared with the United States, Western Europe, and Australia. That is particularly true in
developing markets where traditional “mom and pop” retailing remains the norm.
Toothpaste distribution channels in Asia have been grouped historically as independent,
drugstores, and hypermarket. Independent channels are small, “mom and pop” stores or open
market areas almost exclusively served by wholesalers (indirect distribution). Drugstores are
more developed channels where customers serve themselves, but that typically offer a narrow
line of merchandise more focused on health care products. Hypermarkets are a new style of
channel that is found primarily in cities. These are usually large stores with a wide variety of goods
and typically purchase items directly from the manufacturer (direct distribution). Many of the
hypermarket chains are foreign owned or allied with a global distributor, such as Wal-Mart or
Carrefour.
All other distribution is grouped together in the “Other” category, which also includes emerging
channels such as home delivery and Internet sales. Tables 13 and 14 provide retail channel data
for each country.
Table 13: Toothpaste Distribution Shares by Type of Retail Channel
COUNTRY
China
Japan
India
S. Korea
Philippines
Thailand
Retail
Sales
(Mill