REGULATORY INFLUENCES ON PRICES
The ability to engage in either price discrimination or strategic pricing may be limited by national or international regulations. Most important, a firm’s freedom to set its own prices is constrained by antidumping regulations and competition policy.
Both predatory pricing and experience curve pricing can run afoul of antidumping regulations. Dumping occurs whenever a firm sells a product for a price that is less than the cost of producing it. Most regulations, however, define dumping more vaguely. For example, a country is allowed to bring antidumping actions against an importer under Article 6 of GATT as long as two criteria are met: sales at “less than fair value” and “material injury to a domestic industry.” The problem with this terminology is that it does not indicate what a fair value is. The ambiguity has led some to argue that selling abroad at prices below those in the country of origin, as opposed to below cost, is dumping.
Such logic led the Bush administration to place a 20 percent duty on imports of foreign steel in 2001. Foreign manufacturers protested that they were not selling below cost. Admitting that their prices were lower in the United States than some other countries, they argued that this simply reflected the intensely competitive nature of the U.S. market (i.e., different price elasticities).
Antidumping rules set a floor under export prices and limit firms’ ability to pursue strategic pricing. The rather vague terminology used in most antidumping actions suggests that a firm’s ability to engage in price discrimination also may be challenged under antidumping legislation.
Most developed nations have regulations designed to promote competition and to restrict monopoly practices. These regulations can be used to limit the prices a firm can charge in a given country. For example, at one time the Swiss pharmaceutical manufacturer Hoffmann-LaRoche had a monopoly on the supply of Valium and Librium tranquilizers. The company was investigated by the British Monopolies and Mergers Commission, which is responsible for promoting fair competition in Great Britain. The commission found that Hoffmann-LaRoche was overcharging for its tranquilizers and ordered the company to reduce its prices 35 to 40 percent. Hoffmann-LaRoche maintained unsuccessfully that it was merely engaging in price discrimination. Similar actions were later brought against Hoffmann-LaRoche by the German cartel office and by the Dutch and Danish governments.25
• QUICK STUDY
1. What conditions are necessary for price discrimination to occur?
2. How might strategic pricing be used to enhance a firm’s long-run competitive position?
3. How do regulations limit the ability of a firm to engage in strategic pricing?
Configuring the Marketing Mix
A firm might vary aspects of its marketing mix from country to country to take into account local differences in culture, economic conditions, competitive conditions, product and technical standards, distribution systems, government regulations, and the like. Such differences may require variation in product attributes, distribution strategy, communications strategy, and pricing strategy. The cumulative effect of these factors makes it rare for a firm to adopt the same marketing mix worldwide. A detailed example is given in the accompanying Management Focus, which looks at how Levi Strauss now varies its marketing mix from country to country. This is a particularly interesting example because Theodore Levitt held up Levi Strauss as an example of global standardization, but as the Management Focus makes clear, the opposite now seems to be the case.
The financial services industry is often thought of as one in which global standardization of the marketing mix is the norm. However, while a financial services company such as American Express may sell the same basic charge card service worldwide, utilize the same basic fee structure for that product, and adopt the same basic global advertising message (“don’t leave home without it”), differences in national regulations still mean that it has to vary aspects of its communications strategy from country to country (as pointed out earlier, the promotional strategy it had developed in the United States was illegal in Germany). Similarly, while McDonald’s is often thought of as the quintessential example of a firm that sells the same basic standardized product worldwide, in reality it varies one important aspect of its marketing mix—its menu—from country to country. McDonald’s also varies its distribution strategy. In Canada and the United States, most McDonald’s are located in areas that are easily accessible by car, whereas in more densely populated and less automobile-reliant societies of the world, such as Japan and Great Britain, location decisions are driven by the accessibility of a restaurant to pedestrian traffic. Because countries typically still differ along one or more of the dimensions discussed earlier, some customization of the marketing mix is normal.
However, there are often significant opportunities for standardization along one or more elements of the marketing mix.26 Firms may find that it is possible and desirable to standardize their global advertising message or core product attributes to realize substantial cost economies. They may find it desirable to customize their distribution and pricing strategy to take advantage of local differences. In reality, the “customization versus standardization” debate is not an all or nothing issue; it frequently makes sense to standardize some aspects of the marketing mix and customize others, depending on conditions in various national marketplaces.
MANAGEMENT FOCUS Levi Strauss Goes Local
It’s been a tough going for Levi Strauss, the iconic manufacturer of blue jeans. The company—whose 501 jeans became the global symbol of the baby boom generation and were sold in more than 100 countries—saw its sales drop from a peak of $7.1 billion in 1996 to under $4.0 billion in 2004. Fashion trends had moved on, its critics charged, and Levi Strauss, hamstrung by high costs and a stagnant product line, was looking more faded than a well-worn pair of 501s. Perhaps so, but the second half of the decade brought signs that a turnaround was in progress. Sales increased after several years of decline, and after a string of losses, the company started to register profits again.
There were three parts to this turnaround. First, there were cost reductions at home. Levi Strauss closed its last remaining American factories and moved production offshore where jeans could be produced more cheaply. Second, the company broadened its product line, introducing the Levi’s Signature brand that could be sold through lower-priced outlets in markets that were more competitive, including the core American market where Walmart had driven down prices. Third, there was a decision in the late 1990s to give more responsibility to national managers, allowing them to better tailor the product offering and marketing mix to local conditions. Before this, Levi Strauss had basically sold the same product worldwide, often using the same advertising message. The old strategy was designed to enable the company to realize economies of scale in production and advertising, but it wasn’t working.
Under the new strategy, variations between national markets have become more pronounced. Jeans have been tailored to different body types. In Asia, shorter leg lengths are common, whereas in South Africa, more room is needed for the backside of women’s jeans, so Levi Strauss has customized the product offering to account for these physical differences. Then there are sociocultural differences: In Japan, tight-fitting black jeans are popular; in Islamic countries, women are discouraged from wearing tight-fitting jeans, so Levi Strauss offerings in countries such as Turkey are roomier. Climate also has an effect on product design. In northern Europe, standard-weight jeans are sold, whereas in hotter countries lighter denim is used, along with brighter colors that are not washed out by the tropical sun.
Levi’s ads, which used to be global, have also been tailored to regional differences. In Europe, the ads now talk about the cool fit. In Asia, they talk about the rebirth of an original. In the United States, the ads show real people who are themselves originals: ranchers, surfers, great musicians. There are also differences in distribution channels and pricing strategy. In the fiercely competitive American market, prices are as low as $25 and Levi’s are sold through mass-market discount retailers, such as Walmart. In India, strong sales growth is being driven by Levi’s low-priced Signature brand. In Spain, jeans are seen as higher fashion items and are being sold for $50 in higher-quality outlets. In the United Kingdom too, prices for 501s are much higher than in the United States, reflecting a more benign competitive environment.
This variation in marketing mix seems to be reaping dividends; although demand in the United States and Europe remains sluggish, growth in many other countries is strong. Turkey, South Korea, and South Africa all recorded growth rates in excess of 20 percent a year following the introduction of this strategy in 2005. Looking forward, Levi Strauss expects 60 percent of its growth to come from emerging markets.
Sources: “How Levi Strauss Rekindled the Allure of Brand America,” World Trade, March 2005, p. 28; “Levi Strauss Walks with a Swagger into New Markets,” Africa News, March 17, 2005; “Levi’s Adaptable Standards,” Strategic Direction, June 2005, pp. 14–16; A. Benady, “Levi’s Looks to the Bottom Line,” Financial Times, February 15, 2005, p. 14; and R. A. Smith, “At Levi Strauss Dockers Are In,” The Wall Street Journal, February 14, 2007, p. A14.