International Pricing and Performance Module Guide International Pricing and Performance BBM 7 IPF The Business Faculty 2018-2019 Level 7 Marketing the art of arresting someones attention long enough to take money from their wallet Gerald Goodhardt International Pricing and Performance 2 Table of Contents 2. Short Description.3 3. Aims of the Unit 3 4. Learning Outcomes 4 4.1. Knowledge and Understanding 4 4.2. Intellectual Skills..4 4.3. Practical Skills ..4 4.4. Transferable Skills..4 5. Assessment of the Unit.4 6. Feedback.5 7. Introduction to Studying the Unit .5 7.1. Overview of the Main Content ..5 7.2. Overview of Types of Classes..5 7.3. Importance of Student Self-Managed Learning Time5 8. Teaching, Learning and Assessment 6 9. Student Evaluation .7 10. Learning Resources ..7 10.1. Core Materials ..7 10.2. Optional MaterialsError! Bookmark not defined. 11. Cases .10 International Pricing and Performance 3 1. Module Details Module Title: International Pricing and Performance Module Level: M Module Reference Number: BBM-7-IPF Credit Value: 20 CATS points Student Study Hours: 150 Contact Hours: 4 Private Study Hours: 1 Pre-requisite Learning (If applicable): None Co-requisite Units (If applicable): None Course(s): MSc International Marketing Year and Semester 2018-2019, Semester 1,2 Unit Coordinator: Dag Bennett MC Contact Details (Tel, Email, Room) X 6997 Room LR327 firstname.lastname@example.org Subject Area: Marketing Summary of Assessment Method: External Examiner 100% coursework Colin Bradshaw, University of Bedfordshire 2. SHORT DESCRIPTION International business managers must have an understanding of all major business functions and be able able to work in teams from different backgrounds, cultures and specialisations. They must also understand how their own priorities relate to larger corporate aims; balancing marketing, financial and other objectives. This means managers must be able to use financial information to inform their own decisions and to assess its relevance in different circumstances. This module seeks to provide a solid grounding in International Pricing and Performance. It aims to build a flexible framework of reference points and analytical tools to enable marketing managers to work with other functional specialists. It provides the basis for understanding effective cross-border marketing management through use of international examples, cases and business situations. Students taking the unit begin by developing basic numeracy skills for financial analysis. They work through a variety of exercises designed to make familiar the terminologies, measures and calculations of financial reporting, progressing to pricing calculations that extend this knowledge from the domestic to the international arena. 3. AIMS OF THE MODULE This course aims to provide students with a thorough knowledge of strategic and operational aspects of pricing and revenue decisions on corporate performance. The aims of this unit are to: a) provide an analytical framework for understanding pricing methods and strategies. b) provide an understanding of how to formulate international pricing strategies. c) provide an understanding of the various marketing performance measures. d) delineate the financial implications of international marketing activities. International Pricing and Performance 4 4. LEARNING OUTCOMES 4.1. Knowledge and Understanding Numeracy In this unit, students will use many forms of numerical analysis, including basic statistics, financial ratios, cost/profit analysis and spread-sheets to expand and deepen their understanding or academic theories, frameworks and concepts. Students will develop a basic understanding of contemporary (and sometimes controversial) theories at the forefront of academic re(search. This will be driven by reference to established knowledge in marketing, or empirical generalizations. Through casework and article discussions, students will deepen their understanding of decision-making in international marketing and the ethical dilemmas that are likely to be faced in implementing international strategies. 4.2. Intellectual Skills Rational problem solving using quantitative tools This will be developed by means of case study analysis, quantitative exercises and live company pricing analysis. There will also be analysis of company financial reports. A key element is the student-lead group project in which student teams select a particular company, or issue that allows them to demonstrate the financial implications of international marketing decisions. In this project students will gather and evaluate both scholarship and research to argue alternative approaches. 4.3. Practical Skills Be able to: Identify, assemble and manipulate quantitative information to connect marketing functions with other measures of corporate performance, develop, evaluate and control international pricing strategies across countries, create realistic, inclusive and actionable budgets for international marketing programmes, identifying and accessing key information. 4.4. Transferable Skills Report writing Students will prepare a variety of assignments in report format, beginning with one-page memos and progressing to managerial reports based on case study analyses. Teamwork and interactive group skills Students can interact with and within groups to define roles, negotiate problem solutions, devise recommendations and organise presentations. Group work will primarily be seminar projects based on case studies. IT skills Live case studies require students to gather current information from a many sources and to manipulate data with a variety of tools and techniques. 5. ASSESSMENT OF THE MODULE The assessment of the unit is entirely based on course-work (seminar papers, presentations and time-constrained assessments). Evaluation will be based on: Identification and description of problems and issues. Resourcefulness in gathering data Analysis of problems and contributory factors. Evaluation of alternatives. Relevance, actionability and clarity of recommendations, Structure and coherence Feedback through the seminars gives an indication of whether students are mastering course concepts. There is substantive comment and guidance on all seminar work. The weighting and due dates of assessed course components is: International Pricing and Performance 5 Week DueAssignment Word Limit Weighting 3 Case # 1 250 5% 5 Case # 2 250 10 7 Case # 3 400 20 9 Time-constrained Assessment 1 hour 20 10 Group Case Presentations 20 mins. 15 11 12 Individual Case Write-up 2,000-3,000 30 13 Assignments are due on before the days listed. This is important because cases will be discussed in class in the week following submission. 6. FEEDBACK Feedback will normally be given to students 7-15 working days after the submission of an assignment, although some feedback will be immediate, in class. Feedback will take a variety of forms; for example, in the week following case submissions there will be group feedback on the case during seminar. There will also be individual feedback on all cases. Other feedback will be given by students to each group after presentation of group company reports (the feedback form is attached at the end of the unit guide). These student forms will then be given to the presenting groups to use to refine their written reports. Verbal feedback will also be given after group project presentations by the instructor(s). 7. INTRODUCTION TO STUDYING 7.1. Main Content The content of the unit is in the first part numeracy, which requires proficiency in mathematical techniques. This will be delivered through a number of exercises and cases, combined with selfdirected study of statistics and numerical manipulation 7.2. Overview of Types of Classes The teaching programme requires the following contact time per week over a 12-13 week period: One two hour combined lecture and one two-hour seminar. Occasional guest speakers, sometimes outside the ordinary unit time slot. Teaching and learning in this unit emphasises interaction, learning-by-doing and practicality. Students undertake a variety of projects, case studies and practical exercises. In presenting, students are expected to take the approach of not just demonstrating their understanding of an issue, but of helping their colleagues to understand as well. Likewise, discussions are intended to foster group-wide learning 7.3. Importance of Student Self-Managed Learning Time Prior to each session, students should prepare cases, exercises or reports to be discussed. Each student whether presenting or not will be expected to participate in discussion. Project work requires preparation beyond reading and discussing a case, e.g. calculations, analysis of information and discussion give students the chance to demonstrate individual skills. International Pricing and Performance 6 7.4 Employability Employability skills are embedded and developed within the teaching & learning of this unit. These include numeracy, team working, time management and communication skills. In particular, the project will develop specific skills to enhance employment potential for positions in marketing. 8. TEACHING, LEARNING AND ASSESSMENT Week Lecture Activities Seminar Activities 1 Introduction to Unit, Pricing Basics Getting Organized 2 Pricing Principles, The international environment, S&D Kotabe & Helsen, ch 1 5 (www.wiley.com/go/global/kotabe) Nagle Hogan & Zale, ch. 3, 4, Sharp, Ch 9 Team formation 3 Setting prices, Costs, Consumers, Markets Nagle Hogan & Zale, ch.1, 2 Kotler & Keller, ch. 12, 13, 16 Hand in Case Study 1 Team-work on group case Exercises 4 International Pricing, Transfer Pricing Kotabe & Helsen, ch 12, Emmanuel & Mehafdi, ch. 3, 4, 5, 8. http://www.wto.org Group Project Ideas (3) Discuss: Case Study 1 5 Research into Pricing Issues South bank Pricing Tests, Price-related promotions Nagle Hogan & Zale, ch.12 Hand in Case 2 Group Project proposals 6 Profits, bananas, etc. Nagle Hogan & Zale, ch. 5 http://mckinseyquarterly.com/marketing Discuss: Case Study 2 Group project key data sources 7 Pricing and Regulation, Dumping, Scurrilous behaviour Kotabe & Helsen, ch 12, 17 Hand in: Case Study 3 Group case outline 8 Budgeting, Market and Brand measurement Nagle Hogan & Zale, ch. 7, Sharp, Ch 3-6 Group work Discuss Case Study 3 9 Time Constrained Assessment Case Prep 10 Consumer Panels, data into decisions Nagle Hogan & Zale, Ch. 8. Presentations 2 Groups each seminar 11 12 ROI, Corporate responsibility Nagle Hogan & Zale, ch. 9, 10, 13, Sharp. 14 http://www.iccr.org Presentations Individual Case write ups International Pricing and Performance 7 9. STUDENT EVALUATION Module content and activities are continually updated based on tutors and students experiences and reflection. Student evaluation of the module is consistently good: Students find it engaging and a good, disciplined approach to university learning. 10. LEARNING RESOURCES 10.1. Core Materials Emmanuel & Mehafdi, Transfer Pricing, 1994, Academic Press, Harcourt Brace, London. Hollensen, S, Global Marketing, 2016, 7th International ed, Pearson Nagle, Hogan & Zale 2014, The Strategy and Tactics of Pricing, 5th International Ed, Pearson Scriven, J, 1999, The South Bank Pricing Tests, Research Report for The Ehrenberg Centre for Research in Marketing Background Reading Sharp, B., Marketing: Theory, Evidence and Practice, 2017, 2nd Ed, Oxford University Press [The online version of this reading list can be found on Reading Lists http://readinglists.lsbu.ac.uk. Finding research materials Students are encouraged to make use of academic resources to support their research. There is a list of journal databases including Emerald, Sage, Business Source Complete and ScienceDirect on the Library subject page for Business on MyLSBU. Electronic resources can be accessed 24/7. Support for referencing: A list of learning resources including guidelines, on how to reference using Harvard style is on the Library page > Referencing your work: https://my.lsbu.ac.uk/my/portal/StudySupport/Library/Referencing-Your-Work Library support for students: You are encouraged to book additional workshops to learn how to find learning resources and reference them: MyLSBU > Library > Events and Workshops : LLRbus@lsbu.ac.uk. If you need further help in using a particular software or application, please contact IT and Digital Skills Training team: LLRittt@lsbu.ac.uk. Chartered Institute of Marketing: http://www.cim.co.uk/ A.C.Nielsen Corporation: http://www.nielsen.com/uk/en.html Marketing Week; www.marketing-week.co.uk Which? Magazine: Product and service evaluations and comparisons, consumer association National Bureau of Economic Research: The law of one price NBER paper, Haskel & Wolf. The World Factbook CIA, https://www.cia.gov/library/publications/the-world-factbook The observatory of Economic Complexity, http://atlas.media.mit.edu globalEDGE International Business Resource Desk, globaledge.msu.edu/ibrd/ibrd.asp Euromonitor International, www.euromonitor.co.uk Mintel: Global Market Research & Market Insight | Mintel.com, www.mintel.com International Pricing and Performance 8 11. Cases Case 1. Who needs a real bank? LONDON Ben Finney was trying to refinance the mortgage on his four-bedroom home in Bristol when things started going awry. An attempt by his bank, TSB, to shift data to a new computer system had gone spectacularly wrong. For several maddening days, he could not connect to his account, transfer funds or reach anybody at the bank for help. I felt abandoned, said Mr. Finney, a 31-year-old software developer. I needed to be moving money around, and I needed access to my bank. The systems failure in April, affecting nearly two million TSB customers, was a breaking point for Finney. He moved his money to Monzo, a British start-up that is among a growing number in Europe offering checking accounts and A.T.M. cards, but lack physical branches everything is done through an app. So-called fintech companies have tried to take on the worlds biggest banks for years, but only recently have companies like Monzo begun to build critical mass. Millions of customers across Europe, most in their 20s or 30s, have signed up over the past two years. Thanks to favorable regulations and an influx of venture capital, that shift is accelerating. Here in Britain, officials have been concerned about the power of large banks in the wake of the 2008 financial crisis, and they see the start-ups as weakening the hold of traditional lenders. The authorities have adopted policies such as a regulatory sandbox, allowing what are known as challenger banks to test new financial products and get feedback from regulators before proposing them to customers. In contrast, while some policymakers in the US are trying to make it easier to open new banks, progress has been slow. States do not want to cede oversight, and without a license, American financial start-ups must set up partnerships with traditional banks to hold deposits. Support from regulators in Europe has given momentum to companies entering the market there. In addition to making slicker apps, the companies have slashed fees for spending overseas and wiring money. Last year, Monzo became one of the first challenger banks to receive a license allowing it to hold customers deposits on its own, a milestone no start-up in the United States has achieved. Our regulator is pretty forward thinking, said Tom Blomfield, 33, the co-founder and chief executive of Monzo, referring to Britain. Finance isnt immune to the technological change reshaping many other industries onsumers and businesses are using new payment services and online lenders. But Blomfield argues that day-to-day retail banking has been relatively unaffected. Monzo, has begun to reimagine banking for an increasingly cashless society. Future Customers wont need branches when they can text a customer service representative and get detailed spending breakdowns on their phones. Doing without retail space and tellers keeps costs down, allowing the company to reduce fees. The internet lets you run these traditional businesses at a fraction of the cost, Blomfield said. The company sends celebratory GIFs on Twitter to new customers, and offers a bright coral-color A.T.M. card that is Instagram-ready. Users can visit the office to see whats being worked on, test new features and perhaps even pet the Monzo dog, Bingo. Or they can view the companys product road map, published online. Monzo got started with crowdfunding and remains a minnow compared with the giants of British banking, but customers notably younger, wealthier ones are signing up. Roughly 75 percent of Monzos 900,000 clients are under 40, split evenly between men and women. On average, they make more than 50,000 pounds, or about $65,000, a year, nearly double the median British salary, and Monzo is adding more than 2,000 customers a day. Digital banks face innumerable issues, though. Chief among them is how they will make money. A slick app and basic checking accounts are unlikely to be enough, unless they can offer services like mortgages and other loans that come with higher interest rates. Last year, Monzos losses quadrupled to 33.1 million. The company is developing a marketplace where International Pricing and Performance 9 customers can shop for financial services offered by other firms, with Monzo collecting a fee. In the meantime, it makes some money from overdraft and A.T.M. charges, and is experimenting with giving out short-term loans of up to 1,000. As they expand, these start-ups will also face more regulatory scrutiny and targeting by fraudsters. Traditional banks must ensure, for example, that a certain proportion of the deposits they hold are kept in reserve, as a safety net. Such policies help guarantee that a bank will not lose its customers money, but they make it harder to turn a profit. Now that Monzo holds customer deposits, it must also meet these requirements. Start-ups must also fight inertia. People rarely change banks, whether because of an existing mortgage or the headache of updating a Netflix account. Less than a quarter of Monzos customers deposit their paychecks into their accounts; most use it as an add-on to take advantage of perks like cheaper foreign exchange transactions. Even Mr. Finney, who uses Monzo for day-to-day banking went to another local lender to refinance. The big question is, will millions of people switch their primary transaction accounts, where their checks get deposited and where they pay their bills, and do their key transactions, said Hans Morris, a former executive at Citigroup and Visa who now manages Nyca, a New York venture capital fund. If youre making a historical bet, you would say that they arent going to switch. At the same time, traditional banks are adapting. JPMorgan is testing a mobile-focused banking service called Finn, which offers savings and budgeting tools similar to those of Monzo. Goldman Sachs introduced Marcus, an online savings and lending product that has more than 1.5 million customers. Mr. Blomfield is confident his companys young customer base will eventually turn to Monzo for other, more lucrative, financial services that it intends to offer. Monzo plans to announce in coming weeks that it is raising about 100 million, at a valuation of more than 1 billion, according to people familiar with the deal, making it one of the biggest start-ups in Europe. Monzo will use the funds to help enter the United States as early as next year. Revolut, another banking start-up, has more than 2.75 million customers across Europe, and it is adding 7,000 each day. After raising $250 million in April, it, too, wants to offer services in the United States. Government policies there are more constraining, however. As a result, most fintech firms in the United States have focused on payment services like Square, and mobile money transfers like Venmo, though companies including Chime have entered partnerships with licensed lenders to offer banking accounts more like Monzo. Still, investors in Europe have been won over. A record $1.2 billion has been pumped into banking startups globally so far this year, 70 percent of which has gone to European companies. That is more than double last years figure, and a tenfold increase on the amount invested in 2014, according to CB Insights, a market research firm. Martin Mignot, a partner at Index Ventures and a Revolut director, said TSBs systems failure this year encapsulated the issues traditional banks face: costly retail space and slow, legacy computer systems. Revolut and others are more nimble than their older, larger competitors. Its a different mind-set, he said. Even some who once felt that app-based banks were a gimmick have been won over. I was a bit skeptical, but Im definitely a convert, said Sinead Loftus, a legal assistant in Ireland who joined Revolut after growing frustrated with her local banks fees. Ive convinced my mom to get one, I told all my coworkers to get one, I got my boss one. ANALYZE THIS 1. Describe the consumer (retail) banking industry as it currently is, and how it is likely to become. Use numbers, data, industry reports etc. Count whatever can be counted. 2. How do banks make money? List the ways 3. What will challengers like Monzo or Revolut have to do in order to become profitable International Pricing and Performance 10 Case 2. GoNuts International GoNuts are a new savoury snack made from quinoa. Derived from the Spanish spelling of the Quechua name kinwa, quinoa was first grown in the Andes 3,000 to 4,000 years ago. It is a pseudo-cereal (not derived from grasses) that is in many ways healthier. This is partly because it has been less intensively cultivated and is mostly still farmed organically. For GoNuts the manufacturing method is similar to cornflakes but it is to be sold as a savoury snack. GoNuts look like potato crisps but are more golden and regular in shape. Raw materials and manufacturing costs are higher than for potato snacks but they are healthier in their basic form they have fewer calories and are low in saturates and cholesterol. GoNuts are sweeter than potato crisps but can be flavoured. Consumer trials showed that the versions of popular crisp flavours received satisfactory reviews. R&D were working on these flavours. Meanwhile the aim was to launch the product with four flavours that consumers liked: regular, sweet and sour, honey roasted, and ranch. GoNuts needed dedicated plant that produces the product for a direct cost of 1,500 per tonne, excluding the cost of capital. With potato snacks selling for 3,000 per tonne, the brand manager was confident about the products profitability. Her confidence took a serious knock however when Sales, Finance and Market Research each came up with different recommended prices. The finance officer demanded that the price be set to cover the usual 100 percent of overhead charge plus a 20 per cent margin. His suggested price of 3,600 per tonne gave a very satisfactory 190,000 profit for the targeted 300 tonne annual sales. Unfortunately, the finance officers view conflicted with the sales managers who wanted the price to be 100 per tonne below potato crisps. The sales manager claimed that only with a price advantage could they achieve the target sales against the established competition. The sales manager added that a low initial price would also compensate traders for the extra shelf space GoNuts used. The marketing researchers contribution to the pricing debate confused the brand manager even more. Rather than giving a price, the researcher gave a string of prices and sales levels and to the annoyance of the finance officer, some financial information: Price(000) 2.5 3.0 350 3.5 280 4.0 200 4.3 110 Sales (tonnes) 405 The researcher also estimated the 315,000 annual fixed operating cost for the product and the capital investment that depended upon the annual volumes produced. Annual sales (tonnes) 405 350 280 200 110 Capital investment (000) 2,250 2,050 1,650 1,220 600 I assume you know that our average cost of capital is 13 per cent. Commented the finance officer. All very impressive, said the brand manager, but what price should we charge? That all depends on what you want to achieve. Replied the researcher. 1. Use the price and sales data provided by the marketing researcher to estimate price elasticities. Show how you would use them elasticities in setting the GoNuts price. 2. What prices give the highest sales value, sales volume, gross profit, gross margin, net profit, Return on sales, ROCE, capital cost covered (C3), economic value added (EVA)? Choose a price at which to market GoNuts and explain why. How much room is there to manoeuvre around this price? 3. At a price of 3,500 per tonne, sales levels for advertising levels are shown below. What level of advertising should the company should invest in? Explain the financial implications. Advertising (000) 25 50 100 200 400 Sales (tonnes) 180 210 280 360 420 Capital investment (000) 1,100 1,250 1,650 2,050 2,300 4. GoNuts can use a manufacturing process with a direct cost of 1500/tonne and fixed cost of 320,000 or a new plant with direct cost of 2,500/tonne and a fixed cost of 50,000. Which is best? Why? International Pricing and Performance 11 Case 3. Billing Boats AS Dag Bennett & Jon-Erling stvold Norway has a long tradition of boatbuilding stretching back to before Viking times. This is due, no doubt, to Norways proximity to the sea, ample forests, and long coastline. Among luxury sailing yachts, the boats of Aker, Seil and Hyen are internationally known and admired. There are over 100 other boat builders in Norway that turn out 10,000 sailing yachts yearly. Although most Norwegian sailboat companies are situated on the south coast, Billing AS is located in the town of Steinkjer, roughly 450 kilometers northeast of Oslo. Billing was founded in the town partly because of the efforts of the Norwegian Regional Development Council, which provided a loan of twenty million Norwegian Crowns (Kroner, or NOK) to Billing AS, a privately owned company, to start its operations in the Nord Trndelag area because of the regions relatively high rate of unemployment. The present product line consists of three fibreglass sailboats. The Billing 16 is a coastal sailing yacht with a new design approach. This approach is to provide a craft that enables a family to make weekend and holiday cruises in coastal waters and also offers exciting sailing. The sailboat is very fast. The Norwegian Yacht Racing Association stated in its test in which the Billing 16 was judged to be the best in her class: She is delicate, lively, spacious, and easy to steer. She is well balanced and has a high-quality interior. She is especially fast on the beat and lively to handle in a free wind. The B-16 has berths for two adults and two children, a sail area of 130 square feet, weighs one-half ton, and is a little over 16 feet long. The hull is made of glass-reinforced plastic (GRP), and the mast and boom are made of aluminium. The boat has a drop keel that is useful when negotiating shallow anchorages or when lifting the boat on a trailer. The Billing 33 is a motor sailer that sleeps seven people in three separate compartments. The main saloon contains an adjustable dining table, a full galley, and a navigators compartment and is separated from the fore cabin by a folding door. The aft cabin, entered by a separate companionway, contains a double berth, wardrobe, and lockers. The toilet and shower are situated between the fore cabin and the main saloon. The boat has a sail area of 530 square feet, weighs about five tons, and has an overall length of 33 feet 5 inches. A significant feature of the craft is that she is equipped with a 35 horsepower diesel engine. The Billing 33 has the same design approach as the 16. She is well appointed, with sufficient space for seven people to live comfortably. An important feature is that the three separate living compartments allow for privacy. In addition however, the modern hull is quite sleek, making her an excellent sailing yacht. The Billing 35 was designed for a different purpose. Whereas the 16 and 33 are oriented toward a family approach to sailing combining the features of safety and comfortable accommodations with good sailing ability the 35 is first and foremost a sailing craft. It has two births, a small galley, and toilet facilities, but the emphasis is on sailing and racing rather than comfort. The boat has a sail area of 420 square feet, weighs a little less than four tons, and has an overall length of 34 feet 6 inches. The boat is also equipped with a small (7 horsepower) diesel engine for emergency power situations. The Billing 35 is a traditional Swedish design and, therefore, is directed solely to the Swedish market. Billing AS was established in order to manufacture sailboats for export. The Norwegian sailboat market is small because of the short sailing season. Even so, the company has been successful in marketing the 16 in Norway, though this was difficult in the beginning because of the lack of dealers. To solve this problem, Billing persuaded several new car dealers to handle the Billing 16 on an agency basis. This involved providing one boat to each car dealer to put in the showroom. The dealer then marketed the sailboats for a 25 percent sales commission. Though some scoffed at this idea, the system produced reasonable sales and also made the company known throughout Norway. This led to an arrangement with one of the largest cooperative wholesale-retail operations in Norway. Like most cooperatives, this organization began with agricultural products: however, the product range of the company now includes virtually every conceivable consumer product. The present contract states that the cooperative will purchase eighty Billing 16 boats per year for the next three years. The Swedish market is served by a selling agent, although this representative has not been particularly effective. Because Sweden is also the home of many sailboat builders, the company has tried to market only the 35 in that country. In Denmark, France, Holland, Germany and the United Kingdom, Billing has marketed the 33 through importers. These importers operate marinas in addition International Pricing and Performance 12 to selling new sailboats. They purchase the boats from Billing for their own accounts and mark up the price by 60 percent or more. In return for exclusive marketing rights in their respective countries, they agree to purchase a minimum number (usually three or four) of the 33 design per year. None of these importers is interested in marketing the 16 or the 35; the shipping cost for the 16 is too high compared with the value of the boat, and there is little customer interest in the 35. Billing is planning to introduce a new sailboat. Whereas the present products were designed by people in the company who were relatively unknown (to the customers), the hull of the new sailboat has been designed by an internationally known boat designer. The cost of these design services was a $160,000 initial fee plus a $2,100 royalty fee to be paid for each boat produced. The new sailboat, the Billing 29, has an interior quite similar to that of the Billing 33 because the same people designed the interiors and decks of both sailboats. The new boat is a motor sailer that sleeps six people in three separate compartments, is 28 feet 9 inches long, weighs 4 tons, and has a joined cabin space and a separate aft cabin, small galley, toilet and shower facilities, and a 22 horsepower diesel engine. Because a new construction technique greatly reduces the amount of fibreglass required, the variable costs to construct the boat are only 60 percent of the cost for the 33. With a preliminary selling price of 195,000 Norwegian Kroner, the Billing 29 is receiving very favourable attention, but the company is concerned that sales may have an adverse effect on sales of the 33. The company categorizes the marketing expenses as fixed costs because allocating these expenses to specific products is difficult. The major element of the program is participation in international boat shows in London, Paris, Hamburg, Amsterdam, Copenhagen, and Oslo. The initial purpose of participating in these shows was to locate suitable importers in the target markets; however, this effort is maintained in order to support the marketing programs of the importers. The importers are also supported by advertising in the leading yachting magazines in national markets. Billings selling effort consists mostly of servicing the importers and agents and staffing the exhibitions at the boat shows. Most of the sales promotion costs are the result of the sales brochures that the company has developed for each boat. The costs are increased however by having to print a relatively small number of each brochure in Russian, Polish, French, English, German and Swedish. The brochures are provided to the agents and importers and are used at the boat shows. Enter the Dragon At a recent boat show held at Earls Court Exhibition Centre in London, after a long series of discussions, Billings company president received a proposal from the president of Sea Dragon Boats, a Chinese company located in the formerly Portuguese colony of Macau. The company is like Billing in that it sells several hundred traditional style sailing craft per year within China, and to the Chinese communities around Asia. But although the company has made boats in the traditional manner for over 200 years, it is beginning to shift its focus: from commercial coasting boats, to boats configured as luxury yachts, and from wood construction to fiberglass and composites. For that reason it recently built a modern fiberglass and composites production facility in Zhuhai Special Economic Zone (SEZ). At Earls Court, Sea Dragon proposed entering into a 49-51 joint venture for Sea Dragon to produce the B-29 for the Chinese market. Billing would need to transfer its design and production expertise to Sea Dragon. In return, Sea Dragon would handle production and marketing across Asia for the B-29. The advantages of the JV are that Macau has direct linkages with the Zhuhai SEZ, in which taxes are not paid on goods that are exported, so export prices are generally competitively low. Sea Dragon also said that its production costs in Zhuhai would be 25 percent lower than Billings own Norwegian production cost, and suggested that this would make Chinese-produced boats profitable in the European market, even after transportation costs to Europe. Sea Dragon had previously hosted Billing executives at the Macau Yacht show which demonstrated that there was rising demand for sailing yachts in Asia, that yachts were assuming a rather global character and style, and that Chinese buyers were keen to obtain the latest in yacht designs. Billings executives also felt the Chinese factory was suitable for production of the B-29, though the production workers would need careful training. International Pricing and Performance 13 Going forward The company is in the process of preparing its production and marketing plan for the coming year in order to arrange financing. The president is strongly committed to the continued growth of the company, and the market indications suggest that there is a reasonably strong demand for the 16 in Norway and for the 33 in most of the other national markets. The sales results of the previous and present years are shown in Table 1: the profit statement for the present year is shown in Table 2. Table 1 Billing AS Sales Last Year Present Year No. Ave Pricea Revenue No. Average Revenue Pricea B-16 200 28,500 5,700,000 240 29,700 7,128,000 B-29 B-33 30 341,000 10,230,000 36 356,000 12,816,000 B-35 4 199,900 799,600 5 207,900 1,039,500 16,729,600 20,983,500 a All prices are manufacturers prices: prices and revenues are in Norwegian Kroner: 1.00 NOK = U.S. $0.185 Table 2 Billing AS Profit Statement for Present Year In NOK percentage of sales As a Sales Revenue 20,983.500a Variable costs (direct labor and materials) 13,640.000 65.0% Fixed costs: Production (buildings, production management salaries, etc.) 945.000 4.5 Product design costs (salaries, prototypes, testing, consultants) 1,345.000 6.4 Administration costs (salaries, insurance, office expenses) 650.000 3.1 Marketing costs (salaries, advertising, boat shows, sales promotion, travel, etc.) 2,300.000 11.0 Total Fixed costs 5,240.000 25.0 Profit before taxes 2,103.500 10.0 a All prices are manufacturers prices: prices and revenues are in Norwegian Kroner: 1.00 NOK = U.S. $0.185 The main problem for next year is determining the price for each sailboat in each market. In previous years, Billing set its prices in Norwegian Kroner, on an ex-factory basis. Management has become convinced however that it must change the terms of its prices in order to meet competition in the foreign markets. Thus, the company has decided to offer CIF prices to its foreign customers in the currency of the foreign country. The use of truck ferries between Norway and Sweden, Denmark, Poland, Russia and Germany is expected to make this pricing approach more competitive. Table 3 Shipping Costs forBilling35 to Sweden andBilling29 and 33 to Other Countries Present Exchange Rates in Norwegian Kroner Expected Inflation Rate Estimated Freight and Insurance Costs per Boat Denmark Danish Kroner = 0.73 3% 15,500 NOK Russia Rouble = 4.22 21 25,000 NOK Poland Zloty = 2.02 26 19,000 NOK Sweden Swedish Kroner = 0.73 1 12,500 NOK UK English Pound = 11.31 3 22,500 NOK Germany Euro = 8.91 2 20,500 NOK Norway 3 International Pricing and Performance 14 Billing would also like to assure its agents and importers that the prices will remain in effect for the entire year, but the financial manager is concerned about the possible volatility of exchange rates because of the varying rates of inflation in the market countries. The present exchange rates, expected inflation rates, and the estimated costs to ship the Billing 35 to Stockholm and the Billing 29 and 33 to the other foreign marinas are shown in Table 3. A second difficulty in pricing the product line for Billing is to establish a price for the 29 that will reflect the value of the boat but will not reduce the sales of the 33. There are three schools of thought concerning the pricing of motor sailers. The predominant theory is that price is a function of the overall length of the sailboat. A number of people, however, believe that the overall weight of the craft is a much more accurate basis. The third opinion argues that price is a function of the special features and equipment. Table 4 was prepared by a Swiss market research firm and shows the relationship between present retail prices and the length of new motor sailers in the West European market. Table 4 Retail Price in the European Market of sailing yachts as a function of Length Note: All boats to the right of the bold line are priced above $150,000. Questions for Discussion 1. Determine the manufacturers selling price in the Norwegian market for all Billing sailboats for the coming year. Explain your rationale for setting prices. 2. Determine the CIF prices, in the foreign currencies for the B-29 and B-33 to the importers in Denmark, Sweden, Poland, the UK, Germany, and Russia. 3. Develop a production plan (how many of each type of boat) for Billing AS for the coming year. Support your plans by using relevant marketing metrics, e.g. sales, margins, company profits, etc. 4. Using your production plan, develop a projected profit statement for the coming year. 5. Should Billing enter the Joint Venture with Sea Dragon? If so, on what basis? Explain your answer thoroughly. International Pricing and Performance 15 To: International Pricing and Performance Students From: Inigo Montoya Date: 21/10/2018 Re: Multi-faceted Analysis 1. This project is an opportunity to investigate the broad category of transformative industriesthe things and services that change the way we do things, or change the way we live. We will approach the project from multiple perspectivese.g manufacturers of smartphones, complementary devices (tablets, laptops, e-readers, etc.), or providers of content (Netflix, Youtube, Rovio, Castle, etc.), or pioneers of the sharing economy such as AirBnB, Uber, Carclub etc. 2. This project is an opportunity to investigate the broad category of forever industries entertainment, communication, things to eat, household goods and servicesthe types of products and services that we will continue to needforever. What sorts of things and services are these? Are there any? Methods 1. Each group will establish the industry/category/business that they will explore 2. Each group will perform a broad industry overview to identify key players, key industry performance measures, geographic scope, etc. 3. For your area of focus describe the: Structure, Competition, Factors required for success, Major industry developments, etc. Groups should draw on readings, lectures and discussion and should use any information relevant to their project. Quantify whatever possible. 4. Describe the business model(s), if possible, choose a key firmand use it to explain industry practices, etc. 5. Outline marketing strategy(s)and critique. Quantify whatever possible. 6. Talk about the money where do revenues come from, profits, trends? 7. Clearly show how your work has resulted in new or better understanding of the financial implications of marketing activity. Assignment Give a 20 minute group presentation (in person, on-line, or virtually) in week 11 or 12 Each group member then provides a written report of 2000-4000 words (excluding appendices) detailing findings, conclusions and implications, incorporating feedback, one week or less after presentation. Evaluation Criteria 1. Effective communication (verbal and written) in response to the brief; 2. Accuracy, currency, and relevance of information; 3. Realistic and supportable conclusions (suitable to presentation to a company board); 4. Evidence of good team-work and organization, and contribution from all members; 5. Teach something to the class that they did not already know International Pricing and Performance Sales volume (SV) Increasing the quantity sold (sales volume) is a driving force behind much marketing activity. There are good reasons for this: Increased sales are an indicator of success and most companies want to grow Increased market share shows competitive success. If sales do not match production, capacity will be under-used or customers disappointed. Net proceeds from sales (S) Increased sales volume may show competitive success but net proceeds from sales show the cash flowing into the company. It is the value of sales made, less returns. The popular idea of everyday low prices can increase sales but not always by enough to cover lost margins. Sales value and sales volume sometimes do not move hand in hand. A company that increases sales by 5% by cutting prices by 10% increases sales volume but reduces sales value: Action Regular price 10% discount Percentage change Price ($) 1.00 0.90 (10.0) Sales (units) 100 105 5.0 Sales ($) 100.00 94.50 (5.5) Gross profit (GP) Gross profit is the difference between net proceeds from sales (S) and the cost of goods sold (COGS). The costs are the variable costs incurred each time a product is made. It typically includes raw materials, labour, energy, and so on. The interplay between gross profit and price is dramatic. The 10% price cut has much more impact on gross profits than sales: Action Regular price 10% discount Percentage change Sales Price ($) 1.00 0.90 Sales (units) 100 105 Sales ($) 100.00 94.50 (5.5) Cost of goods sold Unit cost ($) 0.50 0.50 Sales (units) 100 105 Cost ($) 50.00 52.50 5.0 Gross Profit 50.00 42.00 (8.0) Net profit (NP) Gross profit shows the contribution made to the company by each unit sold but neglects many other trading expenses. These include fixed costs like rates, staff, and so forth, and strategic expenditure like research and development. Interest paid on debts is sometimes not included because this depends upon the capital structure of the company. FORMULAS FOR ASSESSING MARKETING ACTIVITY International Pricing and Performance 17 The fixed cost means that net profit is more volatile than gross profit. This sensitivity encourages companies to convert some of their fixed costs into variable ones, for example, hiring trucks rather than buying them: Action Change Regular price 10% discount Percentage Sales ($) 100 94.5 (5.5) Cost of goods sold ($) 50 52.5 (5.0) Gross profit ($) 50 42.0 (8.0) Other trading expenses 40 40.0 0.0 Net profit 10 2.0 (80.0) Return on sales (ROS) ROS = NP/Sales Return on sales (or margin) measures the ratio of profit to sales. This can be useful in comparing results over time. From year to year a company may note changes in sales and net profit but not fully understand profitability, so ROS is a useful measure. A 10% price drop increases sales volume but reduces return on sales: Action Regular price 10% discount Percentage change Sales ($) 100 94.5 (5.5) Net profit ($) 10 2.0 (80.0) Return on sales ($) 10.0 2.1 Return on capital employed (ROCE) Some companies, like grocery chains, can have low returns on sales but are very profitable. They achieve this because the critical measure is return on capital employed. This is the product of return on sales and the speed that assets are turned over (the activity ratio): ROCE = ROS x ACTIVITY = NP x Sales Sales Assets By turning over its assets four times each year a supermarket can achieve a 20% return on capital employed although its return on sales is only 5%: Supermarket ROCE = = 5 x 100 = 20 per cent 25 100 In contrast, an exclusive clothes shop has very high margins but turns its assets over slowly. Clothes shop ROCE = = 40 x 100 = 13.3 per cent 300 100 These are powerful ratios that can define how a company can do business. Aldi, the German discounter, succeeds with margins half those of many grocers. Its margins are very low (2-3%) but it keeps its return on capital employed high by high stock turnover and keeping its other International Pricing and Performance 18 assets low it has a small range of products, buys in great bulk and trades in less costly goods than traditional grocers. The main benefits from increasing asset turnover are: improved return on capital employed and reduced fixed costs. The firm hiring trucks rather than buying them reduces its fixed costs and therefore its sensitivity to volume changes. Also, by reducing its assets it increases its activity ratio and return on capital employed. Increased assets turnover is one of the direct benefits of Just in Time (JIT) stock management, lean manufacturing and re-engineering. JIT cuts down the assets tied up in stock, and improves quality. Lean manufacturing reduces investment in plant while re-engineering can reduce capital investments, costs and working capital. Capital cost covered (C3) Assets cost money and return on capital costs takes that into account. It is a powerful tool because it combines three critical business ratios: C3 = ROS x ACTIVITY x CAPITAL EFFICIENCY C3 = NP Sales x Sales Assets x Assets Cost of capital The cost of capital is the weighted average cost of debt and shareholder equity. For a supermarket the figures could be: Debt Equity Weighted average cost of capital (%) (after tax) Debt/equity split 0.50 0.50 Cost of capital (%) 4.00 16.00 Partial cost of capital (%) 2.00 8.00 10.00 At 4%, debt cost less than equity (16%), so by having both, the firm reduces the average weighted capital cost to 10.00%. A firm can reduce its average cost of capital by taking out more debt but the amount used is limited by the risks involved. Debt is relatively cheap because it bears no risk; equity is relatively expensive because it bears the whole risk of the business. If a firm tries to increase its lending too much, a bank, or other lending body, will refuse to give more money or demand a higher interest rate. For the supermarket an asset of $25m would cost $25m x 010 = $2.5m to finance. Therefore: C3 = 5 x 100 x 25 = NP = 2.0 100 25 2.5 CC In other words, the net profit is double the capital cost the company is healthy. This ratio is more discriminating than the familiar distinction between profit and loss. If the capital cost covered is below zero a firm is making a loss. A capital cost covered above zero indicates a profit. However, capital cost covered between zero and one shows a firm is in profit but not adding value its profit does not cover its cost of capital. International Pricing and Performance 19 Economic value added (EVA) Economic value added makes a direct comparison between the cost of capital and net profits. It is a simple idea that has hugely increased the value of companies using it. Christened EVA by Stern Stewart & Company of New York, many leading companies see it as a way of examining the value of their investments and strategy. Amongst early users are Coca-Cola, AT&T, Quaker Oats and Briggs & Stratton. William Smithburg, Quakers former CEO explains that EVA makes managers act like shareholders. EVA = Net profit Cost of capital For the supermarket: EVA = 5 2.5 = $2.5m Profit, economic value added and capital cost covered, are related concepts: profit shows how a companys trading is going, economic value added shows a companys wealth creation in monetary terms, while capital cost covered gives the rate of wealth creation. Category C3 EVA NP Economic state I >1 >0 >0 A profitable company which is adding economic value. II 1>0 <0 >0 A company whose profits do not cover the cost of capital. No economic value is being added. III <0 <0 <0 A loss-making company. The supermarket is a clear category I company; this contrasts with the clothes store whose capital is more expensive because the clothes market is cyclical and fashion-dependent: Clothes store Debt Equity Weighted average cost of capital (%) Debt/equity split 0.25 0.75 Cost of capital (%) 5.0 20.0 Partial cost of capital (%) 1.25 15.1 16.25 Assets of $300m give a capital cost of $48.75m. C3 EVA ($m) NP ($m) Category Supermarket 2.0 2.5 5 I Clothes store 0.8 (9.5) 40 II __________________________ Sources: Alan Wolfe, Price Wars, Marketing Business (November 1991); Shawn Tully. The real key to creating wealth, Fortune (20 September 1993), 24-30. Raj Srivastava, Emory University, Liao & Feng, An all-around Analysis of EVA: An Evaluating Indicator of Operating Performance, China-USA Business Review, 2005 International Pricing and Performance 20 ORAL PRESENTATION ASSESSMENT CRITERIA Below 40% Above 79% 40-49% 50-59% 60-69% 70-79% Category Assessment Mark Content, of which: Introduction Main Body information Main Body coverage Main Body analysis Conclusions & Recommendations Q & A Session Presentation Skills, of which: Graphics/Visual Aids Delivery Teamwork Conviction Timing Overall Quality of Presentation Overal Grade/Mark International Pricing and Performance 21 Harvard System Referencing All students will use the Harvard System of referencing. References are indicated in the text as either Recent work (Smith 2011) or Recently Smith (2011) has found. Where a direct quotation is used the page number should be noted e.g. (Smith 2011 pg. 17). All such references should then be listed in alphabetical order at the end of the paper in accordance with the following conventions: 1. Books surname, forename and/or initials, (year of publication), title, place of publication: publisher, e.g. Burns, P. (2011), Entrepreneurship and Small Business, Basingstoke, Palgrave. 2.Journal Articles surname, forename and/or initials, (year) title, journal name, vol, issue, pages, e.g. Vargo, S. and Lusch, R. (2004) Evolving to a New Dominant Logic for Marketing Journal of Marketing Vol.67 No.1 pp.1-17 3.Contributions in books, proceedings, etc. surname, forename and/or initials, (year), title, In:, editors surname and/or initials, book title, place of publication: publisher, pages, e.g. Doyle, Peter (2003), Managing the Marketing Mix. In: Baker, Michael J, ed., The Marketing Book5thEdn, London: Heinemann Ltd., pp. 227-267. 4.Websites / Online resources. Author/Editor surname, forename and/or initials, (year), title[online], place of publication: publisher. Available at: URL, [accessed date] e.g. Baker, Michael J. (2011), Individual Branding, Westburn Dictionary of Marketing [online], Helensburgh: Westburn Publishers Ltd. Available at: http://www.westburn.co.uk/tmd/searchDetails.cfm?PageNum_Record=180 [Accessed 14th February 2011].
International business managers
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