Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing. A Research Report Presented to COPYRIGHT UCT

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1 Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing A Research Report Presented to In partial fulfilment of the requirements for the Masters of Business Administration Degree Presented by Brynn James Alric Simpson 30 November, 2000 Supervisor: Professor Michael Morris

2 ACKNOWLEDGEMENTS I wish to thank Professor Michael Morris, my research supervisor for his support, insight throughout the process of this research project. Further I wish to thank my wife Wendy and daughter Ceilidh for their support, understanding and patience. Without them the walls of the Breakwater Campus, Graduate School of Business, would have been much bleaker. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 2

3 ABSTRACT This study addresses the continued debates revolving around export market expansion strategies and product and promotion standardisation strategies from the perspective of a combination developed/developing country. Trends in new market selection are identified and discussed to improve the understanding of export marketing selection by South African firms. A framework is developed from the findings of a numbers of other key research works, identifying factors in the development of market expansion and product and promotion standardisation strategy. Data collected through an industry survey, involving the wine and fishing industries, was used to identify the determinants of the export strategy selection under study. A comparison is made with those factors identified as determinants in research based on developed nation exporters. This study improves the understanding of the strategy selection process in a combination developed/developing country. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 3

4 TABLE OF CONTENTS 1 INTRODUCTION LITERATURE REVIEW DEVELOPMENT OF AN EXPORT FRAMEWORK Expansion strategy - concentration versus diversification export marketing framework subsection Standardisation strategy - standardisation versus adaptation export marketing strategy framework EXPORT MODEL HYPOTHESES THE STUDY THE QUESTIONNAIRE SAMPLING METHOD STATISTICAL ANALYSIS RESULTS INDUSTRY DATA REVIEW CRITERIA FOR NEW MARKET SELECTION TESTING FOR DIFFERENCES BETWEEN THE INDUSTRIES RESULTS OF PEARSON S CORRELATION ANALYSIS MULTIPLE REGRESSION MODELS SUMMARY OF HYPOTHESIS TESTS REVISED VERSION OF EXPORT MODEL DISCUSSION MANAGERIAL IMPLICATIONS THEORETICAL IMPLICATIONS CONCLUSION REFERENCES WEBSITES APPENDICES LIKERT SCALE MODELS OF NEW MARKETS QUESTION RESPONSES WINE AND FISHING INDUSTRY FREQUENCY STATISTICS FOR COMPANY DATA DESCRIPTIVE STATISTICS FROM FISHING AND WINE INDUSTRIES T-TEST STATISTICAL ANALYSIS DATA...67 Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 4

5 10.5 EXPORT QUESTIONNAIRE...68 Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 5

6 1 INTRODUCTION Global marketplace As the world becomes a global marketplace, governments worldwide are making concerted efforts to level the playing fields between countries through the disbanding of trade barriers. Businesses are being encouraged to internationalise, to look beyond domestic boundaries to market their products, through the implementation of national policies emphasising both export incentives and promotion programs (Katsikeas & Leonidou, 1996). As South Africa moves into this global economy from a past restricted by legacy of Apartheid, it is faced with a necessity to focus on export as a vital driver of economic growth. South African export South African export is characterised by large corporations exporting raw materials with little value added. Small and medium enterprise firms play a limited role in generating export income, with only 3 percent of small and medium enterprise firms acting as exporters (Mapetla, 1995). Small and medium exporters account for less than 1 percent of all export sales from South Africa, compared with the same representing 40 percent of all export sales in Korea, 56 percent in Taiwan, 53 percent in Italy and 9 percent in Canada (Hall, 1995). This highlights the vast opportunity for improvement of export performance in South Africa. Presently the strength of new export production development lies with large wealthy companies; hence the emphasis from a research and support perspective for future export generation and promotion should lie with the small and medium enterprise firms in South Africa. This study will attempt to broadly cover the entire scope of company size for comparative purposes. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 6

7 The government response The government has responded, noting the low level of participation of these firms in the export market. Steps are being initiated to increase their participation, as seen in the Reconstruction and Development Programme (RDP, 1994) and the White Paper on Small Business Development (DTI, 1995). These programmes and policies are aimed at reducing the internal and external barriers to export for South African firms. They will aid in providing basic export related knowledge to inexperienced exporters or those attempting to enter new markets. However, these programs are not geared to helping firms to make strategic decisions related to export. Strategic choices Exporters face a number of obstacles, whether they are based in developed or developing countries. Obstacles include distance from markets, cultural differences, identification of profitable markets, development of new products, standardisation of product and promotion, identification of reputable buyers/agents, market selection, domestic and international regulations and payments and distribution systems among others. These will all have an effect on the strategic decisions made by the exporting company. This study will address arguably the two most strategic issues facing exporting companies in developing countries. These strategic issues are market concentration or market diversification (spreading), and product and promotion standardisation. Both strategies will be covered by the study, as they are essentially intertwined and inseparable. Definition 1 market concentration versus diversification: Ayal & Zif (1979) defined expansion strategy as being based on two opposing strategies: market concentration and market diversification. Market concentration is based on the focus of resources on few markets with slow gradual expansion into new territories. Market diversification implies a fast penetration into a large number of markets and the diffusion of efforts among them. Definition 2 product and promotion standardisation: Standardisation refers to the level to which a product or promotion strategy of the product is developed to fit Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 7

8 the specific needs of a particular market. A product/promotion may be standardised for use across a number of different markets or may be adapted to suit the specifications required by each different market. Standardisation of product and promotion is facilitated when a product can meet universal needs (Levitt, 1983), however when a product meets unique needs, greater adaptation of product and promotion will be required (Cavusgil et al, 1993). Each of the above strategies has a broad range of possible approaches, covering different levels of market concentration/diversification or different levels of product/promotion standardisation/adaptation. Each approach requires substantially different criteria within the company and within the market to be met. The implications of incorrect selection of the above two strategic approaches are seen to have a greater effect on the future success of an export business than any of the other strategic issues mentioned previously. Essentially all other strategic issues come together in the spreading and standardisation strategies. Implementation of a poor strategy will likely lead to product failure and possible financial collapse of the company, whereas the implementation of the right spreading strategy and standardisation strategy will boost the export success of the firm. It is necessary for firms, both large and small, to analyse their internal (within the firm) and the external (foreign market) positions in order to determine what export strategies to adopt. With this borne in mind, a framework will be developed based on the work of previous researchers to help exporting firms understand the internal and external forces related to exporting. Through improving the understanding of these forces it is hoped that firms will be able to make more informed choices in the field of export strategy. Two industries, the wine industry and the fishing industry, were surveyed to identify what export strategies were used by a range of different sized companies. The study sought to determine the relative importance of different criteria in developing an expansion strategy for firms in developing countries and to compares these to those of a developed country. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 8

9 2 LITERATURE REVIEW The term internationalisation is used to describe the incremental pattern of a firm s expansion into foreign markets (Viviers et al, 1996). A large body of research exists covering all aspects of internationalisation and firms export development strategies. Research has however largely been limited to developed countries with only a few papers covering developing nations, for example Viviers & Calof (1999) on South Africa and Eshghi (1992) on El Salvador, Brazil and Korea. The process of internationalisation is dealt with in depth and infinite detail by many authors. From the various stages of export development (Viviers & Calof, 1999; Bilkey & Tesar, 1977), level of commitment (Cavusgil, 1984) to the effects of attitudes (Gripsrud, 1990), domestic environment (Morgan, 1999), foreign market environment and size on firms export efforts (e.g. Piercy, 1981; Anderson & Ziethaml, 1984, Cavusgil, 1984; Kwon & Konopa, 1993; Hall, 1995). For the South African point of view, Viviers et al (1996) studied South African enterprises and concluded that these exhibit similar export behaviour to those of more developed countries. The debate on adoption of market concentration or spreading strategies has been covered by a number of different authors, among others Katsikeas & Leonidou (1996) and Crick et al (2000). The majority of research has focused on manufacturing firms in developed countries and their approach to the adoption of an expansion strategy. Crick et al (2000) investigated the adoption of export strategy by agricultural firms in the United Kingdom and found little statistically significant difference in competitiveness between market concentrators and market spreaders. Product and promotion standardisation strategy has been reviewed by a number of authors (e.g. Aksoy & Kaynak, 1994; Zou et al, 1997; Buzzell, 1968; Cavusgil et al, 1993). These studies have mostly covered developed countries with the occasional study covering developing countries (Grosse & Zinn, 1990) and agricultural products (Crick et al, 2000). There is a wealth of information in this bulk of literature that will be used in the formulation of an export framework. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 9

10 2.1 DEVELOPMENT OF AN EXPORT FRAMEWORK The development of the frameworks presented here is aimed at helping firms identify broadly what export marketing strategy they should follow. The framework is also expected to improve the understanding of the dynamics of export markets and to help giving direction to companies regarding export strategy. The frameworks developed are based on the research of others authors largely focused on export strategy applied to developed economies. This study will attempt to identify the criteria seen as by South African firms Expansion strategy - concentration versus diversification export marketing framework subsection Distribution costs Market Research * Competition Age of company Sales volume Concentration vs Spreading Expected sales growth rate Control * Planning * Export experience Company size Culture Promotion level * Integrated vs independent channel Export dependence Figure 2-1. Schematic of the various criteria linked to the decision involved in the selection of an expansion strategy. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 10

11 In the selection of the level of concentration/diversification strategy firms need to bear in mind the real effects of these choices. Selection of a concentration strategy will mean that the firm chooses to focus its efforts on just a few foreign markets. This will allow the firm to place greater resources on exporting to each market. These resources will include financial, time and management resources. It will be possible for a firm selecting a concentration strategy to put far greater effort into researching the culture and needs of a particular market and then carrying out stricter control of the export process to that country. The selection of a diversification strategy means that a firm will have made the decision to spread its efforts thinly across many markets. The firm s resources will be spread thinner and the firm will be unable to develop the level of market understanding of each market that could be attained when focusing on only a few markets. A number of factors or criteria affecting the choice of expansion strategy were identified from the literature search. these have been designated as antecedents of the strategy, i.e. factors that control the selection of the strategy, and correlates of the strategy (denoted by * in Figure 2.1), i.e. factors that are essentially affected by the strategy selected. Each factor is related to expansion strategy and will affect the choice of strategy in a particular way. The following section details each factor and the expected relationship with the expansion strategy Company size: There is a difference in opinions on company size and its effect on the selection of a concentration or a spreading export strategy, with good reasoning presented by each author. Gripsrud (1990) suggests that larger companies tend to have greater resources available to them and as a result are more likely to enter distant markets. Similarly Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 11

12 Katsikeas & Leonidou (1996) established that large companies tend to spread across many markets, but usually have a strong presence and large market shares in each. However Lee & Yang (1990) found that large companies tend toward concentration on specific markets, putting greater effort into each and gaining a greater market share in each market. Lee & Yang (1990) showed that small companies tend toward market spreading, taking small shares in each market, and avoiding head-on confrontation with large companies in the same market. Alternatively, Katsikeas & Leonidou (1996) said they would take the opposite strategy and concentrate on a few markets, making the most of their limited resources and gaining a larger market share in these markets Age of company: Older companies will tend to have more experience in exporting as well as greater financial resources. They will tend towards a market concentration strategy, attempting to gain greater market share in fewer markets, however it is expected that larger companies will penetrate more markets attaining higher market share Level of export experience: A key asset in export marketing is international experience (Douglas & Craig, 1989). Knowledge gained through experience will minimise uncertainty the company experiences in exporting (Katsikeas & Leonidou, 1996). Export experience should theoretically be measured as a multidimensional variable; considering time involved in export, volume of product exported, and knowledge capture level and the number of different markets entered. For simplicity this study will consider only the number of years a company has been involved in exporting. Katsikeas & Leonidou (1996) saw market spreaders to be more needy of trained and qualified employees with high levels of export experience. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 12

13 An opposing opinion holds that firms with little experience will tend to spread their marketing effort. Firms with lots of export experience and greater knowledge of each market will tend to concentrate their efforts in fewer markets. Limited experience firms will tend to drop their less profitable markets as they gain experience Cultural diversity of markets: Firms entering markets that are culturally different from the exporting country will require some knowledge of the culture to ensure smooth running of operations as well as correct marketing and promotion of the product. Firms exporting to a number of culturally diverse markets will need to channel resources into export market research in order to gain the necessary knowledge to succeed in these markets. Markets where cultural differences are small encourage a market diversification strategy (Crick et al, 2000). The exporting company has little in the way of barriers and can spread efforts over a number of countries. Where cultural gaps are great the company will have to invest heavily in research and promotion to ensure the success of their products. Hence where cultural gaps are great companies will tend to use a concentrated export marketing strategy Competition within markets: A negative association between the level of competition in markets and the attractiveness of the market has been suggested by a number of authors (e.g. Sandberg, 1986 and Buzzell & Gale, 1987). Markets are seen as highly competitive if there are a number of well-established brands in the market. The absence of strong brands would constitute weak competition. Competitiveness in export markets will affect companies differently dependent on the characteristics of the company. In general companies averse to competition will follow a market spreading strategy. This will allow the company to enter a number of different markets on a small scale, without coming up against strong competition with well-established products (Lee & Yang, 1990). Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 13

14 It should also be noted that the intensity of domestic competition is a significant determinant of a firm s intent to enter or expand into new foreign markets (Sullivan & Bauerschmidt, 1988). As domestic competition increases firms are forced to find avenues of revenue creation in foreign markets. Companies capable of withstanding strong competition will enter highly competitive markets and attempt to capture a significant share of the market Market research level*: Low market research levels results in limited knowledge regarding a firm s export markets. Market concentrators were seen by Katsikeas & Leonidou (1996) to be less likely to engage in market research. This was confirmed to an extent by the observation of their tendency to make fewer visits to overseas markets. Firms following a market spreading strategy tended to have higher market research budgets than those following a concentration strategy (Katsikeas & Leonidou, 1996). Through market research, companies are able to determine the best methods to penetrate, promote and distribute their products in a particular market Promotion budget*: Low or non-existent promotion budgets tend to result from the selection of a spreading strategy where limited penetration is made into a number of different markets with low market share gained. Medium to high promotion budgets are usually a follow on from the selection of a concentrated approach. Stronger promotion of the company s products in a limited number of markets will result in the company gaining greater market share than if it spread the promotion effort over many markets. When a limited budget is spread over a diverse market the level of resources applied to each market is reduced (Ayal & Zif, 1979). Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 14

15 Planning*: Export requires a large amount of planning resources to ensure success in the foreign market. Inadequate resources will greatly narrow the domain of a firm s foreign market activities (Cavusgil & Zou, 1994). The selection of a market spreading strategy will result in a highly complex export net. This will require intense control to maximise the effort, requiring resources and high levels of planning. Companies that are able to put the higher level of effort into efficient and thorough planning are therefore more adapted to market spreading. Conversely market concentration will require less planning and control to maintain the efficiency of export operations Sales volume: High volume exporters tend towards market spreading (Katsikeas & Leonidou, 1996), moving to new markets as the carrying capacity threshold for the product is approached in their existing markets. Firms producing low volumes will tend to concentrate on fewer markets while those with high volume sales will tend to spread across many markets (Katsikeas & Leonidou, 1996) Growth rate of exports required: Firms requiring a high growth rate of exports will tend towards a market diversification strategy. By spreading across a number of markets the company is able increase the potential size of the market. A strategy of market concentration is characterised by slow and gradual rate of growth in the number of markets served (Ayal & Zif, 1979). Firms with low growth potential will tend to concentrate their export marketing to a few markets, whereas those looking for rapid growth will spread their marketing efforts across many markets (Lee & Yang, 1990). However if the growth of the chosen market is high then it is possible for a rapidly expanding firm to have a concentrated strategy. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 15

16 Distribution channel: Firms will use either an integrated or an independent channel for distribution of export products. Firms using an independent channel rely on other operators or agents to market and distribute their products in foreign countries. The independent channel is the more likely option for companies lacking foreign market knowledge, financial and operational resources and strategic capabilities (Anderson & Coughlan, 1987). Companies lacking these resources or seeking to spread their export marketing effort generally use the independent channel. This channel use does however increase communication costs for the firm as new markets and new agents are added (Bucklin, 1966). An integrated channel is where the company gets involved in the marketing and distribution of its products in foreign countries, through opening its own branches or developing a distribution system in the foreign market. Through the integrated channel the firm has greater control over its products in the foreign markets (Root, 1994). Setting up a distribution channel in a foreign market is costly and hence favours a concentration strategy Distribution costs: Distribution costs were found to be an factor affecting exporting companies (Gripsrud, 1990). High distribution costs force a company to concentrate marketing efforts to a few export markets. Distribution costs increase rapidly with the introduction of a market diversification strategy. Lower product volumes are spread over greater areas and scales of economy are lost. Low distribution costs would be less prohibitive to a market diversification strategy, allowing the firm to spread the export of products to many markets. Diversification would however increase distribution costs per product unit, as economies of scale are lost. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 16

17 Level of control over market required by company*: The level of control required by a firm over its product distribution is dependent on the complexity of the export network, the corporate culture of the organisation as well as the product type. Highly complex export networks require greater levels of control to manage and as a result require more resources. More sophisticated products and highly perishable products require more control by the firm to ensure product quality in the foreign market. Companies seeking high control tend to take a concentrated approach to exporting. Resources and marketing effort can then be focused on a limited area, developing strong relationships and high market share. Those requiring less control over foreign markets tend to take a market spreading approach to export Dependence on export: It is expected that firms with a high dependence on exports will follow an export market diversification strategy. This will allow them to increase the size of the market to absorb as much of their product volume as possible Standardisation strategy - standardisation versus adaptation export marketing strategy framework Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 17

18 Adaptation cost Technology Planning * Market Research * Export experience Adaptation vs Standardisation Competition Culture Sales volume Export dependence Company size Promotion level * Figure 2-2. Schematic of the various criteria linked to the decision between an adaptation or standardisation strategy for export marketing. Levitt (1983) suggested that different cultural preferences and national tastes and standards are a thing of the past, and that globalisation is at hand. Picard et al (1988) found that the level of standardisation in Europe was generally higher than in South America, suggesting that more developed countries sustain higher levels of standardisation. It is desirable to standardise as much of the marketing mix, product and promotion, as possible to achieve cost savings and a global product identification (Grosse & Zinn, 1990). Producing standardised products can cut costs through large production volume generated economies of scale (Kreutzer, 1988). Fewer product types will mean lower manufacturing costs per unit as production plant and equipment are minimised and manufacturing operations optimised due to volume. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 18

19 Similarly, using the same promotion materials and systems in different markets will also act as a cost cutting mechanism. By standardising the promotion campaign, a single advertising concept can be used across a number of markets, resulting in lower production costs (one campaign instead of many) and agency costs (again one instead of many). The use of a single promotion campaign across a number of neighbouring countries reduces confusion among users (Kreutzer, 1988). For example products give different names in different countries will create confusion amongst highly mobile users; this would be particularly prevalent in Europe due to the high concentration of different countries and cultures. For a standardisation strategy to have any significant cost cutting value it is necessary for there to be similar preference systems supported by similar purchasing power across the different markets (Kreutzer, 1988). Failure to ensure similar preferences and purchasing power across the range of markets exposed to a standardised campaign could result in damage to the image of the company and significant loss of profits. In such an environment where preferences are different across markets it is more suitable to adapt the product and promotion marketing mix to the cultural tastes of each market. Costs will be higher due to the increase in production and promotion complexity. In-depth study of the markets and the economic viability of adaptation is necessary in such a situation. A number of factors or criteria affecting the choice of standardisation strategy were identified in the literature search. As with the previous framework, these have been designated as antecedents of the strategy, i.e. factors that control the selection of the strategy, and correlates of the strategy (denoted by * in Figure 2.2), i.e. factors that are essentially affected by the strategy selected. Each factor is related to standardisation strategy and will affect the choice of strategy in a particular way. The following section details each factor and the expected relationship with the standardisation strategy. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 19

20 Company size Katsikeas & Leonidou (1996) found that larger firms tended to do less product adaptation than smaller companies. Larger firms will tend to produce products that can be mass-produced and sold across many markets, pursuing experience curve cost advantages. Smaller firms will tend towards fewer products and fewer markets, adapting the products to the market. New product adaptations do however reduce the accumulated production experience cost advantage Level of export experience Andrus & Norvell (1990) state that firms with different levels of international involvement will pursue different degrees of standardisation. A firm s knowledge of the foreign market will improve with an increase in export experience and international involvement. The increase in knowledge will lead to an improved understanding of the wants of the client market and a higher level of product adaptation to their specific needs Perceived level of cultural difference across markets: Marketers must be aware of and sensitive to the diverse cultures in foreign countries to survive and prosper in international markets (Cateora, 1993). To be viable a firm s product and promotion need to be tailored to the cultural idiosyncrasies of the export market (Douglas & Wind, 1987). A standardisation approach will only be feasible in those markets where cultures are not significantly different (Zou et al, 1997). Where markets are significantly different it will be necessary to adapt product and promotion to the specific culture (Cavusgil & Zou, 1994). Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 20

21 The degree of cultural difference among the targeted markets should to be determined such that the correct degree of standardisation or adaptation can be applied to product and promotion Competitiveness of markets: Competitiveness of markets relates to the level of competition between providers of a similar product. It is expected that greater competition will lead to the necessity for companies to adapt their products to the specific needs of the market. Product adaptation can help gain competitive superiority over rival companies (Hill & Still, 1984). Grosse & Zinn (1990) however found no difference in the levels of standardisation between companies acting in highly competitive environments and those acting in low competition environments Market research* A high level of knowledge is required to fully understand the preference systems of foreign markets. In order to adapt products to a specific export market, a firm will require in-depth knowledge of the needs of that market. Hence, firms choosing to adapt products to specific market preferences will place greater emphasis on market research Promotion level*: It is expected that firms placing significant resources on adaptation of products will invest heavily in the promotion of these market specific products. Different promotion campaigns will be needed for each market, resulting in higher costs and resource requirements Level of export planning*: The implementation of an export marketing strategy requiring high levels of product and promotion adaptation will also require high levels of planning and management control. Companies with higher levels of planning ability are hence expected exhibit higher levels of export product adaptation and conversely those applying high levels Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 21

22 of adaptation will require similarly high planning levels. Highly standardised product and promotion campaigns are expected to require relatively less planning resources Sales volume Standardisation of product and promotion allows for reduction in variable costs through the effect of the experience curve with an increase in the cumulative product volume (Rapp, 1973). Standardisation will lead to lower product costs, the development of a competitive advantage related to lower costs and possibly higher profit margins. Higher volume growth means greater cost reduction and greater competitive advantage. Sales volume impacts on distribution costs, with per unit cost reducing with an increase in volume (Ayal & Zif, 1979). Firms can reduce unit distribution costs by adding new product ranges to existing markets to increase volumes Perceived costs of product adaptation: Increasing levels of standardisation are expected for product and promotion as the costs of adaptation increase (Grosse & Zinn, 1990). Firms are less likely to adapt high production cost products for specific markets. Generally high tech products receive only a low level of adaptation, while consumer non-durables are most likely to receive high levels of adaptation to suit the preferences of different market tastes. It is also expected that firm s entering niche markets will be required to allocate greater resources to the adaptation of products and promotion strategies (Fleming, 1992) Technological intensity of products: Products that rely on high technological intensity in the design and manufacture phase will tend towards standardised products across markets (Grosse & Zinn, 1990) while those requiring low technological intensity will tend towards higher levels of adaptation (Cavusgil & Zou, 1994). Adaptation costs are expected to increase as the level of technological intensity increases. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 22

23 Dependence on export It is expected that firms dependent on export will place more resources on developing products and promotion systems adapted to specific markets. A high level of dependence will be seen from the proportion of product volume exported and the proportion of the total revenue coming from the export channel. 2.2 EXPORT MODEL A simple framework model was developed based on the findings presented in the literature. This model will allow exporters to develop a better understanding of the factors affecting the choice of export strategy and will give some idea of where to position themselves regarding the strategy options. The model takes the form of two sections, the market expansion section (concentration versus spreading) and the product and promotion standardisation section (standardisation versus adaptation). Each is presented as a table, listing the factors affecting strategy choice. Criteria Concentrated strategy Spreading strategy Company size Small X Large Company age Older X Younger Export experience Much X Little Cultural gap High X Low Competition in markets Low High Market research High Low Promotion budget High Low Planning level Low High Sales volume Low High Expected growth rate Low High Distribution channel Integrated Independent Distribution cost High Low Control required High Low Dependence on export Low High Table 2-1. Framework for the selection of export marketing concentration or diversification strategies. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 23

24 Users of the model should evaluate their firm s position on each of the variables listed and mark their perceived position on the appropriate line as demonstrated in the first few lines of the Table 2-1. On completion the average position of the firm will roughly identify the appropriate level of strategy the firm should follow. The framework presents a very basic idea of what strategy should be followed, but more ly serves to improve the firms understanding of the factors affecting export strategy selection. It is to note that the framework is based on the studies carried out largely in developed countries and hence should not be expected to fit entirely with the South African situation. Criteria Standardised marketing Adaptive marketing approach approach Company size Small Large Export experience Low High Cultural gap Low High Competition in market Low High Market research Low High Promotion budget Low High Planning level Low High Sales volume High Low Perceived cost of product High Low adaptation Technological intensity of product High Low Dependence on export Low High Table 2-2. Framework section for the selection of product and promotion adaptation versus standardisation strategy. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 24

25 2.3 HYPOTHESES The following null hypotheses were formulated for testing. Each hypothesis has been broken down to a number of subsections relating to the factors identified in the framework. H1: there is no association between the degree of export market concentration/diversification and the following criteria: 1. Company size 2. Company age 3. Markets research effort 4. Planning level 5. Export experience 6. Competition in existing markets 7. Promotion level 8. The need for control 9. Cultural gap 10. Distribution costs 11. Export channel selection (independent/integrated export channels) 12. Dependence on export 13. Sales volume 14. Sales growth rate H2: there is no association between the degree of product and promotion adaptation (standardisation) by exporting firms and the following criteria: 1. Company size 2. Export experience 3. Culture gap between domestic and export market 4. Adaptation costs 5. Competition within the market 6. Market research effort 7. Promotion level Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 25

26 8. Level of planning 9. Sales volume 10. Technological intensity of the product 11. Sales volume 12. Dependence on exports 3 THE STUDY The study, based on a cross-section survey represents descriptive research. The study focuses on two industries (wine and fishing) selected for convenience. The study was aimed at identifying the criteria influencing the selection of two different export strategies by South African firms. The strategies are 1) the choice between a concentrated versus diversified marketing strategy and 2) a standardisation versus adaptation strategy. For the purposes of this study concentration is seen as the focusing of marketing effort on less than five foreign markets while diversification of export marketing entailed penetration of more than five foreign markets. Standardisation implies the provision of the same products and promotion methods to a number of different markets without any adaptation to a specific market. 3.1 THE QUESTIONNAIRE A questionnaire was developed to cover the issues of strategy selection covering two focus issues of this study: Standardisation of product and promotion versus adaptation of product and promotion Concentration of export marketing effort versus diversification of export marketing effort. The questionnaire was divided into two sections. Questions in the first section were designed to elicit responses that could be combined into indices. A number of questions (2 to 5) would represent a single variable. Responses would be averaged to give an index value representing the variable. These questions required answers on Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 26

27 either a three point Likert scale (e.g. Yes, we would definitely do this to No, we would definitely not do this ) or a five point Likert scale (e.g. Strongly agree to Strongly disagree ) (See Appendix 9.5 for questionnaire). Further to this the second section of the questionnaire attempted to draw out direct information regarding the characteristics of the company. These included the following areas: Size Turnover Age and years of export experience Investment in market research Investment in promotion Performance in domestic and export markets Proportion of product exported Geographic areas exported to Number of countries exported to and the largest single market Questions were structured such that companies did not feel that they were giving out confidential information. This was done through the use of response banding in most data collection questions. Certain questions were left blank by a number of companies. These were generally questions that required specific potentially highly confidential information such as profit margin. As a result these questions were left out of the final analysis. 3.2 SAMPLING METHOD Two different industries were sampled in the survey, the fishing industry and the wine industry. Both industries are strongly centred in the Cape region and were targeted for convenience reasons. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 27

28 For the wine industry, firms were randomly selected from a wine guide (Platter, 2000) produced for the wine industry of South Africa. Fishing firms were identified from the Mbendi Industry Directory web site and contacts suggested by other exporters involved in the industry. A random sample of 42 wine producing firms of a total possible 337 wine cellars (SAWIS, 1999) were approached to participate in the survey. A random sample of 28 fishing firms were contacted, of an estimated company count of over double that, and asked to participate in the survey. In the time available for the study, a sample size of 70 was seen as acceptable if a high response rate was achieved. The questionnaire was specifically aimed at the export manager/director who was expected to be the most knowledgeable person regarding export strategy and statistics. An attempt was made to communicate with the individual who would complete the questionnaire such that he or she had personally agreed to complete the survey. Participants in the survey were either ed or faxed the survey. Participants were sent a cover letter and questionnaire and were asked to respond by fax or within 10 days. This deadline was extended by a further two weeks as participants required a significant amount of encouragement to respond. A total of 39 responses were received with only one questionnaire being spoiled. This represents a high combined response return rate of 56% and can be attributed to the personal contact made with the individual firms. Response rates for the industries were: 52% for the wine industry and 61% for the fishing industry. Data was processed using Microsoft Excel spreadsheets, to calculate the index values for each variable. Likert scale questions were coded either on a scale of 1 to 3 or 1 to 5 depending on the scales used in the questions related to the particular variable. All descriptive data used in the statistical analysis were either used in raw form (e.g. company age) or coded according to the questions (e.g. revenue bands 1 to 9). Statistical analysis of the above data was carried out on Statistica software, copyright Statsoft Inc. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 28

29 3.3 STATISTICAL ANALYSIS A number of statistical tests were performed on the data. All tests were carried out at the 5% percent level. Initially descriptive statistics were performed on both the company descriptive statistical data (e.g. age, turnover) and survey variables (e.g. adaptation index) of the full data set (n = 39). Statistical data gave means, standard deviations and frequencies. These are included in tables in the result section and in the appendices. Thereafter a t-test was used to identify differences between the two industry data sets (wine industry n = 22; fishing industry n = 16). Only two statistical differences were identified between the two sets. It was decided to pool the data to achieve a higher n value and improved statistical analysis. Pearson s correlation tests were performed on the combined data to identify relationships between both the adaptation/standardisation and concentration/diversification indices and the survey variables. A number of significant correlations were identified. These were further analysed to determine the regression equations and corresponding R 2 values. Further a multiple regression analysis was carried out in an attempt to build a model to describe the adoption of expansion and standardisation strategies in South African companies. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 29

30 4 RESULTS 4.1 INDUSTRY DATA REVIEW The wine and fishing industries are both well-established industries in South Africa. The tables below (Table 4-1 & Table 4-2) summarise the company data collected through the survey (Appendix 2). Wine firms partaking in the survey have been in existence for somewhat longer than the fishing firms have; average ages being years (sd years) as opposed to years (sd years). Certain wine farms partaking in the survey were over 300 years old and had had more than 200 years of export experience behind them; others were a mere one year old. Average years of export experience for fishing firms was roughly 17 years (sd years) while wine firms had slightly more experience at around 25 years (sd years) Both industries had a median employee band of employees. Total turnover for both industries was in the range R10-R50 million per annum, while export turnover medians were R5-R10 million for the wine industry compared to a higher R10-R50 million for the fishing industry. Fishing firms show a much greater dependence on export with an average of 60-75% of the volume of product and 50-60% of revenue being generated from exports. Wine firms averaged around 30-40% of total product being exported and 40-50% of revenue being generated through exports. For a number of firms the profit margin on exported products was lower than that received for domestically sold products. Both industries had the same median values for the portion of the annual turnover spent on market research and promotion; these were 0-1% and 1-5% respectively. These figures highlight the low investment in market research and promotion for exporting companies. Firms in both industries covered an average of around 4 geographic areas. The wine industry had a slightly higher average number of individual markets penetrated than Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 30

31 the fishing industry; 18 markets (sd ) compared with markets (sd ). The United Kingdom was the more common most profitable market for the wine industry with a number of other European Union countries close behind. The fishing area had a wider range of most profitable countries with European, Far East and African countries featuring equally. Mean Standard Median Range Most Valid N deviation Band common Grouping Company age (years) Number of employees Annual turnover (rands) million Export turnover (rands) million Years of export experience Proportion of volume % 21 exported Proportion of turnover from % 22 export Proportion of turnover spent % 22 on market research Proportion of turnover spent % 22 on promotion Geographic market areas Number of individual market countries Number of product categories Table 4-1. Wine industry data with means, medians, std. Deviations and ranges. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 31

32 Mean Standard deviation Median Band Range Most common Grouping Valid N Company age (years) Number of employees Annual turnover (rands) million Export turnover (rands) million Years of export experience Proportion of volume % 16 exported Proportion of turnover from % 16 export Proportion of turnover spent % 15 on market research Proportion of turnover spent % 15 on promotion Geographic market areas Number of individual market countries Number of product categories Table 4-2. Fishing industry statistics with means, medians, std. Deviations and ranges CRITERIA FOR NEW MARKET SELECTION Firms were asked to evaluate a number of criteria related to the selection of new markets for the export of their products. The aim of these questions was to identify criteria that strongly effect market selection. Results are presented in Table 4-3 and in Likert scale format in Appendix 1. Market Expansion and Product and Promotion Standardisation Strategy for Export Marketing Page 32