Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Chapter Thirteen Global Pricing

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide A GLOBAL PRICING FRAMEWORK EXPORT PRICINGMULTINATIONAL PRICING COUNTERTRADEPRODUCTION COSTS AND EXPERIENCE CURVES DUMPING TRANSFER PRICING F.O.B./C.I.F. QUOTESGLOBAL COORDINATION EXCHANGE RATES GOVERNMENT REGULATION TARIFFS AND PRICE ESCALATION FINAL PRICE PRICE- QUALITY PLC IMPACT TRADE CREDIT SYSTEMS PRICING PRICING AGAINST GRAY TRADE ETHNOCENTRIC PRICING POLYCENTRIC PRICING GEOCENTRIC PRICING

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide The Pricing Basics Costs Experience Curve Competition Demand

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide UNIT COST P**(given) BREAKEVEN TIME PROFIT MARGIN < 0 PROFIT MARGIN > 0 ACCUMULATED PRODUCTION = q THE EXPERIENCE CURVE EFFECT

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide PERCEIVED VALUE PRICING CATERPILLAR USES THIS APPROACH ALSO, SETTING ITS PRICE PREMIUM EXPLICITLY ON THE BASIS OF DIRECT COMPARISONS WITH COMPETITION (ADAPTED FROM KOTLER, 1984, CH. 16): $20,000 IS THE COMPETITOR’S PRICE (READ: “KOMATSU”) $ 3,000 IS THE PREMIUM FOR SUPERIOR DURABILITY $ 2,000 IS THE PREMIUM FOR SUPERIOR RELIABILITY $ 2,000 IS THE PREMIUM FOR SUPERIOR SERVICE $ 1,000 IS THE PREMIUM FOR LONGER WARRANTY ON PARTS $28,000 IS THE TOTAL VALUE (INCL. “AMERICAN” STATUS) $ 4,000 DISCOUNT (“FOR YOU”) $24,000 FINAL PRICE THE CUSTOMER IS SUPPOSEDLY “HAPPY” TO LEARN THAT THE HIGHER PRICE FOR THE CATERPILLAR WAS ACTUALLY “TOO LOW”.

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide START START: OVERINVESTMENT IN BUILDINGS AND INFRA- STRUCTURE FUELED BY CHEAP FOREIGN LOANS. SEQUENCE SEQUENCE: THREAT OF HIGHER INTEREST RATES IN WEST. NEED TO BUY FOREIGN CURRENCY QUICKLY. RESULT: A RUN ON LOCAL CURRENCIES. BUSINESS PROBLEM BUSINESS PROBLEM: PRICES ARE QUOTED IN LOCAL CURRENCY, SO REPATRIATED REVENUES DWINDLE. ASIAN CURRENCIES TUMBLE

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide SOLUTIONS --QUOTE PRICES IN STRONG CURRENCY (BOEING) --IF FEASIBLE, HEDGE IN FINANCIAL MARKETS (OPTIONS, TRADES OF FUTURE REVENUES) --BUT COSTLY (10% OF AMOUNT HEDGED)

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide TYPES OF COUNTERTRADE

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide PRICING A TURNKEY PACKAGE Profit sharing or penalty for nonperformance Package Price System discounts? Get supplier discounts? Bundled? Pricing of turnkey package Unbundled No firm-specific advantages Components where firm has FSAs Price takerPrice maker Competitors: stand- alone profit centers? Competitive entry? Make or buy? Component prices? No profit sharing or penalty for nonperformance

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide The Hamburger Standard Source: The Economist, April 17, 1993, p. 79, with data from McDonald’s. ©1993 The Economist Newspaper Group, Inc. Reprinted with permission.

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide The Hamburger Standard Source: The Economist, April 17, 1993, p. 79, with data from McDonald’s. ©1993 The Economist Newspaper Group, Inc. Reprinted with permission. *Prices may vary locally †Purchasing power parity; local price divided by price in the United States **Against dollar ‡Average of New York, Chicago, San Francisco and Atlanta ‡‡Dollars per pound §Market rate

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide COORDINATED PRICING STRATEGIES Economic controls Informal coordination FormalizationCentralization High Low Level of Marketing Standardization Strength of Local Resources Source: Gert Assmus and Carsten Wiese, “How to Address the Gray Market Threat Using Price Coordination,” Sloan Management Review, 36, no.3 (1995), pp reprinted by permission of publisher. ©1995 by the Sloan Management Association. All rights reserved.

Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Slide PRCING ACTIONS AGAINST GRAY TRADE Economic Controls Centralization Formalization Informal Coordination