1. 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 13 - 0 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

2. 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 13 - 1 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

3. 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 13 - 2 The Pricing Basics Costs Experience Curve Competition Demand

4. 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 13 - 3 UNIT COST P**(given) BREAKEVEN TIME PROFIT MARGIN < 0 PROFIT MARGIN > 0 ACCUMULATED PRODUCTION = q THE EXPERIENCE CURVE EFFECT

5. 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 13 - 4 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”.

6. 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 13 - 5 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

7. 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 13 - 6 SOLUTIONS --QUOTE PRICES IN STRONG CURRENCY (BOEING) --IF FEASIBLE, HEDGE IN FINANCIAL MARKETS (OPTIONS, TRADES OF FUTURE REVENUES) --BUT COSTLY (10% OF AMOUNT HEDGED)

8. 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 13 - 7 TYPES OF COUNTERTRADE

9. 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 13 - 8 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

10. 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 13 - 9 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.

11. 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 13 - 10 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

12. 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 13 - 11 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. 31-42. reprinted by permission of publisher. ©1995 by the Sloan Management Association. All rights reserved.

13. 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 13 - 12 PRCING ACTIONS AGAINST GRAY TRADE Economic Controls Centralization Formalization Informal Coordination