1. Going Global – Export Expansion

18. Sample Causes and Effects of Price Escalation Manufacturing net $ 5.00 $ 5.00 $ 5.00 $ 5.00 Transport, c.i.f. n.a. 6.10 6.10 6.10 Tariff (20 percent c.i.f. value) n.a. 1.22 1.22 1.22 Importer pays n.a. n.a. 7.32 7.32 Importer margin when 1.83 sold to wholesaler +0.73 * (25 percent) on cost n.a. n.a. 1.83 2.56 Wholesaler pays landed cost 5.00 7.32 9.15 +9.88 3.29 +0.99 * Wholesaler margin (33 1 / 3 percent on cost) 1.67 2.44 3.05 =4.28 Retailer pays 6.67 9.76 12.20 14.16 7.08 +1.42 * Retail margin (50 percent on cost) 3.34 4.88 6.10 =8.50 Retail price 10.01 14.64 18.30 22.66 Foreign Foreign Foreign Example 1: Example 2: Example 3: Assuming the Importer and Same as 2 but same channels with same margins with 10 percent Domestic wholesaler import- and channels cumulative Example ing directly turnover tax Notes: a. All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable. b. The exhibit assumes that all domestic transportation costs are absorbed by the middleman. c. Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown. * Turnover Tax

19. Price Escalation The Lower Prices are at Home Aspirin $ 0.99 $ 1.23 $ 7.07 $ 6.53 $ 1.78 Movie 7.50 10.50 7.89 17.29 4.55 Levi 501 jeans 39.99 74.92 75.40 79.73 54.54 Ray-Ban sunglasses 45.00 88.50 81.23 134.49 89.39 Sony Walkman 59.95 74.98 86.00 211.34 110.00 Nike Air Jordans 125.00 134.99 157.71 172.91 154.24 Nikon camera 629.95 840.00 691.00 768.49 1,054.42 New York London Paris Tokyo Mexico City SOURCE: Norihiki Shirouzu, “Luxury Prices for U.S. Goods No Longer Pass Muster in Japan,” Wall Street Journal, February 8, 1996, p. B1; and Elizabeth Fleick, “The Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell about Prices,” Time International, December 13, 1999, p. 38. Los Angeles Madrid Stockholm Berlin Rome Mariah Carey CD 16.22 16.09 17.82 15.31 20.67 Windows 98 117.99 123.94 179.79 211.20 264.46 Diapers 13.52 5.03 5.42 6.86 10.55

26. Export Strategies Under Varying Currency Conditions Stress, price benefits Expand product line and add more costly features Shift sourcing and manufacturing to domestic market Exploit export opportunities in all markets Conduct conventional cash-for- goods trade Use full-costing approach, but use marginal-cost pricing to penetrate new/competitive markets When Domestic Currency is WEAK... Engage in nonprice competition by improving quality, delivery, and after-sale service Improve productivity and engage in vigorous cost reduction Shift sourcing and manufacturing overseas Give priority to exports to relatively strong-currency countries Deal in countertrade with weak-currency countries Trim profit margins and use marginal-cost pricing When Domestic Currency is STRONG... SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing," Business Horizons, May-June 1988, figure 2, p. 58.