Vertical Integration and Vertical Restraints By Kevin Hinde.
Strategic analysis of vertical integration
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The strategic analysis ofVertical integration:
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Vertical integration is the combination oftechnologically distinct production, distribution,selling , and /or other economic processeswithin the confines of single firm.
It represents a decision by the firm to utilize
internal or administrative transactions ratherthan market transaction to accomplish itseconomic purposes.
For e.g. a firm with its own sales force couldcontracted, through the market, anindependent selling organization to supply theselling services it requires.
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Strategic benefit and costs of
Vertical Integration
Vertical integration has important generic
benefits and costs which need to be
considered in any decision.
In a vertical chain, the upstream firm is
the selling firm and the downstream firmis the buying firm in the vertical chain
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Strategic beneficiate of
Integration
Economics of integration: the most
commonly citedbenefit of vertical
integration is the achievement ofeconomics , or cost savings in join
production, sales , purchasing control
and other areas.
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Economies of combined
operations
By putting technological/distinct operations
together, the firm can sometimes
gain efficiencies.
Facilities can be co-located
Step eliminates transportation costs which
are substantial for a hazardous and
difficult logistic plan
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Economics of internal control
and coordination
Costs of Scheduling, coordinating
operations, and responding to emergencies
may be lower if the firm is integrated.
Adjacent location of the integrated
facilitates coordination and control
Such economies of control can reduce idle
time, the need for inventory and need for
personnel in the control function.
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Economics of internal control
and coordination
Costs of Scheduling, coordinating
operations, and responding to emergencies
may be lower if the firm is integrated.
Adjacent location of the integrated
facilitates coordination and control
Such economies of control can reduce idle
time, the need for inventory and need for
personnel in the control function.
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Economies of information
Integrated operations may reduce need
for collecting some types of information
about the market or likely by may reduce
the overall cost of saving information.
Market information may well flow more
freely in an organization then through aseriesof independent participants.
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Economies of avoiding the
market
By integrating the firm potentially saves
on some of the selling, price shopping,
negotiating transaction costs of markettransactions.
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Economies of stable relationship
Specialized procedures for dealing withcustomer or supplies can include
dedicated, specialized logistical
systems, special packaging, uniquearrangements for record keeping and
control as also potentially cost
saving ways of interacting.
It is possible that stability of the
relationship will allow the upstream
unit to tune its
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Characteristics of vertical
integration A firm with a strategy of low cost
production may place a greater value on
achieving economics of all types.
Similarly, a firm with weakness in
marketing may save more by avoiding
market transactions
Tap into technology
Offset bargaining power and input cost
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Characteristics of vertical
integration If a firm is dealing with suppliers or
customers who wield significant bargaining
power and reap returns on investment in
excess of the opportunity cost of capital
Enhanced ability to differentiate
Vertical integration can improve the ability
of the firm to differentiate itself from others by
offering a wider slice of value added
services under the control of
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Characteristics of vertical
integration Elevate entry and mobility barriers
Benefits to the integrated firm vis-a- vis an
integrated firm are in form of better prices,lower costs and lower risks.
Extra High return business
Vertical integration will increase overall
return on investment.
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Characteristics of vertical
integration Defend against foreclosure
Widespread integration by competitors
can tie up many of the sources of supply
on devisable customers or retailoutlets
Will lead to problems for unintegratedfirms.
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Strategic costs of integration
Strategic costs include:-
Entry Cost
Flexibility
Balance
Ability to manage the integrated firm
Use of internal organizational incentives/
market incentives.
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Cost of overcoming mobility barriers
Vertical integration obviously requires thefirm to overcome the mobility barriers to
compete in the upstream or downstream
barriers
Overcoming barriers caused by cost
advantages from proprietary technology onfavorable source of raw materials can be a
cost of vertical integrations incentives.
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Increased operating language
Vertical integration increases the
proportion of a firms costs that are fixed
If a business has low fixed costs, the
effective increase in operating leverage
can be minor
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Reduced flexibility to change
partners
Vertical integration implies that the
fortunes of a business unit are at least
partly tied to the ability of its in house
suppliers on customers (who might itsdistribution channel) to compete successfully.
Extent of this risk depends on a realisticassessment of the likelihood that the in
house supplier or customer will get into
trouble and the likelihood of external or
internal changes that will require adaptation
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Higher overall exit barriers
Integration that further increases the
specialization of assets, strategic
interrelationships may raise the overall exitbarriers
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Capital investment requirement
Vertical integration consumes capital
resources, which have an opportunity
cost within the firm, whereas dealing withan independent entity uses investment
capital of outsiders
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Foreclosure of access to supplies or
consumer research or know how
Integration usually means that a
company must accept responsibility for
developing its own technologicalcapability rather than piggybacking on
others
If it does not the suppliers are often
willing to support the firm aggressively with
research, engineeringassistance and the
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Maintaining balance
Productive capacities of the upstream
and downstream units in the firm must
be held in balance or potential problems
arise
Vertical stages go out of balance for a
variety of reasons. Technological change inone stage may require changes in
methods that effectively increase its
capacity relative to the other stage or
changes in product mix and quality may
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Dulled incentives
Vertical integration means that buying and
selling will occur through a captive relation
Declining house can reduce incentives
Incentives for the upstream movement mabe dulled because it sells in house instea
competing for the business
Conversely, the business buying internally
from another unit with company may not
bargain as it hard as its would with outside
vendors.
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Differing Managerial Requirements
Business can be differed in structure,
technology and management despitehaving a vertical relationship.
Manufacturing and retailing arefundamentally different
A management capable of operating one
part of the vertical chain very well may beincapable of effectively managing the
other, to put the point in its most extreme
form.
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Designing the Sales Force
Most industrial companies rely heartily
on a professional sales force to locateprospects, develop them into customers
and grow the business, or they hire the
manufacturers representatives andagents to carry out the direct selling task.
In addition many consumer companies
use a direct selling force: insuranceagents, stockbrokers, and
distributors work for direct sales
organization such as Avon, Amway,
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Sales Representatives
Deliverers A salesperson whose major
task is the delivery of a product (water,fuel)
Order taker- A salesperson who acts
predominantly as an inside order taken(salesperson standing behind the counter)
or outside order taker (the soap salesperson
calling on the supermarket manager) Missionary- a salesperson who is not
expected to take an order but whose major
task is to build goodwill or educate the
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Sales Representatives
Technician- A salesperson with a high level of
technical knowledge (the engineeringsalesperson who is primarily a consultant to
client companies)
Demand Quote- A salesperson who relies oncreative methods for selling tangible products
(Vacuum cleaners, cleaning brushes) or
intangibles (insurance, advertising and
education)
Solution Vendor- A salesperson whose
expertise is in solving of a customers
problem, often with a system of the
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Sales Force Objectives and Strategy
Prospecting Searching for prospects
or leads
Targeting deciding how to allocate
their time among prospects and
customers
Communicating Communicating
information about companysproducts and services
Selling Approaching, presenting ,
answering questions, occurring
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Sales Force Objectives and Strategy
Servicing Providing various services
to the customers consulting on problems,rendering technical assistance,
arranging finance, expending delivery.
Information gathering Conducting
market research and doing intelligence
work
Allocating Deciding which customers will
get scarce products during product
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Sales Force Structure
One product line to one and usingindustry with customers in many
locations would use a territorial/
structure.
A company which sells many products
to many types of customers might need a
product or market structure
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Sales Force Size
First establish the number ofcustomers to be reached , then use a work
board approach to establish
Sales force size E.g.
1000 A- Accounts
2000 B- Accounts / Country Status
A account require 36 calls a year
B account require 12 calls a year
Total calls A+B = 60000 (36000+ 24000)
Average up con make 1000 call a year
No. of salesperson: 60000/1000 =60
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Sales Force Compensation
Salary
Variable amount (commissions, bonus
on profit sharing )
Expense allowance
Benefits
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Managing the sales force
Recruiting and selecting representatives
Training and supervising sales
representatives
Sales reproductively
Motivating sales representative
Evaluating sales representatives
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Principles of Personal Selling
Prospecting and Qualifying- Identify and qualifying prospects
- Hot/ warm/ cold categorization
Pre- approach- Learn about the prospect
- Decides on best contract approach which
might he a personal visit, a phone call or a
letter.
Presentation and demonstration
- AIDA GET attention
- Hold Interest
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Principles of Personal Selling
Overcoming objection Closing
Follow up and maintenance
Miscellaneous-Negotiation
- Relationship Marketing
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International Market Promotion
Product policy and planning
- Product decision is among the first
decision a marketing manager makes
in order to develop a marketing mix.
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International Product planning
Product objectives emerge from the host
country and corporate objectives arecombined the business definition.
The companys goals usually are stability,
growth, profits and return on investment.Stated differently, the corporate objectives
may be defined in terms of activities (the
manufacture of a particular product or
export to a particular market), financial
indicators (to achieve a targeted return on
investment), desired position (its market
share and relative market leadership and all
Perspectives of International
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Perspectives of International
Product Planning
Business definition of the
country
Product Objectives
Product offering
Marketing Mix
Customer Satisfaction
Country
ObjectivesCorporate
Objectives
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Product Design Strategy
Decision criteria
Nature of Product
Market
Development
Cost/ Benefit
relationship
Legal requirements
Competition
Support system
Physical Environment
Market conditions
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Standardization
A recent study on the subject lendssupport to the high propensity to
standardize all or parts of marketing
strategy in foreign markets.
An extremely high degree of
standardization appears to exist in landnames, physical characteristics of product
and packaging.
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Rewards of Adaptation
Although standardization offers benefits toomuch attachment to standardization can
be counterproductive.
Marketing environment from country to
country, and thus a standard product
originally conceived and developed in the
US may not really match theconditions in each and every market.
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Developing an International
Product line
Extension of domestic line
Introducing additional products to the
international line
Introducing a new product in a host country
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New Product Development
Process (Six Steps)
Idea
Screening
Evaluation Prototype product
Market testing
Entry
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Management of Product line
A few generalizations are required to be
made for managing an international
product line:- Product segmentation
Product design
Product quality
Product innovation
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R & D in the home country
Critical mass and economies of scale
Easier communication
Better production of know-how
More leverage with host government
Ease of control of coordination
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Adoption and diffusion of
New Products
Customers DO not instantly buy new products.They go through a step by step mental process
of acceptance or rejection of any new product.
Awareness (Exposure to a new product)
Knowledge
Evaluation
Trail
Adoption
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Product related characteristic
Relatives advantages
Compatibility
Complexity Divisibility
Communicability
Customer innovativeness
Need perception
Economic ability
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Foreign product diversificatio
Diversification refers to seekingunfamiliar products or unfamiliar markets
or both for expansion.
Diversification can also be a risky
strategy and a company should choose
this path only when current product/market orientation seems to provide no
further opportunities for growth.
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Brand Strategy
B d lt ti
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Brand alternatives
An overseas marketer has several
alternative ways to decide on thebrand name:-
Use one name with NO adaptation to local
markets Use one name but adapt and modify for
each local market
Use different names in different markets forsame products
Use the company name as brand nameunder one house style on the corporateumbrella approach.
B d Pi
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BrandPiracy Counterfeiting
Lows pertaining to bound piracy in many countriesare loose with little punishment for shady practices
Three forms of piracy
- Imitation: copying an established hand.
-Faking refers to identifying the fraudulent productwith a symbol, logo or brand name that is verysimilar to the famous brand.
- Piracy through preemption of brand names isfeasible in those countries where the low permitswholesale registration of brand names. InMonaco for e.g. a person registered 300 famous
brand names such as Chase Manhattan, BankersTrust Scare Texaco NBC amd CBS.
B d Pi
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BrandPiracy Counterfeiting
Lows pertaining to bound piracy in many countriesare loose with little punishment for shady practices
Three forms of piracy
- Imitation: copying an established hand.
-Faking refers to identifying the fraudulent productwith a symbol, logo or brand name that is verysimilar to the famous brand.
- Piracy through preemption of brand names isfeasible in those countries where the low permitswholesale registration of brand names. InMonaco for e.g. a person registered 300 famous
brand names such as Chase Manhattan, BankersTrust Scare Texaco NBC and CBS.
Private Branding for
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Private Branding for
Foreign Markets International Packaging Promotional
100% takes into account requirements of
four groups of people-
Customers Shippers
Distributors Host Government
International warrantees and services
Private Branding for
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Private Branding for
Foreign MarketsWarranties
Competitive tool
Grantee from the manufacturer that theproduct will perform as stipulated
Standard warranty vis--vis customized
warranty- Nature of the market
- Environmental conditions (tear, wear)
etc.
Private Branding for
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Private Branding for
Foreign Markets Services
Constitute an offer to maintain the
original product through occur having,
replacement of parts adjustments and the
like.
- Formulation of a service policy
requires objective
assessment of needs.
Rationale for seeking
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Rationale for seeking
comparative advantage Nations seek to increase the material
standard of living of its people.
Living standards increase as a functionof productivity
With greater productivity , the sameamount of labor yields more goods andservices
As productivity increases, greatermaterial wealth results
Productivity leads to specialization of
production
T d B i
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Trade Barriers
Two types of Trade Barriers
Tariffs barriers
Non-tariffs barriers
T d B i
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Trade Barriers
Tariffs refer to taxes levied on goods
moved between nations
Most important of these is the tax usuallycalled the customs duty, which is levied by
the importing nation A tax may also be imposed by the
exporting nation and is called an exporttax.
A country through which goods pass ontheir way to their destination may
impose a transit tax.
N.B Real purpose behind trade barriers is
Arg ments for protection
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Arguments for protection
Keep money at home argument transferof national wealth in exchange with
another nation for goods.
Home market argument
Equalization of costs of production
argument. To make local goods
competitive against imports which may be
cheaper due to technological advantages
Employment argument
Arguments for protection
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Arguments for protection
Anti- dumping argument
Impart industry argument
Bargaining and retaliation argument to
seek reduction of tariffs by other country
or to retaliate against another country
National security argument
Tariff Barriers
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Tariff Barriers
Different nations handle tariff barriersdifferently
A country may leave a single tariff
system for all goods from all sources.
This is called uni-linear or single-
column tariff.
Another type of tariff is the general
conventional tariff. This tariff applies to
all nations except those that have
tariff treaties (or a convention to that
effect) with a particular country.
Tariff Barriers
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Tariff Barriers
A tariff may be worked out on the basisof a tax permit, called specific duty or
as a percentage of the item, which is
referred to as advalorem duty. Sometime
both may be levied on a specific item as
combined duty.
Non Tariff Barriers
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Non Tariff Barriers
They include:-
Quotas
Import equalization taxes
Road taxes
Laws giving preferential treatment to
domestic suppliers, administration ofanti dumping measures, exchange
controls, and a variety of invisible tariffs
that impede trade
Principal Non Tariff Barriers
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Principal Non Tariff Barriers
Specific limitation on trade
Customs and administrative entry
procedures
Standards
Government participation in trade
Charges on import
Other categories.
GATT (General agreement on
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( gTariffs and Trade)
Recent was Uruguay round
addressed issues such as tariff servicesand trade related aspects of intellectualproperty and investment measures.
Uruguay round was completed on Dec15, 1993. (After 07 years of
negotiations)
117 countries (including the US signedthe agreement)
Motive: to reduce trade barriers andcreate more comprehensive and
GATT (General agreement on
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( gTariffs and Trade)
Unlike GATT, WTO panel decisions are binding.
If one nation a makes a complaint to the WTOthat another nations laws or decisions are non-binding and in violation.
Agreement was signed in April 94
Went into operationalisation w.e.f. 01 Jan. 95Agreement created WTO (World Trade
Organization) on 01 Jan; 95
WTO implements the agreement and provides a
forum for:- Negotiating additional reduction of trade barriers
Setting policy disputes
Enforcement of trade rules
WTO
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World trade organization rules apply to90% of world trade
Stronger enforcement mechanism in
WTO Member countries as on date are 125
(nearly the whole of the world except
China WTO works to eliminate non- tariff
barriers, can be used to challenge
environment health and other WTO
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Stronger enforcement powers representa shift in power from citizens and national
government to unelected bureaucrats.
Unlike GATT, WTO panel decisions are
binding. If one nation makes a complaint
to the WTO that another nations laws or
decisions are non-binding and inviolation of WTO rules, WTO can enforce
WTO standards
Marketing Memo
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Marketing Memo
Helping stores to sell!
Attract shoppers and keep them in thestore
Honourthe transition zone :- Make surethere are clear sight lines.
Make merchandise available to reach &touch
Men do not ask questions as a rule.
Women need space
Make checkout easy
Retail Category Management
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Retail Category Management
Step What is meansDefine the category Draw the line between product
categories. Alcohol & soft drinks as
one beverage category ?? or
separately managed
Figure out the role How des the category fills / fits into thestore ? destination category vis--vis
fill-ins
Assess performance Analyze sales data
Set goals Agree on category objectives
Choose the audience Sharpen focus for maximum effect
Figure out the tactics Decide product selection promotion
merchandising and achieve category
goals
Implement the plan Set time table / execute
Growth and type of
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ypwholesaling
Wholesaling will retain importance
and see decent growth due to spurt
in consumer purchasing
Growth and type of
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ywholesaling
Merchant wholesalers
- Independently owned businesses
- Will take title to merchandise
Merchant wholesalers
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Merchant wholesalers
Handles:
Full service wholesalers Carry stock maintain, a sales force, offer
credit , make deliveries , providemanagement assistance
Limited service wholesalers
- Cash and carry wholesalers sell a limitedline of fast moving goods to small
retailers for cash- Truck wholesalers sell and delivers alimited line of semi- perishable goods
to supermarkets, goods stores hospitals etc.
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Functions
Selling and Promoting: wholesalers salesforces help manufactures reach many
small business, customers at relatively lowcost.
Buying and assortment building
Bulk breaking
Warehousing
Transportation
Financing
Risk bearin
Functions
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Functions
Market Information
Management services and counseling
Drop shippers secure bulk industries
such as coal, heavy equipment etc. Rack jobbers serve grocery retailers in
non- food items.
Mail order wholesalers sent catalogues toretail, industrial and institutional
customers. Orders are filled and sent by
mail, plane or truck
Functions
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Functions
Brokers and agents- Facilitate buying
selling- limited functions
Manufacturers and retailers branches andoffices- wholesaling operations are
conducted by sellers or buyers themselvesrather than through independentwholesalers.
Specialized wholesalers- Agricultural assemblers (output of
many farms)
- Petroleum bulk plants and
Factors affecting demand and
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supply of U.S Dollars
1. Factors increasing supply ofUS dollars in world markets.
2. Impact of merchandise
3. Impact of gold and silver
4. Payments to foreign ships for
straight and passengerservice.
5. American tourist expenditure
abroad.
6. Banking and all other financial
charges payable to foreigners
7. Interest and dividends due on
American securities held
aboard
1. Factors increasing demand forU.S. Dollars in world Markets.
2. Export of Merchandise
3. Exports of gold and silver
4. Foreign tourists expenditures
in the US5. Banking and other financial
charges receivable form
foreigners
6. Interest and dividends due on
foreign securities in US
7. New sale of American
securities abroad.
Factors affecting demand and
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Factors affecting demand and
supply of U.S Dollars
Supply
New Purchase of foreign
securities
Repurchase and
redemption of American
securities held abroad
Transfer of American
balances to foreign bands
US govt. grants and loans
Demand
Repurchase and
redemption of foreign
securities held here (U.S)
Transfer of foreign balances
to American banks.
International Monetary System
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International Monetary System
Trade settlements involves topic suchas determination of foreign exchange
rates, balance of payments, foreign
exchange transactions, internationalfinancial flows and international
financial and trade institutions.
Each country has its own currencythrough which it expresses the value
of its goods
International Monetary System
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International Monetary System
For international trade settlements,however, the various currencies of theworld must be transformed from one
into the other. This is accomplished by
foreign exchange markets.1. Negotiations to establish postwar international
monetary system took place atBrethonwoods, New Hampshire in 1944.
2. Economically disastrous post war period.
3. Recommendations:
International Monetary System
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International Monetary System
Each nation should be at liberty to usemicro-economic policies for full
employment (Tent ruled out return to
Gold standard) Free floating exchange rates could not
work extremes of both permanently fixed
and floating rates should be associated. Monetary system should recognize that
exchange rates were both a national
and international concern
International Monetary System
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International Monetary System
Sustained a rapidly increasing volume
of trade and investment.
Displayed flexibility in adapting to
changes in international commerce
Proved to be efficient
Proved to be hardy
Allowed a growing degree ofinternational cooperation established a
capacity to accommodate reforms and
improvements.
Foreign Exchange
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Foreign Exchange
Foreign exchange is the monetary
mechanism by which transactionsinvolving two or more currenciestakes place
It also refers to exchange of onecountrys money for another countrysmoney
Foreign exchange transactions present
two problems.- Firstly each country has its own
methods and procedures for effective
foreign exchange- usually developed by
Historical perspective on making
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p p g
payments across national boundaries:-
Gold standard refers to using gold as themedium of exchange for effecting foreigncommercial transactions. Before World
War- I, most countries followed the goldstandard.
Gold exchange standard: this means thatthe foreign exchange rate of a currencyis set in relation to that countrys goldholdings
Gold bullion standard amounts to holdingan adequate quantity of gold in reserve in bar
or bullion form to settle international
transactions at the level of government
ac ors a ec ng eman an supp yof US Dollars
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of US Dollars
Factors increasing supply of US Dollars in
world Markets
Factors increasing demand for US Dollars
in World Markets
Import of Merchandise Export of Merchandise
Imports of gold and silver Exports of gold and silver
Payments to foreign ships for passenger
service
Foreign tourists expenditures in the US
American tourist expenditure abroad Banking and other financial charges
receivable from foreigners
Banking and all other financial charges
payable to foreigners
Interest and dividends due on Foreign
securities in USA
Interest and dividends due on American
Securities held abroad
New sales of American Securities abroad
New purchase of foreign securities Repurchase and redemption of foreign
securities held here (US)
Repurchase and redemption of American
securities held abroad
Transfer of foreign balance to American
Banks
Transfer of American balance to foreign banks
US Govt. grants and loans
Balance of Payment
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y
Balance of Payment
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Balance of Payment
The balance of payments of a countrysummarizes all the transactions that havetaken place between its residents and foreignersin a given period, usually a year! Transactionsrefers to imports and exports of goods andservices, lending and borrowing of funds,
remittance, government and militaryexpenditures.
Residents: includes all individuals and businessenterprises, including financial institutions, that
are permanently residing within a countrys
borders as well as government agencies at alllevels.
In other words balance of payments reflect thetotality of a countrys economic relations with the
rest of the world .
Factors affecting demand and supplyof US Dollars
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Most currencies today areinconvertible. This refers tocurrencies that cannot converted orexchange for other currencies.
Currencies may be labeled hard andsoft
Hard- in great demand
Soft- relatively easily available.Developing nations currencies aregenerally soft.
of US Dollars