The research work has presented an enlarged view of the operation within the grey markets, their functioning, pricing structure, the customer base & lastly the arguments in favour, thereby evaluating -‘Can grey be good?’
It has also focussed on grey markets- as a subject of annoyance for the IT players & OEMs. Counter-arguments & hostile measures adopted to combat grey goods have also been the point of discussion.
Overall, this piece of research is being successful in presenting a balanced view of the goods & the bads of the grey industry from the perspective of industry players’, grey entrepreneurs’ as well as consumers’.
– To obtain information & insights about grey marketing activities within the software industry.
With the help of Journals, case studies & secondary research activities shed light on the present scenario of the grey markets (consumer targeting & inclination, pricing etc). The pros & cons of grey marketing shall also be presented to have an equalised view.
– To know what are the hostile measures adopted by firms to prevent grey activities.
Present cases to depict the preventive measures adopted by firms like HP & Microsoft to combat grey market products. The paper also focuses on the initiatives adopted by independent agencies such as AGMA & BSA towards grey market activities.
– Market Penetration & Grey Markets
Can grey market ever be an alternative to market penetration? If yes, to which extent can it be possible? In addition, understanding the concept of ‘free riding’ as a way for market penetration, as mentioned in the Journal of Business Venturing (Vol 4).
– To evaluate: Can grey ever be good?
Based on the research undertaken, evaluating & thereby concluding the positives & negatives of grey markets. Should they be encouraged? Can they boost an economic scenario of a country? & lastly how effective can they be in increasing sales of a product?
The methodology that is to be adopted for fulfilment of the above aims is as under:
– Journals, Newsweekly, Internet (secondary research) along with white papers provided by firms shall be the main sources of information for this research.
– Primary data obtained through interviewing shall be the most vital aspect (it shall be considering not only the consumer perspective towards grey markets & its products, but also of dealers operating within this arena).
– & finally, the crux of the research (insights, analysis & evaluation) will be presented to obtain a concluding perspective.
1.3 GREY MARKET: AN NTRODUCTION
Majority of distribution companies are flourishing thanks to distribution channels that shepherd product from a manufacturer & eventually direct them to the consumers through a chain of legitimate distributors across the world. But a mounting & quite detrimental market subsists that can cause ignorant customers to buy technology products with untrue warranties, several designed for use in other countries – or worse products consisting counterfeit parts. These practices can erode customer satisfaction & harm brand integrity, causing major profit attrition for manufacturers’.
Welcome to the global ‘Grey Market’ where branded products have been sidetracked from the authorised supply channel within a country or are imported into a country without the approval or awareness of the manufacturer. Grey market goods are usually sold at lesser prices than those proposed by the legitimate distributors. And the pricing disparity amongst various legitimate markets & customers generates an opportunity for the brokers’ to procure labelled products at discounted prices & move them to markets where they can fetch high income.
A research study by KMPG demonstrates that grey market goods pose a grave challenge to information technology manufacturers’ & their authorised dealers’. The study reveals that IT manufacturers’ are communally losing up to US$5 billion in profits on yearly basis, a figure that is mounting. While the grey market affects many businesses, including automobiles, consumer products, pharmaceuticals, fashion accessories & others, this study shall validate that computers & related products are the industry segments most affected by grey market actions.
1.4 INTRODUCTION TO THE PROBLEM
(a) Software Counterfeiting
Counterfeiting is amongst the most exigent problem facing the information technology (IT) industry today. Illegal replicas of brand-name & high tech products are flooding the marketplace, causing harm to legitimate companies’ profits and dropping their aptitude to invest in research and development (R&D). Multiplication of technology employed to make computers, servers, and a host of high tech products—as well as a lack of regulatory enforcement in developing countries—is speeding up counterfeiting. It is now estimated that as much as 10 percent of all high tech products sold globally are counterfeit.
(b) Free Riding: A Way To Penetrate Markets?
‘Free Riding’ is a term which comes into picture when software products have been counterfeited. Free-riding was first introduced by Tan et al. (1995, 1997) as an alternative explanation for the incidence of grey marketing, whereby grey entrepreneurs are provided with the opportunity to enter money-making markets that are presently supplied by big firms.
However, hostile measures have been taken to prevent grey market activities by agencies like AGMA & BSA as well as biggies like Microsoft, HP etc. HP is administrating reseller spot checks and distie reviews to stamp out the grey market in a variety of regions without being hesitant to exercise the law courts against resellers who “breach contractual requisites”. The firm, at the moment, is taking legal action in opposition to one UK reseller for violation of agreement and cautions it has other cases under review. While, Microsoft has collared another plagiarist in the UK for flogging grey software on eBay. The software giant has scored £35,000 in compensation against an internet trader for copyright violations and illegitimately bringing in cheap American software to Europe.
Meanwhile, an agency like Business Software Alliance (BSA) is outing bandits by setting a bounty on their heads. The group announced its “Blow the Whistle” operation which presents $1m to workers who squeal on their companies. Certain firms are trying to launch software which might allow manufacturers’ detect sales through unofficial mediums.
1.5 SCOPE FOR THE REASERCH
The main reason behind the proposed research subject is to obtain information on the grey markets & the practices that are being carried out. The scope for undertaking the research work is as under:
1.6 LIMITATIONS TOWARDS THE REASERCH
The possible shortcomings for the proposed research topic are as under:
1.7 REASEARCH STRUCTURE
The research has five focus groups (in order to understand the information.)
The first chapter offers an inside view of the topic with its backdrop. It also contains the customary objectives which form the foundation for a focused research study. Meanwhile, it also describes how the established purpose will be achieved and the manner they would provide help. This section gives rationale and importance of conducting this research.
The second chapter comprises the prior literature on grey markets, constructed by a range of authors and researchers in earlier years. This would aid to shed light on the pros & cons in grey marketing. In addition; this chapter provides live cases published in reputed newsweekly.
The third chapter talks about the type of methodology the researcher has employed to achieve the study. It gives out the arguments in favour & against of each method in order to gain understanding. Furthermore, it exemplifies of some important sources which have been accessed to complete the study. Thus, this chapter explains the different techniques to achieve the objectives.
The fourth chapter forms the body of the thesis as it entails the detailed analysis of the various aspects to establish the objectives. This chapter generates convincing points to support the study.
The fifth and the last chapter of the paper summarises all the information gathered, finally, concluding the thesis.
1.8 SUMMARY & HYPOTHESIS
To summarise the above literature in few words, I shall be basically focusing weather grey markets can influence the sales of a product, thereby helping towards market penetration.
Concepts, rather strategies, such as free riding shall be looked & researched upon to present realistic as well as optimistic view towards grey markets, thereby analysing -‘Can grey ever be good?’ & ‘Can grey goods help in market penetration?’
Almost exclusively, the existing literature on grey marketing regards the occurrence as a pricing problem but falls short to identify it as a market entry opportunity for start-up entrepreneurs. The grey marketing strategy forms apt for start-up entrepreneurs in view of their resource limitations and the risk of being a first-mover in market development. Within this paper, the researcher shall be focusing on how an entrepreneur can effectively penetrate an established market by adopting suitable approaches. This is most favorable for an incumbent trader to accommodate the entrepreneur/grey marketer even if the former could compel the latter out of the market through hostile counter actions.
Moorthy (1985) demonstrated the game theoretic methodology is most appropriate to investigating the behavior of market participants in such a state. This game theory is being pursued by Lim G.H., Lee K.S., Tan S.J. (Journal of Business Venturing, Jul 2001, Vol 16) to depict the strategic communications between parties concerned in grey markets and to recognise the circumstances under which entrepreneurs can effectively enter these markets.
2.1 THE POSITIVES OF GREY MARKETING
A study offered by USC Marshall Research in fall 2004 by Mark Bergen (Carlson School of Management, Kersi D. Antia (University of West Ontario, London) & Shantanu Dutta (Marshall School of Business, University of California) portrays the optimism towards grey markets.
According to the paper, grey markets are often an helpful way to react to competitive demands, control distribution channels, fragment markets, reach unexploited markets & alter the changes in market conditions. Some of the positive aspects of grey markets are being highlighted below:
Incremental Sales: Grey markets are favourable if they reach formerly untapped markets. Grey markets also disclose the existence of new markets. Cell phone manufacturers’ competing in Malaysia, for instance, discovered a buying segment keen to pay premium prices for the newest phone gadgetry.
Supply restrictions: Grey markets are advantageous if they permit dealers to overcome supply constraints & scarcities. For example, IBM relied on the illegal outlets in China to get around government policies requiring the participation of local companies. Rather than make huge investments to fake partnerships with local distributors’, IBM turned a blind eye to a flood of grey market imports from Hong Kong.
Competitive need of opportunity: Competitors’ will frequently exploit grey markets if they are lucrative & companies which do not follow trail shall lose significant market share, position & power. This is precisely what happened to Indian-branded manufacturers’ of PCs. With the evident competition and sales went on at high-end retailers, the actual sales volume that led to economies of scale & market penetration took place in the unorganised sector, accounting nearly 60% of total market. Several branded PC maker in India, uncared for this market, failing to reach a large unexploited segment of customers whose wants were not being met by the existing channel. Competitors’ that did sell to this sector have since grown to be key players’.
Market Segmentation: It is at times complicated to segment market within an existing distribution channel structure. Grey markets permit firms to segment their customer base more profitably than they could if they employ only a constricted base of distributors, customer uncertainty & branded dilution that arrives from selling through a multi-channel network of legitimate dealers. IBM used a twofold channel approach to sell profitably in high end markets while still attaining more price responsive consumers with grey market goods; this strategy helped the company meet sales targets, spawn profits & produce sales economies in manufacturing.
Channel Management: Occasionally it is less expensive to abide grey market activity than to close it entirely. Shutting down grey market can be very pricey in terms of management time & other resources required sensing breach, filing them, communicating them internally with distributors, and punishing the lawbreakers. Grey markets may also be a less expensive means to serve small customer sections that do not have access to authorised outlets or customers who do not value the services offered by authorised dealers.
Varying market environment: In many situations, distribution channels cannot modify adequately to meet new market realities. For example, auto dealers have supply networks in places that are hard to switch. But in an epoch of soft sales, sustained incentives & continually growing competition, they are struggling for numbers, even if it means forgone revenues. With effect, dealers have been more tolerant to grey markets as long as these markets let them to get in touch with a broader set of customers at improved prices.
Market Aptitude: Companies that reveal grey market activities & the causes following them discover about their customers & their markets. Since grey markets materialise on their own, outside existing supply channels & structures, they are frequently driven by influential market forces (such as short supply to a particular segment that wants the product) & therefore put forward some of the purest forms of market intelligence accessible.
2.2 CONS OF GREY MARKETING
1. Dilution of exclusivity: Perhaps the most instant outcome of grey market is the draining down of exclusive rights to distribute a product. Instead of being the solitary distributor or one of a select few enterprises for delivering a product, the authorised distributor becomes merely one of several sources. The consequence is a radical drop in margins as multiple outlets struggle for the same customer. What follows promptly thereafter is only to be expected: loud complaints from the legitimate distributors and calls to the company to “do something concerning it!”
2. Free riding: But what if a manufacturer turns blind eye or, worse yet, writes off its authorized distributors’ complaints? While it is improbable that a distributor would split relations with the supplier in protest, there are several indirect but possibly more insidious ways of reaching the manufacturer. One of these is free riding. Free-riding was initially offered by Tan et al. (1995, 1997) as an alternative justification for the event of grey markets. In such situations, authorised traders, dispirited by anemic margins and manufacturer’s ineffectiveness, begin skimping on the imperative services they generally offer—such as presale service, consumer awareness & education on product features, salesperson training and so on—in an attempt to lessen their expenses and match grey marketer’s price. This approach can weaken the value-added services and activities that often lay at the heart of several enterprises sources of differentiation and competitive plan in the marketplace. As one automobile dealer put it, “We invest millions in sales and service facilities. It’s hard to compete with someone whose only investments are a briefcase and a cell phone.” The under provision of services is the death knell of high-end brands, as customers who value service will discard the brand in droves.
3. Damage to channel relations: Perhaps the prime cost of grey marketing is its impact on the relations and trust amid members of the distribution system. When a manufacturer has made major investments in official channel members or is dependent on one or a few associates (or both), grey markets that rip off these relationships can be particularly pricey.
Visualise an official supplier that has recently coughed up $2 million to set up a new outlet and its related trappings—all to accomplish its contractual obligations. The manufacturer has guaranteed the dealer that ownership of an exclusive region will more than add up for his venture. Just as the distributor begins to foresee the promised sales, he receives word that the cash cow of the product line is offered down the street at a markdown of 15% to 20% off its own posted price. Frenzied phone calls to the manufacturer are met with empty reassurances or even stony silence. What should the enterprise do? Should it (a) match the price of its grey market opponent, doing whatsoever necessary to cut costs, (b) complain robustly to the manufacturer or (c) seek assistance from the courts, suing whoever appears liable for his current remorseful situation?
4. Undermining segmented pricing schemes: The spill over from this distribution headache expands with equivalent viciousness to most essential elements of a marketing strategy, including pricing. A basic characteristic of multinational operational strategy is the facility to price goods at levels that every local market can bear. As long as a company can fragment each market, it has a winning hand. But globalisation tosses a twist in the works. Tumbling trade barriers, easy accessibility of information and improved logistical potentials have collectively made the watertight local market a quaint belief; these factors also make it easier for grey market operators to flourish.
5. Repute and legal liability: A manufacturer’s ability to support its product is taken for granted. In the case of grey market goods, however, the manufacturer loses control of the product.
FOR AN EXAMPLE OF how these five fundamentals can work together, consider the troubles faced by manufacturers of new, high-end IT products. High levels of services are often required to instruct customers on the features and benefits of these products. To really understand quality & new product features and their functioning with other technologies, it is obligatory for the customers to learn from a salesperson at the retail outlet. To make such services available, the manufacturer time and again needs to develop a relatively elite set of distributors, fostering strong contacts and supporting the distributor’s actions with subsidies and an opportunity to achieve high margins.
Authorised suppliers’ are chiefly vulnerable to grey markets in this condition. Illegitimate dealers’ can free ride, allowing other dealers invest in the service and offering the similar products at lower prices. Budding customers can take what they discover from authorised dealers and hunt for low-service, lower-price grey markets. The authorised sellers thus face high costs, shrinking margins and low sales. Often, the clarification they opt is to provide less service and to be more price competitive. As their margins contract, channel clashes grow, and the dealers start routing customers to competitors’ products which offer higher margins. The difficulty, then, eventually budges from the authorised distributors and comes to rest on the shoulders of the manufacturer.
Below presented are two different cases providing two different perspectives towards grey practices. The first consist of a comparative study amongst countries & the pricing structure of the grey goods that are being sold.
The second case depicts the current scenario of grey activities in China. The case focuses mainly on the problem of counterfeiting of IT products & the preventive measures that can be taken to minimise this nuisance.
BUYING FROM THE GREY MARKET
Are you tempted to buy cheap and cheerful goods from the grey market or should you take the authorised route? asks Sean Fleming.
Anyone who has visited the US or the Far East will have found themselves going misty-eyed and waxing lyrical on the subject of ‘how cheap things are over there’. But you don’t have to cross an ocean to see bargains.
The difference in the price of new cars in Britain and mainland Europe – they are often as much as 20% cheaper on the continent – has many people hopping mad.
The UK’s Director General of Fair Trading has concluded ‘the market isn’t working’, and has now ordered the Monopolies and Mergers Commission to investigate whether or not cartels exist in the car industry.
Whatever the cause, people are realising that we must be paying over the odds in the UK for a whole range of goods and services. But do we complain? No, that’s not the British way, is it?
So that decision to investigate high prices in the UK will come as music to many people’s ears. Trade and industry minister Stephen Byers says he has identified this as a key obstacle to the concept of a harmonised Europe.
If you want proof that things cost more here in the UK, there is plenty of it around. Bureau European des Unions de Consommateurs (BEUC), the European consumers’ organisation, carried out a survey last year in 52 cities across Europe in which it compared the prices of 400 different products. From this it produced an index of the cheapest and most expensive countries.
The UK turned out to be the dearest of the 10 countries sampled, with a rating of 124 overall. By comparison, France scored 107, Luxembourg 102 and Germany a rating of 100.
Report after report, survey after survey, they all come back with the same result – when you compare like-for-like goods, we in the UK are paying more than just about everyone else in the developed world.
Sure enough, it’s the same story with IT equipment – both hardware and software. Feel like paying through the nose? No? That’s unfortunate, because the chances are you’re going to.
There is a painfully simple solution to all of this, of course. If stuff is cheaper somewhere else, then go somewhere else to buy it. Plenty of people import cars from Holland and Germany, and even from the Far East, so why not do it with IT?
The practice of buying from non-standard, unauthorised outlets is often referred to as buying from the grey market.
The grey market is a bit like the black market, except in this case no one’s actually breaking the law – just risking the annoyance of original manufacturers.
There are big savings to be had from going grey. For example, an IBM PC 300GL, with PII 400MHz chip, 32Mb memory and a 4.2Gb hard drive running Windows 98 would set you back about #814 in the UK, but bought on the European mainland, the same PC will cost you #689. That’s a 15% saving.
How about a Cisco 1601CH router? It’ll cost you about #779 here and only #649 on the other side of the channel.
Mike Almond is business development manager at ProSource, a company which specialises in finding this sort of deal for its customers. Using a combination of overseas contacts and the Net, ProSource keep tracks of international prices on a daily basis. When asked by a customer for a particular product, it can go out and find the best price.
‘We’re not saying we’re better than established channels or that our approach is the right one for organisations to adopt, but our results speak for themselves. More importantly, we offer an alternative option to our customers. That’s what a free market should deliver,’ Almond says.
‘It’s not difficult to find this stuff. Some manufacturers will discount heavily in particular countries to make in-roads into that market. We can use those markets to buy products back cheaper.’
There is, of course, a catch – buy your kit from another country and the manufacturer’s warranty is invalid when you get home.
No warranty means no technical support, no helpline advice and certainly no upgrades. Some manufacturers are so inflamed at the thought of people saving money like this that they will not just refuse support; they will also claim the law is being broken. This is despite the fact that Europe is now a single market.
Phil Humphries is head of IT services at Surrey Police and it is no surprise that he’s extremely cautious about ending up on the wrong side of the law, whether statutory or a manufacturer’s warranty rule.
As part of his force’s year 2000 project, a lot of equipment has been replaced, at the same time as migrating to Windows NT. He may have seen lots of expensive equipment being bought, but Humphries is not tempted by the lure of the grey market.
‘I am aware that some of the things we use could be bought cheaper overseas by using the grey market, but I don’t think the differences are as great as they used to be,’ he says. ‘Apart from which, the hassle factor would be enough to put me off.’
This is an important factor for many people. ‘All too often you don’t know exactly what you’re buying and who you are buying it from. In the event of a problem, can you be sure you’ll be able to get hold of them?’ Humphries said.
But there’s more to it than that. Saving money on initial capital outlay may have its attractions, but Humphries feels this is a short-term gain had at the expense of longer term success.
‘We are moving away from a situation where we are buying boxes. Now we want to deal with a partner which can offer the right support we need from start to finish.’
Most of the bargain-basement IT offers that crop up in the small ads will be for software. Adverts purporting to have US versions of Microsoft Office at less than half price are fairly commonplace. David Gregory, Microsoft UK’s customer legal licensing manager, warns there is more to these offers than meets the eye.
He explains: ‘Our biggest problem with people using unauthorised sources is that the overwhelming majority of this software is counterfeit. It will be passed off as being from the US, but in about 90% of cases it is pirated. The individual serial number on the product tells us where that product was bought or if it is a copy.’
Finding anyone with IT purchasing responsibility who will admit to using the grey market is difficult, although one IT manager confided anonymously: ‘Most of our procurement has to go through a centralised process. However, some stand-alone projects are bought on an ad-hoc basis and that’s when buying on the cheap becomes a viable option.’
But why is any of this stuff priced so much higher in the UK in the first place? Almost all the major manufacturers operate different pricing policies in different countries, but few can explain why the UK gets clobbered quite so comprehensively.
As far as Microsoft is concerned, Gregory says: ‘The majority of software originates from the US and there are certain unavoidable costs incurred when taking that software into other territories – local support services, language support, translating documentation and so on. Not to mention currency fluctuations.’
But with the world’s foremost software vendor moving toward shipping single ‘every-language’ versions of its products, this position is set to become obsolete.
On the hardware front, the world’s number one in PCs, Compaq, also varies prices between the countries that it sells to.
David Petts, Compaq UK commercial unit business manager, explains: ‘Local pricing exists because different markets have different patterns of economic behaviour. In Europe, Compaq prices are set by the company’s European HQ in Munich, and individual countries are then able to fix their own prices within a given range.
‘So, if one were to charge at the top end of the range and another charged at the lower end, you could, in theory, see material price differences,’ he says.
Why the UK is hit hardest by these price differentials is obviously a difficult subject for manufacturers to discuss candidly.
One source within a major hardware company begrudgingly admits: ‘Lots of things are cheaper in the US and Japan. It’s the way of the world – people just need to face up to it.’
So, there you have it – put up and shut up. If you don’t put up, and instead succumb to the grey market, your warranties won’t work.
However, there are ways to get around the warranty issue. In the case of Compaq, any warranty in operation in the UK will also cover the rest of Europe and vice-versa. You can buy Compaq kit in Holland, for example, and not have to worry about your warranty.
ProSource’s Almond explains that it is important to keep geography in mind when venturing into the grey market.
‘Manufacturers will claim warranties are not valid, but under EC law there is nothing to stop you buying things from any other EC country.
If we have a customer that is very sensitive about maintaining the warranties, we’ll be careful to only buy from within the right region,’ he says.
In the case of IBM, things are even more straightforward: good old Big Blue offers global support on all its products, so it doesn’t matter if you bought your ThinkPad in Durban but you live in Doncaster.
A long-standing champion of the grey market is Cirencester-based RBR Networks, Cisco’s largest European distribution partner. Before getting its Cisco accreditation in October 1997, RBR was something of a thorn in Cisco’s side. It was doing so much business in grey-market Cisco product that in the end the company had to be brought into the fold.
RBR marketing director, Jos White, takes a fairly pragmatic view of the subject. He does, however, prefer the term ‘second sourcing’ to grey market – he believes it doesn’t sound so grubby. ‘Using second sourcing, we could make a healthy margin and still sell cheaper than most of the competition,’ says White.
‘It has to be up to the manufacturer to make it worth everyone’s while to use the authorised channels,’ he adds.
‘Manufacturers cannot simply try and ban this sort of thing and it is definitely not on for them to throw their weight around, threatening everyone by saying that their licences are invalid and they may be breaking the law.’
It comes as no surprise that a manufacturer such as Compaq is against the use of the grey market. It has nothing to gain from people bypassing the authorised Compaq reseller, and it messes up the company’s marketing campaigns.
‘I think users should always opt for the authorised channels,’ says Petts.
‘They are closer to the manufacturers and are better resourced, whereas the unauthorised channels miss out on things like special promotions.’
But in spite of this, he is still a carrot rather than stick man. ‘I don’t see this as a question of legality – it’s more about the quality of service and support you can offer to your customers. And customers also have a part to play in this – they should be asking themselves if they are fostering the right sort of relationship with their supplier.’
Ultimately, there are two ways to buy IT goods: the authorised route and the unauthorised route. The former will cost you more but gives you lots of feel-good factor and after-sales support.
The latter will probably save you a considerable amount of money, but could leave you feeling mightily exposed in the event of a system failure.
Like most things in life, high rewards tend to go hand-in-hand with high risks. You pay your money and takes your choice.
WHY UK PLC IS SO PRICEY?
Computing spoke to Roger Alford, senior research associate of the Financial Markets Group at the London School of Economics, about why the UK is so expensive.
Several distinct factors can be identified.
– The UK is small and crowded, and planning applications are heavily regulated
– The UK’s smallness makes it easier for one retailer to control more of the market in a particular area. Global commodities like fuel have very large suppliers which can keep prices artificially high in small or remote areas. The market for fuel affects the price of anything that needs to be distributed, so the knock-on effect can be significant. The tax on such goods is also a very significant inflating factor on high street prices given that the price of fuel for electricity, distribution for example, and other commodities are reflected in an item’s final retail price
– The UK is an island so it’s more expensive to import goods. As our economy requires increasing international trade, this overhead affects an increasing proportion of goods and services.
When management consultant McKinsey looked at the UK’s low competitiveness and productivity for the Treasury, it highlighted the high cost of land.
As Alford puts it: ‘The fact that our planning laws are tighter than the US or France has two main knock-on effects: higher land prices because you can’t go building out-of-town hypermarkets on green field sites, and there’s less competition, because the start-up costs are higher. Once you knock off regional differentials like tax, these factors become far more significant.
‘Its possible retailers expect too high a return on sales. In the case of computers, for example, some US companies have been complaining about Dixons’ high street prices, but Dixons claims that it suffers high overheads.
‘Labour costs may be no cheaper here in the UK than the US, but premises costs are higher. The general view, however, is that once these things are taken into account, the difference between prices here and abroad is not that great.
Cisco 1601 CH router
IBM PC 300GL series PII 400MHz processor, 32Mb memory, 4.2Gb hard drive
Compaq ProLiant 6000 server with PII 400MHz
Xeon processor, dual CPU, Raid, 256Mb memory. An extra 128Mb SDRam for the above server
3Com 3300/24 switch
3Com 3C 509B Combo network interface card
IBM Token Ring 16/4 PCMCIA 85H913 network interface card
CISCO 1601 CH router
SOURCE: Pricing information supplied by ProSource.
Prices subject to change due to currency fluctuations
CHINA: A FAVOURABLE ENVIRONMENT FOR COUNTERFEITERS
China attracts a huge influx of foreign direct investment (FDI) resulting in high technology capability with adopted know-how, accessible distribution in densely populated areas, and inconsistent regulatory enforcement. These factors— coupled with low wage rates, high unemployment, and a largely uneducated workforce—create a favourable setting for counterfeiting.
Whether its computers, communications systems, drugs, or basketball shoes, most executives agree that southern China is a focal point of counterfeiting. “Every year 25 percent of our business is eaten away by counterfeits,” according to Daniel Chow, former in-house legal counsel for a large multinational enterprise and secretary for the China Anti-counterfeiting Coalition. In testimony before a subcommittee for Senate Governmental Affairs in April 2004, Chow said, “In terms of size, scope, and magnitude, trademark counterfeiting in China is considered by many to be the most serious counterfeiting problem in world history.”
Chow, who is the Robert J. Nordstrom Designated Professor of Law at the Michael E. Moritz College of Law, The Ohio State University, added, “Brand owners in China estimate that 15 to 20 percent of all well-known brands in China are counterfeit and estimate their losses to be in the tens of billions of dollars.”
Based on Chow’s testimony, three key factors are the root causes of China’s counterfeiting problem:
• Foreign direct investment with advanced technology
• Direct and indirect state support of counterfeiting, combined with protectionism
• Ineffective legal enforcement
FDI in China during 2003 was US$57 billion, according to the United Nations Conference on Trade and Development. Historically, the influx of FDI led to a concentration of legitimate, joint venture manufacturing in Fujian and Guangdong provinces. Not coincidentally, the bulk of Chinese counterfeit manufacturing is also centred there. Manufacturing processes of legitimate companies in these provinces could easily “migrate” to illegitimate factories nearby.
In China, large wholesale markets are common to densely populated areas with good access to transportation. These are known hubs of counterfeit distribution.
The third factor is ineffective laws and deterrents. China’s wholesale markets are the aegis of local administrations of industry and commerce (AICs). The AICs create and regulate them—a classic case of conflict of interest. The AICs receive revenue from the booth owners in the wholesale market and, therefore, are reluctant to do anything to diminish their revenue base, such as enforcing national laws against distributing counterfeits.
China’s government has passed laws to satisfy the concerns of its trading partners, but it lacks coordinated efforts between national and local authorities to quell blatant manufacturing, distribution, and sale of counterfeit product. “We conducted a raid on an aftermarket dealer in China,” says Linda Heban, vice president and chief trademark counsel for Harley-Davidson. “Actually, we had the AIC conduct the raid. But the problem is, when you stop one, another pops up.”
Recently, encouraging signs are emerging from the Chinese government that point to the realization that counterfeiting could hinder economic development in the country.
According to China Daily, China’s recent release of the judicial interpretation on intellectual property rights (IPR) infringement criminal cases attests to the country’s updated efforts to fight the crime. The 17-article interpretation, which took effect in December 2004, materializes the legal principles in the previous IPR-related laws.
The move fully demonstrates the country’s determination to stamp out IPR-infringing crimes, which are costly not only to the victimized organizations and individuals but also to the country’s overall investment and market environment. Rampant piracy, for example, will lead to less confidence in innovation and independent development of technology.
2.4 SUMMARISATION O LITREATURE REVIEW
Counterfeiting & Free Riding are complimentary to each other. The literature presented above, portrays, Free riding as a negative aspect of the grey markets. However, the fact that, it can also be used as a tool for market penetration is ignored upon. Free Riding, though not ethical, can be the most, rather is one of the most, crucial market entry strategy adopted by grey dealers/entrepreneurs’.
The next chapters shall be focusing on the methods adopted to fulfil the desired aims & objectives thereby providing a detailed analysis & results of the outcome thus achieved.
Grey markets are global phenomenon & software industry forms the most vulnerable target. The recent figures obtained from the IT industry ($40 billion a year, KMPG), concludes with utmost certainty that grey markets are a nuisance for the authorised dealers & manufacturers. Free riding can indeed be a way to penetrate markets.
In this chapter, the researcher shall be focussing on the research methodologies that were adopted for achieving the desired aims or goals.
Researcher’s overall purpose in opting for fundamental research method(s) was to obtain the most valuable information in the most cost-effective and pragmatic manner.
What data is required to accomplish current research?, Of this data, how much can be put together and analysed in a low-cost and realistic mode, e.g., use of questionnaires, surveys and checklists?, How exact will the data be?, Will the techniques be successful in achieving all the needed information?, What additional methods should and could be used if further information is required? Were some of the questions under scanner before selecting the methodologies for the research topic.
The information to be obtained was divided into two sections-
Focus groups in this scenario were considered appropriate, as the individual
involved shall be able to provide expertise on the grey markets & their
To gather data on the proposed research topic subject specific journals were
analysed. Journal of Business Venturing, Journal of International Business
Studies, Harvard Business Review, Journal of Business Strategy etc to name a
Being an unconventional subject for research, obtaining information, rather relying on certain sources for information, did not seem to be an apt decision. Therefore, to obtain precise as well as accurate information two of the research methods- Focus Groups & Case Study- were adopted.
Focus Groups: Focus groups are a powerful means to assess services or test new ideas. Focus groups are interviews of 6-10 people at the same time in the same group. Before conducting a focus group interviewing, the steps to be considered are as under:
(i) Recognition of the main goals of the session
(ii) Framing questions
(iii) Planning the meeting &
(iv) Inviting individuals for the session.
The most apt focus group for this research had to be the end users, rather consumers, of the grey IT products. Individuals between 23- 35 were the major participants within the discussion, the results for which shall be analysed in the next chapter.
Case Study: Case study is particularly useful in depicting a holistic representation of experiences and results concerning a service or a product. They play a pivotal role in analysing & evaluating the strengths & weaknesses & thereby successes & failure, for a product. Classifying a wide range of information about a case and then analysis of the contents by seeking samples and ideas in the data is being carried out in the case mentioned below.
The case which the researcher had chosen for this purpose, not only focuses wholly on the grey shade of the grey market- ‘free riding’ & how does it help in penetrating markets.
A combination of methods, in this case, helps in gathering a great deal of information, and then interviews to get more precise data. Case study is being employed for more in-depth analysis.
ANALYSIS & EVALUATION
4.1 FOCUS GROUPS
The focus group was ranged between the age group of 23-35 years, which are the major end users of the grey IT products. Individuals from various backgrounds, educational & professional, were selected to get a broadened view of the grey market functioning.
The results, thus, obtained were quite precise. They help in gaining a better perspective not only about the products sold, pricing structure, but also the supply chain aspect of the grey goods. Let us now discuss & interpret the results obtained by studying focus groups:
The first & foremost question was about the pricing within the grey markets. The answer to which was quite predictable & can be known through the below graphical representation —
The Original Equipment Manufactures” (OEMs) as well as authorised dealers’, in such a situation are bound to suffer losses.
The major part of the respondents obtained products at 10%-20% discounted price. Take for instance, an original Belkin Router with an market price of £80 (appx) shall be costing £50 (appx) within a grey market, which is a deal to grab onto.
The next obvious question was about the products that are most often bought from the grey markets, the answer for which is displayed below:
From the above figure, it can be clearly stated that, Servers- may it be hard disks, operating systems etc- ruled the list. Whilst products used for servicing & networking contributed to a nominal percentile.
The next question focused on the supply chain aspect of the grey goods. When asked about the delivery time required, the responses received form the focus group can be seen below:
A whooping 67% of the selected respondents answered next day delivery of the products. It can be observed from the figure that the delivery time never exceeds than a week, through which we can gain a better logistical perspective grey markets & its suppliers’.
Lastly, the main issue was bought up; Can grey ever be good? & Can it be of help in penetrating markets?; to which major part of the focus group nodded. Being grey market buyers, the product quality (over long term) was an aspect they had to compromise upon. However, the features, the functioning & the overall quality of the product were as good as original. Hence, for them grey was certainly good, though not the best.
Meanwhile, grey goods helping with market penetration had mixed opinions. Being an argumentative question, mixed responses were bound to be received. The aspects put forward are as under:
4.2 CASE STUDY
However, the data gathered was not enough to carry out in-depth analysis & therefore another method- Case Study- was inculcated to understand the issue in a better manner.
The selected case presents an optimistic view towards the grey market activities, portraying it a boost to the economy. Below is the Case Study & Analysis to gain an insight of the proposed issue.
‘GREY MARKET’ SOFTWARE MAY BE THE WAVE OF THE FUTURE’
September 12, 2003
The term “grey market” has traditionally referred to consumer electronics, cars, and other devices brought into a country through channels their manufacturers have not authorized, usually at much lower prices than those products would cost if purchased through “official” wholesalers and retailers. Today grey market drugs are being brought into the U.S. from Canada and other countries where they sell for less than they do here. And before long, if current software pricing trends continue, you’re going to see unauthorized commercial software imports and re-imports — and big savings for commercial software users in developed countries.
Back when I was in the limo business, I was a member of several industry-specific email lists and online forums. One day, in one of them, a limousine operator in The Netherlands asked if any of his U.S. colleagues could help him buy parts for several Lincoln Town Cars he owned. It seemed that a rebuilt alternator for a Lincoln that cost $75 or $80 in the U.S. went for $300 or more in The Netherlands. So this guy was willing to pay someone in the U.S. a reasonable fee to buy Lincoln parts at U.S. prices and ship them directly to him. He found someone to help him, too, not for cash but as a service exchange, because Mercedes and Rolls Royce parts prices in the U.S. typically cost three or four times as much here as in Europe, and a small but significant number of U.S. limo operators own either Rolls or Mercedes cars.
This is a typical example of a grass-roots grey market at work. There are also plenty of people who casually bring late-model, used European luxury cars into the U.S. and (after refitting them to meet U.S. pollution and safety standards) sell them for far less than franchised dealers charge for the same car. Again, this is a two-way trade, since there is also a strong market in Europe for many U.S. cars that are expensive and/or rare on the east side of the Atlantic even though they are cheap and/or popular on the west side of that ocean.
There are also many small, independent companies that bring factory-original Japanese and Korean car parts and accessories into the U.S. and sell them for less than the exact same parts cost at franchised car dealers.
Combine low-cost shipping with the Internet, and suddenly it’s hard to sell cars or parts for one price in one part of the world, and for another price somewhere else. As soon as the price difference is high enough for entrepreneurs to profit from bypassing the “official” distribution system, alternatives to it inevitably spring up.
Not only is the car business affected. Cameras, stereos, and other consumer electronics are also readily available through grey market channels, often from distributors large and strong enough to overcome potential warranty problems by shipping defective units back to their point of origin before turning them in for warranty repair or replacement.
Regionalizing software prices
It’s sad to use Microsoft as “the” example of an evil software empire as often as we do, but it’s the world’s largest and most influential software company, and as such it must take its corporate lumps. Microsoft has long adhered to a “one price fits all” policy. If the retail price of one of its products is $500 in the U.S., that product will be sold at the local equivalent of $500 U.S. in countries where $500 is a month’s or even a year’s wage for most workers.
Naturally, in low-wage countries most commercial software is purchased through unauthorized channels for little more than the cost of the distribution media, but a recent emphasis on international “software piracy” enforcement by commercial software companies has made use of informally obtained programs less attractive. Citizens (and governments) in many countries are responding by switching to free or open source operating systems and applications that aren’t bound by licensing and distribution restrictions. In an effort to maintain their market share while trying to keep users from sharing copies of software with each other, Microsoft is now experimenting with reduced prices in countries where their products have previously been too expensive for most users to obtain through legitimate channels.
According to this InfoWorld story, “…the price of Windows XP Professional Edition in Taiwan was cut by 23.7 percent while the price of Office XP was cut by up to 16.9 percent. The greatest price reductions came for Windows XP Professional Academic Edition (54.5 percent), Office XP Academic Edition (50.1 percent) and Word (42 percent). Specific dollar figures for the price cuts, which became effective on March 15, were not released.”
But, that article says, the best deal currently available on Microsoft software is in Thailand, where “Microsoft — in response to a Linux threat — recently reduced pricing to $40 for an Office and Windows package it offered as part of a government initiative…”
Breaking regionalization barriers
We’ve seen no word yet on whether that Thailand-only price is only for Thai language versions or whether the $40 WinXP/Office combo is available in English as well. If it’s available in English for that price there, I would happily pay $60 or even $80 to a clever Thai entrepreneur for that package, just to have Windows XP and Microsoft Office around for compatibility testing purposes.
I’m sure many other residents of high-cost countries would be happy to pay a similar price for these products, especially if they can activate the software — and later obtain official Microsoft bug fixes, patches, and updates — through a proxy server in Thailand so Microsoft won’t know the Thai-priced products are being used elsewhere.
One of the fastest-growing business areas here Florida is supplying senior citizens with low-cost, U.S.-produced prescription drugs re-imported from Canada. Drug companies are fighting back by trying to control exports to Canada, but so far they only seem to have made life a little harder for a few of the smaller cross-border drug vendors. The business of drug re-importation is still growing like mad.
Even if the U.S. drug companies manage to make it a little harder for senior citizens and workers without prescription drug insurance to buy from Canadian pharmacies through the mail or over the Internet, there is always Mexico, where thousands of U.S. residents go every year to stock up on pharmaceuticals that sell there for a fraction of their U.S. prices, and often don’t require a prescription, which saves on doctor bills, too.
Mexico and Canada are the closest countries to the U.S., but airplanes and ships come here from all over the world, full of everything from people to industrial machinery. Our customs system is famously porous. Very few shipping containers are ever opened and inspected. New, tighter regulations designed to keep terrorists from shipping dangerous substances into the country won’t detect things like anti-AIDS or high blood pressure medicine, nor will dogs trained to sniff out heroin, cocaine, or marijuana. Closer searches of returning tourists won’t work, either. Imagine the headlines when a 72-year-old grandmother is arrested for smuggling anti-cancer drugs into the U.S. from Mexico because she can’t afford to buy them here. Then imagine the millions of emails, calls and faxes U.S. elected officials will get from enraged AARP members.
The AARP is already on record as favouring drug re-importation. Now imagine thousands of senior citizens being denied the right to buy low-cost software through Thailand (or wherever) so they can receive those all-important grandkid pictures by email. Another cause! And one thing American politicians learn early on is that older people vote more heavily than younger ones, and that retired people have lots of time to engage in lobbying and electioneering, so making old people mad is not a wise career move.
Once Microsoft and other commercial software producers try to sell their products at different prices in different countries, they are going to face the same problems drug companies are now having with regional price enforcement. In the end, they are going to be forced to cut prices in high-cost countries in order to prevent smuggling.
How do you prevent software smuggling?
Answer: You don’t, by any practical means. Who is going to boot up each CD every traveller carries on an international flight? Who is going to monitor every cross-border download? Even countries like Iran, Saudi Arabia, and the People’s Republic of China that have tried to control their citizens’ Internet use haven’t had much luck doing it, and countries with a more relaxed attitude toward information exchange are going to have even less success at keeping out “bad” software. The DMCA and DRM are weapons Ashcroft, Microsoft, and other anti-freedom activists will certainly try to wield in an attempt to keep Americans from downloading, but their “unapproved” files, but their attempts are doomed from the start. There are simply too many ways to move information from one computer to another to control even a small fraction of the flow, and too many people willing to grab a discount on digital items they feel are overpriced to keep the public from finding ways to bypass regulations they will almost certainly decide are unfair if the government tries to enforce them heavily.
Besides, Microsoft and other software vendors are (hopefully) smart enough to avoid the sales-killing backlash now being experienced by RIAA member companies, which seem to see a new drop in revenue every time they make another attempt to stop file trading by taking their customers to court (even though they never admit this is one of the reasons they are losing business).
It’s easy to forget that the Internet and the World Wide Web are truly world-wide, and that it is no longer feasible to isolate digital information geographically in any meaningful sense. The communications advances that have made it possible for companies in high-cost countries to hire workers in low-cost countries at local wages also make it easy for people in high-cost countries to buy software sold in low-cost countries at local prices, no matter how angry software vendors get when customers use the Internet’s world-wide nature to bypass their authorized distribution channels.
4.3 SWOT ANALYSIS
Based on the above case, I shall be analysing & evaluating the proposed hypothesis using the tool of SWOT.
Consumers’ saving huge amounts all thanks to the grey activities operating within the regions.
Poor law enforcement by the government & regulatory agencies.
Designing-in and using copy-resistant software on all products
The first & the foremost threat, is the losses to be suffered by the OEMs compelling them to reduce prices.
Use of anti-counterfeit technologies, including Radio Frequency Identification (RFID), security labelling & other packaging technologies & techniques.
If no legality is being bought in the arena, the situation would worsen up, giving grey entrepreneurs a competitive edge over the OEMs.
Scrutinising of distribution of counterfeit products, such as Internet brokers, direct sales, retail outlets, wholesalers & Internet trade Websites.
The geographical hot spots (countries with large population, low levels of skilled labor, high unemployment rate, weak law enforcement & low government interference), in pose a greater threat as these are the areas where the most of the grey entrepreneurs operate.
If the law enforcement doesn’t improvise, there arises an opportunity for the grey entrepreneurs to penetrate profitable markets.
5.1 SUMMARY OF ACHIVEMENTS
Form the research undertaken above, it can be concluded that ‘Grey can indeed be good?’ for the new entrepreneurs, as it helps them to gain entry into profitable markets. The distinguished pricing structure of the grey goods makes it easier for the grey entrepreneurs’ to establish a strong customer base within a short period of time, thereby helping them to penetrate money-spinning markets within the IT arena.
On the other hand, for IT organisations’ & OEMs grey markets & its activities are a nuisance as it’s not only responsible for decreasing their sales but also nibbling the market share. The only possible solution in such a scenario is to lower the prices of the products in order to survive.
5.2 COMPARITIVE STUDY: AIMS WITH ACHIVENMENTS
To obtain information & insights about grey marketing activities within the software industry.
The following aim was fulfilled to its fullest by the literature presented on grey market & its activities within the introductory part & the literature review.
The literature review along with the live cases also presented the positives & negatives of grey markets. The pricing structure for the grey goods was also portrayed within one of the case discussed.
To keep it simple, the proposed aim was achieved & mainly based on the secondary research undertaken.
To know what are the hostile measures adopted by firms to prevent grey activities.
Grey markets have over the years become a subject of annoyance for the IT organisations’ & OEMs. Hence, knowledge about the preventive measures adopted by the firms was vital. This requirement is being undertaken & accomplished within the introductory part of the research work. The Case Study Analysis presenting the SWOT model also includes the measures that can be adopted by the firms under the heading of ‘Opportunity’.
Market Penetration & Grey Markets
This aspect of research had its base on the primary research that was undertaken by the use of focus groups. The concepts of free riding & counterfeiting were discussed to have an enlarged perspective about how grey goods can help in penetrating markets.
Literature obtained from the journals helped in providing an insight in favour of the grey markets. However, interviewing focus group played a pivotal role in achieving the following aim.
Can grey ever be good?
The concluding statement of ‘Can grey ever be good?’ was being achieved by the primary research & the case study analysis undertaken. The literature review presented, also depicts optimism towards grey markets & its activities.
However, it can also be concluded that grey goods/markets can be good for some (grey entrepreneurs & customers with low budgets) but a pest for the others (IT firms & OEMs).
5.3 CONTRIBUTIONS MADE & FUTURE WORK
Firstly, the researcher hopes justice had been done to the subject of research undertaken. Overall, this piece of research presents a balanced perspective of the industry players as well individuals (grey entrepreneurs) in this arena.
The research thus, undertaken has fulfilled all its aims with the help of the objectives that were established. Lastly, the researcher perceives the research would be fruitful to anyone who plans to undertake further study into grey markets.
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