Marketing Strategy

RJCINU DL’L’ISTONS
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May—lune i977, pp. 20—39..
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MINOLTA CAMERA CO. LTIIIK”2
“We have got to fix this problem,” said Mr.
Katsusaburo Nakamura as he read the letter
he had just received from one of his company’s European retailers. (See Figure 1..) It
was Juiy 1971.. Mr. Nakamura was the manager of the International Division of the Minolta Camera Co. Ltd. , a leading manufacturer
‘This case was prepared by Ulrich Wiechmann
as the basis for class discussion rather than to illustrate
either effective or ineffective handling of an administra—
tive situation Copyright © 1976 by the President and
Fellows of Harvard College Used with permission.
2Certain names, places, and financial data have
been disguiSed.
of cameras and camera accessories, headquartered in Osaka, Japan. The letter he was
reading came from Mr. Wilfried Renter, president of a large camera dealership in Germany
with stores in Cologne, Dusseldorf, and Essen. Mr. Reuter, who had recently visited the
Minolta headquarters in Osaka, complained
about the fact that sizable quantities of Min—
olta cameras moved through unofficial channels from Hong Kong to Germany, where
they were sold at prices substantially below
Minolta’s officiai suggested retail prices.
Mr. Reuter’s letter was not the first of
its kind that Mr. Nakarnura had received. A
PRICING DECISIONS 42.3
Dear Mr Nakamura,
After having safely returned to Cologne, I would like—to thank you again for the
kind welcome extended to me at the occasion of my visit to Japan. It was certainly
a pleasure to see you and have the opportunity to exchange thoughts and discuss
various matters with you
On my way home I spent one day in Hong Kong, where I had to notice the very
low prices at which the Minolta cameras and particularly the lenses are offered.
For a German photo dealer, it is still very much worthwhile to purchase the products in Hong Kong direct. This situation should really urgently be changed. We
would like to point out again that this price difference makes business very diffi- cult and has repeatedly been the subject for unpleasant discussions with some of
our customers.
We are convinced that you, as International Manager, can appreciate our diffi- culties, and we suggest that you exchange your position with the Manager of your
Domestic Department for a while, which would most certainly make him understand our problems much better afterwards!
We sincerely hope that the “problem Hong Kong” can soon be solved. Meanwhile, we remain, with best regards,
Yours very truly
REUTER PHOTO AG
Wilfried Reuter
President
FIGURE 1 Letter of a Camera Retailer in Germany
‘ number of other authorized dealers in EurOpe
and in the United States had voiced similar
complaints about unfair price competition because of’ an inflow of’ Minolta cameras through
irregular channels. In virtually all these cases,
the source of the problem seemed to be that
merchants in Hong Kong bypassed Minolta’s
regular distribution system by exporting directly to camera retailers abroad. The basis
of these export transactions was the signifi- cant price difference f’or Minolta cameras that
existed between Hong Kong and Japan, on
the one hand, and Europe and the United
States, on the other.
Mr. Nakamura estimated that these
“gray exports,” as he called the movement
of Minolta cameras through irregular channels, accounted for less than 10 percent of
Minolta’s total camera sales. A disturbing fact,
however, was that the magnitude of these
transactions, while hard to measure, seemed
to be increasing rather than decreasing. Just
a few days ago Mr. Nakamura had received
a letter from one of Minolta’s exclusive dis—
——-——_424 PRICING Dracrsrons
Dear Sirs,
Understanding that you are important photographic dealers, we address this letter
with the hope or” establishing business relations with your esteemed firm.
By way of introduction, we are a Japanese firm with head office in Tokyo. We
specialize in the photo line trade.
From the free port 01″ Hong Kong, we are in position to supply you with all . japanese brands of cameras and accessories at low H ong Kong prices. We are in position to supply ASAHI PENTAX, CANON, FUJICA, KONICA, KOWA, MAMIYA, MINOLTA, MIRANDA, YASHICA, OLYMPUS, and NIKON and also
all brands of’ accessories.
Please specify the brand name you are particularly interested in. Offers will be
promptly submitted for your perusal and consideration.
We are also in position to supply Hang Kong—made transistor radios.
Very truly yours,
INTER EXPORT ENTERPRISES
HONG KONG B..C.C.
FIGURE 2 Direct-Mail Promotion of an Export Firm Sentto European Camera Outlets
tributors in Europe. The distributor was very
concerned that in trying to sell Minolta cameras to the retail accounts in his country he
frequently found himself competing against
unauthorized exporters in Hong Kong. Attached to the letter was a piece of direct-mail
promotion that one of these exporters, Inter
Export Enterprises, had sent to major camera
retailers in the distributor’s country. (See
Figure 2..) The distributor commented:
I wish to emphasize that similar direct mail is reg—
ularly coming into our market from firms in Hong
Kong offering photographic equipment at exceptionally low prices. We are obviously concerned
at these overseas firms selling in our market as the
recent increase in such selling by overseas outlets
causes great discounting to take place in our market and also reduces our market possibilities. There
is nothing illegal whatsoever in companies, such
as Inter Export, exporting to our country but, like
other official photographic equipment distributors, we are being heavily affected because of this
unreasonable practice.
COMPANY BACKGROUND
Minolta Camera Co. Ltd. was one of the leading Japanese manufacturer’s of’still and movie
cameras, lenses, and camera accessories.
Founded in 1928, the company reached a 1970
sales volume of¥22.8 billions“s Sales of cameras, lenses, and accessories accounted for
82 percent of this volume. The remaining 18
percent were predominantly sales oi’electrostatic office cepiers; a small fraction of total
3I US $ = ¥360 in 1970.
company sales was contributed by a diverse
line of products, such as light-sensing devices, planetaria, hand calculators, and specialized optical instruments. Minolta’s sales
had shown a rapid growth over the past five
years {See Table l .) For 1971, management
expected to reach a sales volume of ¥24..S
billion.
Minolta’s line of cameras covered almost the whole spectrum from modestly priced
simple cameras for the beginner or occasional
photographer to premium-priced sophisticated equipment for the serious amateur or
the professional photographer. Throughout
its history, the company had been a pioneer
in the development of advanced Japanese
camera equipment. The Auto—Minolta, introduced in 1935, was the first rangefinder press
camera in Japan when it was marketed in
1937. The Minolta SR—7, introduced in 1962,
was the world’s first single—lens reflex camera
with a built—in CdS exposure meter. While
manufacturing and marketing a full line of still
and movie cameras, Minolta’s sales volume
and marketing efforts concentrated on so—
phisticated 35mm single-lens reflex still cameras and a range ofinterchangeable lenses for
these cameras. With these products Minolta
competed against other well-known Japanese
brands, such as Nikon, Canon, and Asahi
PkiciNt; Drcrsums 425
Pentax, as well as foreign brands such as Leica.
All manufacturers offered essentially similar
camera features and equipment. Further—
more, with the exception of the premiumpriced LeiCa, all brands sold at more or less
comparable prices
All Minolta’s products were manufactured in Japan. Thecompany operated four
plants for the manufacturing of cameras and
lenses and two plants for the business machines and other products. In» spite of the
rapid sales growth over the past years, Minolta, as were other Japanese camera manu—
facturers in 1970, was finding it difficult to fill
the production capacity in its camera and lens
factories. “The whole industry is characterized by a discrepancy between supply and
demand and, consequently, intense competition,” Mr. Nakamura observed.
INTERNATIONAL ACTIVITIES
As did most Japanese camera manufacturers,
Minolta depended heavily on sales outside of
Japan. In 1970, Minolta’s camera products
were sold in about 100 countries. Exports
contributed roughly 60 percent to the company’s total sales of cameras and equipment;
for 1971 , management expected this figure to
TABLE 1 Consolidated Sales, 1955—1571
TOTAL SALES SALES OF CAMERAS. LENSES, AND ACCESSORIES
YEAR (BILLION ¥J AS A PERCENTAGE OF TOTAL
1 985- ¥ 8 4 95%
1 988 Q ,0 92
1 957 1 2 1 84
1968 14 7 82
‘l 959 18 5 79
1970 22 8 82
1971 [est] 24 5 88
Source: Company records.
426 PRlLlNG Drusross
rise to 6.5 percent. Moreover, export sales
were considerably more profitable than were
domestic sales in Japan. (See Table 2.)
Of the various export markets, the
United States and Eur0pe were the most important geographical areas for Minolta. The
United States accounted for 4.5 percent and
Europe for 35 percent of Minolta’s export
sales of photographic products.
in the United States and in Germany,
Minolta had established wholly owned sales
subsidiaries. In all other foreign countries,
the company worked through exclusive distributor‘s for the sale and servicing ofits products. It was company policy to appoint only
one distributor per country. “We want foreign Operations to run as orderly as possible,” Mr. Nakamura explained. Usually, these
exclusive distributors carried only Minolta
cameras and equipment Exceptions were
made in some of the smaller countries where
the distributors had to carry competing camera brands to reach a viable sales volume.
As did most marketers of expensive
photographic equipment, Minolta and its distributor attempted to be selective in choosing
retail outlets for Minolta cameras. Worldwide, Minolta cameras were sold through approximately 2.5,000 retail stores. most of which
could be classified as camera specialty stores
or camera specialty departments of large department stores. – In most countries the retailer played a
very important role in the consumer purchasing process. Consumer studies Minolta
had obtained from several major Eur’Opean
countries had shown that most consumers relied heavily on the advice and information of
the retailer in deciding what type and brand
of camera to buy. Moreover, these studies
indicated that less than one-fourth of all prospective buyers entered a retail store with a
clear idea about the brand of camera they
wanted to buy. Even then, consumers often
would not insist on that particular brand if
the dealer argued strongly in favor of another
brand.
The marketing of Minolta cameras was
fairly standardized from country to country,
due to the fact that many of the important
dimensions ofthe marketing activities in each
country were determined in Osaka.
The products, model names, and packaging were identical in all markets. Occasionally in the past, a distributor had suggested changes in either the packaging or the
TABLE 2 Profit and Loss Statement for Sales of Camera Products,
October 1970—March 1971 and April 1971—September
1971 (in millions of yen! . APFHL 1971—
UCTOBEFI 1970— SEPTEMBER 1971
MARCH 1971 [est]
Domestic Export Domes tic: Export
Sales ¥3.684 ¥5,869 ¥3, 51 0 ¥7.038
Cost of goods sold 2.382 4,105 2.304 5.01 1
Gross profit 1.302 1.784 1.206 2,025
Selling and administrative ‘
expense 1.092 802 1,183 1 .045
Operating profit 210 882 73 980
Sour as: Company records
model design for his or her country. So far,
such suggestions had never been followed;
the headquarters management in Japan feared
that even slight deviations from a uniform
product policy would create serious prob—
lems in production scheduling and incur ad—
ditional costs. It was already not easy to provide the brochures, instruction booklets for
the cameras, and dealer manuals in many different languages. Accurate forecasting of demand in each country was a major problem.
Aside from the uniform product policy,
the advertising for Minolta cameras was also
highly standardized on a worldwide basis. Print
media campaigns and posters were mostly
prepared in Japan and then sent to the fOreign
distributors and subsidiaries for placement in
local media.
Minolta also granted a uniform world—
wide warranty for its products. Within the
warranty period of one year, a customer could
get free service in case of defective workmanship or materials from any of the authorized Minolta service representatives in
PRICING Decisions 42‘?
the world. Management had always consid—
ered free worldwide warranty service, cou«
pled with a uniform worldwide advertising
approach, as a mark of quality and prestige
in the field ofhigh—pr’iced consumer products.
It was the accepted practice not only of most
major camera manufacturers but also, for ex—
ample, of famous watchmakers.
While Minolta’s marketing approach
showed great similarity from country to
country in terms of product, advertising, service, and distribution policy, it varied con—
siderably in terms of price. In 1970, all export
prices for Minolta products were quoted in
US. dollars. Wide differences in retail prices
existed between one export market and another and also between certain export markets and the Japanese domestic market. The
reason for these price differences was primarily fierce competitive conditions in some
markets, which forced prices down to a very
low level. Hong Kong, Singapore, and also
Japan were these low-price markets.
Table 3 gives an example for the price
TABLE 3 Price Schedule for a Minolta Single-Lens Reflex Camera with Case
in Japan, Hong Kong. Germany, and the United States, First Quarter
1971*”
UN U S DOLLARS]
Japan Hong Kong Germany United Statest
Production cost $ 52 $ E32 $ E32 $ 58
Price net to wholesalers 108 — —— — – Export price F 08 Japan — SB . 84 SB
Landed cost: to distributors — 121 130 123
Price net to dealers 138 148 189 205
Retail list price 170 174 270 342
Approximate actual retail price 160 165 248—271 280—280
*Disguised data
tExchange rates in early 1.971 were U- 8 $1 = ¥3|3C| = H K $8 08 = DM3 85 In mid-1371-
there were strong signs that significant changes in the exchange rates would take place The position
of the U 8 dollar had weakened The German mark had begun to float Market. observers predicted a devaluation of the US dollar by 5 to 10 percent before the and of 1871
iCase not included
Source: Company records
428 PRICING DECISIONS
differences that existed in Japan, Hong Kong,
the United States, and Germany for a popular
Minolta single-lens reflex camera. For many
items in the Minolta product line, the price
differences were even more drastic. In several instances, the price net to dealers in Japan was similar to the landed cost of distributors in Europe and in the United States.
“Generally, the retail prices in Europe and
. in the United States are between 50 percent
and 200 percent higher than in Hong Kong
or Japan; 200 percent is more typica ,” said
Mr. Nakamura. “Prices in Hong Kong and
Japan are very close; usually Hong Kong is
only about .5 percent above retail prices in
Japan. Our low prices in Hong Kong and in
Japan are dictated by the tough competitive
situation and the overhang of supply and demand. Our distributors in Hong Kong and
Japan buy from us at prices that are close to
our F..O.B. prices for Europe and the United
States. The margins for the distributors and
the retailers in Japan and Hong Kong are relatively low; in Hong Kong, in particular, a
retailer often takes only a 2—3 percent markup.
Distributors and dealers in Europe and in the
United States insist on much higher margins.
These high margins have largely historical
reasons- When Japanese camera manufac—
turers first started to enter the Western markets after the war, high margins were absolutely necessary to gain distribution. We have
thought of reducing these margins in Europe
and in the United States, but we can’t do a
thing as long as our competitors keep their
margins high.”
HONG KONG AND THE “GRAY
EXPORT” PROBLEM
In Hong Kong, Minolta had been represented
for more than 10 years by Goddard & Co.
Ltd. as its exclusive distributor. Goddard was
one of the many medium-sized specialist
camera distributors that operated in Hong
Kong. The. company carried only Minolta
camera products.
Goddard & Co. Ltd was founded by
Mr. George Ho, a Chinese businessman, well
connected in business and government circles in Hong Kong. Aside from being a camera distributor, Mr. Ho was associated with
other businesses in Hong Kong, the most
prominent of which were in T..V. and radio
broadcasting. Through his association with
Minolta, Mr. Ho had become a personal friend
of Mr. Kazuo Tashima, the founder and president of Minolta.
“Through his connections, Mr. H0 is
very valuable to us,” Mr. Nakamura observed. “Mr. Ho comes from an old family
with excellent connections to Chinese merchants, banks, and the Hong Kong government. He has a lot of information that we
couldn’t get alone.”
Goddard & Co. Ltd. sold to roughly 80
regular retail accounts. Many of these retailer’s carried very little inventory. “When a
customer comes into his store and the retailer
doesn’t have a particular item, he orders it
from Goddard for same-day delivery,” explained Mr. Nakamura. “Goddard has messenger boys making daily deliveries to retail
stores.”
Goddard employed two salesmen for
sales to retailers .. The salesmen were paid a
commission and a small fixed salary. The salary amounted to roughly 30—35 percent of the
salesmen’s total compensation.
While Goddard served about 80 regular
Minolta accounts, there was no effective control of who the salesmen visited and to whom
they sold. Mr. Nakarnur’a suspected that they
occasionally sold to dealers who reexported
Minolta cameras to other parts of the world.
“It is hard for Goddard and their salesmen ‘
to turn down an order,” Mr. N akamura com-
mented. “Goddard has done a good selling
job for us over the past 10 years, and we have
a very nice relationship with them. But they
don’t control distribution. They don’t care
about ‘gray exports,’ who they sell to and
where the merchandise goes after they have
sold it. Of course, distribution control is very
hard to do. The people who reexport to Europe and to the United States are not easily
identified; the frequency and quantity of’their
purchases may be an indication.”
Minolta’s export sales to Hong Kong
had increased rapidly in the past and in 1970
had accounted for almost 4 percent of the
company’s total export sales. This figure was,
however, only a fraction of the total volume
of Minolta cameras moving from Japan to
Hong Kong. Mr. Nakamura explained:
“Most of the gray exports to Europe
and to the United States are organized by
traders in Hong Kong- But the Hong Kong
market has to be seen together with the Jap—
anese market. The gray exporters in Hong
Kong, we call them ‘smugglers’ although there
is nothing illegal about their operations, actually get most of their merchandise from reg—
ular camera retailers in Japan. It works like
this: Every day a lot of Hong Kong ships and
a lot. of Chinese sailors come into Japanese
ports- Many of these sailors ‘work’ for the
‘smuggler’ in Hong Kong. On his order they
each buy one camera tax free4 in a regular
camera store, take it back to Hong Kong,
deliver it to the ‘smuggler,’ get reimbursed
for whatever they paid, and receive a commission. Since they buy only one camera and
some lenses at a time as personal property,
there is no export or import documentation
necessary.
‘ ‘I don’t know how many cameras move
this way to Hong Kong. The retail price level
“Under Japanese Iaw, foreign visitors were allowed tax exemption on cameras and several other products—a saving of from 10 to 20 percent.
PRICING DECISIONS 429
and the supply and demand situation in Japan
are decisive factors. If the market in Japan
is weak, and it frequently is with so many
camera makers around, a lot of’ merchandise
flows into Hong Kong-
“What I do know is that this is a regular,
organized business. Sometimes the “smugglers” also “employ” airline stewardesses and
pilots. The annoying thing is. that all this happens strictly within the boundaries ofthe law;
so from that angle there is nothing we can do
to st0p it.
“The individual deliveries that reach
Hong Kong from .Japan in this manner are
then pooled and perhaps combined with purchases the “smuggler” makes in the Hong
Kong market to form large shipments to Europe and the United States. Again, this whole
export operation is perfectly legal. At the mo—
ment, most of the cameras go to Europe, West
Germany in particular. The buyers at the other
end are typically large department stores, dis—
count-type operations, specialty camera retailer’s, and sometimes even our authorized
Minolta dealers.
“The Hong Kong exporter can offer very
low prices to these outlets. First, he buys the
merchandise cheaply in Hong Kong or in Japan. He takes only a small markup, usually
less than 5 percent. The price difference between the Far East markets and the markets
in Eur’Ope and the United States is large enough
to pay for shipping expenses and still offer
an attractive price to the Western dealers.
For example, for a shipment from Hong Kong
to West Germany, we figure that an exporter
would have to pay roughly 20.5 percent of
the F ..O..B.. Hong Kong value for freight, insurance, and import duty.
“Sometimes the shipments from Hong
Kong don’t go directly to retailers but to
somebody who specializes in ‘gray imports”
from Hong Kong. We have identified a number of these firms in Germany, France, Bel—
4.30 PRICING DECISIONS
gium, and Switzerland. The ‘gray importer”
usually takes another 7 percent of the FD .3
Hong Kong price.
“This is pretty much all we know about
the situation and probably all we are ever
going to know. We certainly also know that
these ‘gray exports’ are a danger to our idea
of orderly marketing. Just recently 3,000 SRT35 emerged through the Hong Kong system
in the United States. Our regular dealers
screamed like hell.6 In Germany, a department store just offered 600 SR-Ts at ‘drastically reduced prices.’ The problem is that
these ‘gray exports’ create a lot of attention;
the retailers who’buy them in Europe or in
the United States, of course, heavily advertise that they have a Special deal ‘as long as
supply lasts.”’
TACKLING THE PROBLEM
“We have got to fix this problem,” said Mr.
Nakamura. He had called a meeting with key
executives of the International Division. The
meeting was attended by Mr. Isao Izuhara,
manager of’the Export Department, Mr. Akio
Miyabayashi, general manager of Minolta
Camera Handelsgessellschaft G..m.b..H.. in
Hamburg, Germany, Mr. Sadahei Kusumoto, president of Minolta Corporation in New
York, and Mr. Koji Kusumoto, who had previously been the general manager of Minolta’s Hamburg subsidiary and was now working in the Export Department.
“I agree,” said Mr. Koji Kusumoto. “I
got into some very uncomfortable situations
with our regular dealers when I was over in
5Model designation for one of Minolta‘s singlelens reflex cameras.
6Minolta’s total export sales of the SR-I model
to the United States in 1970 had amounted toabout
51,000 units
Germany. At the last l—“hotokina7 a number
of our dealers cornered my sales manager and
me; they-wanted to know what Minolta is
going to do about it. But I am not sure whether
there is anything we can do unless we eliminate the current differences in price that exist between the Far East and the Western
markets. Water will flow from high points to
low points, and cameras will flow from lowprice markets to high-price markets.”
“Well, our dealer‘s don’t see it quite that
way,” replied Mr. Miyabayashi. “They think
that What we should do, first, is have better
control. ofour distribution. They keep arguing
that other companies, prestigious watchmak—
ers like Omega, in particular, which have similar price differences, don’t seem to have our
problem. Of course, what the dealers don’t
say is that wristwatch distribution is much
more selective, almost exclusive, than ours;
I don’t think that would be feasible for our
products.”
“Still, distribution control and stock
control is something we can do and we should
do better,” said Mr. Izuhara. “Goddard in
Hong Kong just isn’t doing a good job in this
respect. We have discussed the matter with
them several times. They don’t care where
our products go. I think we should control
the Hong Kong operation ourselves. I have
had some very preliminary discussions with
George Ho about this. I think there may be
a chance of talking him into changing God—
dar’d into a 50:50 joint venture with us. We
have made some rough calculations; for a
50:50 joint venture we might need a capital
expenditure of roughly HK$600,000. ”
“But, certainly, we would want more
than an equity participation,” said Mr. Nakamura. “If we do it, we would have to insist
7Important trade exhibition of photographic products in Cologne, Germany.
on Japanese management of the .joint venture. I wonder whether George Ho would go
along with that.”
“If he doesn’t, I believe that we should
terminate our agreement with Goddard and
establish a wholly owned subsidiary in Hong
Kong,” Mr. Izuhara replied.
“These are all very drastic steps,” com—
mented ‘Mr. Sadahei Kusumoto from New
York. “I think there are a number of tactical
changes we can make to improve the situation. I believe that if we sold our cameras
under different model names in the Far East
and in the West we would reduce the inflow
of ‘gray exports’ from Hong Kong signifi- cantly. Consumers in the United States would
be reluctant to buy the Hong Kong imports
if’the imports carried a model designation that
is different from the models we show in our
advertising. They wou1d feel that they would
get an inferior model if they bought the lowerpriced Hong Kong imports.”
“Furthermore, we could change our
DISCUSSION QUESTIONS
1. What alternatives are available to Minolta in
this situation?
2. What would you do if you were Mr. Naka—
mura? Why?
PRICING DECISIONS 4.31
current warranty policy under which we service any camera f’ree of charge during the
warranty period, irrespective of where the
camera was bought. Why not impose a handling charge, say, $25.00, for any camera we
receive for service that was not imported
through the Minolta Corporation in New York?
We could make similar arrangements in Europe. Since each of our cameras and lenses
carries a number, it’s easy to determine
whether we imported a specific camera or
whether it reached the US. in some other
way-”
“These are all very interesting ideas,”
said Mr. Nakarnura- “I wish we had more
information about the ‘gray export’ problem.
But I am sure we won’t get much more. We
have got to make some decisions on the basis
of’what we know now. The fluctuation in currency exchange rates we are experiencing at
the moment certainly doesn’t make this job
easier.”