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:
- Understanding the global phenomenon of ‘grey marketing’.
- Understanding the logistics within grey markets.
- The precautionary measures adopted by the firms & agencies to prevent grey activities.
- The concept of free riding to penetrate markets within the software arena.
- & lastly analysing & evaluating the research produced to gather & provide insights.
1.6 LIMITATIONS TOWARDS THE REASERCH
The possible shortcomings for the proposed research topic are as under:
- Being an unconventional subject for research, obtaining information can be tough.
- Tracking the right sources of information is a major challenge.
- Information gathered through ground research can’t be entirely relied upon, as it can be manipulative.
- Information obtained from grey suppliers may not be fruitful, as they might not give out precise information about the present scenario &
- Interviewing people from companies or firms who are being targeted by grey marketers’ may prefer to remain low profile on the preventive measures they plan to adopt in future.
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