Promotion strategies for banking services: case study of Nordea in Estonia

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BACHELOR’S THESIS

2004:152 SHU

Promotion Strategies for Banking Services

Case Study of Nordea in Estonia

Social Science and Business Administration Programmes

INTERNATIONAL BUSINESS AND ECONOMICS PROGRAMME

ANNA GRANKVIST CAROLINA KOLLBERG

ANNA PERSSON

Department of Business Administration and Social Sciences Division of Industrial Marketing and e-Commerce

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ACKNOWLEDGEMENTS

This Bachelor’s thesis was written as a part of the program for International Business and Economics at Luleå University of Technology in the spring of 2004.

We would like to thank our supervisor Manucher Farhang at the division of Industrial Marketing for his help and guidance during the process of writing this thesis. We would also like to thank our respondent Mr. Christer Rosentröm, country manager of Nordea Bank Finland plc Estonia branch, for taking time of to answer our questions. Without him we would not have been able to complete this thesis.

Finally, we would like to express our gratitude to all the people that have supported us during the process.

Luleå, May 2004

Anna Grankvist Carolina Kollberg Anna Persson

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ABSTRACT

The issues of promotion are becoming more and more complicated as internationalization of financial services continues to increase. In the latter years, the Baltic States have emerged as attractive markets for many western countries, and several banks have initiated operations there. The purpose of this thesis is to gain a better understanding of international banks’ promotion strategies in the Baltic States. In order to reach our purpose we have conducted a case study of a Nordic retail bank’s promotion strategy in Estonia. For our data collection we have used interviews and documentations. Our study shows that the most important promotion tools for financial services are personal selling and advertising, in order to create awareness of the brand and establish personal relationships. The external factors influencing the choice of promotion strategy are technology orientation of the industry, cultural aspects, competitiveness of the market, and economic factors. Adaptation of the promotion strategy is performed to a great extent, due to customers’ different preferences and expectations, as well as local conditions of the host country. However, banks attempt to standardize their promotion as much as possible in order to reduce costs and reach economies of scale.

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SAMMANFATTNING

Frågor gällande marknadsföring blir alltmer komplicerade i takt med att internationaliseringen av finansiella tjänster ökar. Under de senaste åren har de Baltiska staterna utvecklats till attraktiva marknader för många länder i västvärlden, och ett flertal banker har initierat verksamhet där. Syftet med denna uppsats är att öka förståelsen för internationella bankers marknadsföringsstrategier i de Baltiska staterna. För att nå syftet har en närmare studie av marknadsföringsstrategier hos en Nordisk bank, aktiv i Estland, genomförts. För insamling av data har vi använt oss av intervjuer samt dokumentationer.

Vår studie visar att de viktigaste marknadsföringsverktygen för finansiella tjänster är personlig försäljning samt reklam. Detta för att skapa medvetenhet om varumärket och för att etablera personliga relationer. De viktigaste externa faktorerna som påverkar valet av marknadsföringsstrategi är teknikintensitet inom industrin, kulturella aspekter, konkurrens på marknaden samt ekonomiska faktorer. Adaptering av marknadsföringsstrategin genomförs i mycket stor utsträckning, främst på grund av kundernas varierande preferenser och förväntningar, men även på grund av lokala betingelser. Emellertid försöker banker att standardisera sin marknadsföringsstrategi i så stor utsträckning som möjligt, för att minska kostnaderna samt uppnå skalekonomi.

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TABLE OF CONTENTS

LIST OF FIGURES

Figure 2.1 A Testable Framework of Product and Promotion Adaptation...10

Figure 3.1 External Factors Influencing the Choice of Promotion Strategy ...21

Figure 3.2 A Conceptual Frame of Reference ...23

Figure 4.1 A visual design of Methodology ...32

Figure 5.1 The Nordea Group...33

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LIST OF TABLES

Table 4.1 Relevant Situations for Different Research Strategies...26

Table 4.2 Six Sources of Evidence: Strengths and Weaknesses...27

Table 6.1 Comparison between Theory and Empirical Data...47

Table 6.2 Basic Conditions for Adaptation or Standardization ...49

Table 6.3 Arguments for Adaptation...50

Table 6.4 Arguments for Standardization...51

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INTRODUCTION

1 INTRODUCTION

This introductory chapter is divided into four subsections. Firstly, a brief background will be presented. Thereafter, the problem discussion will be provided, which in turn will lead to the purpose and research questions. Finally, the demarcations will be set forth.

1.1 Background

Globalization is growing faster than ever. In order to keep up with the competition, companies are forced to think globally and to expand their business across borders.

National boundaries are falling and multi-national companies are increasing in numbers.

The focus on internationalization efforts and development of global strategies has tended to fall upon manufacturing companies. However, due to the growth of the service sector and its important role for many countries in compensating trade deficits, as well as its increasing internationalization, service companies have become more and more important. (McLaughlin & Fitzsimmons, 1996)

Today, services are the fastest-growing part of world trade and account for the largest share of gross domestic product in almost every country (Albers-Miller & Straughan, 2000). In an internationalization process, services are assumed to be encountering larger risks than manufactured goods, since service providers often immediately have to establish its operations abroad and cannot gradually export the goods (Välikangas &

Lehtinen, 1994). This is due to the fact that services generally cannot be separated from the person performing or selling them (Nicolaud, 1989). One of the sectors within the service industry that has been influenced the most by the changes in the globalization process, and at the same time has been highly internationalized, is the banking sector.

(Sanchez-Peinado, 2003)

1.1.1 Internationalization of the Banking Industry

Financial activity across borders is a phenomenon as old as international trade (Marquardt, 1994). Since the 1960s, the internationalization of banks has expanded at a rapid pace, and banks from all over the world have established themselves abroad since then (Lindström, 2003).

According to Albers-Miller & Straughan (2000) banks have been encountering numerous challenges during the past two decades, including competition, recessions and image problems. Additionally, many banks have been facing mature domestic markets with limited future growth potential, which as a result, has led to expansion of their services abroad (ibid). Until recently, banks were seen as highly bureaucratic organizations operating solely in national markets. Today, they are more likely to be efficient and modern institutions operating in a highly competitive environment, and often on international markets. (Quintana, 2003) There are three primary driving forces behind

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INTRODUCTION

the increasing interdependence of national financial markets, and indirectly, through the parallel internationalization of organizations. The second force is the reduction of regulations concerning the banking industry in most countries, including the decreasing interference of central banks. (Quintana, 2003) Finally, the technological expansion has been an important factor behind the transformations (Daniels & Radebaugh, 2001).

For a long time retail banking¹ operations have to a great extent been conducted nationally. However, internationalization within this sector is now taking place, either through cross-border mergers and acquisitions, or through the establishment of subsidiaries in foreign countries. (Quintana, 2003)

Flohr-Nielsen et al., (2003) claim that the best place to study how companies meet market and technology challenges is within the Nordic-banking sector. What makes this banking sector particularly interesting are the ongoing changes reflected in mergers, acquisitions and technological developments. (ibid) Apart from the Benelux countries, the Nordic countries appear to be the only region within Western Europe where cross- border bank mergers have achieved satisfactory results. The reason for this success is said to be the resemblance in culture, language and history of the countries within those regions. (Quintana, 2003)

1.1.2 Promotion of Financial Services

Promotion is the direct way an organization tries to reach its publics. This is performed through the five elements of the promotion mix, i.e. advertising, sales promotion, personal selling, public relations, and direct marketing (Czinkota & Ronkainen, 2004) With the growing importance of the financial sector, pressures are escalating for more effective marketing management of the financial services. Despite the recent recessions, the financial services sector is continuing to grow in terms of turnover and profits and thus, has a supreme impact on the other spheres of the economy. Consequently, there is currently growing interest in applying marketing techniques and tools in financial services. (Meidan, 1996)

In spite of major changes on the market of financial institutions, there are indications that banks have not yet successfully embraced the marketing philosophy or achieved levels of its implementation consistent with satisfied customers. Financial institutions are realizing that their established promotion practices are inadequate for new market conditions as levels of customer defection in the sector grow. Traditionally, banks have tried to reach out to everyone in the community, but recent research proposes that banks should aim to identify and serve micro-segments. (Dawes & Brown, 2000)

The role of promotion has been redefined into managing long-term relationships with carefully selected customers, including construction of a learning relationship where the marketer maintains a dialogue with an individual customer (Dawes & Brown, 2000). Due to this fact, the personnel are one of the most important resources of a bank. Their

1 Banks that focus on private persons and smaller companies (Lindström, 2003)

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INTRODUCTION

competence will determine the quality of the bank and how well it operates. (Marquardt, 1994)

The difficulties with understanding a foreign culture² often leads to insecurity, which as a result makes it harder to operate on a new market. This is a reason why many banks choose to operate in markets that are similar to those of their home countries. (Marquardt, 1994)

1.1.3 Financial Services in the Baltic States

The transition economies in Central and Eastern Europe are emerging as attractive target markets for companies in Western Europe. The notable economic growth that is taking place in the former East block has triggered interaction, especially across the Baltic Sea.

The Nordic countries have demonstrated an increasing interest in trade relations and in making direct investments in Estonia, Lithuania and Latvia. (Ghauri & Holstius, 1996) The Baltic States are some of the most developed transition economies (Fleming et al., 1997). Since the independence of the three countries in 1991, the development from planned economy to a functioning market economy has been rapid. A great number of new corporations have been established, and almost all economic activity is now operated privately. (Exportrådet, 2003) Initially the three countries took different approaches regarding their financial systems (Fleming et al., 1997). Today, however, the basic structures of the financial system in the Baltic States are quite similar, in the sense that they are strongly dominated by retail banks, which increasingly tend to be foreign owned (Berglof & Bolton, 2002). For example, in Estonia the market share of foreign-owned banks is more than 90 percent (Ghauri & Holstius, 1996).

1.2 Problem Discussion

Experience has shown that operating abroad involves many difficulties, such as cultural differences, language, laws and regulations, lack of foreign contacts and business connections. These factors are ever so difficult for banks, since their operations involve a high degree of risk taking. The establishment of banks has generally taken a long time, and very few have attained a strong position on foreign markets. (Marquardt, 1994) Promotion of financial services is an understudied area. Much of the bank marketing literature has concentrated on marketing theory more than promotion practice.

Unfortunately, the issues of marketing are becoming more complicated as internationalization of financial services continues to increase. (Albers-Miller &

Straughan, 2000) Effective promotion of financial services is crucial since services are intangible products, and it is hard to stand out, considering the fact that all banks offer similar products (Meidan, 1996). A bank’s services are seldom unique and they are easy

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INTRODUCTION

for competitors to copy (Marquardt, 1994). Additionally, many people cannot make a distinction between different banks’ services, and they are often not aware of the wide range of different financial services available. (Meidan, 1996)

Since the independence from the Soviet Union, advertising in the Baltic States has been reinforced. Advertising did exist prior to 1991, but mainly in the form of outdoor poster sites and shop-window displays, promotional techniques far from those mostly familiar in the west, i.e. television and press. Since the adoption of the free market, advertising has become an inevitable feature of the Baltic economies, especially through the activities of western companies. Although, in actual terms, advertising expenditure remains small, it is continuously growing. In comparison to other central and eastern European countries, there is evidence that advertising growth will continue. Perhaps most significant is the contribution that advertising is already beginning to make to the GDP of these countries.

(Arnold et al., 2001)

According to Ghauri & Holstius (1996) transition economies are very different from industrialized countries, and their banking and communication systems tend to be rather underdeveloped. However, since the Baltic States are referred to as some of the most developed transition economies by Fleming et al. (1997), it would be very interesting to know to what extent their rapid development has affected the promotional activities of Banks operating within this region. Berglof & Bolton (2002) state that the banks in the Baltic States are to a great extent foreign owned, and yet there has not been enough significant research concerning the challenges facing international banks’ when promoting themselves in these countries. Our main motive for conducting this study is due to the fact that limited research is available within this area. We think that this is ever so interesting to study now, as the Baltic States are entering the European Union.

1.3 Purpose & Research Questions

Based on the problem discussion above, the purpose of this thesis is to gain a better understanding of international banks’ promotion strategies in the Baltic States.

In order to fulfil this purpose three research questions have been constructed and will be used as a foundation for the research:

RQ1: How can the promotion mix for banking services in the Baltic States be described?

RQ2: How can the external factors influencing the choice of promotion strategy for banking services in the Baltic States be described?

RQ3: How can the adaptation vs. standardization of the promotion strategy for banking services in the Baltic States be described?

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INTRODUCTION

1.4 Demarcations

Ghauri & Holstius (1996) state that the Baltic countries are three different areas with different cultures and history. Yet they can be seen as one area as far as the establishment of Nordic companies is concerned. Out of all the Baltic States, Estonia is the most developed economically, especially in its banking system. (ibid) The system was effectively reformed in the early 1990s, and today it is working satisfactorily (Exportrådet, 2003). As far as technological advances are concerned, and the impact that they have on the way business is done, Estonia is in the forefront in Europe (Bokros et al., 2001).

Estonia is called a transition economy, but appears to be relatively comparable to the industrialized countries of Western Europe. Since it is the Baltic country that is most similar to the Nordic countries, we think that it will be interesting to see what possible obstacles or differences in terms of promotion might be facing a Nordic bank operating there. As a further demarcation we will solely focus on one form of banking activities, namely retail banking.

Based on the facts stated above, this thesis will focus on promotion strategies pursued by Nordic retail banks operating in Estonia.

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THEORETICAL FRAMEWORK

2 THEORETICAL FRAMEWORK

In this chapter the theoretical framework relevant to our purpose and research questions will be presented. The chapter begins with a presentation of the promotion mix for banking services, followed by the external factors influencing the choice of promotion strategy, and thereafter theories regarding adaptation and standardization of promotion will be discussed.

2.1 The Promotion Mix for Banking Services

Promotion is according to Brassington & Pettitt (2000) the direct way in which an organization communicates the product or service to its target audiences. Within the financial services industry, promotion is used in many different ways (Meidan, 1996).

Brassington & Pettitt (2000) has categorized the promotional tools into five main elements;

! Advertising,

! Sales Promotion,

! Public Relations,

! Personal Selling, and

! Direct Marketing Advertising

Brassington & Pettitt (2000) define advertising as any paid form of non-personal communication directed towards target audiences and transmitted through various mass media in order to promote and present a product, service or idea. The key difference between advertising and the other promotional tools is that it is impersonal and communicates with large numbers of people through paid media channels. (ibid)

Meidan (1996) states, that a financial services organization can use its advertising for either its short-term or its long-term objectives. A bank attempting to generate a long- term build-up of its name would use institutional advertising, while a bank interested in promoting its brand name and its different services would use a brand advertising policy.

(ibid)

Meidan (1996) further states that the institutional advertising consists of promotion of the firm’s image as a whole, and promotion of the products offered, with extra emphasis on the specific firm’s name organization. The organization seeks through its marketing communications, to build awareness and to impress customers looking for the best range of financial services. Due to the former impression of banks as impersonal institutions with no interest in their customers as people, and of financial services as abstract and quite similar, the institutional advertising has become more and more important. Brand advertising follows closely in the footsteps of institutional advertising. Its purpose is to create awareness of the bank’s name and to advertise the different services it is offering.

Since financial firms are serving a mass of people, the problems of brand advertising are

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to know who to advertise to, and how to advertise. While institutional advertising is directed towards the whole population, the brand advertising of particular products has to be much more selective, since it has to show that the consumer will benefit from the service. Furthermore, all the individual campaigns of brand advertising have to be compatible in tone and presentation, and match the image the bank has created through its institutional advertising. (ibid)

Mortimer (2001) states that an important part of advertising is to make the service tangible in the mind of the consumer in order to reduce perceived risk and provide a clear idea of what the service comprises. Furthermore she considers it important to advertise consistently, with a clear brand image, in order to achieve differentiation and encourage word-of-mouth communication (ibid).

According to Meidan (1996), there are two types of advertising channels appropriate for financial advertising. That is “above-the-line” and “under-the-line” advertising. Above- the-line advertising contains different channels of communication, such as television, radio, posters, magazines and newspapers. Under-the-line advertising constitutes a huge part of a financial organization’s advertising activities. It is the invisible advertising of the bank’s services, including leaflets, pamphlets, explanatory guides and manuals that can be used to support selling of a specific service. It is hard to draw a definite distinction between under-the-line advertising and sales promotion. Under-the-line advertising is very easy and cheap to produce, but it must be used discreetly. Furthermore, this kind of advertising does not attract new customers, and it is depending on personal selling for its effectiveness. (ibid)

Sales Promotion

According to Brassington & Pettitt (2000) sales promotion is different tactical marketing techniques with mostly short-term incentives, which are designed to add value to the product or service, in order to achieve specific sales or marketing objectives.

Furthermore, Meidan (1996) states that it has two distinctive qualities. Firstly, it provides a “bargain chance”, since many sales promotion tools have an attention-gaining quality that communicates an offer that will not be available again to purchase something special.

The disadvantage, however, is that although they appeal to a wide range of buyers, many customers tend to be less brand loyal in the long run. Secondly, if sales promotions are used too frequently and carelessly, it could lead to insecure customers, wondering whether the service is reliable or reasonably priced. (ibid)

Meidan (1996) indicates that due to the conflicting ideas concerning the benefits of sales promotions, a financial service organization must base its decisions upon relevance and usefulness of sales promotion, as well as cost-effectiveness. Peatti & Peatti (1994) claim that normally, coupons, special offers and other forms of price manipulation are the dominant forms of sales promotion. However, price-based promotions are difficult and probably dangerous to use for financial service markets. This due to the fact that the price setting of a financial service is already a difficult process, and that consumers often see lower prices as a result of lower quality. (ibid) However, Meidan (1996) states that sales

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with advertising. The primary objectives with sales promotion within financial services are to attract new customers; to increase the level of deposit accounts, thereby increasing the banks share of savings; to increase market share in selected market segments; and to lower the cost of acquiring new customers by seeking to avoid direct price competition with other financial institutions. (ibid)

Public Relations

According to Brassington & Pettitt (2000) the essence of public relations (PR) is to look after the nature and quality of the relationship between the organization and its different publics, and to create a mutual understanding. PR covers a range of activities, for example the creation and maintenance of corporate identity and image; charitable involvement, such as sponsorship, and community initiatives; media relation for the spreading of good news, as well as for crisis management, such as damage limitation.

Moreover, an organization can attend trade exhibitions to create stronger relationships with key suppliers and customers as well as enhancing the organization’s presence and reputation within the market. (ibid)

Meidan, (1996) states that another part of public relations is the publicity gained through magazines. Financial services obtain considerable publicity in so called quality press, such as different financial journals. In popular newspaper the publicity is, in contrary to the quality press, often negative from the financial firm’s point of view. (ibid) Meidan (1996) further claims that the importance of public relations is being increasingly attended, and financial services often have public affairs officers, working actively to generate publicity.

Personal Selling

Brassington & Pettitt (2000) define personal selling to be a two-way communication tool between a representative of an organization and an individual or group, with the intention to inform, persuade or remind them, or sometimes serve them to take appropriate actions.

Furthermore, personal selling is a crucial element in ensuring customers’ post-purchase satisfaction, and in building profitable long-term buyer-seller relationships built on trust and understanding (ibid).

Verhallen et al. (1997) state that the increased competition within the fast changing environment of financial services has lead banks to develop and maintain comprehensive relationships with their customers. Furthermore, Julian & Ramaseshan (1994) state that the long-term person-to-person relationship is an important factor for a retail bank to achieve a competitive advantage. Meidan (1996) points out that once a customer has chosen its bank, he is unlikely to switch to another. Thus, personal selling is probably the most important element in the communication process within the financial services industry. (ibid) Lee (2002) state that personal selling can be performed either face-to-face or through technological aids such as the Internet.

According to Julian & Ramaseshan (1994) the relationship between the salesperson and the customer is perceived as being of great importance for the marketing of a bank.

Hence, the sales force within the financial services industry needs not only to be trained

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in the art of selling, but also to be aware of all the services available and be able to clearly explain what each service offers. Since customers’ needs and motivation are likely to be complex, and their ability to assess alternative courses of action without professional assistance is likely to be limited, it is of great significance for the sales force to know their customers, as well as their products. (ibid) Verhallen et al. (1997) indicate that banks should see the selling as a problem-solving process in which the sales force engages and co-operates towards the customer, trying to find a solution to the customer’s problem, rather than only persuading him to purchase the products or services. In addition, Meidan (1996) claims that it is up to the sales force to enhance the bank’s reputation by looking after its customers.

Direct Marketing

According to Brassington & Pettitt (2000), direct marketing is an interactive system of marketing, using one or more advertising media to achieve measurable response anywhere, forming a basis for creating and further developing an on-going direct relationship between an organization and its customers. To be able to create and sustain quality relationships with sometimes hundreds or even thousands of individual customers, an organization needs to have as much information as possible about each one, and needs to be able to access, manipulate and analyze that information. Thus, the database is crucial to the process of building the relationship. (ibid)

Lee (2002) states that the fast advances in technology over the past 30 years have reshaped how consumers today interact with their financial institutions. The financial sector has extended its “face-to-face” selling towards direct marketing of products and services in the form of phone, mail, or computer transactions. (ibid)

Mols (2000) claims that as computer literacy and the availability of computers increase and the costs decrease, Internet banking consumers are increasing considerably. Through the Internet banks, the customers can identify what interests them. Furthermore, the Internet technology also makes it possible to follow individual customer usage. With the information gathered in an integrated database it is possible to read the customers needs and satisfy them. This knowledge can be used for different kinds of direct marketing.

(ibid)

2.2 External Factors Influencing the Choice of Promotion Strategy

According to Cavusgil et al. (1993) there are three categories of influences on the choice of adaptation of the promotion strategy; the product and industry, the company and the export market of choice.

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Figure 2.1 A Testable Framework of Product and Promotion Adaptation Modified from Cavusgil, et al., 1993, p. 485

The Product and Industry

According to Cavusgil et al. (1993) the product and industry influences include four factors; type of product, product uniqueness, technology orientation of the industry and cultural specificity of the product.

Type of Product

Cavusgil et al. (1993) define the type of product as the product’s classification. Nicolaud (1989) & Meidan (1996) state that services are intangible products which often cannot be separated from the person performing or selling them. Czinkota & Ronkainen, (2004) further state that the value of services is harder to measure, its performances are harder to observe and to possess, compared to manufactured goods. According to Bossone (2000) banks are intermediaries between savers and users of capital. They supply transaction services and provide liquidity to both consumer and industrial markets (ibid). Meidan (1996) states that banks need to offer a wide range of products and services to meet a

COMPANY EXPORT MARKET

PRODUCT & INDUSTRY

Product Familiarity of Export Customers Similarity of Legal Regulations

Competitiveness of Export Market Firm’s International

Experience

Export Sales Goals for the Venture

Entry Scope

Promotion Adaptation

! Positioning

! Packaging/Labeling

! Promotional Approach Type of Product

Technology Orientation of

Industry Product

Uniqueness

Cultural Specificity of

Product

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variety of financial and related needs from different customers in different areas. The general types of products offered by a bank can be divided into five categories;

• Cash accessibility (for instance telephone banking)

• Asset security (for instance safety of money deposits)

• Money transfer (for instance payment service)

• Deferred payments (for instance loans)

• Financial advice (for instance advice on investments, taxation or wills)

Meidan (1996) further states that a service such as bank credit cannot appeal to a buyer’s sense of touch, smell, taste, sight or hearing, which as a result makes it very important for the marketer to explain what the service actually comprises. However, the general promotion strategy tends to focus on the brand rather than the product (ibid).

Product Uniqueness

Cavusgil et al. (1993) define the product uniqueness as the degree to which the product is made or designed to satisfy unique needs of the customers. According to Julian &

Ramaseshan (1994) there is constant pressure within the competitive environment of banking to innovate and develop new ways to improve customer service. Long-term person-to-person relationships between a financial institution, its distributors and its customers, are seen as an important factor for a bank to achieve a competitive advantage (ibid). However, Meidan (1996) claims that since banks offer similar products, it is very hard to stand out. According to Marquardt (1994) a bank’s services are seldom unique and they are easy for competitors to copy. Additionally, Meidan (1996) states that banking services tend to meet general needs rather than specific, and since there are no particular benefits distinguishing different banks from each other, promotion of financial services is essential. A bank must strive to attain a good overall image and to attract customers with the right message (ibid).

Technology Orientation of the Industry

According to Cavusgil et al. (1993) the technology orientation refers to the technology intensity of the industry. Joseph et al. (1999) claim that technology has increasingly been applied in the delivery of services since the mid-eighties. The adoption of technology into service industries has become important, and service providers are being urged to invest in technology as a way of securing their future in the electronic age (ibid). Meidan (1996) states that new products, new payment systems, new forms of distribution and delivery and improved management information systems are increasing the demand of technology within the financial services sector. According to Flohr-Nielsen (2002) Internet banking should be seen as part of general trend in which customer relationships as well as new Web-technologies have become very important. The banking industry provides strong incentives for banks and customers to use the Internet. Banks can reduce their costs considerably, and at the same time meet potential demands of customers, such as convenience and cheap transactions. (ibid)

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Cultural Specificity of Product

According to Cavusgil et al. (1993) cultural specificity of a product concerns if the product relates to the extent to which the product mediates the needs of a specific culture.

Albers-Miller et al. (2000), state that consumer expectations can differ tremendously and the issues of culture should therefore be thoroughly examined by the bank in wish of conducting international business. An understanding of the customers is essential in order to create effective promotion (ibid). Root (1994) indicates that the greater the distance between two cultures, the harder it is to communicate effectively. Culture can affect many, if not all, of an organization’s strategic decisions (ibid). Meidan (1996) states that banking services tend to meet general needs rather than specific. He claims that a bank should analyze the wants and needs of different market segments and design its marketing mix to fulfill them. Consequently, market segmentation is essential. Consumer behavior towards financial services is very much a function of social class. (ibid)

Papavassiliou & Stathakopoulus (1997) claim that the development of a basic advertising campaign with country-specific adaptations is very important, especially when there are great linguistic differences across different host countries. The advertising messages must correspond with the beliefs and traditions of the citizens in each country traditional, since cultural values have an impact on advertising message appeal (ibid).

The Company

According to Cavusgil et al. (1993) the company influences include the firm’s international experience, export sales goal for the venture and entry scope.

Firm’s International Experience

According to Cavusgil et al. (1993) a firm’s international experience refers to its previous international practice and the amount of information management had gained about the target country. A firm can gain international experience through involvement in international transactions, operating in many foreign markets, and through interaction with foreign suppliers or distributors. (ibid) Ghauri & Holstius (1996) mean that gaining information about the target market can be very difficult in developing countries and in the former socialist countries, because the infrastructure is often underdeveloped. Getting information from local counterparts may also be difficult, and it necessitates the development of relationships and mutual trust. However, research shows that this is less of an issue in the Baltic countries. (ibid)

Export Sales Goal for the Venture

According to Cavusgil et al, (1993) the export sales goal for the venture refers to what the penetration aim of the venture is in the target country. When a venture sets ambitious goals for it self, it will require a deeper penetration and a better understanding of the market of interest, in order to achieve success (ibid). Claessens & Jansen (2000) state that in comparison with domestic banks, foreign banks tend to be larger and have better quality loan portfolios, higher net worth and higher ratios of operating income to costs.

They specialize in different activities and have a slightly smaller share of income from services than domestic banks. Foreign banks also tend to be less involved in consumer

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lending, and focus their portfolios rather on the manufacturing sector. Foreign banks thus differ in their operations from domestic banks. (ibid)

Entry Scope

According to Cavusgil et al. (1993)the entry scope refers to if the product is exported to a single foreign market or multiple foreign markets. When a product enters multiple markets at the same time, the cost of adapting the product and promotion to fit each market is likely to be compounded with by substantial initial investment costs (ibid).

Ghuari & Holstius (1996) claim that the Baltic States differs to a great extent from entry into traditional developing countries since these countries are more developed.

The Export Market

According to Cavusgil et al. (1993) the export market influences include three factors;

similarity of legal regulation, competitiveness of export market and product familiarity of export consumers.

Similarity of Legal Regulation

According to Cavusgil et al. (1993) similarity of legal regulation is defined as the degree of market similarity, and similarity of legal regulation between the host and home country. Brassington & Pettit (2000) name political stability, ownership restrictions, employment laws, safety regulations, financial laws, promotion constraints, price regulations, and consumer protection legislation as some of the political and legal factors affecting an international organization. Cavusgil et al. (1993) further state that in an export market where the legal regulations are comparable with those in the home market, firms have less pressure to modify their promotional program. However, when there are great differences, modification promotion will be required (ibid).

Ghauri & Holstius (1996) claim that when international companies start operations in East European transition economies, the environment is very different to their home country. However, according to Fleming et al. (1997) the Baltic States are some of the most developed transition economies. Exportrådet (2003) states that since the independence of these countries, the development from planned economy to a functioning market economy has been rapid. Ghauri & Holstius (1996) also claim that out of the Baltic countries, Estonia has done the most to harmonize laws with Western ones, but Lithuania is not far behind. Politically, all three countries are going through a democratization process (ibid).

Competitiveness of Export Market

According to Cavusgil et al. (1993) competitiveness of export market refers to the competitive intensity of the host country. Czinkota & Ronkainen (2004) mean that there is a greater variance of competition in the international market than the domestic. To be successful, an organization has to learn about the competitive activities and evaluate the actual and potential impact it has on its own operations (ibid). Papavassiliou &

Stathakopoulus (1997) further state that by making a competitive analysis, multinational corporations can gain a “competitive advantage” for the role of advertising in their

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marketing strategies in foreign markets. When this is not fulfilled, competition may force organizations to adapt promotion (ibid).

According to Quintana (2003) increased competition has strongly affected banking organizations throughout the industrialized world, and there is now greater diversity than ever before in the activities and markets in which banks decide to operate. Deregulation and growing European integration have facilitated both domestic consolidation and internationalization of banking firms (ibid). Arnold et al. (2001) claim that the banking industry hardly existed in the Baltic States at the turn of the decade, but tens of companies have been establishing after 1991, many without the reserves to maintain their position.

Product Familiarity of Export Consumers

According to Cavusgil et al. (1993) product familiarity of the export consumers refers to if the customers are familiar with the product or not. Lindström, (2003) state that banks are generally important for the functioning of any country’s economy. However, according to Watters (1995) the financial services sector has no worldwide brands and has even lacked this extensive expansion across borders. This is because some of the considerations, such as management control and language, are the same as other business sectors, and others, such as legislation and regulation, are distinct to this sector (ibid).

Other External Factors Influencing the Choice of Promotion Strategy

Papavassiliou & Stathakopoulus (1997) state a few other factors that are influencing the advertising adaptation. These factors are country of origin image, economic factors and advertising infrastructure.

Country of Origin Image

Root (1994) implies that people in industrial countries tend to have a more favorable image of their own country’s product than foreigners do. Knowledge of made-in images can be of great help when operating abroad. Each image contains both positive and negative attitudes towards the product identifiable with the country of origin. By being aware of these attitudes and promoting on the positive ones, a company can increase the chance of success. (ibid) Claessens & Jansen (2000) mean that the increasing internationalization of financial services eliminates discrimination in treatment between foreign and domestic financial services providers, and removes barriers to the cross border provision of financial services.

Economic Factors

Papavassiliou & Stathakopoulus (1997) indicate that the economic conditions prevailing in the host country are of major concern in influencing international strategy. Brassington

& Pettit (2000) mean that these economic factors can include inflation, exchange rates, income, consumption potential, rate of unemployment and exchange control regulations.

Ghauri & Holstius (1996)state that the Baltic countries have made free trade agreements with the Scandinavian countries and have started to redesign their legislation to follow Western principles better. That is very important, since modern taxation laws are crucial for foreign investors. There are also some investment incentives for foreign enterprises in

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all the Baltic countries, such as tax relief and improved protection of foreign property against nationalization. (ibid)

Advertising Infrastructure

Papavassiliou & Stathakopoulus (1997) further state that the availability, performance and cost aspects of the advertising infrastructure can affect the promotion decisions. The advertising infrastructure consists of the institutions and functions essential to the advertising process, such as availability of media, the structure of media, availability of technical equipment, local advertising experience and staff talent in the target country (ibid). Arnold et al. (2001) claim that in the latter years, a great deal of money has been invested in advertising in the Baltic States, and this in turn has increased availability of media and development of the advertising structure.

2.3 Adaptation and Standardization of the Promotion Strategy

The decision whether to adapt or standardize the marketing mix is, according to Brassington & Pettitt (2000), complicated for any organization operating in more than one environment. Too much adaptation might lead to failure of the organization to exploit the synergies that become possible when going international. (ibid) However, Van Mesdag (2000) states that a pure, comprehensive standardization is not possible, since the differences in for example language, retail structure, regulations and cultural features between countries are too great.

Adaptation

Agrawal (1995) states that marketers in favor of the adaptation strategy tend to argue that advertisers have to take differences including culture, stage of economic and industrial development, stage of product life cycle, media availability and legal restrictions into consideration. Brassington & Pettitt (2000) claim that when acting on an international market, an organization always have to consider to which degree a customer’s needs and wants are different from those on the domestic market, and if adaptation is necessary.

Brassington & Pettitt (2000) further state that promotional mixes often have to be adjusted to suit the local environment and reflect the target markets preferences.

Promotion has to take language as well as local regulations, in terms of both media choice and content, into account. Sales promotion is also affected by local regulations;

therefore the choice of activities must respect these regulations and consider the preferences of the customers. (ibid)

Brassington & Pettitt (2000) also indicate that marketing communication might have to be adapted, due to consumer readiness stage. A product that is mature in one market might be totally unknown in another market, and therefore the promotional mix will have to be adapted. Cavusgil et al. (1993) claim that adaptation of the promotion includes the costs of using different promotional messages, appeals, packaging/labeling and media.

There are four variables that significantly and constantly impact the promotion

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adaptation. These are the firm’s international experience, technology orientation of the industry, product exclusivity and the competitive intensity of the market. (ibid)

Cavusgil et al. (1993) further state that both reactive and proactive approaches of promotional adaptation exist. Proactive harmonizing with the characteristics of the market includes modification of positioning, packaging/labeling, and promotional approach. Firms may also choose to reactively adapt their products in order to improve their competitive position, especially if competition in the market is intense, the industry is technology intensive, or the product is unique. (ibid)

There are three basic conditions, stated by De Mooij (1994), that have to be fulfilled in order to use a standardized approach, and if these are not realized adaptation should be considered.

1. A brand’s advertising cannot be universal if different national markets are in diverse stages of maturity.

2. A brand’s advertising cannot be universal if the idea depends on a large budget which is unsupported in some markets

3. A brand’s advertising cannot be universal if it defies local customs and regulations and ignores the efforts of the competition.

De Mooij (1994) presents eight arguments in favor for choosing an adaptive promotion strategy:

1. The heterogeneity of the countries concerned.

2. The “not invented here” syndrome: the desire to create own campaigns.

3. Differences in the media scene.

4. Differing regulations regarding service or advertising.

5. The nature of the competition in different markets.

6. The service is at different stages of its life-cycle in different markets.

7. The danger of being seen as a foreign company.

8. Reduced economic advantage because of higher co-ordination costs.

According to Czinkota & Ronkainen (2004) adaptation also has to be carefully investigated in emerging market economies, where the consumers are more likely to be interested in rational advertising that has a clear message. They see advertising as information, which they can use in order to sort out between the numerous and sometimes confusing offers. This has led to the fact that many consumers tend to prefer advertisements in newspapers to those on television, particularly if they are well organized and informative. (ibid)

Standardization

Cavusgil et al. (1993) state that the development in communication and transportation technologies, together with the increased travel contributes to the globalization of markets, has resulted in emerging global customer groups. Therefore, in a market where needs and preferences of the customers are largely universal, standardization might be

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preferable. In order to succeed in the global market it is of importance for companies to be able to deliver high-quality products at a competitive price. Standardization of marketing programs might be crucial to achieve a low-cost competitive position. (ibid) Agrawal (1995) explains that people favoring a standardization approach believe that differences between countries are more a matter of degree than direction. That is why advertisers should focus on the similarities of the consumers in the international marketplace rather than the differences (ibid).

De Mooij (1994) claims that the following nine arguments are a reason for choosing a standardized promotion strategy:

1. Cost reduction is the most important argument for standardization.

2. A uniform brand image and corporate image worldwide avoid confusion.

3. The globalization of media.

4. Simplified planning through uniform objectives.

5. Maximum use of good ideas and transmission of know-how.

6. Centrally managed international enterprises.

7. Better use of manage abilities and resources.

8. Universal guidelines and quality standards.

9. Better access to know-how and experience of other countries.

According to O’Donnell & Jeong (2000) the main characteristic of global marketing tends to be to standardize the elements of the marketing mix as much as possible. The advantages are economies of scale within the three elements product, place and promotion, which are captured in the marketing mix (ibid).

O’Donnell & Jeong (2000) further claim that the amount of standardization needed depends on the type of product. Industrial products are seen to be more suitable than consumer products for standardization, since industrial buyers tend to be more rational in their purchasing behavior and demand for industrial products is more homogenous across markets. (ibid) Furthermore, Cavusgil et al. (1993) state that in a captive market, where the product already has achieved a leader position, a higher degree of standardizations may be advantageous.

The Contingency Theory

O’Donnell & Jeong (2000) indicate that it is not possible to use either total standardization or complete adaptation. The degree to which these are used depends on a number of internal factors, for example organizational structure and managerial orientation, and external factors, such as target market and environment. (ibid) Cavusgil et al. (1993) states that standardization and adaptation should be seen as two extremes, and choosing one of these approaches without adjusting it will not be successful.

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FRAME OF REFERENCE

3 FRAME OF REFERENCE

Based on the theoretical framework presented in the previous chapter, this chapter will show the conceptualization of the theories and help to clarify how they will answer the research questions.

Miles & Huberman (1994) state that the meaning of conceptualization is to explain, either through graphics or text, the main things that will be studied. Because of the extensiveness of the literature review, parts of each theory has been chosen and conceptualized. Our conceptualization will be presented accordingly with the order and content of our research questions stated below:

RQ1: How can the promotion mix for banking services in the Baltic States be described?

RQ2: How can the external factors influencing the choice of promotion strategy for banking services in the Baltic States be described?

RQ3: How can the adaptation vs. standardization of the promotion strategy for banking services in the Baltic States be described?

3.1 The Promotion Mix for Banking Services

In order to answer our first research question, we will apply theories regarding promotion of financial services. We will use the five general promotional tools, which according to Brassington & Pettit (2000) are advertising, sales promotion, public relations, personal selling and direct marketing. For the characterization of each tool, we will use the definitions provided by these authors. The theories we will rely on for describing the five tools are theories concerning promotion of financial services, presented mainly by Meidan (1996), but also by Julian & Ramaseshan (1994), Peatti & Peatti (1994), Verhallen et al. (1997) and Lee (2002). We believe that with these theories as a foundation, the comparison with our research findings will be facilitated and more accurate, and that we will be able to describe the promotion mix of a bank’s services.

Concerning advertising, we will look at institutional and brand advertising, which according to Meidan (1996) covers advertising of the company image as a whole versus advertising the brand name and the different products. He also talks about above-the-line advertising as channels of communication that can be applied, and under-the-line advertising as a discreet but significant part of a financial services organization’s promotion. These two communication approaches will also be considered.

Meidan (1996) also presents a number ways to use sales promotion, such as through coupons, special offers and other forms of price manipulation. This will also be of relevance for our research. Moreover, he describes to what extent sales promotion can be used by financial institutions, which also will be of interest.

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FRAME OF REFERENCE

With public relations, we will look at significant issues, which according to Brassington

& Pettit (2000) are relationships building, image maintenance, charitable involvement, sponsorship, and community initiatives. We will also consider Meidan’s (1996) statement regarding the importance for financial institutions to appear in financial magazines.

Concerning personal selling, we will look at the importance of interaction and relationships with customers, which according to Verhallen et al. (1997) is increasingly important for banks due to the competition intensity.

Lastly, within direct marketing our concerns will mainly include measurable response achieved through different tools such as the Internet, which according to Lee (2000) and Mools (2000) is to a large extent replacing face-to-face interaction.

3.2 External Factors Influencing the Choice of Promotion Strategy

Our second research question concerns external factors influencing the choice of promotion strategy. In order to answer this question we will mainly use selected parts from the theory of Cavusgil’s et al. (1993) and also some facts mentioned by Papavassiliou & Stathakopoulus (1997), which we believe covers most of the issues that are relevant to describe the external influences on the choice of promotion strategies.

There are no theories to be found that suit the exact approach of our research, but although our chosen theories concern influences on promotional adaptation, we think that the theories provide a suitable framework for defining of the external factors that can influence the choice of promotion strategy.

We will focus on the factors that Cavusgil et al. (1993) state are the product and industry and the export market. The product and industry influences include four factors; type of product, product uniqueness, technology orientation of the industry and cultural specificity of the product. The export market influence will include two factors; similarity of legal regulation and competitiveness of export market. (ibid)

Most of the basic definitions of each subtitle have been applied, but the theory has been adjusted with a number of authors’ statements regarding financial services and the general conditions in the Baltic States. This has been done in order to make a relevant comparison and to answer our research question more properly.

Although it provides a general framework for possible influences, the theory by Cavusgil (1993) is in many ways inadequate. This is due to the fact that it only comprises factors relevant for manufactured products and does not consider services. Furthermore, we also found the theory limited, since it concerns a number of factors, which we believe are only relevant for a market entry strategy. Those factors will not be of significance for our research, since we will focus on current promotion strategies performed by an established bank operating in the Baltic States. The concerned factors are all three of the factors regarding the company as an influencing factor, and also one of the export market

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FRAME OF REFERENCE

Due to the facts stated above, we have decided to construct our own adapted version of the theory by Cavusgil (1993). As mentioned before, all company factors have been removed, partially because we see those factors as internal factors which to a great extent would have been the same as in the home market, and also since the factors focus on a company’s entry strategy. The export market influence called product familiarity of export consumers also felt irrelevant, since banks exist everywhere and people tend to know to some extent what kind of function they have, and this factor would have been more relevant if we were looking at goods instead of services. Further adaptations have been made since the theory concerns manufactured goods that are being exported to a new country and our approach is to investigate promotion strategies of a foreign bank established in the Baltic States. The remaining factors describing the external influences on the choice of promotion strategy will be utilized, however, with some adjustments on either their names or their purpose, in order to suit the situation. The export market will be renamed to the international market, the competitiveness of the export market will be renamed to the competitiveness of the market. Furthermore, the cultural specificity of the product will be called cultural aspects, and will be adjusted to the theories found and consider general cultural issues, such as differing expectations, attitudes and preferences, facing the company, with focus on the influence on promotion strategies.

Apart from the theory of Cavusgil et al. (1993), we have also found a few other external influences, which we consider to be relevant for our research. Papavassiliou &

Stathakopoulus (1997), state that country of origin image, economic factors and advertising infrastructure also can affect promotion decisions. These factors will also be considered and will help us to answer research question number two.

The new model used for our research will comprise the following factors: the type of product, product uniqueness, technology orientation of the industry and cultural aspects (product and industry factors), similarity of legal regulation and competitiveness of export market (international market factors) and country of origin image, economic factors and advertising infrastructure (other external factors).

The factors presented in figure 3.2 are the ones that have been selected and adapted to serve the purpose of answering research question number two.

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FRAME OF REFERENCE

Figure 3.1 External Factors Influencing the Choice of Promotion Strategy

3.3 Adaptation and Standardization of the Promotion Strategy

The third research question regards to what extent the promotion is standardized or adapted. In order to answer it, theories regarding adaptation and standardization will be applied. We believe that the theories mentioned in this section will enable us to describe the adaptation vs. standardization of an international bank’s promotion strategy in the Baltic States, and thereby answer research question number three.

We will look at a number of basic conditions that have to be fulfilled in order to choose strategy and arguments in favor for choosing one or the other of the two strategies.

There are three basic conditions, stated by De Mooij (1994), that have to be fulfilled in order to use a standardized approach, and if these are not realized adaptation should be considered.

1. A brand’s advertising cannot be universal if different national markets are in

OTHER EXTERNAL FACTORS

PRODUCT & INDUSTRY

INTERNATIONAL MARKET

Similarity of Legal Regulations

Competitiveness of the Market Country of Origin

Image

Economic Factors Type of Product

Technology Orientation of

Industry Product

Uniqueness Cultural Aspects

Advertising Infrastructure

Promotion Strategy

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FRAME OF REFERENCE

2. A brand’s advertising cannot be universal if the idea depends on a large budget which is unsupported in some markets

3. A brand’s advertising cannot be universal if it defies local customs and regulations and ignores the efforts of the competition.

De Mooij (1994) has stated eight arguments in favor for choosing an adaptive promotion strategy:

1. The heterogeneity of the countries concerned.

2. The “not invented here” syndrome: the desire to create own campaigns.

3. Differences in the media scene.

4. Differing regulations regarding service or advertising.

5. The nature of the competition in different markets.

6. The service is at different stages of its life-cycle in different markets.

7. The danger of being seen as a foreign company.

8. Reduced economic advantage because of higher co-ordination costs.

Furthermore, de Mooij (1994) also states nine arguments for choosing a standardized promotion strategy.

1. Cost reduction is the most important argument for standardization.

2. A uniform brand image and corporate image worldwide avoid confusion.

3. The globalization of media.

4. Simplified planning through uniform objectives.

5. Maximum use of good ideas and transmission of know-how.

6. Centrally managed international enterprises.

7. Better use of manage abilities and resources.

8. Universal guidelines and quality standards.

9. Better access to know-how and experience of other countries.

Furthermore, we will use the theories presented below.

Brassington & Pettitt (2000) presents some theory regarding adaptation and preferences of the customers, which is relevant for our research questions. According to O’Donnel &

Jeong (2000) products or services directed to the industrial market are seen as more suitable for standardization than consumer products or services. Moreover, Czinkota &

Ronkainen (2001) claims that adaptation has to be carefully investigated in emerging market economies, where the people are interested in rational advertising and see it as information. Finally, Cavusgil et al. (1993) state that the development of communication possibilities together with the increased travel contributes to the globalization of markets.

3.4 A Conceptual Frame of Reference

In order to fulfill the purpose of this study concerning international banks’ promotion strategies in the Baltic States, the three research questions will be applied to cover all

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FRAME OF REFERENCE

significant parts of the area. The first research question will provide the different promotion tools available for banking services. Research question number two will describe the external factors influencing why and how a specific promotion strategy is chosen. Finally, research question number three will clarify how the strategy will be implemented in terms of adaptation and standardization of the original concept. These research questions are interrelated and together they will serve the purpose of this study.

Below the conceptual frame of reference model provides an overview of the theoretical parts that have been chosen, and which will aid the collection of data, and later also facilitate the data analysis.

Figure 3.2 A Conceptual Frame of Reference

RQ 2:

External Factors Influencing the Choice of Promotion Strategy

1. Product and Industry 2. The International

Market

3. Other External Factors RQ1:

The Promotion Mix for Banking Services

1. Advertising 2. Sales Promotion 3. Public Relations 4. Personal Selling 5. Direct Marketing

RQ 3:

Adaptation vs.

Standardization of the Promotion Strategy

1. Standardization of the Promotion Strategy 2. Adaptation of the

Promotion Strategy

Promotion Strategy for Banking Services in the

Baltic States