Topic: Black-Market Activity
Characters: Suzanne Thompson, International Tobacco Products Manager, U.S. Tobacco Inc. Suppakorn Rachinda, a Kalandese national, Southeast Brand Manager for UST’s “Primo” brand
Freshly promoted to International Tobacco Products Manager for U.S. Tobacco, Suzanne Thompson finds herself at the cutting edge of the firm’s growth strategy for the next decade. Faced with declining volume sales and systematically increasing taxes on tobacco products in the United States, U.S. Tobacco has targeted for growth in volume sales. Further, the prestige image of American cigarettes in many foreign markets permits higher prices and margins on tobacco products. This is particularly true of the “Primo” brand, whose symbol of a sophisticated, urban, professional male is recognized virtually worldwide.
In Rohanda, UST’s plans have run afoul of a government policy which formally bans the import of cigarette products. While the health ministry supports the ban, the major beneficiaries of the policy are the government-owned cigarette monopoly and the country’s tobacco farmers. The monopoly is required to buy the crops of these farmers at above-market prices. Intense pressure from U.S. tobacco companies and the U.S. Department of Commerce has failed to convince the government of Rohanda to repeal the ban on cigarette imports. Ironically, American brands have traditionally controlled about 20 percent of Rohanda’s cigarette market as the result of black-market sales by established distributors in neighboring Kalanda. Rohanda’s government has not enforced the ban in the past, nor has it made any effort to stop UST from spending $8 million a year to advertise “Primo.” Apparently, the government is convinced that the high prices for black-market cigarettes are sufficient protection for the brands offered by their monopoly.
Disgusted by what he considers a duplicitous policy, Suppakorn Rachinda, “Primo” brand manager in Southeast Asia, has submitted to Suzanne his first-ever marketing plan for Rohanda. He proposes to double the advertising budget in Rohanda to $16 million and increase prices to Kalanda distributors by 20 percent. He argues that this plan will allow UST to capitalize on its premium position in Rohanda and share in the lucrative black-market profits. He asserts further that the plan will not produce higher prices in Kalanda since the smuggling distributors will not have to raise prices, thus ensuring that the nonsmuggling distributors will be unable to do so. Finally, he maintains that the plan is consistent with the established practice of Rohanda’s government, if not its formal policy.
Suppakorn’s proposed marketing plan is now on Suzanne’s desk, awaiting her approval for implementation in the coming year.
Author: Fred L. Miller, Associate Professor of Marketing, Murray State University
What Are the Relevant Facts?
1. International market expansion is a primary objective of UST.
2. Suzanne’s performance appraisal will likely be highly influenced by her ability to increase foreign sales.
3. Rohanda seems more interested in protecting a monopoly market position with the import ban than the health of its citizens.
4. Rohanda has not enforced the ban in the past, nor does it seem likely to do so in the future.
5. As a national of Kalanda, Suppakorn should be more familiar with business customs in this region of the world than is Suzanne.
6. The premium price position of “Primo” in Rohanda results at least partially from UST’s promotion of the brand there.
7. UST is not violating the import ban; its distributors are.
8. Suzanne’s decision on this issue may well influence UST’s relationships with distributors throughout the region.
What Are the Ethical Issues?
1. Should Suzanne attempt to stop the sale of “Primo” in Rohanda?
2. Should Suzanne stop the promotion in Rohanda of a product that is technically banned from the market?
3. Should Suzanne increase prices to Kalandese distributors to share in the premium margins the “Primo” brand commands in Rohanda?
Who Are the Primary Stakeholders?
- UST’s employees and shareholders.
- The government of Rohanda, its cigarette monopoly and health ministry.
- Rohandese tobacco farmers.
- Cigarette consumers in Rohanda.
- UST’s distributors in Kalanda.
- Suzanne and Suppakorn
What Are the Possible Alternatives?
1. Accept Suppakorn’s marketing plan proposal.
2. Accept Suppakorn’s proposal minus the price increase to Kalandese distributors.
3. Suspend/decrease all promotion for “Primo” in Rohanda.
4. Take active steps to stop Kalandese distributors from selling “Primo” in Rohanda.
5. Seek to negotiate a license agreement for the “Prim” brand with the Rohandese tobacco monopoly.
What Are the Ethics of the Alternatives?
How does the AMA Code of Ethics affect this decision? (Optional: A copy of the code is attached for instructors wishing to use it.) Relevant material may be found in the following sections of the Code:
1. “Responsibilities of the Marketer”
2. “Honesty and Fairness”
3. “Rights and Duties of Parties in the Marketing Exchange Process – Distribution”
4. “Organizational Relationships”
What are the utilitarian considerations in this decision?
1. The balancing of benefits and harms will tend to set UST, its employers, managers, share- holders, and smuggling Kalandese distributors against the Rohandese government, cigarette monopoly, cigarette consumers, and UST’s nonsmuggling Kalandese distributors. The exact balance of these interests varies from alternative to alternative.
2. Students may well raise utilitarian issues based on the effects of the product itself. Instructors may elect to deal with these questions at the systemic level (i.e., who should make the decisions about the right to consume harmful products and the resulting individual and social costs) or exclude them as irrelevant to the corporate and individual decisions Suzanne must make.
What are the rights considerations in this decision?
1. Comments here tend to focus on the rights of Rohandese cigarette consumers (lack of free consent to the ban or lack or privacy in the form of personal consumption habits) or the rights of nonsmuggling Kalandese distributors (violation of their right of freedom of conscience due to the pressure to smuggle inherent in the proposed pricing policy).
What are the justice considerations in this decision?
1. Does proposed pricing policy treat smuggling and nonsmuggling distributors equally? Are any differences in treatment justified?
2. Does the proposed marketing plan treat Rohandese and Kalandese cigarette consumers equally? Are any differences in treatment justified? Are such differences within Suzanne’s realm of control?
What Are the Practical Constraints?
1. T echnically, the Rohandese policy of banning cigarette imports is beyond the control of UST.
2. Suzanne may have difficulty stopping the smuggling from Kalandese distributors if she attempts to do so.
3. Should UST follow a government policy which the government shows no intention of enforcing?
4. Are UST’s expectations for foreign market growth so strong as to prevent Suzanne from withdrawing from the Rohandese market?
What Actions Should Be Taken?
1. Additional alternatives may arise during the discussion of those listed above. Add them to the list.
2. Ask students to recommend an alternative or combination of alternatives from the list.
3. Ask students how the discussion of the AMA Code of Ethics and the utilitarian, rights, and justice principles has affected their selection of alternatives.
