Marketing in the export of military products (from Russia)

Marketing in the export of military products

1 Specificity of military purpose products

01. Specificity of military purpose products

1.1 Similarities with capital goods

The usefulness and value of MP (Military products) for a buyer shows itself in a relatively long time and are capital goods to the choice of which the buyer is particularly careful and this determines the specifics of marketing and product promotion on the market.

Unlike non-durable goods, capital goods are expensive, their service life sometimes exceeds decades and purchase decisions are made by top managers, and these decisions are based on field trials and evaluation of all characteristics.

The estimation of the expected returns from capital goods is calculated by discounting future financial flows for the operation of the MP, which allows the buyer to analyze similar offers and evaluate the effectiveness of investments. Consumables, ammunition, spare parts, repairs, training of specialists can be considered as goods for discounting.

Characteristics reflecting the similarity MP with capital goods:

The qualitative characteristics of MP appear themselves over a long period, and its increase is facilitated by proper operation, proper repair, upgrading and maintenance.

The development of MP products has evolutionary cycles and the emergence of new weapon systems devalues the quality of previous samples of this type and they completely lose demand in developed markets, but they can still be implemented on backward ones.

The price of MP includes the cost of total exploitation. It includes all total costs during the product life cycle that the buyer will incur.

Qualitative characteristics of MP such as reliability and security can be identified only in the dynamics and in mass usage.

Weaknesses can manifest themselves only in long-term military actions when it is not possible to improve the characteristics of equipment, unlike military test site.

The most modern and expensive equipment is the most difficult to use and use and requires the presence of specialists whose preparation can take a long time.

In addition to objective reasons for characterizing the quality of military equipment, there are misconceptions about the simplicity and reliability of certain suppliers of MP, as well as such doubtful indicators as tradition and fashion.

1.2 Similarities with long-term
financial assets

The cost of MP and their real monetary value as in the case of financial assets is determined by the situation on the market and can be classified according to the psychophysical reaction of buyers.

The price of MP can have a high volatility depending on the state of the market and can also be determined by non-market reasons such as the political situation. The weapons system acquired by the buyer, by analogy with financial assets, resembles a portfolio in which it is necessary to balance samples of military equipment with different efficiency and price range.

Factors of military asset management:

1.3 The inclusion of military
products in a complex system

Buying military equipment is only the initial stage of its use. The benefit from the operation is related with the additional costs for maintaining the product in its original state and its improvement. The use of MP is characteristic is possible only after its inclusion in a more complex system.

An aircraft cannot be used without an air traffic control system. Installation of weapon systems, ammunition, refueling with fuel and air, power supply to the airfield, logistics, specialists, etc. are necessary. Not only direct costs but also operating costs associated with the process of consumption are important for the purchaser of MP.

The cost of military products is only one of the parameters for assessing competitiveness compared to similar systems. The ability of the buyer to maintain efficiency in comparison with the size of total costs and its ability to satisfy a specific need are at the forefront.

1.4 Total Cost of Ownership

1.5 The limited choice of promotion methods

Modern promotion methods (focus group, trial sales, demonstration at the consumer, promo actions, event marketing, Internet, television) do not apply or are limited to the promotion of MP.

International exhibitions, demonstration of military equipment at test sites and during combat operations have the greatest effect on the buyer to stimulate sales in the military-industrial complex.

1.6 The segmentation of the global market

The world market of MP is segmented by the level of development of countries, participation in military blocs, international organizations and the political situation:

the developed countries
advanced developing countries
developing countries
other developing countries
backward countries

1.7 A narrow circle of buyers

Military products have a narrow circle of customers compared with consumer goods.

Buyers of military equipment are most often government agencies, officials and decision makers on the purchase of MP, as well as military specialists responsible for the technical part of the transaction.

Resellers may officially or unofficially (black market agents) acting with the approval of state members may participate in the sale of military products.

1.8 State regulation

The export of products of military-industrial complex is carried out under the most severe control of the state, regulated by legislation and agreements between states. The arms market is influenced by the foreign policy of the seller and buyer states and it is subject to changes in the political situation and the world arms market condition.

Organization and participation in MP exhibitions are carried out within the framework of the system of control and supervision of marketing, advertising and exhibition activities in the field of military-technical cooperation, which in accordance with the legislation of the Russian Federation is carried out by the Federal Service for Military-Technical Cooperation.

The main task of the Russian FSMTC is to promote the development of cooperation between Russia and other countries of the world in the military-technical field, including through the organization and participation of Russian companies involved in the production and trade of military equipment in international exhibitions, hence, its export, marketing and promotion on global markets.

1.9 Problems of promoting Russian
products on the world arms market

Suppliers of Russian companies (even with state support) are not able to offer financing conditions that are competitive in terms of deadlines and interest rates.

Russian companies don’t have an understanding of strategic marketing and most often they are focused on short-term financial results.

At the initiative of manufacturing companies samples of weapons that are not in service in the Russian Federation or are under development are offered to the external market. This creates both advantages and complaints about the quality and reliability of the products due to the lack of knowledge and lack of testing at the site.

Russian companies of MP manufacturers do not have the competence for satisfactory after-sales service, repair, supply of spare parts and consumables.

Compared with the Soviet era, modern companies have low quality logistics, difficulties in the efficiency of export deliveries at the documentary level, the rejection of deliveries from the warehouse.

Russian companies are not actively participating in international research projects, exhibitions, forums, conferences, showrooms.

2 The participation in exhibitions as a basic criterion of MP promotion

02. The participation in exhibitions as a basic criterion of mp promotion

2.1 History of science and technology exhibitions

The idea of presenting the achievements of science and technology in the military industry, and in particular in the aviation industry, arose in Russia when aeronautical engineering was first demonstrated at an industrial exhibition in 1890 in Nizhny Novgorod.

The first international exhibition of the aviation industry was opened in Paris in 1909.

2.2 Interest in the world

Major international exhibitions, forums, salons, where various military equipment, various weapons systems and modern military technologies are fully represented are held in more than 30 countries of the world.

2.3 Exhibition as the most
powerful marketing tool

The participation of manufacturers in exhibitions is crucial in MP promotion, and the results of participation affect the activities for many years.

Promotion is any form of communication between the seller and the buyer whose main goals are to provide information (including texts, photos, videos, infographics, research), beliefs, product reminders, social activities and ideas. The most important promotion functions include:

Creating an image of prestige, low price, reliability, product innovation.

Drafting of complete information about the product, its parameters and characteristics.

Maintain current information about the popularity of the product.

Targeted change and improving the image of the products.

Persuading buyers not to save and move on to more modern and expensive types of goods.

Preparation of possible and real-world questions and answers to consumer inquiries.

Creation of favorable information about the company seller and the country of origin.

2.4 The structure of the exhibition event

The specificity of the exhibition lies in its character, purpose and content. The structure of a major international exhibition of the military industry includes the following events:

2.5 Competitive advantages
of participation in exhibitions

Strict requirements for the rules of the event and registration forms are able to ensure the safety of participants and collect information about the audience.

The company's interaction with the media is to provide information about the exhibition project in the form of modular advertising, articles, reports, interviews, polls, and analytical reviews.

Involving interested government agencies and ministries, public organizations for participation.

Wide media coverage of the event. As a rule, the list of participants includes: central and specialized newspapers and magazines, news agencies, radio stations and television. These sources have a wide audience coverage, a vast geography of presence, and the greatest opportunity to create a public resonance.

Active participation in significant events of the exhibition process: presentations, business meetings, seminars, conferences, symposia, forums, congresses, press conferences, excursions.

The exhibition is a place to solve complex problems of lobbying, discussing corporate issues that support and encourage the industry represented at the exhibition.

2.6 Problems arising at different stages
of participation in exhibitions:

Pre-show preparation:

lack of clear understanding and strategic planning of participation in the exhibition

incorrect assessment of the ethics of business cooperation and traditions of the country of the exhibition organizer

lack of knowledge about the creation and management of the organizational and financial model of the organization and the processes of promotion

Work on the exhibition:

a vague understanding the picture of the market, industry and its further development by the seller

indistinct using of modern marketing tools in the promotion process

understatement of the importance of human factors and opportunities for irrational decision making

underestimation of the role of behavioral factors influencing the promotion process

lack of experience in using methods of behavioral finance to evaluate partners

Post-show work:

inaccurate understanding of the information about market condition received at the exhibition and its unqualified using

2.7 Examples of mistakes and recommendations to organizers and companies which have opportunities for total participation in international events

The problem: Incompetence in the field of exhibition management influences on attitudes towards products and the country of origin.

The solution: Do not save on participation in international events, accept and borrow modern methods of promotion.

The problem: Ineffective staff can affect the level of participation in the event and reduce the company’s or exhibition’s image.

The solution: It is recommended to invite foreign specialists and consultants for participation, as well as media personalities and officials.

The problem: Weather conditions that are unsuitable for testing can influence on the ability to complete a transaction.

The solution: Timing coordination with the event management and attracted specialists will allow to make the maximum impression on the buyer.

The problem: Weak organization of the business program. The inability to present large-scale projects. Lack of comfortable places for rest and food.

The solution: Making market researches identifying the needs of exhibitors and visitors to the event.

2.8 Expert opinions

Opinions of Russian researchers regarding participation in exhibitions of companies of the military industry:

G.P. Zakharenko

Exhibition: equipment and technology of success

Each exhibition forms public opinion on the state of the industry, individual firms, development trends of this type of activity in the market, not only within one country, but also in the global market

Y.I. Kotov

Exhibition activity is a promising sector of the Russian economy

The exhibition stimulates the development of the country's economy as a whole and regions, has a significant impact on the growth of consumer demand in industry markets, which contributes to the development of many sectors of the economy, attracting direct investment.

A. Ya. Pasmurov

How to prepare and hold a conference, seminar, exhibition efficiently

In recent years exhibitions have become firmly established, as they not only attract curious citizens and act as a place for concluding major trade deals, but also provide a meeting between enterprises and marketing research, manufacturers, consumers and the market as a whole.

3 Theory of behavioral finance

03. Theory of behavioral finance

3.1 Behavioral marketing

Behavioral marketing - the study of the behavior of manufacturers, counterparties - intermediaries and buyers in the market in accordance with certain models of the behavior of the parties to the transaction for the continuous adaptation of the company to changes in the external environment.

3.2 Behavioral Finance

Behavioral Finance - finance theory which takes into account the irrational nature of human behavior and its influence on his decision-making.

The main achievement of the theory of behavioral finance is awareness of the fact that in the field of finance as in other areas of life people tend to make decisions and they often act in the effect of stereotypes, perception illusions, in-country media discourse, preconceived opinions, errors in information analysis.

Individuals do not tend to the rapid assimilation of information, as a result of which non-standard conclusions can be taken that violate the expected utility. The study of the theory of behavioral finance was formed from the classical theory that can determine the optimal choice but is completely helpless in describing the process of real choice.

For a real assessment of the situation during making important decisions, it is necessary to correctly use the information, otherwise it may lead to incorrect assessments and decisions.

3.3 The reasons for the irrational people behavior
(on the example of information):

people can

accept limited information as comprehensive

people can

accept the available information for the true

people may

not be aware of the importance of the available information

people may

analyze and evaluate information incorrectly

people can

people can see consistent patterns where there are none

3.4 Conservatism in the processing of information

In 1968 psychologist William Edwards published the results of a study in which he showed that the slowing down of subject views changes in the in connection with new information is associated with its gradual processing.

If a person has a preliminary opinion about a concept, then the rest of the information that has a different point of view will be ignored, and at best it remains underestimated.

In order for well-established knowledge to be undermined, two to five new testimonies of the same direction are necessary.

3.5 The most important emotional factors that cause the deviation from rational behavior in particular include

conservatism of thinking

excessive confidence

susceptibility to influence

loss aversion

the desire for certainty

the perception of the desired for the real

non-linear preferences

3.6 Examples of effects reflecting the characteristics
of the human psyche during making decisions

The certainty effect

Preference for a smaller result obtained with maximum confidence to greater results with a small probability of achievement.

The formalization effect

Different perception a particular problem by most people if there are several different formulations. Consequently, there is a different preference of choice, and this contradicts the theory of rationality.

The isolation effect

To simplify the choice between the available alternatives the general characteristics are depreciated in favor of alternatives whose characteristics are different.

The loss aversion effect

People’s negative emotions which are received in case of failures and losses are much stronger than the positive emotions associated with the winning result.

3.7 Consistent patterns in military trade

The law of risk

Risk becomes an integral part of any transaction in the military sphere.

Consequences:

success in the MP sale is related to the degree of the arms sellers involvement in reducing risks for the buyer
the purchase of a weapon product is constrained by the fear of failure, fear of making a mistake because of the wrong decision
the negotiation process can both reduce and increase the risk perception and fear of the buyer

The law of trust

The key to successful weapon transactions is the trust that has arisen between the participants.

Consequences:

the creation of a trusting relationship occurs through answers to questions: the aim of these questions is clarifying the real needs of the buyer
weapon sellers usually listen twice as much as they say
the weapon contract cannot be frustrated by careful consideration of the buyer's requests

The law of relationships

Each sale of a weapon product is a relationship sale.

Consequences:

to build a good relationship with the seller is important for the buyer first of all
after the sale of complex and highly intelligent weapons, relations remain for a long time
established relationship between the seller and the buyer is more important than the product itself

The law of perception

The income of a specialized company of the military industrial complex is determined by the quality of the seller’s company as perceived by the buyer.

Consequences:

success rates increase if the buyer and the seller unite their efforts in the result
the seller can win if it will be presented as a consultant and even as a partner who solves individual problems

The law of cranky motivation

The buyer usually likes to buy a weapon but does not like when it is sold to him by imposing and manipulating.

Consequences:

in order to satisfy the buyer requests the seller must introduce himself not as the seller, but as an assistant who is interested in the transaction
the seller must act as an advisor knows how products can meet the needs of national defense and state security

The law of image

The perception of a specialized enterprise predetermines the buyer behavior and the potential purchase.

Consequences:

each attribute of the organization including the seller appearance, the product, its packaging, brand, advertising materials, creates a certain attitude and creates a desire to have a relationship with such company
no one is able to present the proposed samples of military equipment better than the enterprise of the developer and MP manufacturer

The desire to purposefully create a favorable image for the company is motivated by the desire to look profitable in the eyes of potential customers and thereby increase the value of the business.

Questions about the image of the organization addressed to sellers:

Does the seller know how to present the company in society and to potential customers?

Are there any events for strengthening the image of the seller’s company?

Are there any corporate brand gifts for employees and customers?

3.8 Adam Smith's Theory of the Economic Man

Characterized by the following provisions:

1 an individual's personal interest plays a decisive role in motivating his economic behavior

2 personal interest corresponds to public interests, and compliance is achieved through the “invisible hand” mechanism

3 “economic man” is fully competent in his own affairs which related to economic issues

4 the main motive of economic activity of an “economic person” in a market economy is maximization of profit (enrichment) taking into account non-monetary factors of well-being (ease) or the difficulty of learning, pleasantness or unpleasantness of employment, its permanent or non-permanent nature, prestige in society, the probability of success in more or less degree, prospects for the future

A. Smith. An Inquiry into the Nature and Causes of the Wealth of Nations

3.9 Psychological profile of the buyer

Main buyers of MP:

Officials (further)	Military technical specialists (further)	Resellers (further)
Organizational factors
Makes transactions for the export of MP. Attends official exhibitions and other business events, makes the final decision about transactions.	Develops and concludes export contracts. Collects and analyzes market information, compares prices, establishes business contacts.	Acts in the customer interests to the organizer’s advantage. Collects specific technical information.
Interpersonal factors
Belongs to the highest management level in state structures. Responsible for the failure of contracts, responsible to the leadership of the country. The work is focused on the preservation and strengthening of their positions.	It belongs to the middle management in the state or commerce structure. Responsible to supervisor. The work is focused on certain growth and new opportunities.	Connecting but independent link between the supplier and the buyer. Responsible for his reputation for the transaction. The work is focused on the end result and a good deal.
Psychological factors
Insatiable desire for power and the accompanying privileges. Perception of work as a way of self-assertion. They have an authoritative opinion on each issue of the transaction. They are able to hear only the opinion of the leadership of the country.	Work for the sake of professional incentives, prestige and dedication. They perceive work as a career ladder. They have their own opinion on any issues of the transaction, listen to the opinion of the senior management.	Reward makes an appeal to them in work. They have an independent but customer-focused opinion on each issue. The opinion of others makes influence on them.
Behavioral factors
The buyer may act under the influence of already existing illusions and errors in information processing. It is important to consider the subjective factors for each individual customer that determine its irrational behavior, including emotional factors.

Examples of specific tasks for understanding a partner taking into account the factors determining its psychological profile:

predict partner steps

avoid mistakes in communication

identify weaknesses and strengths

find the right approach

pinpoint opportunities

4 Analysis and recommendations to russian exhibitors

04. Analysis and recommendations to russian exhibitors

4.1 The structure of participation of Russian delegations in international exhibitions

India, China, Vietnam, and South Korea are the most important areas of Russian arms exports. These countries account for more than 50% of the export of all Russian-made military products.

Domestic manufacturers of MP take part In exhibitions and forums held in Russia less often. Meanwhile, the largest contracts are signed at Russian exhibition events. Negotiation of transaction terms can be divided into several stages and it is clear that making a deal must be held in the producer’s country in order to become imbued with the spirit of the country and confirm your emotional choice, as well as visit test sites that are most suitable for showing in the producer’s country.

Russia actively takes part in the leading exhibitions in Europe. It demonstrates the importance of participation, but due to the prevailing political circumstances, the share of exports is more complementary and it is only 3%. In recent years, there has been a trend towards the diversification of weapons in developed countries and rapidly developing countries which are ready to review their past agreements. These countries are UAE, Algeria, Egypt, Syria, Greece, Turkey, Saudi Arabia, Azerbaijan, Venezuela, Mexico, Algeria.

4.2 The reasons for the purchase of Russian weapons

Russia does not change the political orientation in contrast to the developed countries.

Russia sells products which are used in this country and therefore there will be no shortage of spare parts.

Russian equipment is easy to set up and operate.

It is cheaper than the best in the arms market.

4.3 Analysis of the Russian MP promotion

10 lacks (negative sides):

the lack of tactical and strategic planning of participation in the exhibition

the lack of modern marketing tools in the process of promotion

the lack of knowledge about using of information received at the exhibition

the lack of a clear picture of the market and the state of the industry and its prospects

the lack of experience in behavioral factors influencing on the promotion process

the lack of behavioral finance approaches and their misuse

the lack of effective solutions due to underestimation of human factors

the lack of adequate assessment of the exhibition and its status

the lack of business cooperation ethics

the lack of organizational - functional model of the company

10 realities (positive sides):

reality in the implementation of goals

reality in the competitor evaluation and observation of him

reality in the establishment and development of business cooperation

the reality of participation in significant business events

reality in maintaining the image of the company

reality in the implementation of the presentation at the international level

reality in testing new tools

reality in obtaining sufficient information base

the reality of drawing attention to their projects by the authorities

the reality of evaluating potential customers and suppliers

4.4 Preservation of the competitive position
of the Russian MP in the world market

To prevent falling demand and preserve the competitive position of Russian military products it is necessary:

to update marketing and promotion tools

speed up technical re-equipment

expand the range of products

improve product quality

because developed and large developing countries sometimes have a more modern technical base, so they impede competition in a number of untapped areas.

Russian companies of the military-industrial complex are faced with two complementary problems. On the one hand, significant investments are needed to modernize and speed up production processes, while at the same time the current level of profitability does not allow to consider these assets as attractive to outside investors.

In the format of alternative factors that hold demand and attention to Russian military products, a special attention is given to revising the strategic role of marketing, behavioral finance, expanding the range of participation in specialized events, creating high-profile media events. These steps are able to provide organizations with new opportunities to implement projects based on current production capabilities.