Ch. 3.pdf - International Market Opportunities PDF

Chapter 3: How do firms identify and assess international market opportunities? Global market opportunity assessment Global market opportunity assessment: is the process of combining circumstances, locations and/or timing that offer prospects for exporting, investing, sourcing or p...

Chapter 3: How do firms identify and assess international market opportunities? Global market opportunity assessment Global market opportunity assessment: is the process of combining circumstances, locations and/or timing that offer prospects for exporting, investing, sourcing or partnering in foreign markets ○ Along any point in the value chain- procurement, production, sales, survive and partnerships, managers must look for the most relevant and reliable data to make their international business decisions ○ Under such conditions, the firms may perceive opportunities to Sell its product and services Establish factories or other production facilities to produce offerings more cheaply or competently Procure raw materials, components, or services at lower cost or of better quality Enter beneficial collaborations with foreign partners ○ The risk-return relationship holds true- International Business poses many more risks than operating domestically only, but global market opportunities can enhance company performance, often far beyond what the firm can achieve in its home market. The 6 Tasks if Global market Opportunities Assessment 1. Analyze: organizational readiness to internationalize 2. Assess: the suitability of the firm’s products and services for foreign markets 3. Screen countries to identify attractive target markets. 4. Assess the industry market potential, or the market demand, for the product(s) or service(s) in selected target markets. 5. Choose qualified business partners, such as distributors or suppliers. 6. Estimate company sales potential for each target market. Task 1: Organizational Readiness ○ Analyze organizational readiness to internationalize to provide an objective assessment of the firm’s preparedness to engage in international business.  It is achieved by examining company strengths and weaknesses for international business, by evaluating key factors in the firm such as: Appropriate financial and tangible resources. Relevant skills and competencies. Management’s commitment to internationalization. Deficiencies that hinder achieving company goals. ○ Similar to SWOT analysis ○ If one or more key resources is lacking, management must acquire or develop them before allowing the contemplated venture to go forward ○ Organizational culture is pivotal because key employees should possess the motivation and commitment to expand the firm’s activities into foreign markets. ○ The external business environment is also examined for opportunities and threats in the markets- researching the specific needs and preferences of buyers, as well as the nature of competing products and the risks inherent in foreign markets. Task 2: Assess the suitability of products and services for foreign markets ○ This means asking questions such as who buys the product? Who uses it? Why do people buy it? What local factors might inhibit sales ○ Assess suitability of the firm’s products and services for foreign markets by conducting a systematic assessment of company offerings for international customers. ○ Evaluate the fit between the offerings and foreign customer needs. ○ For each possible target market, identify the factors that may hinder market potential. ○ Determine how the offering may need to be adapted for each market. ○ Specifically, assess the offering regarding such factors as foreign customer characteristics, laws and regulations, channel intermediary requirements, and nature of competitors. ○ One of the simplest ways is to ask intermediaries in the target market about the likely local demand for the product. ○ Another very efficient method is to attend an industry trade fair in the target market/region and interview prospective customers or distributors there.  Task 3: Country Screening to identify Target Markets ○ Screening to identify the best countries is a fundamental yet time-consuming part of opportunity assessment. Failure to choose the right countries not only results in financial loss; it also incurs opportunity costs, tying up resources the firm might have used more profitably elsewhere ○ Identify five or six countries that hold the best potential by assessing each country regarding such criteria as: Size and growth rate Market intensity (buying power) Consumption Capacity (size and growth rate of the middle clas) Country’s receptivity to imports Infrastructure for doing business Economic freedom and country risk ○ To identify the most promising markets firms must: Screen countries for exporting - Population, income, demographic characteristics, government stability, and nature of the general business environment in individual countries are key variables - Initially, firms select countries that are psychically near - countries similar to the home country - culture, legal environment, and management’s comfort zone. As experience, knowledge, and confidence grow, firms expand into more complex and culturally distant markets, such as China or Japan. Industry matters Consumer electronics - emphasize countries with large populations, discretionary income, and ample electricity. Farming equipment - best targets are countries with substantial agricultural land and farmers. Health insurance companies - target countries with many doctors and hospitals. Target Region- Firms may target a group of countries rather than individual countries- more cost effective. Screening Methodology for Potential Country Markets Gradual Elimination  ○ Start with a long list of prospective target countries, then gradually eliminate many of them after researching specific information about each. ○ The aim is to identify five or six countries that warrant in-depth investigation as potential target markets, and eliminate unattractive markets quickly. ○ Macro Level Market Research: population, income, and economic growth ○ Micro level:size of the market, presence of competitors, import statistics, and the level of the country’s exports (because some countries function as transit points, not end consumers). Indexing and ranking ○ Researchers assign scores to countries for their overall market attractiveness based on various criteria. ○ Weights are assigned to each market-potential indicator to establish its relative importance.  Engines of Economic Growth- Middle Class ○ Critical indicators- size and growth rate of the middle class ○ Middle Class- measured by the share of national income available to middle-income households. ○ Middle Class size is depicted as a % of world population, consistently increasing over time, thanks to rising affluence in emerging markets and developing economies. ○ Middle class- If income distribution is very unequal, the size of the middle class will be limited and the market will be less attractive. ○ ○ Measures of per capita income may underestimate the true potential of emerging markets due to imprecise measurement methods and the existence of a large, informal economy in many countries. No single country is attractive on all dimensions ○ there are always trade-offs in selecting target countries ○ Package deal- desirable and less desirable features. ○ Country rankings are not static; they evolve in the wake of macroeconomic events or country-specific developments. Country Screening for Foreign Direct Investment ○ FDI investments are usually undertaken for the long term, choosing the right market is critical, and different variables apply to FDI than for exporting.  ○ RESEARCHERS IDENTIFYING THE BEST LOCATIONS FOR FDI USUALLY CONSIDER THE FOLLOWING VARIABLES: Country risk, including regulatory, financial, political, cultural barriers, and the legal environment for intellectual property protection Long-term prospects for growth and substantial returns Cost of doing business, based on the price and availability of commercial infrastructure, tax rates, wages, skill level and capital markets Competitive environment and intensity of competition from other firms Government incentives such as tax holidays, subsidized training, grants, or low-interest loans Task 3 Country screening for Sourcing ○ When seeking foreign sources of supply, managers examine factors such as Cost and quality of inputs Stability of exchange rates Reliability of suppliers Workforce with superior technical skills ○ Financial Attractiveness Compensation costs (average wages), infrastructure costs (for electricity and telecom systems), and tax and regulatory costs (tax burden, corruption, and fluctuating exchange rates) ○ People skills and availability Suppliers’ experience and skills, labor-force availability, education and language proficiency, and employee-attrition rates ○ Business Environment Economic and political aspects of the country, commercial infrastructure, cultural adaptability, and security of intellectual property. Task 4: Assessing Market Potential ○ Once a firm limits its scope to a few potential markets/countries; it must conduct an in-depth analysis of the industry structure. ○ Methods include doing trend analysis, watching key industry-specific indicators, key competitors, key customers, and supplier networks, and attending international trade fairs. ○ The assessment has transitioned from a macro-level to a micro- level, i.e. industry. ○ Industry market potential- an estimate of the likely sales for all firms in a particular industry over a particular period ○ Company sales potential- the focal firm’s share of industry sales expected during a given year ○ Both are typically forecasted for at least three years ○ TO ESTIMATE INDUSTRY MARKET POTENTIAL (PRODUCT/SERVICE), MANAGERS OBTAIN DATA AND INSIGHTS ON THE FOLLOWING VARIABLES FOR EACH COUNTRY: Size and growth rate of the market and trends in the specific industry Tariff and nontariff trade barriers to market entry Standards and regulations that affect the industry Availability and sophistication of distribution channels for the firm’s offerings in the market Unique customer requirements and preferences Industry specific market potential indicators ○ Data Sources for Estimating Industry Market Potential For each target country, information is sought that directly or indirectly captures levels of industry sales and production, and the intensity of exports and imports. ○ Determinants of Company Sales Potential Intensity of the competitive environment- Local or third-country competitors are likely to intensify their own marketing efforts when confronted by new entrants. Their actions are often unpredictable and not easily observed Pricing and financing of sales- The degree to which pricing and financing are attractive to both customers and channel members is critical to initial entry and ultimate success.  Financial resources- Sufficient capital is a prerequisite for any project. International ventures often require substantial financial outlays. ○ Methods for Estimating Industry Market Potential Simple trend analysis examines aggregate production for the industry as a whole. Monitoring key industry-specific indicators examines unique industry drivers of market demand. Monitoring key competitors to estimate their sales levels provides an estimate of market potential. Following key customers around the world can provide an estimate of likely sales in an industry that the firm supplies. Tapping into supplier networks can offer valuable information for assessing sales and competitor activity. Attending international trade fairs facilitates learning about market characteristics and sales potential Task 5: Choose Foreign Business Partners ○ The firm decides on the type of foreign business partner, clarifies ideal partner qualifications, and then crafts an appropriate market entry strategy. ○ Initially the firm determines what value-adding activities must be performed by foreign business partners, and then seeks the appropriate partners.  ○ The firm assesses and selects partners based on such criteria as industry expertise, commitment to the venture, access to distribution channels, financial strength, quality of staff, and appropriate facilities ○ Types of Foreign Business Partners Exporters tend to collaborate with foreign market intermediaries, such as distributors and agents. Licensing partners are independent businesses that apply intellectual property to produce products in their own country. Franchising partners are franchisees – independent businesses abroad that acquires rights and skills from the focal firm to conduct local operations. International collaborative ventures include joint ventures and strategic alliance partners Other partners include basic suppliers, or firms who are involved in global sourcing and contract manufacturing. Task 6: estimate company sales potential ○ The firm estimates the most likely share of industry sales that the company can achieve, over a specific period of time, for each target market. ○ Firm develops a 3 to 5-year forecast of its own sales in each target market, based on criteria such as capabilities of partners; access to distribution; competitive intensity; pricing and financing; market penetration timetable of the firm; and risk tolerance of senior managers. ○ Factors That Determine Company Sales Potential Intensity of the competitive environment. Existing competitors may react strongly against entrants. Pricing and financing of sales. Attractiveness of pricing and financing to buyers, channel members. Human and financial resources. Major factor in the proficiency and speed of company success. Partner capabilities. Partner skills and resources determine speed and effectiveness of entry  Access to distribution channels. Ability to set up and use intermediaries and channel infrastructure. Market penetration timetable. Fast or slow? Each has advantages and disadvantages. Risk tolerance of senior managers. Special links, contacts, capabilities of the firm. The firm’s network in the market. Reputation. Success may be faster if customers are already familiar with the firm’s brands and reputation Methods for Estimating Company Sales Potential ○ Survey end-users and intermediaries. ○ Trade audits. Visit retail outlets and question channel members to assess competitors’ offerings and strengths. Reveals opportunities for new products, and for differentiating existing products and marketing. ○ Competitor assessment. The firm can benchmark itself against main competitors in the market and estimate the level of sales it can potentially attract away from them. ○ Obtaining estimates from local partners. Collaborators such as distributors and franchisees already familiar with the market can often provide reliable estimates. ○ Limited marketing efforts to “test the waters”. A limited entry in the market helps gauge long-term sales potential and provides better understanding of the market ○ The analogy method and proxy indicators are useful for emerging markets and developing economies, where information is often scarce. ○ With analogy, the researcher draws on known statistics from one country to gain insights into the same phenomenon in a similar country. ○ With proxy indicators, the researcher uses known information about one product category to infer potential about another product category, especially if the two are complementary.