Post on 25-Dec-2015
International BusinessSession 5
Understanding and Analyzing International Markets
Political
Economic
Social/Cultural
Technological
P
E
S
T
PEEST, PESTEL, PESTLE, SLEPT, STEEPLED, PEST LIED
(L)egal(E)nvironmental
(Ecological/Physical) (E)thical (E)ducational
(D)emographic
Understanding and Analyzing International Markets
Political - includes (L)egal, (E)nvironmental law/policy
Economic - includes (E)nvironmental climate and weather
Social/Cultural - includes (D)emographic, (E)thical, (E)ducational, (E)nvironmental attitudes
Technological
P
E
S
T
Key VariablesPolitics Political System Legal System Laws (affecting business) National Trade Policies Government Stability and Risk Openness to FDI
Economics and Market Characteristics
Economic System Per Capita GDP and Growth Rate Purchasing Power Inflation Rate Middle Class Size Currency Convertibility and
Trends
Social / Cultural and Demographic
Dimensions of culture Beliefs and Attitudes Language Religion Population and Age
Structure Education Urban/Rural Composition
Technical Infrastructure ICT level Productivity Cost and Accessibility of
Energy Processes and Supply Chain Medical
Economic SystemsCommand Economies (Centrally
Planned)Market EconomiesMixed Economies
Command (Centrally Planned) Economies The state is responsible for making all
decisions: What goods and services the country
produces; Quantity of production; Prices at which they are sold; and Distribution
The state owns all wealth, land, and capital, and allocates resources based on which industries they want to develop.
Command economies were common in the 20th century; they proved so inefficient that most have gradually died out.
Central planning is less efficient than market forces in synchronizing supply and demand.
Today many countries exhibit some characteristics of command economies- examples- China, India, Russia, and certain countries in Central Asia, Eastern Europe, and the Middle East.
Market Economies
Decisions regarding production levels, consumption, investment, and savings resulting from the interaction of supply and demand (market forces).
Economic decisions are left to individuals and firms.
Government intervention in the marketplace is limited.
Capitalism (private ownership of production) is closely aligned with market economies.
State should establish a legal system that protects private property and contractual agreements.
Government may also intervene to address the inequalities that market economies sometimes produce.
Mixed Economies
Exhibits market and command economy features, thus combining state intervention and market mechanisms.
Most industries are under private ownership, and entrepreneurs freely establish, own, and operate corporations- but the government also controls certain functions, such as pension programs, labor regulation, minimum wage levels, and environmental regulation.
The state usually funds public education, health care, and other vital services and owns enterprises in transportation, telecommunications, and energy.
Examples- France, Germany, Japan, Norway, Singapore, and Sweden, government often works closely with business and labor interests to determine industrial policy, regulate wage rates, and/or provide subsidies to support specific industries.
Laws affecting business
National Legal Environment – doingbusiness.org
Laws directed against foreign firms◦ Restrictions on Income Repatriation ◦ Controls on Operating Forms and Practices◦ Expropriation, Confiscation, Nationalization
Environmental lawsMarketing and Advertising lawsLevel of economic freedom
Levels of International Strategy
Environmental
Conditions &Trends
Environmental
Conditions &Trends
Opportunities
and Threats
Opportunities
and Threats
Inventory of Distinctive
Competencies
Inventory of Distinctive
Competencies
Strengthsand
Weaknesses
Strengthsand
Weaknesses
Identify& Evaluate
Options
Identify& Evaluate
Options
ChooseStrateg
y
ChooseStrateg
y
Strategy Implementation
Strategy Implementation
International Strategic Management
External Analysis
Internal Analysis
Strategy Formation
Pressures for Global Integration
Economies of Scale. Concentrating manufacturing in a few select locations to achieve economies of mass production.
Capitalize on converging consumer trends and universal needs. Companies such as Nike, Dell, ING, and Coca-Cola offer products that appeal to customers everywhere.
Uniform service to global customers. Services are easiest to standardize when firms can centralize their creation and delivery.
Global sourcing of raw materials, components, energy, and labor. Sourcing of inputs from large-scale, centralized suppliers provides benefits from economies of scale and consistent performance.
Global competitors. Global coordination is necessary to monitor and respond to competitive threats in foreign and domestic markets.
Availability of media that reaches customers in multiple markets. Firms now take advantage of the Internet and cross-national television to advertise their offerings in numerous countries simultaneously. International Business: Strategy,
Management, and the New Realities 14
Pressures for Local Responsiveness
Unique resources and capabilities available to the firm. Each country has national endowments that the foreign firm should access.
Diversity of local customer needs. Businesses, such as clothing and food, require significant adaptation to local customer needs.
Differences in distribution channels. Small retailers in Japan understand local customs and needs, so locally responsive MNEs use them.
Local competition. When competing against numerous local rivals, centrally-controlled MNEs will have difficulty gaining market share with global products that are not adapted to local needs.
Cultural differences. For those products where cultural differences are important, such as clothing and furniture, local managers require considerable freedom from HQ to adapt the product and marketing.
Host government requirements and regulations. When governments impose trade barriers or complex business regulations, it can halt or reverse the competitive threat of foreign firms. International Business: Strategy,
Management, and the New Realities 15
International Strategy Forms
GlobalStrategyGlobal
StrategyTransnational
StrategyTransnational
Strategy
MultidomesticStrategy
MultidomesticStrategy
Home Replication
Home Replication
Pressures for Local Responsiveness
Low High
High
Low
Pre
ssure
s fo
r G
lob
al
Effi
cien
cies
Where would you place these companies? ToshibaBMWUnileverIntel City UniversityDisneyCitibankNokiaCarrefour
BoeingVodafoneTexas
InstrumentsMicrosoftCoca-colaNestleColgate PalmoliveKPMGHeineken
GMOA (Global Market Opportunity Assessment) Six Steps
Conduct an internal assessment of the firm’s readiness to initiate international business activity.
Assess the suitability of the firm’s products and services for foreign markets.
Systematically identify the best markets to target with the chosen product(s) or service(s).
Estimate the industry market potential, or the “market demand”, for the product(s) or service(s) in selected target markets.
Screen and select qualified business partners, such as distributors or suppliers.
Estimate the company sales potential for each target market.
1: Key Questions to assess Readiness
• What does the firm hope to gain from international business?
• Is international business expansion consistent with other firm goals, now or in the future?
• What demands will internationalization place on company resources, such as management, personnel, and finance, as well as production and marketing capacity? How will such demands be met?
• What is the basis of the firm’s competitive advantage?
Motivations for Internationalization
Efficiency◦ Economies of scale – access to a large number of new
customers/markets
◦ Exploit another country’s resources – labor raw materials, etc.
◦ Extend the product life cycle◦ Operational flexibility – shift production to other countries
as costs, exchange rates, etc., change over time
Strategic◦ First mover in a product – favorable access to customers
◦ Cross-subsidization – use position in one country to subsidize position in another country
◦ Leverage ownership advantages
Motivations for Internationalization
Risk◦ Diversify macroeconomic risks – economic growth and
recessions vary across countries◦ Diversify operational risk – labor problems, earthquakes,
warsLearning
◦ Acquire new capabilities in diverse competitive environments
Reputation◦ Crossover customers from one market to another
2: Key Questions to assess Suitability
• Sell well in the domestic market? • Cater to universal needs? • Address a need not well served in
particular foreign markets? • Address a new or emergent need abroad?
3: Systematically Screening CountriesStart with large numberQuickly reduce to about 5 using
broad macro statistics (market size, growth, middle class, etc.)
First considerations for country screening
Cultural Similarity (language)Gateway (Singapore, Hong Kong,
Turkey)Region (EU, NAFTA)
Criteria Relevant to Country Screening for FDI
Long-term prospects for growth, as well as the potential for exports
Cost of doing business: Potential attractiveness of the country based on the cost and availability of commercial infrastructure, tax rates and wages, access to high-level skills and capital markets
Country risk: Regulatory, financial, political, and cultural barriers and the legal environment for intellectual-property protection
Competitive environment: Intensity of competition from local and foreign firms
Government incentives: Availability of tax holidays, subsidized training costs, grants, or low-interest loans.
A.T. Kearney’s FDI Confidence Index: www.atkearney.com
Criteria Relevant to Country Screening for Global Sourcing
cost and quality of inputs, stability of exchange rates; reliability of suppliers; and the presence of a work force with superior technical skills
A.T. Kearney’s Offshore Location Attractiveness Index evaluates according to 3 dimensions:
Financial structure takes into account compensation costs (for example, average wages), infrastructure costs (for electricity and telecom systems), and tax and regulatory costs (such as tax burden, corruption, and fluctuating exchange rates);
People skills and availability accounts for supplier’s experience and skills, labor force availability, education and linguistic proficiency, and employee attrition rates;
Business environment assesses economic and political aspects of the country, commercial infrastructure, cultural adaptability, and security of intellectual property.
4: Industry Market Potential Analysis
Objective: To estimate the size of relevant industry sales within each target country; To investigate and evaluate any potential barriers to market entry.
Outcomes: 3 to 5- year forecasts of industry sales for each target market. Delineation of market entry barriers in industry
Criteria: Market size, growth rate, and trends in the industry; The degree of competitive intensity; Tariff and non-tariff trade barriers; Standards and regulations; Availability and sophistication of local distribution; Unique customer requirements and preferences; Industry-specific market potential indicators.
Indicators of Industry Market Potential
Market size, growth rate, and trends in the specific industry
Tariff and non-tariff trade barriers to enter the market
Standards and regulations that affect the industry
Availability and sophistication of local distribution
Unique customer requirements and preferences
Industry-specific market potential indicators
Practical Methods for Estimating Industry Market Potential Simple Trend Analysis. Likely industry market potential is
derived from aggregate production for the industry as a whole, adding imports from abroad and deducting exports.
Monitoring Key Industry-Specific Indicators. Caterpillar, examines announced construction projects, building permits, growth rate of households, infrastructure development, and other pertinent leading indicators.
Monitoring Key Competitors. If Caterpillar is considering Chile as a potential market, it investigates the current involvement in Chile of its number-one competitor, the Japanese firm Komatsu.
Following Key Customers around the World. Automotive suppliers can anticipate where their services will be needed next by monitoring the international expansion of their customers such as Honda or Mercedes Benz.
Tapping into Supplier Networks. Firms can gain valuable leads from current suppliers by inquiring with them about competitor activities.
Attending International Trade Fairs. Industry trade fairs and exhibitions are excellent venues for managers to obtain valuable information on foreign markets.
National Trade Data Bank (STAT-USA)
Best Market Reports identify the top 10 country markets for specific industry sectors.
Country Commercial Guides analyze economic and commercial environments of countries.
Industry Sector Analysis reports analyze market potential for sectors such as telecommunications.
International Market Insight reports cover country and product-specific topics, providing various ideas for approaching markets of interest.
5: Foreign Partner Selection
Objectives: To decide on the type of foreign business partner; clarify ideal partner qualifications; and plan mode of entry.
Outcomes: Determination of most suitable types of foreign business partners. List of attributes desired of foreign business partners. Determination of value-adding activities foreign business partner contribute.
Criteria: manufacturing and marketing expertise in the industry; commitment to the international venture; access to distribution channels in the market; financial strength; quality of staff; technical expertise; infrastructure & facilities.
6: Estimate Company Sales Potential
Objective: To estimate the most likely share of industry sales the company can achieve, over a period of time, for each target market.
Outcomes: 3 to 5-year forecast of company sales in each target market. Understanding of factors that will influence company sales potential.
Criteria: Capabilities of partners; access to distribution; competitive intensity; pricing and financing; market penetration timetable of the firm; risk tolerance of senior managers.
Estimating Company Sales Potential is More of an Art than a ScienceThe process of estimating company sales is
more like starting from multiple angles, and then converging on an ultimate estimate that relies heavily relying on judgment.
Managers combine information about customers, intermediaries, and competition.
Often, managers prepare multiple estimates based on ‘best case,’ ‘worst case,’ and ‘most likely case’ scenario.
Arriving at such estimates will require assumptions as to: the degree of firm effort; price aggressiveness; possible competitive reactions; degree of intermediary effort; etc.
Sales prospects for a company hinges on factors both controllable by the firm (e.g., prices charged to intermediaries and customers), as well as uncontrollable factors (e.g., intensity of competition).
The Method of Analogy
When using the analogy method, the researcher draws on known statistics from one country to gain insights into the same phenomenon for a similar country.
If the researcher knows the total consumption of citrus drinks in India then -- assuming that citrus drink consumption patterns do not vary much in the neighboring Pakistan – a rough estimate of Pakistan’s consumption can be made, making an adjustment, of course, for the difference in population.
If the marketer of antibiotics knows from experience that X number of bottles of antibiotics are sold in a country with a Y number of physicians per thousand people, then it can be assumed that the same ratio (of bottles per 1,000 physicians) will apply in a ‘similar’ country.
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Proxy Indicators for Estimating Company Sales Potential
By using proxy indicators, the researcher uses information known about one product category to infer findings about another product category.
This approach may lead to practical results especially if the two products exhibit a complementary demand relationship.
A proxy indicator of demand for professional hand tools in a country may be the level of construction activity in the country. Surrogate indicators of potential for a particular piece of medical equipment in a market may include total number of hospital beds and total number of surgeries performed.
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GMOA Cancer Insurance
BACKGROUND: Companies and National
Governments provide basic medical insurance
But, usually does not fully cover high costs of specialized cancer treatments
Therefore, sizable world market for specialized insurance
GMOA Cancer Insurance
TASK: What countries offer the best
prospects? In which foreign markets can
supplemental cancer insurance be profitably sold?
GMOA Cancer Insurance
COUNTRY SCREENING (initial):market size (usually assessed by
examining each country’s population);
growth rate (typically the growth rate of each country’s population); and
market intensity (the buying power of each county’s residents in terms of income level)
GMOA Cancer Insurance
RESULT:Argentina, China, France, and
Japan
Next Step: estimate the likelihood of sales potential
GMOA Cancer Insurance
INDUSTRY MARKET POTENTIAL:PopulationHuman Development Index ValueAdult Literacy RatePopulation Age 65 and overHeath Expenditure Per CapitaPrivate Expenditure on HealthPhysicians per 100,000 PeoplePrevalence of Smoking
GMOA Cancer Insurance
Where to Research:Human Development Report
(HDR) by the United Nations Development Program (UNDP; www.undp.org)
World Bank (www.worldbank.org) International Monetary Fund (
www.imf.org) GlobalEDGE™ (
globaledge.msu.edu)
Argentina China France Japan
Population
Human Development Index Value (scale rating)
Adult Literacy Rate (percent)
Population Age 65 and Over (% of total population)
Health Expenditure Per Capita (amount)
Private Expenditure on Health (% of GDP)
Physicians per 100,000 people (number)
Prevalence of Smoking (% of all adults)
Argentina China France Japan
Population 40,000,000 1,327,000,000 62,000,000 128,000,000
Human Development Index Value (scale rating)
0.863 0.768 0.942 0.949
Adult Literacy Rate (percent)
97.2% 90.9 99.0 99.0
Population Age 65 and Over (% of total population)
10.1% 7.5 16.6 19.2
Health Expenditure Per Capita (amount)
$1,067 278 2,902 2,244
Private Expenditure on Health (% of GDP)
4.6% 3.6 2.4 1.5
Physicians per 100,000 people (number)
301 106 337 198
Prevalence of Smoking (% of all adults)
29% 36 26 31
GMOA Cancer InsuranceWhich Market is most attractive?What additional factors would
you want to consider?What other markets do you think
would be attractive for this product?
What does your managerial judgment say about this decision?
Would the Czech Republic be a good market?