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Market segmentationEntering international markets

Ana Colovic

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Market screening techniques

• Choosing which market to enter is a key strategic decision.

• Correct market definition is crucial for the measurement of share and other indicators of performance, for the specification of target customers and their needs and for the recognition of important competitors.

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Identifying appropriate markets

• Screening countries against a series of factors. Key areas of interest are:– Market size (population, age structure, levels of domestic

production and imports, number of firms serving the market…)– Structure of the population (age groups, geographical

distribution, population density…)– Economic development– Income and wealth (GDP, GDP per capita)– Business environment (religious or cultural norms, laws, tariffs)– Storage and transport facilities– Political considerations– Local competition

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Identifying appropriate markets (2)

• Field work– When it is difficult to measure a market’s size and

characteristics from published data– Where consumer attitudes and behaviour cannot

otherwise be assessed.

• Market attractiveness indexes– Countries are ranked according to a number of

points (GDP, rates of ownership of consumer durables, socio-demographic variables)

– Problem: deciding the weights to attach to each variable

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Market segmentation

• Market definition leads into issues of market segmentation.

• Segmentation means breaking down the market for a particular product or service into segments of customers that differ in terms of their response to marketing strategies. It means breaking down the total market into self-contained and relatively homogeneous subgroups of consumers, each possessing its own special requirements and characteristics.

• For example, on the basis of language, there are French, German and Italian-based segments in Switzerland.

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Lifestyle (psychographic) segmentation

• Segmentation according to economic or demographic variables assumes that most of the consumers within the economic or demographic category concerned behave in a similar manner.

• Consumer attitudes, perspectives and purchasing behaviour can differ remarkably within market groups possessing nearly identical demographic characteristics.

• The incorporation into the analysis of a psychosocial dimension to reflect consumer lifestyles, personality types, interests, leisure activities, perspectives and opinions sharpens the firm’s targeting.

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Psychographics

• The term ‘psychographics’ refers to the systematic study of consumer lifestyles, attitudes, interests, opinions and prejudices as they affect purchasing behaviours.

• Psychographics seeks to sketch profiles of particular consumer groups and identify demands for certain products from key variables that characterize consumer types.

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Lifestyle

• Lifestyle is the consequence of many interacting variables: income, upbringing, experiences, relationships with others, cultural influences…

• It involves a pattern of living habits, leisure pursuits, types of entertainment purchased, degree of involvement with the community and so on.

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Lifestyle (2)

• The aim of studying lifestyles is to identify in consumers certain common characteristics such as: – whether they are motivated by materialistic or non-materialistic

drivers; – the extent to which their main concern is merely to exist and survive

rather than engage in luxury;– whether their outlook is ‘conservative and traditional’ or whether they

are ‘innovative and adventurous’;– The degree of logic and rationality they apply to purchasing

decisions;– Whether they are ‘inner directed’ (i.e. concerned with personal

growth, individual freedom and human relations) or ‘outer directed’ materialists who gain their greater satisfaction from physical consumption of goods;

– Attitudes towards home, family, security and the status quo

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Problems with psychographic segmentation

• Psychographic segmentation rests on the assumption that consumers have stable values, beliefs and attitudes that are not subject to sudden and unpredictable change. This is not always true.

• Psychosocial categorizations are highly subjective and open to numerous interpretations (for example, what exactly is meant by ‘sophisticated’, ‘reflective’,…)

• Psychographic analysis can be a waste of money (if a wide range of types of consumers use the product).

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Entering international markets

• The firm needs to consider carefully all the available options, costs, possible loss of control and risk involved.

• The market entry methods have to relate to the company’s overall strategy, goals and the time periods in which it wishes its objectives to be achieved.

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Options

• Aquisitions• Exporting• Use of agents and/or distributors• Joint ventures with foreign firms• Licensing and franchising• Management contracts• Contract manufacturing• Establishment of foreign branches and/or subsidiaries

(including FDI in manufacturing plant)• Direct marketing via the Internet

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Agents and distributors

• Distributors purchase a supplying firm’s products

• Agents find clients for the supplying firms and then ‘drop out’

• Distributors typically demand exclusivity• Agents usually operate on a

commission basis

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Joint ventures

• A joint venture is a collaborative arrangement between unrelated parties that exchange or combine various resources while remaining separate and independent legal entities.

• JVs are increasingly popular as a means for entering foreign markets

• Advantages: can be quickly entered into and abandoned; enable the sharing of costs, can be used to establish bridgeheads in a foreign market prior to major marketing efforts by individual participants.

• Problems: disagreements over organization, control, goals, pricing policy, confidentiality of information, need to share intellectual property…

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Licensing and franchising

• Firms that possess patented inventions, registered trade marks or specialist know-how that can be kept confidential may decide to license foreign firms to make and market their products.

• With a franchise agreement a foreign firm adopts the franchisor’s entire business format in the local market - its name, trade marks, business methods, layout of premises, etc.

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Management contracts

• A firm in one country provides a team of expert managers to an enterprise in another for a fixed period under contract.

• Typically the team will install a new system, train local personnel and then hand over the entire system to local control. This procedure is known as turnkey agreement.

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Contract manufacturing

• The firm places orders with local business for the production of goods, which it then sells locally or exports.

• Advantages: not having to invest large sums of money in capital equipment; easy withdrawal from high-risk markets; avoidance of involvement in industrial relations with local workforces.

• Problems: difficult to monitor and maintain quality levels, protect intellectual property;

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Establishing branches and subsidiaries

• A branch is a direct extension of the parent firm into a foreign country (so that the parent is legally responsible for all the branch’s debts and activities).

• A subsidiary is seen in law as a separate business from the firm that owns it. It is responsible for its own debts and is subject to exactly the same taxes, auditing, registration and accounting regulations as any other local business.

• A marketing subsidiary can monitor trends on a continuous basis, provide after-sales service, deal with local advertising and research agencies, arrange for transport, distribution, warehousing etc.

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International marketing through the Internet

• E-commerce

• It is very successful in business-to-business markets

• Traffic sustaining factors: speed, graphics, interactivity, consistency and user-friendly design, cookies, creativity and contents, links.