Marketing Analysis & Foreign Entry Strategy

Marketing Analysis

How should you go about determining which countries are most attractive to enter?

How should a country choose a target market? start with a large pool of candidate countries narrow down this pool

careful not to ignore countries with viable opportunities careful not to waste time on countries with little potential

Screening Process

Step 1: Select indicators and collect data Pick a set of socioeconomic and political indicators

believed to be critical e.g., political risks, trade barriers, etc. Aggregate economic statistics

Economic Indicators Gross National Product (GNP)

Measure of value of all goods and services produced by a nation

A higher GNP generally regarded as indicator of better market, but GNP/capita is a better measure

A country w/ a higher GNP/capita is generally more advanced than a country w/ a lower figure

Population Good indicator for low unit-value products or necessities (not

very good for luxury goods) Population growth is an important indicator Population density is an important indicator (Canada)

Economic Indicators Personal Income

Can reflect attractiveness of a market because consumption and income are positively correlated

A better measure is buying power – high incomes can be associated with high costs (rent, food, etc.)

Disposable income Income distribution is very important

In US top 12% account for 38% of national wealth, while poorest 26% only account for 10% of income

In Brazil, top 20% have 62% of income, while bottom 20% only have 4% of income

Income elasticities of imports and exports

Economic Indicators Where do you find this type of

information?OECDUNWorld BankCIAOther databases – see librarian in Krannert

Market Size Indicators Methods to assess size of market for a

given productAnalogy methodTrade auditChain ratio methodCross-sectional regression analysis

Market Size Indicators Analogy method

pick a country at the same state of economic development as the country of interest and for which the market size is known

Based on premise that the relationship between demand for a product and a particular indicator is similar in both countries

Example

Poland

Poland

Ukraine

Ukraine

in USE TVsColor

DemandPlayer DVD

in USE TVsColor

DemandPlayer DVD

UkraniePoland

PolandUkraine in Use TVsColor

in Use TVsColor

DemandPlayer DVDDemandPlayer DVD

Market Size Indicators Analogy method

McDonald’s uses a variant of the analogy method, where penetration is the number of restaurants

XX

X

USAUSA

USA

Income Percaptia*Population

nPenetratio

Income Percaptia*Population

nPenetratio

USA

X

USA

USA

XX Income Percaptia

Income Percaptia*

nPenetratio

PopulationPopulation

nPenetratio

300,36$Income capitaPer ;036,21nPenetratio

PopulationUSA

USA

USA

Market Size Indicators Trade Audit

based on local production and import and export figures for the product of interest

Market Size = local production + imports – exports Problem: difficult to find data

Market Size Indicators Chain Ratio Method

Starts with rough base-number as an estimate for market size (e.g., entire population)

Base estimate is systematically fine-tuned by apply a “chain” of percentages to come up with the most meaningful estimate for total market potential

Ex: demand for Nicorette gum in Japan Japan’s total population: 127 million Smoking rate in Japan: 31% Frequency of adults in Japan: 67.5% Potential demand: 127*.31*.675 = 26.5 million

Market Size Indicators Cross Sectional Regression Analysis

Relate market size to a variety of predictor variables Use data from countries where product is already

being sold to estimate statistical model e.g., Annual sales of DVD players = -13.3 +

2.43*per capita income + 1.25*number of color TVs in use

Screening Process

Step 2: Rate countries in pool on each indicator give each country a score on each of the indicators ex: use a 10-point scale where better country gets a

higher score on the particular indicator

Step 3: Determine importance of each country indicator allocate 100 points across set of indicators according

to their importance in achieving company’s goals

Screening Process Step 4: Compute overall score for each country

sum weighted scores to determine countries that are most attractive

might weed out countries that don’t meet some criteria of critical importance

Example

Market Entry Strategy

Exporting Licensing Foreign Direct Investment

Joint venture Overseas manufacturing facility Turnkey operation Acquisition

Exporting

A strategy in which a company, without any marketing or production organization overseas, exports a product from its home base

Often exported product is fundamentally the same as domestic product

Indirect exports: firm sells its products in the foreign market via an intermediary located in the firm’s home country

Direct exports: firm sets up own exporting department and sells its products via middlemen located in foreign market

Exporting

Advantages Easy to implement Risks are minimal Might be advantageous for small firms or for firms first

experience with international marketing

Disadvantages While easy, may not be optimal Unresponsive to international consumer Exposure to exchange rate risk

Licensing

An agreement that permits a foreign company to use the industrial property (i.e., patents, trademarks, and copyrights), technical know-how and skills, or architectural and engineering designs in a foreign market

Situation often arises when company finds exporting ineffective but is hesitant to have direct investment abroad

Examples: beer, soda, prescription drugs Similar to franchising

Licensing Advantages

Spread R&D costs while receiving income with negligible risk

Protects patents against cancellation for non-use in markets where previous investments have been made

Avoid trade barriers Low risk Easy way to enter a market

Licensing Disadvantages

With reduced risk comes reduced profit – licensing may be the least profitable of all entry strategies

By licensing to a foreign firm, a firm may be nurturing a future competitor

Licensee may perform poorly (low quality) and degrade brand equity

Licensing may destroy mystique of foreign product Antitrust laws

Foreign Direct Investment

Investment of capital in a foreign market Varying degrees of FDI from joint venture to

ownership of overseas manufacturing facility

Joint Venture

A partnership at the corporate level An enterprise formed for specific business

purposes by two or more investors (in this case one domestic and one international) sharing ownership and control

Involves a relationship which can be beneficial or result in conflict

Example: Phillip Morris and Russian cigarette manufacturer

Joint Venture Advantages

Substantially reduces amount of resources (money and personnel) that each partner must contribute

Avoid competitive pressure Foreign firms can contribute technology while

domestic firms contribute local knowledge Often, a joint venture may be the only way (other than

through licensing) to enter a market Common in many communist or formerly communist

countries Increases political feasibility of international marketing

Joint Venture Disadvantages

If partners have not established clear-cut decision making policy – decisions may be slow and ineffective

Conflicts due to cultural differences, divergent goals, disagreement over strategies, etc.

Problem of control – if a partner has less than 50% ownership, it must in effect let the other partner make decisions

Potential antitrust problems

Manufacturing

A firm can manufacture all or some of its production in a foreign country

One type of manufacturing is sourcing: manufacture in foreign country not for sell there, but to export from that country back home (i.e., shoes)

Example: IBM has 18 plants in foreign countries in addition to 16 in the US

Manufacturing Advantages

Gain access to raw materials unavailable in home country

Take advantage of low cost or other abundant factors of production

Can make product more price competitive by avoiding import taxes

Can tailor products to local preferencesForeign countries often enthusiastically

welcome FDI

Manufacturing Disadvantages

Can destroy mystique of foreign productDifficult to transfer payments and capital

within companyExposure to full range of political risks

discussed in previous lecture

Other Variants on FDI Assembly operation – fitting or joining together

fabricated components – used to take advantage of each countries competitive advantage

Turnkey operation – agreement by seller to supply a buyer with a facility fully equipped and ready to be operated by buyer’s personnel

Fast-food franchising: franchisor agrees to build store, equip it, and train employees

Also associated with large projects sold to governments Acquisition – direct purchase of a foreign company

Allows rapid entry in a foreign market with maximum control Opposite of “greenfield” (new investment) and not as favored

by government Strategic alliance – like joint venture, but doesn’t

require creation of a separate legal entity

SummaryEntry Mode Advantages DisadvantagesIndirect exporting low commitment lack of control

low risk lack of contact with foreign marketno learning experiencepotential opportunity cost

Direct exporting more control than indirect export need to build up export organizationmore sales push more demanding on resources

Licensing little or no investment lack of controlrapid way to gain entry potential opportunity costmeans to bridge import barriers risk of creating competitorlow risk low profit

Joint venture risk sharing risk of conflict with partnersless demanding on resources than wholly owned

lack of control

potential synergies risk of creating competitorAcquisition full control costly

access to local assets high riskless competition need to integrate differing

national/corporate culturesGreenfield full controls costly

latest technology time consumingno risk of cultural conflicts high political and financial risk

Market Entry Strategy

Criteria affecting mode of entry external criteria

market size and growth - larger markets potentially justify more commitment

risk – the greater the risk, the less resources committed to a country

government regulations competitive environment local infrastructure

Market Entry Strategy

Criteria affecting mode of entry internal criteria

company objectives need for control internal resources, assets, and capabilities flexibility

Overall, company faces a tradeoff between benefits of increased control and costs of resource commitment and risk

Market Entry Strategy

Which strategy should a firm choose? Answer: it depends Answers from readings . . .