2.1. Selection of International Markets

Class 2.

Evaluation of International Markets: Evaluation of International Markets: Two Main ApproachesTwo Main Approaches

22

Considering international market as country or group of countries

Considering international market as groups of consumers (from

different countries) with similar behavior

«+» Secondary information is often enough

«+» A lot of information on the country

«+» Sales and marketing often organized divided by countries

«-» From the marketing point of view it is crucial to work similarly with similar customers, and vice versa

«+» More adequate information

«+» More possibilities to adapt products to the needs of foreign consumers

«-» Firm needs to conduct primary research «-» Problems in finding reliable cross-national statistics

Three Qualifying CriteriaCriteria

Accessibility

Profitability

Market size

To determine accessibilityCan we serve the market effectively and efficiently?What may prevent us from doing so?

To determine profitabilityCan the market afford us? Can we get adequate profits? What is the likely return on investment and timescale of payback?

To determine market sizeWhat is the existing market size? Is there a latent market? What is the potential for emerging demand?

Purpose

““Fine” Market Screening ProcessFine” Market Screening Process

44

• Size / amount of resources• Type and nature of industry

• Internationalization objectives •Degree of international knowledge

Internal Environment

Specific country within the chosen continent

Target segments of customers

• Political, economic, legal, socio-cultural, technological factors

• International industry structure• Competitive environment•Market size, potential

External Environment

Potential Markets (by continent)

Specific segment within the chosen country

Pri

mar

y D

ata

Sec

ond

ary

Dat

a

Globalizing processes as a system of interconnectedelements

THE GLOBAL ECONOMY

Transnational corporations

Nation-states

Technology&Global Shifts

THE REGIONAL ECONOMY

THE NATIONAL ECONOMY

THE LOCAL ECONOMY

Environmental Analysis

66

• International laws & wars • Economic situation

• Socio-cultural factors• Technological development

• Ecological factors

Macro Environment

Micro Environment

• Market Opportunity Analysis

• Competitive Environment

• Consumer Behavior

• Political• Economic • Socio-cultural• Technological

• Legal• Public policy, risk and regulation

Regional Environment

Market Opportunity AnalysisMarket Opportunity Analysis (MOA) enables the firm to identify opportunities within new markets and thoroughly understand the market structure, competitive landscape, customer needs and competing technologies

The analysis of the findings provides the firm with: an expert assessment of whether the market is attractive / penetrable; a market entrance strategy; the optimal approach to gain market share; more profitable links in the value chain; potential partner organizations and acquisition targets and a depth understanding of how to maximize chances of success.

Competitive EnvironmentThe competitive landscape

Which companies are active within the market? Which companies are the major players ?Who are the specialists that focus on the business ?Which companies are important but minor players in the business ?Recent entrants to the market ?

Segments of the market serviced by each competitor Product and service profiles of suppliers Claimed product or service advantages Distribution channels used Partners Key information on each competitor (geographical coverage, locations of head offices, production plants and sales offices, staff numbers) Growth history within the business Financial performance of suppliers Nature of the competitive environment (stable, change or rapid change) Pricing

Consumer BehaviorThe key components of Consumer Analysis are:

Analysis of buying processes and decision making Analysis of customer expectationsCustomer satisfaction research Measurement of customer loyalty Pricing research

The key components of B2B Customer Analysis are:Composition and structure of decision making unit Analysis of buying processes and decision making Analysis of suppliers within target markets Methods of identifying and evaluating suppliers Analysis of customer expectations from suppliers Customer satisfaction research Measurement of customer loyalty Pricing research Analysis of reasons for lost business

Expanded Marketing Process Model

Understand the marketplace

and customer needs and

wants

Design a customer-driven

marketing strategy

Construct a marketing

program that delivers

superior value

Build profitable relationships and create customer

satisfaction

Capture value from

customers to create profits and customer

quality

Create value for customers and build customer relationshipsCapture value

from customers

Research consumers and

market

Manage marketing

information and customer data

Select customers to serve:

segmentation and targeting

Decide on a value proposition:

differentiation and positioning

Product and service design:

build strong brands

Pricing: create real value

Distribution: manage

demand and supply chains

Promotion: communicate VP

CRM and CEM: build strong

relationships with chosen

customers

Partner relationship

management: build strong

relationships with marketing partners

Create satisfied loyal

customers

Capture customer

lifetime value

Increase share of market and

share of customer

Marketing technology Global markets Ethical and social responsibility

Marketing Information System

Information Processing

General data bank

Analytical data bank

Statistical data bank

Organization Decision-makers

Strategic decisions

Managerial decisions

Operational decisions

Decisions

Strategy

Market

How to compete

Marketing Mix

Resources

Control

Info

rmat

ion

Dis

sem

inat

ion

P

roce

sses

/ M

ech

anis

ms

Inte

rnal

an

d E

nvi

ron

men

tal

Dat

a / I

nfo

rmat

ion

Decision to Enter International MarketDecision to Enter International Market

AlternativesAlternatives Main factorsMain factors QuestionsQuestionsTo enter international market immediately

Firm’s resources

Motivations of managers / owners

Experience of top managers in international activity

Ability to export competitive goods / services

International market opportunities

Are our goods / services able to meet export demand? On what information the answer is based?What changes are needed in the marketing mix to meet the international demand?If our good / services are suitable for foreign markets why didn’t we act internationally before? What do we know about governmental support of export or entry of foreign markets?

To postpone international market entry

No intention to enter international market

Process of International Markets Selection

1313

1. Segmentation criteria

4. Market Attractiveness (BCG Matrix, McKinsey Matrix)

3. Scanning (BERI, other indexes)

2. Segment profiles

5. Target markets within target countries

Global market segmentation

Target countries selection

Microsegmentation

   

CAGE ModelCAGE Model

Cultural distance

Administrative distance

Geographical distance

Economic distance

Source of distance

Linguistic differences

Different ethnic groups

Under-developed ethnic and social networks

Religious differences

Different social norms

Weak institutions

No common monetary or political organizations

Political hostility

State policy No colonial

interconnections

Physical distance

No common boundaries

No access to seas and rivers

Small size of the country

Underdeveloped transport and communications infrastructure

Different climate

Income differences

Differences in the value and quality of:- natural resources - financial resources- human resources- infrastructure- information and knowledge- intermediary services

BERI Index – Business Environment Risk Information Index

CriteriaCriteria WeightWeight ValueValue1)1) Total valueTotal value2)2)

Political stability 3

Economic growth 2,5

Currencies convertibility 2,5

Manpower costs/productivity of labour 2

Short-time credits 2

Long-time credits/venture capital 2

Attitude to foreign investors and profits 1,5

Nationalization 1,5

Inflation 1,5

Balance of payments 1,5

Execution of contracts 1,5

Bureaucracy 1

Communications 1

Local management and partners 1

Professional services and contractors 0,5

Sum 25 х4 (max) =100(max)

1) Scale «0» to «4»: 0 – unacceptable terms; 1 – bad terms; 2 – middle terms; 3 – good terms ; 4 – ideal terms

2) BERI ≥ 80 – favorable investment environment, developed economy; 70 ≤ BERI ≤ 79 – not so favorable and developed; 55 ≤ BERI ≤ 69 – developing economy having investment potential; 40 ≤ BERI ≤ 54 – high level of risk, underdeveloped economy; BERI < 40 – a very high level of risk, investing is possible only exceptionally

GE /McKinsey Matrix

GE /McKinsey Matrix

2.2. International Market Entry Modes

Class 2.

Entry Mode Choice

Considered by many as the most important aspect of a firm’s internationalization strategy

Entry mode will determine long-term success or withdrawal from foreign markets

Poor decisions can be very costly for the firm

Factors in the Entry Mode Decision

Entry mode

decision

Target country market factors

Target country environmental

factors

Target country production

factors

Home country factors

Company product factors

Company resource and commitment

factors

External factors

Internal factors

Strategies of Foreign Market EntryStrategies of Foreign Market Entry

Время

Developed countries

Developing countries

Under-developed countries

Step by step (Waterfall model) Simultaneously (Watering can model)

Developed countries

Developing countries

Under-developed countries

Foreign Market Entry ModesForeign Market Entry Modes

2222

Entry ModesEntry Modes

InvestmentAssociatedExport

DirectDirect

IndirectIndirect

LicensingLicensing

FranchisingFranchising

Management contracts

Management contracts

Joint ventures Joint ventures

Strategic alliances

Strategic alliances

Fully owned companies

Fully owned companies

Acquisitions Acquisitions ProductionProduction

Types of Exporting

Indirect exportingDistributorExport agentEMC

Direct exportingExport departmentExport sales representativesE-business

Cooperative exportingExport groupsPiggyback exporting

Foreign Direct Investment (FDI)

The ultimate form of foreign involvement

Direct ownership of foreign-based assembly, manufacturing or sales facilities

The company can buy part or full interest in a local company (M&A) or build its own facilities (GFI, ex nihilo)

Considered the “preferred” mode of entry

Advantages and Disadvantages of FDIAdvantages- Cost economies (labor, raw materials, incentives, freight savings,

etc…)- Better image in host country- Deeper relationship with government, customers, local suppliers,

distributors- Better adaptation- Full control of investments- Long term objectives

Disadvantages- High initial and operating costs- High level of risk

FDI OptionsMake-or-buy decision

Greenfield investment / Ex nihiloMergers and acquisition

Branch or subsidiary?StructureLegal status

Analyzing FDI projectAssessing profitabilityDiscounted cash flow analysis

FDI nowadays

Developing economies absorbed close to half ofglobal FDI inflows

Development of South-South cooperation15% below pre-crisis level

FDI to developed countries continued to declinePoorest regions continued to see declines in FDIFDI to service industries fell: business services,

finance, transport and communications, utilities50% of global FDI – TNC’s market-seeking projects

Associated Entry Modes

Newest, most recent forms of international business

Transfer of technology or know-how between two firms

Shared risks

Only option in countries where the government requires foreign firms to use local capital

Better access to local market knowledge

Types of Associated Entry ModesJoint venture: foreign and local investors share ownership and control of local operationsLicensing: licensor licenses a foreign company to use a manufacturing process, trademark, patent, trade secret or other item of value for a feeManagement contracts: firm exports management services instead of a product, separation between ownership and managementInternational Franchising: contractual association between a franchisor (manufacturer, wholesaler or service organization) and franchisees (independent business people who buy the right to own and operate units in the franchise system). Franchising is based on some unique product, service or method of doing business.

Industrial franchisingDistribution franchisingService franchising

NEM cooperation$2 trillion in sales 2010NEMs include contract manufacturing, services, outsourcing, contract farming, franchising, licensing, management contracts$1.2 trillion – outsourcing, $340 – franchising, $340 -

licensing, $100 – management contractsTNCs make choice between FDI and NEM based on its

strategy, the relative costs and benefits, the associated risks, feasibility of available options

Example of International Franchising Entry ModesDirect modes

Direct franchising (16%)Subsidiary (19%)Area development agreements (14%)

Indirect modesJoint venture (16%)Master franchising (34%)

In the Direct system the franchisor is controlling and coordinating the activities of the franchisees directly. In the indirect system a master franchisee (subfranchisor) is appointer to establish and service its own Subsystem of franchisees within its territory

International franchising comparative matrix

Distance /

Adaptation

Commitment /

Control

Strong

Weak

Weak Strong

Area development agreement

Direct franchising

FDI

Master franchising

Joint venture

Direct franchising

Foreign Market Entry ModesForeign Market Entry Modes

VC - Variable (direct) costsFC – Fixed (overhead) costs

Entry mode Control Assets share

VC FC Market share

Risk

Indirect export

Direct export

Licensing

Production by contract

Local production

MIN

MIN MIN MIN MINMIN

MAX MAX MAX

MAX

MAXMAX

Entry Mode Choice SummaryEntry modes vary in terms of resource or equity commitment to foreign marketsLow-commitment modes can allow firm to reduce risk in high-risk countries, culturally diverse countries or limited potential marketsDesired degree of control over international operations influences choice of entry modeLoss of control yields limited returnsNo market entry strategy is appropriate in all circumstancesMost firms will have a vast portfolio of entry modes, depending on each specific market situation

Comparing Different Entry Mode Options

Foreign buying department

ITC / distributor

Piggy back

EMCAgent

Branch office

Wholly owned subsidiary (M&A)

FDIFranchising

Licensing

Management contract

AD / Concessionaire

Minority shareholding through partial acquisition

Majority JV investment (local partner know-how)

Level of ownership

Contribution of know-how

High

Low

Low High

Choosing the Right Entry ModeAll entry modes

All feasible entry modes

Internal factors

External factors

Rejected entry modes

Comparative profit contribution analysis

Comparative risk analysis

Comparative analysis for nonprofit objectives

Ranking by overall comparative assessment

The right entry modeTarget market

Marketing channels within markets

Class 2.Practical work

Task 2. Choosing proper country to enter

Compare BRICS countries, create the chart and find the closest country to Russia

Global shift

Transformation of world economy to geo-economyGlobalization: geographically and organizational tendenciesTNCs play significant role Interactions between state and TNCSurge economy: the only thing is certain - changes

New tendenciesInternet commerce

High competition

Networking

Innovations

Intangible assets

Information, knowledge driven economy Growing power of developing and BRICS countries

No geographical barriers