Marketing Analysis & Foreign Entry Strategy
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 . . .