International Business Session 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 Variables Politics • 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 Systems • Command Economies (Centrally Planned) • Market Economies • Mixed 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 laws • Marketing and Advertising laws • Level of economic freedom
International Strategic Management Opportunities and Threats Environmental Conditions & Trends Identify & Evaluate Options Choose Strategy Inventory of Distinctive Competencies Strengths and Weaknesses Strategy Implementation External Analysis Strategy Formation Internal Analysis
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
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
International Strategy Forms Pressures for Global Efficiencies High Global Strategy Transnational Strategy Home Replication Multidomestic Strategy Low Low High Pressures for Local Responsiveness
Where would you place these companies? • Toshiba • BMW • Unilever • Intel • City University • Disney • Citibank • Nokia • Carrefour • Boeing • Vodafone • Texas Instruments • Microsoft • Coca-cola • Nestle • Colgate Palmolive • KPMG • Heineken
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, wars • Learning • 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 Countries • Start with large number • Quickly 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 Science • The 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 analogymethod, 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.
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.
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: • Population • Human Development Index Value • Adult Literacy Rate • Population Age 65 and over • Heath Expenditure Per Capita • Private Expenditure on Health • Physicians per 100,000 People • Prevalence 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)
GMOA Cancer Insurance • Which 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?