OBS 359 Chapter 12 PDF

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OBS 359 Chapter 12...

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Chapter 12 LO. 1 Review the steps of market screening and techniques for environmental analysis Environmental scanning – A procedure in which the firm scans the world for changes in the environmental forces that might affect it. Market screening – A modified version of environmental scanning in which the firm identifies desirable markets by eliminating the less desirable ones. Two levels of Market Screening: 1. Country screening – A screening that uses countries as the basis for market selection. 2. Segment screening – A screening that uses market segments, a within-country analysis of groups of consumers, as the basis for market selection. Selection of Foreign Markets In market screening, the firm reviews markets based on the market’s basic need potential and the external environmental forces in the market, such as economic, financial, political, legal and cultural conditions. Although these forces may be placed in any order in a screening, the arrangement suggested in figure 12.1 progresses from the least to the most difficult analysis based on the accessibility and subjectivity of the data

1. First Screening: Basic Needs Potential The basic need potential of some goods is influenced by various physical forces, such as climate, topography, and natural resources. The basic need potential of some goods is easy to assess. With less specialized products that are widely consumed, assessing basic need potential can be more challenging. For example, establishing a basic need for chocolate is difficult, because for these products we are addressing desires rather than needs. 2. Second Screening: Financial and Economic Forces After the initial screening, the analyst will have a much smaller list of prospects. Then a second screening based on financial and economic forces further reduces the list of potential markets. • •

Financial forces include trends in inflation, currency exchange rates, and interest rates. Economic forces include credit availability, paying habits of customers, and rates of return on similar investments, are also important.

Economic (+socioeconomic) • •

Economic indicators: GDP, GDP growth rate, GNI/capita, income distribution, private consumption, unit labour costs. Socioeconomic: population, population growth, population density and distribution, age distribution.

Two measures of market demand based on economic data are especially useful at this point: market indicators and market factors. In addition, trend analysis and cluster analysis, both of which depend on economic data, may be used to estimate demand • •

Market indicators – Economic data used to measure relative market strength of countries or geographic areas. Market factors – Economic data that correlate highly with market demand for a product

When analysts know the historical growth rates of either the relevant economic variables or the imports of a product, they can forecast growth by means of trend analysis • •

Trend analysis – a statistical technique used to estimate future values by successive observations of a variable at regular time intervals that suggest patterns Cluster analysis - statistical technique that divides objects into groups so that the variables in the group are similar.

3. Third Screening: Political and Legal Forces Political: The elements of political that most impact the IC are • • • •

Barriers to entry-import/export barriers Limits on foreign ownership Limits on repatriation of earnings Stable government policies (different from government stability)

Is there continuity in policy when a new leader takes office, for example? Legal: The elements of political that most impact the IC are • • •

Laws governing international contracts Some specific national laws Intellectual Property Rights protection

4. Fourth Screening: Cultural Forces A screening of the remaining candidates based on cultural factors is next and is a difficult process 1. Firstly, the recognition of cultural factors is a subjective and interpretive process. The analyst must rely on the perceptions and opinions of others. 2. Secondly, data is difficult to assemble, particularly from a distance. After this screening, the analyst should have a list of countries for which an industry demand appears to exist

5. Fifth Screening: Competitive Forces In this screening, we examine markets on the basis of competitive forces such as: 1. The number, size, and financial strength of the competitors 2. Their market shares 3. Their marketing strategies 4. The apparent effectiveness of their promotional programs 5. The quality levels of their product lines 6. The source of their products—imported or locally produced 7. Their pricing policies 8. The levels of their after-sales service 9. Their distribution channels 10. Their coverage of the market Segment Screening Segment – grouping of consumers with similar needs or wants, possibly residing in different countries. When we identify and assess segments, it is important that they be: 1. Definable. We should be able to identify and measure segments. The more we rely on lifestyle differences rather than socioeconomic indicators, the more difficult this becomes, but the more accurate the resulting analysis is likely to be. 2. Large. Segments should be large enough to be worth the effort needed to serve a segment and have the potential for growth in the future. Of course, as we adopt 3D printer manufacturing, the need to find large segments is beginning to recede for some products. 3. Accessible. If we cannot reach our target segment for either promotional or distribution purposes, we will be unsuccessful. 4. Actionable. If we cannot bring into play the components of marketing programs (the 4 Ps of product, promotion, place, and price), we may not be successful. For example, in Mexico, the price of tortillas was formerly controlled by the government. Therefore, competition on the price variable was impossible. 5. Capturable. Although we would love to discover market segments whose needs are completely unmet, in many cases these market segments are already being served. Explain international market-entry methods Once a company has decided to enter into a foreign market, it must decide which of the many different options for market entry would be the best strategic fit for the company. Modes of Market Entry

Nonequity-Based Modes of Entry If a firm wishes to enter foreign markets without equity investments in the market entry, a number of alternatives are available:

1. Exporting Selling some of the company’s regular production beyond its domestic market. Advantages of exporting To serve new markets To remain price competitive in the home market Upon customers’ requests To offset cyclical sales in the domestic market To achieve additional sales To extend a product’s life cycle

Disadvantages of exporting High transportation costs Trade barriers Problems with local marketing agents Intermediaries in indirect exporting may change sources of supply, and have to be paid a commission Little experience gained by exporter Little control over activities carried out in foreign market

To retaliate competitors’ moves To take advantage of currency exchange 2. Licensing A contractual arrangement in which one firm (the licensor) will grant to another firm (the licensee) the right to use any kind of expertise, such as manufacturing processes (patents,) marketing procedures, and trademarks for one or more of the licensors products, for a given fee. Often used in technology and fashion industries. 3. Franchising A form of licensing in which one firm contracts with another to operate a business under an established name according to specific rules, permitting the franchise to sell products or services under a well-publicized brand name. Licensing with more control. A specific set of rules. 4. Contracted manufacturing An arrangement in which one firm contracts with another to produce products to its specifications, in order to enter into a foreign market.

5. Turnkey project An export of technology, management expertise, and possibly capital equipment where a contractor agrees to design and erect a plant, supply the process technology, provide the production inputs, train the operating personnel, and, after a trial run, turn the facility over to the purchaser. Typically found in chemical, pharmaceutical, petroleum-refining, and metalrefining industries. Advantage Earning economic returns from assets and know-how

Disadvantages Potentially creating a competitor Lack of long-term market presence

6. Management contract An arrangement under which a company provides management in some or all functional areas to another party for a fee that typically ranges from 2 to 5 percent of sales. International companies make such contracts with firms in which; • • •

they have no ownership, (e.g. Hilton Hotel provides management for foreign hotels that use the Hilton name) they have joint venture partners, and wholly owned subsidiaries.

Equity-Based entry modes When management does decide to make a foreign direct investment, it has several alternatives available, though not all of them may be feasible in a particular country.

1. Strategic alliance Collaboration with competitors, customers, and/or suppliers that may take nonequity or equity form. Objectives of strategic alliance: • • •

Provide faster market entry and start- up Gain access to new products, technologies, and markets Share costs, resources, technology, and risks

Strategic alliances may or may not include equity

2. Joint venture A cooperative effort among two or more organizations that share a common interest in a business undertaking. A new corporate entity is formed (vs. strategic alliance). There are different equity arrangements such as 50-50, 49-51 etc. Advantages Reduce risk of large investments Avoid dangerous competition Economies of scale Politically acceptable Ability to exploit a local brand identity Acquire local expertise and market knowledge Potential tax benefits in foreign country Reduce risk of large investments Acquire partner’s resources and experienced personnel

Disadvantages: Profits must be shared May not have equity-based control Loss of know-how Opposing goals

Disadvantages can be mitigated with management contracts and other agreements 3. Wholly owned subsidiary 1. Start from the ground up: greenfield investment 2. Acquire a “going concern” (an existing business): acquisition Wholly owned subsidiary A company that wishes to own a foreign subsidiary outright may start from the ground up by building a new plant (greenfield investment) or acquire a going concern. 1. Greenfield investment: Historically, ICs making foreign direct investments have preferred wholly owned subsidiaries when possible. o o o

Reduce risks of merging corporate cultures Lack of suitable buy out Competitive advantage based on skills that are difficult to transfer

2. Acquisition: o High rivalry o High entry barriers o Timing of entry is important With an acquisition, a company might purchase its distributor, thus obtaining a distribution network familiar with its products. Foreign investors in the United States have demonstrated a preference for acquiring going concerns for the instant access to the market they provide....