International Business (9th, Wild) - Notes for Chapter (12).doc

4 Ch 12: Analyzing International Opportunities 15 Ch 12: Analyzing International Opportunities Chapter 12 Analyzing International Opportunities Learning Objectives: 12.1 Explain the importance of examining basic appeal and national factors. 12.2 Describe how companies measure and select a market or site. 12.3 Identify the main sources of secondary market research data. 12.4 Describe common methods used to conduct primary market research. Chapter Outline: Introduction Basic Appeal and National Factors Step 1: Identify Basic Appeal Determining Basic Demand Determining Availability of Resources Step 2: Assess the National Business Environment Cultural Forces Political and Legal Forces Government Regulation Government Bureaucracy Political Stability Economic and Financial Forces Other Forces Cost of Transporting Materials and Goods Country Image Manager’s Briefcase: Conducting Global Business Market Access Legal Issues Financial Matters Measure and Select the Market or Site Step 3: Measure Market or Site Potential Measuring Market Potential Industrialized Markets Emerging Markets Measuring Site Potential Step 4: Select the Market or Site Field Trips Competitor Analysis Secondary Market Research International Organizations Government Agencies Industry and Trade Associations Service Organizations Internet Problems with Secondary Research Availability of Data Comparability of Data Primary Market Research Trade Shows and Trade Missions Interviews and Focus Groups Surveys Environmental Scanning Problems with Primary Research A Final Word A comprehensive set of specially designed PowerPoint slides is available for use with Chapter 12. These slides and the lecture outline below form a completely integrated package that simplifies the teaching of this chapter’s material. Lecture Outline I. INTRODUCTION Technological advances in communication and transportation open national markets around the globe. Managers screen and analyze locations as potential markets and as potential sites for operations. The attraction to distant markets and the integrated nature of location decisions demand that location decisions be made in a systematic manner. II. BASIC APPEAL AND NATIONAL FACTORS Managers try to keep search costs low yet examine every potential market or location when screening potential markets and sites. The screening process has four steps (See Figure 12.1). A. Step 1: Identify Basic Appeal For a potential market, this entails determining basic product demand. For a potential site, this involves determining the availability of resources required. 1. Determining basic demand Must explore the suitability of a nation’s climate, and whether there are bans on a product (e.g., alcohol in Islamic nations). 2. Determining availability of Resources a. Raw materials for manufacturing must be local or imported. Imports may face tariffs, quotas, or other trade barriers. b. Companies making labor-intensive products often relocate to low-wage countries. c. Financing can send production abroad if it is not available at home or when interest rates are high at home. d. Markets and sites not meeting requirements are dropped. B. Step 2: Assess the National Business Environment Managers must understand differences in cultures, politics, laws, and economies and incorporate that understanding into market and site selection decisions. 1. Cultural forces (See Chapter 2) a. Countries differ in language, attitudes toward business, religious beliefs, traditions, and customs. Cultural elements can influence what kinds of products are sold and how. b. Culture affects site-selection decisions; companies sometimes locate production in the local market when changes must be made to a product’s physical features for cultural reasons. c. The local work ethic, education, and level of managerial skills affect site-selection decisions. 2. Political and legal forces (See Chapter 3 and 4) a. Government regulation Nations differ in their attitudes toward trade and investment based on culture, history, and current events. A nation’s attitude is reflected in the quantity and types of restrictions it places on imports. Can quickly eliminate a market or site from further consideration. They create investment barriers to ensure domestic control of a company or industry by imposing investment rules on business ownership. Restrict international companies from freely removing profits, forcing them to hold cash in the host country or to reinvest it in new projects there. Impose strict environmental regulations such as pollution-control devices or close monitoring of nearby air, water, and soil quality. Extend investment rules to bar international companies from competing in certain sectors of the economy. b. Government bureaucracy Lean and smoothly operating bureaucracy can encourage investment whereas an inefficient, cumbersome, or corrupt one can discourage it. Companies will endure an inefficient bureaucracy if the benefits outweigh the cost of inefficiencies. c. Political stability Companies must monitor political events that threaten operations and future earnings. Political risk can threaten activities of any international business activity. Key to political risk is unforeseen political change: if a company cannot estimate the future political environment with accuracy, political risk is increased. Companies can obtain political risk information from political-risk agencies, international relations scholars, political and union leaders, reporters, bankers, and so on. 3. Economic and financial forces (See Chapter 4 and 9) a. Poor fiscal and monetary policies can increase inflation and budget deficits, weaken a currency, lower productivity levels, and slow innovation. These reduce investor confidence and cause companies to scale back or cancel proposed investments. b. Currency and liquidity issues: a volatile currency complicates the prediction of future earnings in the home-country currency. c. Managers can obtain information about economic and financial conditions from international agencies. 4. Other forces A country’s image and the cost of transporting materials and goods are important in assessing a nation’s business environment. a. Cost of transporting materials and goods Can affect where manufacturing facilities are located. Logistics is managing the physical flow of products from point of origin as raw materials to end users as finished products. Logistics wed production to delivery. b. Country image Embodies all facets of a nation’s business environment and affects the selection of sites for any activity. Affects product image because products are stamped with labels identifying country of origin or assembly. Country image can be good for certain products but unfavorable for others. Country image can also change over time. III. MANAGER’S BRIEFCASE: CONDUCTING GLOBAL BUSINESS Market Access – Companies need to investigate whether potential customers in the market have accessibility to the internet, and that they be aware of individual countries policies and standards. Legal Issues – Companies need to be aware of privacy, security and intellectual property laws, which could differ between countries. Financial Matters – Companies need to be concerned about payments and taxation responsibilities that can also differ between countries. IV. MEASURE AND SELECT THE MARKET OR SITE A. Step 3: Measure Market or Site Potential Despite local demand for a product or availability of resources, consumers might not be ready or able to buy a product or certain sites may be unable to supply the resources needed. 1. Measuring market potential Level of economic development affects the products sold, how they are sold, and their features. Different levels of economic development require varying approaches to researching market potential. a. Industrialized markets Great deal of information on market potential is available about industrialized countries. Information in a typical industry analysis: Names, production volumes, and market shares of largest competitors Volume of exports and imports of the product Structure of wholesale and retail distribution networks Market background, including population, social trends, and marketing approaches used Total expenditure on product (and similar products) Retail sales volume and market prices of product Future market outlook and potential opportunities These reports provide a quick overview of the size and structure of a nation’s market for a product. One way to forecast market demand is to determine a product’s income elasticity—sensitivity of demand for a product relative to a change in income. Calculated by dividing a percentage change in the quantity of a product demanded by a percentage change in income. Income-elastic product: demand increases in a greater proportion to increase in income. These are discretionary purchases such as video games, jewelry, and so on. Income-inelastic product: demand increases less relative to increase in income. These are considered essential and include food, utilities, beverages, and so on. b. Emerging markets Companies often face a lack of information. Data on market size or potential may be unavailable. Can rank locations using a market-potential indicator if company is considering exporting: Market size: snapshot of market size at the moment. Market growth rate: Identify large (but shrinking) markets and small (but expanding) markets. Market intensity: Estimate a market’s wealth or buying power (both individuals and businesses). (See Chapter 4) Market consumption capacity: Estimate a market’s spending capacity. Commercial infrastructure: Assess channels of distribution and communication (See Map 12.1). Economic freedom: Estimate extent that free-market principles predominate (See Map 3.1). Market receptivity: Estimate market “openness” (See Map 5.1) Country risk: Estimate risk of doing business, including political, economic, social and financial risks (See Map 4.2). iii. After analyzing each factor, the importance of each to demand for a product is determined; then potential locations are ranked according to their market appeal. 2. Measuring site potential a. Managers must assess the quality of resources they will employ locally. For many companies, the most important resource will be labor and management. b. Wages are lower if labor is abundant, relatively less skilled (though perhaps well-educated), or both. Yet, training local managers requires a substantial investment of time and money. c. Companies must assess the productivity of local labor and managers; low wages may reflect low productivity levels. d. Managers should examine local infrastructure, including roads, bridges, airports, seaports, and telecommunications systems; each can impact efficiency. B. Step 4: Select the Market or Site This involves intensive efforts of assessing remaining potential markets and sites. Managers visit each location to confirm earlier expectations and perform a competitor analysis. Managers evaluate each potential location’s contribution to cash flows by undertaking a financial evaluation. 1. Field trips Trips to each remaining site let managers experience the culture, observe the workforce, or make personal contact with potential new customers and distributors. 2. Competitor analysis (See Chapter 11) Intensely competitive markets put downward pressure on the prices firms charge their customers. Intensely competitive sites for production and R&D activities increase the costs of doing business. Competitor analysis should address the following: Number of competitors in each market (domestic and international) Market share of each competitor Whether each competitor’s product appeals to a small market segment or has mass appeal Whether each competitor focuses on high quality or low price Whether competitors tightly control channels of distribution Customer loyalty commanded by competitors Potential threat from substitute products Potential entry of new competitors into the market Competitors’ control of production inputs (labor, capital, raw materials, etc.) V. SECONDARY MARKET RESEARCH Market research is the collection and analysis of information in order to assist managers in making informed decisions. It applies to the assessment of markets and sites. International market research provides information on business environments: cultural practices, politics, regulations, the economy, a market’s potential size, buyer behavior, logistics, and distribution. It is helpful in designing a marketing strategy and understanding buyer preferences and attitudes. Market research informs managers about employment levels, wage rates, and local infrastructure before committing to the new location. It supplies timely and relevant market information to anticipate market shifts, changes in current regulations, and the potential entry of new competitors. Secondary market research is obtaining information that already exists within the company or that is obtainable from outside sources. Secondary data can estimate market demand for a product or form a general impression of a business environment. Its appeal is that it is relatively inexpensive. A. International Organizations 1. International organizations are excellent sources of free and inexpensive information about product demand. 2. These include the United Nations, the International Trade Center, the World Bank, IMF, and the Asian Development Bank. B. Government Agencies 1. Commerce departments and international trade agencies data: import and export regulations, quality standards, and market size. 2. Visiting embassies and attending social functions are excellent for making contact with potential business partners. Seek sources with an objective view of a potential location. 3. Central Intelligence Agency (CIA) World Factbook (www.cia.gov). Is useful throughout the market- or site-screening process because of its facts on each nation’s business environment. 4. Trade Information Center (TIC) (_www.export.gov_) provides product standards and advice for U.S. companies in individual markets; information includes trade laws, trade shows, export counseling, import tariffs, and customs procedures. 5. National agencies abroad promoting trade and investment. 6. Trade-data libraries of governments (e.g., JETRO in Japan- www.jetro.go.jp ). C. Industry and Trade Associations 1. Associations of firms within an industry or trade often publish newsletters (and Web sites) to keep members abreast of market happenings and opportunities in their particular industry. 2. Sometimes commission specialized studies of their industries and offer them to members at subsidized prices. D. Service Organizations 1. International service organizations in banking, insurance, management consulting, and accounting offer information on cultural, regulatory, and financial conditions. 2. Newsletters cover trends in population growth, consumer spending, purchase behavior, media, and advertising. E. Internet 1. Leading online information provider is LEXIS-NEXIS: a database of full-text news reports from around the world. It provides profiles of executives and products, and information on financial conditions, marketing strategies, and public relations. 2. The Internet is an inexpensive means to conduct secondary research considering the high cost of other research tools. F. Problems with Secondary Research Unique circumstances present difficulties that force adjustments in conducting market research in different nations. Companies must be aware of such obstacles to ensure their research data is reliable. 1. Availability of data a. Most industrialized markets have secondary data on product markets. In many emerging and developing countries, previously gathered information can be difficult to obtain; even when market data is available, its reliability is questionable. b. Government-collected information in emerging markets is often stated in the most favorable light and thus suspect. c. Large international research agencies are entering these markets, providing a source of higher-quality information. 2. Comparability of data a. Data obtained from other countries must be interpreted with great caution. Terms such as poverty, consumption, and literacy can differ greatly from one country to another. b. Different ways governments measure data affects comparability among nations. Misinterpreting data can sabotage the best marketing plans and production strategies. VI. PRIMARY MARKET RESEARCH Primary market research is the process of collecting and analyzing original data and applying the results to current research needs. Primary research helps complete the broad picture supplied by secondary data. A. Trade Shows and Trade Missions 1. Trade show is an exhibition at which members of an industry or group of industries showcase their latest products, see what rivals are doing, and learn about recent trends and opportunities. 2. Trade mission is an international trip by government officials and businesspeople organized by agencies of national or provincial governments to explore business opportunities. 3. Trade missions appealing for small- and medium-size firms: (1) visible support of home-country government officials gives them clout in the host country, and (2) cost-effective because they often include several national markets across a region. B. Interviews and Focus Groups 1. These techniques can uncover potential or current buyers’ emotions, attitudes, and general impressions of a company or its product. Interviewing customers in other countries is difficult and getting unbiased and reliable results is challenging. 2. Focus group: unstructured but in-depth interview of a small group of individuals (8 to 12 people) by a moderator to learn attitudes about a company or its product. Uncovers negative perceptions among buyers to correct marketing strategies. 3. Because subtle differences in verbal and body language could go unnoticed, focus group interviews work best when moderators are natives of the countries in which the interview is held. 4. A consumer panel is research in which people record, in personal diaries, information on their attitudes, behaviors, or purchasing habits. This can be useful when people in a focus group might agree with others in the group—as in group-oriented cultures. C. Surveys 1. Research in which an interviewer has current or potential buyers answer written or verbal questions to obtain facts, opinions, or attitudes. Can gather a vast amount of data in a single sweep. 2. Survey methods must be adapted to local markets. Written surveys are impractical in countries with high illiteracy rates although verbal responses can be obtained. D. Environmental Scanning a. Ongoing process of gathering, analyzing, and dispensing information for tactical or strategic purposes. Entails obtaining factual and subjective information on the business environments in which a company is operating or considering entering. b. Contributes to well-informed decisions and effective strategies by helping develop contingency plans in a volatile environment. E. Problems with Primary Research VII. A FINAL WORD In competitive global business, companies should follow a systematic screening process that incorporates high-quality research methods. This chapter provides a systematic way to screen potential locations as new markets or sites for business operations. Yet this is only the first step in “going international.” The next step involves actually accomplishing the task of entering selected markets and establishing operations abroad. Later chapters cover entry modes available to companies, acquiring resources needed to carry out activities, and managing sometimes far-flung international business operations. Quick Study Questions Quick Study 1 1. Q: What is the first step in the screening process for potential markets and sites? A: The first step in identifying potential markets is to assess the basic demand for a product. Similarly, the first step in selecting a site for a facility to undertake production, R&D, or some other activity is to explore the availability of the resources required. In other words, the first step in searching for potential markets mean finding out whether there is a basic demand for the company’s product. 2. Q: What forces should a company research when assessing a nation’s business environment? A: Cultural differences in language, attitudes toward business, religious beliefs, traditions, and customs can influence what products are sold and how they are sold. Companies sometimes locate production in the local market when significant changes must be made to a product’s physical features for cultural reasons. Cultural elements such as work ethic, educational attainment, or the level of managerial skills of the local people also affect site-location decisions. Nations differ in their attitudes toward trade and investment from other countries. Governments can create barriers to investment, for example, by placing restrictions on the percent ownership foreign companies can have in domestic firms or by forcing the formation of joint ventures with local firms. Governments can bar foreign companies from competing in certain sectors of the economy. They can restrict companies from freely removing capital from the host nation. This can force companies to hold cash in the country or invest in new investment projects there. Governments can impose strict environmental regulations that can significantly increase production costs. They can require that companies divulge certain information—such as India’s demand for Coca-Cola’s secret recipe. A clean and smoothly operating bureaucracy can encourage investment whereas an inefficient, cumbersome, or corrupt one can discourage it. Political risk can threaten the activities of any type of international business activity. Companies must analyze a nation’s economic policies before selecting a new market or site. Poor fiscal and monetary policies can cause high rates of inflation, increasing budget deficits, a depreciating currency, falling productivity levels, and flagging innovation. Such conditions can lessen investor confidence and cause companies to scale back or cancel proposed investment projects. Volatile currency exchange rates can make it difficult to calculate the amount of funds needed for an investment, and increase the uncertainty of how much money can be obtained in liquidation situations. 3. Q: Evaluating a product from a certain country as superior to similar products from other countries is an example of what force at work? A: Country image embodies every facet of a nation’s business environment, it is highly relevant to the selection of sites for production, R&D, or any other activity. Country image affects the location of manufacturing or assembly operations because products must typically be stamped with labels identifying where they were made or assembled such as “Made in China.” Products in relatively more developed countries tend to be evaluated more positively than those from relatively less developed nations. Country image can be good for certain products but unfavorable for others. Country image can also change over time. Although “Made in India” once applied only to textiles and sporting goods, it now has a respectable image for quality software and services. Quick Study 2 1. Q: The sensitivity of demand for a product relative to changes in income is called what? A: Income elasticity is the sensitivity of demand for a product relative to changes in income and is one way of forecasting market demand. It is calculated by dividing the percent change in the quantity of a product demanded by a percent change in income. A coefficient of greater than 1.0 conveys an income-elastic product: one for which demand increases in a greater proportion to growth in income. The concept helps managers forecast future demand for products under certain economic conditions. It allows them to work up demand figures under several different scenarios of economic conditions. This allows companies to supplement all the current data collected in earlier screening stages with actual forecasts of potential demand for their products. 2. Q: What variable is commonly included in a market potential indicator? A: The main variables commonly included in market-potential analysis are: market size, market growth rate, market intensity, market consumption capacity, commercial infrastructure, economic freedom, market receptivity, and country risk. Its usefulness lies in the fact that hard data on market size (which is readily available in industrialized markets) is often unavailable in emerging markets. The market-potential indicator is one way for companies to rank different markets in terms of their appeal. However, it should be noted that this indicator is only useful for companies considering exporting to markets. 3. Q: How important is it for top managers to pay a visit to a market or site before making a final decision? A: The final step in the screening process represents the most intensive efforts of assessing remaining potential markets and sites—typically less than a dozen, sometimes just one or two. At this stage of the screening process, managers often want to take trips to each remaining site. The trip gives managers an opportunity to experience the culture, observe in action the workforce that they might soon employ, or make personal contact with potential new customers and distributors. There are also competitive issues managers should analyze in the final step of screening. Some of these are the number of competitors and their market shares, the customer segment of each competitor and the loyalty of their customers, potential new entrants, and competitors’ control over key inputs. Intensely competitive markets typically put downward pressure on the prices that firms can charge their customers. An intensely competitive site can also increase the cost of doing business at that location. Lower prices and higher costs due to competitive forces must be balanced against the potential benefits offered by each market and site under consideration. Quick Study 3 1. Q: Obtaining information that already exists within or outside the company is called what? A: The process of obtaining information that already exists within the company or that can be obtained from outside sources is called secondary market research. 2. Q: What are possible sources of secondary research data? A: The main sources of secondary research data include international organizations, government agencies, industry and trade associations, service organizations, and the Internet and World Wide Web. 3. Q: What are potential problems that can arise with the use of secondary research data? A: Availability of data: In the most industrialized markets, much secondary data already exists on various product markets. However, in many emerging and developing countries, previously gathered information of high quality can be difficult to obtain. Even when market data is available, its reliability can be questionable. Government-collected information in emerging markets is often stated in the most favorable light—and therefore somewhat suspect. However, large international research agencies are entering these markets, thereby providing a source of higher-quality information. Comparability of data: Data obtained from other countries must be interpreted with great caution. Terms such as poverty, consumption, and literacy can differ greatly from one country to another. The different ways governments measure data also affects comparability among nations. Misinterpreting data because one does not know how it was compiled can sabotage even the best marketing plans and production strategies. Cultural differences: Marketers conducting research in unfamiliar markets must pay attention to the ways that cultural variables influence information. Perhaps the most important variable is language. For example, even the use of interpreters can complicate matters as they may unintentionally place more or less emphasis on a certain point they are translating by the words they choose or their voice inflections. High illiteracy rates can force researchers to conduct time-consuming verbal surveys with potential customers. Hiring local research agencies (or international ones with local affiliations) is a good avenue when a company runs into cultural obstacles to research. Quick Study 4 1. Q: Collecting and analyzing original data and applying the results to current research needs is called what? A: Primary market research is the process of collecting and analyzing original data and applying the results to current research needs. It helps complete the broad picture supplied by secondary data. Primary research differs from secondary research in that a company (or an outside agency on behalf of the company) gathers it for the first time. 2. Q: A trade show is the same thing as what? A: A trade show is an exhibition at which members of an industry or group of industries showcase their latest products, see what rivals are doing, and learn about recent trends and opportunities. 3. Q: A firm researching a very unfamiliar but potentially very profitable market might be best to do what? A: Companies that have little experience in an unfamiliar market often hire local agencies to perform some or all of their market research. Ethical Challenge You are executive director of Qualitative Research Consultants Association (QRCA), an organization designed to assist market research practitioners. As part of their membership agreement, QRCA members agree to abide by a nine-point code of ethics that forbids practices such as discriminating in respondent recruitment and offering kickbacks or other favors in exchange for business. The code also calls for research to be conducted for legitimate research purposes, and not as a front for product promotion. 12-5 Why do you think the QRCA and other market research organizations create such codes? A: The codes were created by the QRCA to ensure that its members uphold the highest standards of ethical and professional behavior, not only in their work, but in their relationships with clients, field suppliers, colleagues and respondents. 12-6 Do you believe they are helpful in reducing unethical research practices? A: Students response can vary, however, it is important to note that qualitative research helps business owners identify customer needs, clarify marketing messages, generate ideas for improvements of a product, extend a line or brand, and/or gain perspective on how a product fits into a customer's lifestyle. All businesses can benefit from qualitative market research. It can also help entrepreneurs to understand their customers' or clients' feelings, values, and perceptions of a particular product or service. The QRCA Code of Ethics is designed to mandate members maintain the highest ethical standards in the work and business relationship, which can only result in the reduction of any unethical research practices. 12-7 As QRCA director, what other areas of marketing research do you believe should be covered by ethical codes of conduct? A: Clearly, such codes are designed to provide researchers with ethical guidelines of conduct. The question of whether they help reduce unethical behavior is a tricky one. Many students will likely respond that the code at least becomes part of the subconscious and therefore will guide researchers toward ethical conduct. However, researchers can just easily recall the code, make an evaluation, disregard the code, and go ahead with the opportunistic behavior. As far as new areas for inclusion in the code, certainly there are many online research techniques that must be incorporated into a newly updated code. Data privacy issues, such as medical and financial scenarios, have been brought before the U.S. Congress and laws passed that deal with online snooping and “cookies.” Teaming Up As a team, select an emerging market that interests you. Start by compiling fundamental country data and then do additional research following the steps in this chapter. Flesh out the nature of the market opportunity offered by this country or its suitability as a manufacturing site. Next, select a company that is pursuing opportunities in the country. Determine whether the company’s activities are consistent with the market or site potential as your team researched it. A: This may be a good time to get students working on their Market Entry Strategy Project. This exercise gets students to learn more about a country, and to generate interest in countries other than their own. The project focuses on important aspects of each country and the process can begin to develop teamwork in the course. Practicing International Management Case Vietnam’s Emerging Market Potential 12-10 Q: What do you think western countries can do to help improve the political climate in Vietnam? A: Governments in the West can probably best help improve the business climate in Vietnam by developing closer ties with the government. They can provide aid for infrastructure improvements and help the government to streamline the bureaucracy. However, beyond this, Vietnam itself and its people must want to become more open to investment from Western companies. Without a change in the mindset of the nation’s government and its people, Vietnam is not likely to experience rapid progress. 12-11 Q: What problems might a company encounter while conducting market research in Vietnam? A: Students should review the problems covered in this chapter and consult the business press for stories about the cultural, political, legal, economic, and financial obstacles companies face when researching the market of Vietnam. 12-12 Q: Reflecting on your perception of products labeled, “Made in Vietnam.” Does the type of product affect your perception? Explain. A: As discussed in this chapter, certain low-cost products will be unlikely to have any negative connotation if labeled “Made in Vietnam.” However, high-priced luxury or technical products would likely suffer from such a label. However, as Vietnam develops economically over time, any negativity of such a label on sophisticated goods would be expected to decline. -