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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
Copyright © 2016 Pearson Education, Inc.
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
i. 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.
ii. 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.
iii. Restrict international companies from freely removing profits,
forcing them to hold cash in the host country or to reinvest it in
new projects there.
iv. Impose strict environmental regulations such as pollution-control
devices or close monitoring of nearby air, water, and soil quality.
v. Extend investment rules to bar international companies from
competing in certain sectors of the economy.
b. Government bureaucracy
i. Lean and smoothly operating bureaucracy can encourage
investment whereas an inefficient, cumbersome, or corrupt one
can discourage it.
ii. Companies will endure an inefficient bureaucracy if the benefits
outweigh the cost of inefficiencies.
c. Political stability
i. Companies must monitor political events that threaten operations
and future earnings. Political risk can threaten activities of any
international business activity.
ii. Key to political risk is unforeseen political change: if a company
cannot estimate the future political environment with accuracy,
political risk is increased.
iii. 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
i. Can affect where manufacturing facilities are located.
ii. 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
i. Embodies all facets of a nation’s business environment and
affects the selection of sites for any activity.
ii. Affects product image because products are stamped with labels
identifying country of origin or assembly.
iii. Country image can be good for certain products but unfavorable
for others.
iv. Country image can also change over time.
III. MANAGER’S BRIEFCASE: CONDUCTING GLOBAL BUSINESS
A. 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.
B. Legal Issues – Companies need to be aware of privacy, security and intellectual property
laws, which could differ between countries.
C. 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
i. Great deal of information on market potential is available about
industrialized countries.
ii. 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
iii. These reports provide a quick overview of the size and structure
of a nation’s market for a product.
iv. 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.
v. 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.
vi. 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
i. Companies often face a lack of information. Data on market size
or potential may be unavailable.
ii. 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:
a. Number of competitors in each market (domestic and international)
b. Market share of each competitor
c. Whether each competitor’s product appeals to a small market segment or
has mass appeal
d. Whether each competitor focuses on high quality or low price
e. Whether competitors tightly control channels of distribution
f. Customer loyalty commanded by competitors
g. Potential threat from substitute products
h. Potential entry of new competitors into the market
i. 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.
