International Product Candidate and Target Country Selection
Session 2 Choosing candidate product
Features of ideal product candidate from managementperspective: Ready market acceptance High profit potential Availability from existing product facilities Sustainability for marketing abroad [in much the same way as inthe domestic market] Distinctive advantages that would allow to obtain a competitive niche in foreign markets (low price or distinctive featuresleading to differentiation (quality, design, technical superiority,etc.) Choosing candidate product: appraisal of each potential product
Is this product competitive in the home market? What areits competitive strengths and weaknesses? What need (or needs) does this product serve in thedomestic market? Do the same needs exist in foreign markets?If they do, which products currently meet those needs in theforeign markets? If they do not,can this product serve otherneeds that do exist in foreign markets? How new is this product to foreign markets? How muchcompetition is it likely to encounter? What competitiveadvantages and disadvantages does this product have in foreignmarkets? Choosing candidate product: appraisal of each potential product (Contd
Does this product have same use conditions in the foreignmarkets and in home market? Does this product require after-sales services orcomplementary products for its use? Are they available inforeign markets? Does this product have to be adapted to foreign marketsin one of more of its physical, package,and serviceattributes? Can this product be marketed abroad the same way as athome? Adapting Products for International Markets
The Macroenvironment Geography Climate Economic Sociocultural Political / legal The target market Who buys the product? Who uses the product? How is the product used? Where is the product bought? How is the product bought? Why is the product bought? When is the product bought? Competition Price Performance Design Patent protection Brand name Package Services Product attributes Government / regulations Tariffs Labelling Patents/trademarks Taxes Adapting Products for International Markets
Package attributes Protection Colour Design Brand name Labeling Physical attributes Size Design Materials Weight Colour Service attributes Use instructions Installation Warranties Repair/maintenance Spare parts Expected profit contribution Product adaptation strategies
Standardization Adaptation Conceived market Global Multiple national markets Approach to national differences Recognized but assumed to be overcome with promotional effort Account is taken of differences that distinguish markets from one another and from the home market Product attributes Same across all national markets Adapted to the preferences of each national market or national submarkets Impact on cost structure Keeps down the costs of adaptation, but incurs higher costs of promotion intended to adapt consumers and users to the companys product rather than the other way around Higher costs of adaptation but lower costs of promotion that is intended to inform buyers how well the product matches their preferences rather than to change those preferences Framework for country market and industry attractiveness assessment
Growth? Size? Customer quality? RESOURSES - Is the country a critical resource of: Skilled personnel? Raw materials? Components? Labour? Technological innovation? Learning? Quality of infrastructure supporting services Location COMPETITION Intensity rivalry Entry barriers Bargaining power of supplierscustomers Is the business Profitable short-term? Profitable long-term? Country Market and Industry Opportunities INCENTIVES Taxes Subsidies Infrastructures Government contracts - Does a presence in this country increase competitiveness? Model for selecting a target country (1)
All countries Preliminary screening: Consumer / User Profile Direct estimates of Market Size Indirect market size indicators Rejected countries Accept / Reject decision Prospective target countries Estimating Industry Market Potentials: Top-Down Estimates Bottom-Up Estimates Accept / Reject decision Rejected countries Model for selecting a target country (2)
High-Market potential countries EstimatingCompany Sales Potentials: Entry Conditions Competition Audit Distribution Channels Consumer / User Secondary Target Markets Rejected countries Accept / Reject decision Target Country Target country selection: Preliminary screening
Preliminary screening tries to minimize 2 errors: Ignoring countries that offer good prospects for a company product Preliminary screening should be applied to all countries Spending too much time investigating countries that are poor prospects. Preliminary screening should be quick and economical, using quantitative data that are readily available from public source (1) (2) Target country selection: Customer/User Profile
Who buys the product? Who uses the product? How is the product used? Where is the product bought? How is the product bought? Why is the product bought? When is the product bought? Consumer products: Income Social class Life style Age Gender Industrial products: Company size Input-output relationships Organization Target country selection: Quality of demand
The quality of demand describes the nature and diversity ofmarket segmentation prevailing in a country, and the profile ofthe customers value curve in each segment Top end Lower high end Higher low end Lower End High End: Differentiated products Functionality and performance Less price-sensitive Low End: Undifferentiated products Mass production and distribution Price-sensitive Target country selection: Quality of demand
Top end Lower top and Higher end Top end Lower high end Higher low and Middle class Higher low end Lower end Lower end Developing World Segmentation Huge low-end commodity market Rising middle class but still relatively small Tiny highly wealthy segment Industrialized World Segmentation Diverse segmentation Middle-class markets dominate Country life cycle Newly Industrialized Economies Emerging countries
Industrialized countries Developing countries Characteristics of demand according to country life cycle clusters
Demand characteristics Developing countries Emerging countries Newly industrialized economies Industrialized countries Growth Low High Size Small Small to high Segmentation Dominant subsistence sector Large low-end segment Fast growing-middle class Established middle class Increased diversity of segments Diverse and sophisticated segmentation Customer value curve Price Availability Distribution Emerging advertising Product functionality Performance Services Push logistics Beginning ofpull Pull Beginning of mass retailing Diversity Mass retail important Competition Regulated Beginning of de-regulation New entrants De-regulated Active Diverse Target country selection: Direct Estimates of Market size
Market potential for a product: Si = f (X1,X2, .. Xn) Si- potential sales of a product i in a given country Xi, Xn economic and social factors that collectivelydetermine Si Simay be estimated directly by projecting actual sales data(time series analysis) or by projecting the apparentconsumption or imports of the product Country consumption of the product: Consumption = Local production + imports exports Target country selection: Indirect estimates of market size (1)
NationalAccount Statistics National income,gross domestic product, net material product Expenditure on gross domestic product,net material product by use National income and national disposable income Gross domestic product and net material product by kind of economic activity Population and manpower 1.Population by gender,rate of increase,surface area, density Employment / Hours of work in manufacturing Unemployment Scientific and technical manpower and expenditure for research and development Production Agriculture / Forestry / Fishing / Mining Index numbers of industrial production Manufacturing production(food,textiles,paper,rubber products,chemicals,building materials,metals,transportation equipment) Construction (output and employment, activity) Energy (output and employment in electricity,gas,and water supply) Target country selection: Indirect estimates of market size (2)
International trade Imports by end use Exports by industrial origin Source/destination of imports and exports Imports/Exports by commodity Other economic statistics Transportation (railways,international seaborne shipping,civil aviation traffic,motor vehicles in use,international tourist travel) Wages and prices (earnings in manufacturing,index numbers of wholesale prices, consumer price index numbers) Consumption (total and per-capita consumption of steel, fertilizers,newsprint,and other commodities) Finance (balance of payments,exchange rates,money supply,international reserves) Social statistics Health (hospital establishments and health personnel) Education (number of teachers and school enrolment,public expenditures on education) Culture (number of books produced by subject and language, number of radio and television receivers, total and per-capita) Accept / Reject decisions
Si,j a accept country as a prospective targetcountry for further investigation Si,j the market size for product i in market j a threshold value in monetary units,sales volume (units), index Establish minimum values for all the selected market indicators,rejecting those countries whose indicators fall below them. Consider one or few indicators as decisive and reject all countrieswhose decisive indicators fall below minimum values,regardlessof the values of their other indicators. Weighted average of the selected indicators Estimating Industry Market Potentials
The most probable total sales of a product by all sellers ina designated country over strategic planning period Top-down approach:IMP = f (X1,X2, .. Xn) Xi, Xn set of predictor variables that have an establishedrelationship to industry sales Bottom up approach:IMP = S1Q1+ S2Q2 + .. + SnQn S number of final users in each segment comprising the totalindustry market Q the average quantity of the candidate product type purchased byusers in each segment Annual Real Growth Rate
Accept / Reject Matrix for Selection of Countries with High Market Potential Annual Real Growth Rate ? 1 2 Accept 3 4 5 6 Reject 7 8 9 High Moderate Low Current Market Size Small Medium Large Assessing country attractiveness: Resource endowment
Natural resources Countries that do not use their natural resources for nationalconsumption are prone to export raw materials, to promote processingby domestic companies or to invite foreign firms to invest in processingand export. A particular type of natural resource is geographical location which,combined with good infrastructure and support services and industry, maygive to certain countries or regions within country the role of a hub ora regional centre. Human resources Key aspects: cost and quality Infrastructure and support industry resources Quality of communication and logistics infrastructures, as well as theavailability of supporting industries and services. Country Risk Analysis POLITICAL RISCS OPERATIONAL RISKS
Shareholder's value, in terms of loss of capital or loss through the inability to repatriate dividends. Employees exposure linked to gangsterism, crime and kidnapping as well as operational exposure linked to labour unrest, racketeering or market disruptions or supplies shortages linked to criminal activities. Operational risks are those that directly affect the bottom line, either because government regulations and bureaucracies add costly taxation or constraints to foreign investors or because the infrastructure is not reliable. COMPETITIVE RISCS ECOMOMIC RISKS Competitive risks are related to non-economic distortion of the competitive context owing to cartels and networks as well as corrupt practices. Economic risks expose business performance to the extent that the economic business drivers can vary and therefore put profitability at stake. Framework for country risk analysis
POLITOCAL RISKS SHAREHOLDERS EXPOSURE Assets destruction (war, riots) Assets spoliation (expropriation) Assets immobility (transfer, freeze) OPERATIONAL EXPOSURE Market disruption Labour unrest Racketing Supply shortages EMPLOYEES EXPOSURE Kidnapping Gangsterism Harassment COUNTRY RISK ANALYSIS ECONOMIC RISKS COMPETITIVE RISKS Economic growth Variability Inflation Costs of inputs Exchange rates BUSINESS LOGICS Corruption Cartels Networks OPERATIONAL RISKS REGULATIONS Nationalistic preferences Constraints on local capital, local content, local employment Taxes INFRASTRUCTURE Power, telecommunications, transport Suppliers Shareholder risk in regions of the world
The score is an average of risks of armed conflict, risk of social unrest and risk of expropriation, from 0 =No risk to 5 =High risk). Economist Intelligence Unit (2000) Economic Risks: India vs. Brazil
Brazil (average growth 4.25%yr, STD 4.52; coefficient of variation: 1.06) India (average growth 4.90%yr, STD 2.69; coefficient of variation:0.55) Comparison of country risks: China vs. India
BERI Business Risk Services (2000) Economist Intelligence Unit (2000) Government Incentives
FISCAL INCENTIVES Tax reduction Imports and Exports Tax holiday for a certain period Ability to write off losses against profits after the end of the tax holiday period Reduced tax rate Accelerated depreciation Reduction in social security contributions Special deductions of taxable incomes based on certain types of activities (social, R&D, etc.) Exemption from property taxes or others special taxes Reduction of tax base on local content or employment levels Income tax exemption/reduction for expatriate personnel Exemption of import duties and value added taxes for raw material, capital equipments and parts Exemption from export duties Tax credits on domestic sales based on export performance Government Incentives
Financial incentives Competitive incentives Operational incentives Subsidies of all kinds Sweetener loans Guaranteed loans Export credits Equity participation Risks insurance (exports, exchange rates) Protection against imports Capacity regulation Monopolistic position Preferential purchases Preferential rates rents, land, power, telecoms, etc. Assistance for market studies Utilisation of public services or government agencies for company operations Secondment of personnel Estimating Company Sales Potentials
Most probable sales of companys product in a designatedcountry over a strategic planning period,givenassumptions with respect to entry mode and marketingeffort Export entry conditions / non-export entry conditions Competitive Audit Availability of Distribution Channels Consumers/Users Estimating Company Sales Potentials: Entry conditions
Export entry conditions: (1) import regulations Import duties Nontariff trade barriers (border taxes, health regulations, quotas,industrial standards, and antidumping laws) (2) transportation and other logistical costs Non-export entry conditions: Establish the feasibility of non-export entry Estimating Company Sales Potentials: Competitive Audit (1)
Basic information: Which competitive products are sold in country X? What are the market shares of competitive products? How do competitive products compare with our own reputation,features andother attributes? Which support facilities (production,warehousing,sales branches,and so on)do competitors have in country X? Which problems do competitors face? Which relationships do competitors have with local government? Do they enjoyspecial preferences? Marketing information: Which distribution channels are used by competitors? How do competitors prices compare with our own? What promotion programs are used by competitors?How successful are they? How good are competitors post-sales services? Estimating Company Sales Potentials: Competitive Audit (2)
Market Supply Information: How do competitive products get into the market? If they are imported: Who are the importers? How do importers operate? How long has each importer worked with his foreign suppliers? If they are produced locally: Who are the producers? Are the producers entirely locally owned,or is there foreign participation? What advantages do local manufacturers have over importing competitors? Market Structure What is the degree of monopoly in the market? Is competition rigorous or loose? Estimating Company Sales Potentials
Availability of Distribution Channels: Can we obtain adequate distribution of our products in this country? Can we match the distribution of market leaders? Are there any bottle-necks that would require extraordinary marketing effort(and time) to overcome? Consumer / User Profile Who buys the product? Who uses the product? How is the product used? Where is the product bought? How is the product bought? Why is the product bought? When is the product bought?