1. International Businessby
Prof. Yong-Sik Hwang
This chapter will discuss methods to assess markets around the globe.

2. Global Market Opportunity
A favorable combination of circumstances, locations, and timing that offers prospects for exporting, investing, sourcing, or partnering in foreign markets
Typical opportunities include:
Marketing products and services
Establishing factories or other production facilities to make offerings more competently or cost-effectively
Procuring raw materials or components
Obtaining services of lower cost or superior quality
Entering collaborative arrangements with foreign partners
A global market opportunity is a favorable combination of circumstances, locations, and timing that offers prospects for exporting, investing, sourcing, or partnering in foreign markets. In such locations, the firm may perceive opportunities to sell its products and services; establish factories or other production facilities to produce its offerings more cheaply or more competently; procure raw materials, components, or services of lower cost or superior quality; or enter beneficial collaborations with foreign partners.

3. The Six Tasks of Global Market Opportunity Assessment (GMOA)
1. Analyze organizational readiness to internationalize
2. Assess the suitability of the firm’s products and services for foreign markets
3. Screen countries to identify attractive target markets
4. Assess the industry market potential, or the market demand, for the product(s) or service(s) in selected target markets
5. Choose qualified business partners, such as distributors or suppliers
6. Estimate company sales potential for each target market
There are six major tasks that are necessary to assess global opportunities. We shall look at each of them in detail.

4. Task 1: Organizational Readiness
Analyze organizational readiness to provide an objective assessment of the firm’s preparedness to engage in international business
Examine company strengths and weaknesses for international business by evaluating availability of key factors in the firm, such as:
Appropriate financial and tangible resources
Relevant skills and competencies
Management’s commitment to internationalization
Eliminate deficiencies that hinder achieving firm goals
When assessing the firm’s readiness to internationalize, managers peer into their organization to determine the degree of motivation, resources, and skills necessary to successfully engage in international business. They measure the firm’s degree of international experience; the goals and objectives it envisions for internationalization; the quantity and quality of skills, capabilities, and resources available for internationalization; and the actual and potential support provided by the firm’s network of relationships.
If one or more key resources is lacking, management must acquire or develop them before allowing the contemplated venture to go forward. Managers also examine conditions in the external business environment by studying opportunities and threats in the markets where the firm seeks to do business.

5. Questions to Address in Organizational Readiness Analysis
What does the firm hope to gain from international business? For example, increasing sales or profits, challenging competitors, pursuing a global strategy?
Is international business expansion consistent with other company goals, now or in the future?
What demands will internationalization place on company resources, such as finance, personnel, and manufacturing capacity?
What is the basis of the firm’s competitive advantage?
Questions that firms need to address when analyzing readiness include:
First, what do we hope to gain from international business? Objectives might include increasing sales or profits, following key customers who locate abroad, challenging competitors in their home markets, or pursuing a global strategy of establishing production and marketing operations at various locations worldwide.
Second, is international expansion consistent with other firm goals, now or in the future? The firm should evaluate and manage internationalization in the context of its mission and business plan to ensure that it represents the best use of company resources.
Third, what demands will internationalization place on firm resources, such as management, human resources, and finance, as well as production and marketing capacity? How will the firm meet such demands? Management must ensure that the firm has enough production and marketing capacity to serve foreign markets.
Finally, what is the basis of the firm’s competitive advantage? Companies seek competitive advantages by doing things better than their competitors. Competitive advantage can be based on strong R&D, superior input goods, cost-effective or innovative manufacturing capacity, skillful marketing, highly effective distribution channels, or other capabilities. Assessing organizational readiness to internationalize is an ongoing process. Managers need to continuously verify the firm’s ability to modify its products to suit conditions, needs, and tastes in foreign markets.

6. Task 2: Product Suitability
Assess suitability of the firm’s products and services for foreign markets:
Conduct a systematic assessment of company offerings
Evaluate the fit between the offerings and foreign customer needs
For each possible target market:
Identify the factors that may hinder market potential
Determine how the offering may need to be adapted for each market
Assess the offering with respect to foreign customer characteristics, laws and regulations, channel intermediary requirements, and nature of competitors
When analyzing the suitability of their products, firms must first consider whether their potential customers actually desire these products and then consider how they will deliver these products. Are there existing impediments that will make sales difficult?

7. Products with the Best Foreign Sales Prospects:
Sell well in the domestic market
Microsoft Xbox, Blackberry Curve
Cater to universal needs
Cancer drugs, energy efficient refrigerators
Address a need not well served in foreign markets
Mutual funds, mini notebooks
Address a new or emergent need abroad
A major earthquake creates urgent need for portable housing; AIDS in Africa creates need for drugs and medical supplies
The products or services with the best international prospects tend to have the following four characteristics:
1. Sell well in the domestic market. Offerings received well at home are likely to succeed abroad.
2. Cater to universal needs. For example, buyers worldwide demand personal-care products, medical devices, and banking services.
3. Address a need not well served in particular foreign markets. Potential may exist in countries where the product or service does not currently exist, or where demand is just starting to emerge.
4. Address a new or emergent need abroad. Demand for some products and services can suddenly emerge after a disaster or emergent trend. For example, a major earthquake in Haiti created an urgent need for easy-to-build housing.

8. Task 3: Country Screening
Screen countries to identify target markets: Reduce the number of countries that warrant in-depth investigation to a manageable few.
Identify five or six countries that hold the best potential by assessing each country according to:
Size and growth rate
“Market intensity” (customers’ buying power)
“Consumption capacity” (size and growth rate of the middle class)
Country’s receptivity to imports
Infrastructure for doing business
Economic freedom and country risk
When country screening, exporters first examine such criteria as population, income, demographic characteristics, government stability, and nature of the general business environment in individual countries. Statistics that span several years help determine which markets are growing and which are shrinking. The exporter can purchase research reports from professional market research firms that provide assessments of and key statistics for particular markets. Some firms target countries that are psychically near—that is, countries similar to the home country in language, culture, legal environment, and other characteristics. As managerial experience, knowledge, and confidence grow, firms expand into more complex and culturally distant markets, such as China or Japan. Other firms are more venturesome and target nontraditional, higher-risk countries. The born-global companies exemplify this trend.

9. Middle Class Population in All Countries as a Percent of Total World Population
The size and growth rate of the middle class are often critical indicators of promising targets. These consumers are frequently the best prospect for a typical marketer because the wealthier class in most emerging markets is relatively small and the poorest segment has little disposable income. This exhibit shows how the size of the middle class as a percentage of world population has consistently increased over time, thanks to rising affluence in emerging markets and developing economies.

10. Specific Considerations
Cultural similarity with target market may matter. Some firms target countries that are “psychically” similar in terms of language and culture.
Nature of information sought varies with product and industry. For farming equipment, consider countries with much agricultural land and farmers with higher incomes. For semiconductors, target countries that manufacture computers.
Targeting a region may make sense. For example, the European Union or Latin America.
Some firms target countries that are psychically near—that is, countries similar to the home country in language, culture, legal environment, and other characteristics. Such countries fit management’s comfort zone. Australian firms often choose Britain, New Zealand, or the United States as their first target market abroad. The information necessary for country screening varies by product type or industry. For example, in marketing consumer electronics, the researcher emphasizes countries with large populations that have adequate discretionary income and ample energy production. Health insurance companies target countries with many hospitals and doctors.
Often, the firm may target a region or group of countries rather than individual countries. This approach is more cost effective, particularly in markets with similar characteristics. The European Union includes twenty-seven countries that are relatively similar in income levels, regulations, and infrastructure.

11. Regional Hubs
When deciding on target markets, internationalizing firms often choose regional hubs, which serve as critical entry points for important national or regional markets. Pictured here is Hong Kong, an important entry hub for China.

12. Screening Methodology for Potential Country Markets: Two Methods
Gradual elimination: The firm starts with numerous prospective target countries and narrows the choices by examining increasingly specific information.
Initially, the researcher obtains macro-level indicators like population, income, and economic growth before delving into specific information.
Indexing and ranking: The firm assigns scores to countries based on their overall market attractiveness.
The researcher identifies a set of market-potential indicators and ranks each country on each indicator.
Weights are assigned to each variable to establish its relative importance.
Gradual elimination starts with a large number of prospective target countries and gradually narrows the choices by examining increasingly specific information. The researcher aims to reduce the number of countries that warrant in-depth investigation as potential target markets to a manageable five or six. In the early stages, the researcher obtains general information on macro-level indicators like population, income, and economic growth before delving into specific information. The researcher then employs more specific indicators, such as import statistics, to narrow the choices. By analyzing research data and gradually narrowing the choices, the researcher identifies the most promising markets for further exploration.
The second method is indexing and ranking, in which the researcher assigns scores to countries for their overall market attractiveness. For each country, the researcher first identifies a comprehensive set of market-potential indicators and then uses one or more of them to represent a variable. Weights are assigned to each variable to establish its relative importance: The more important a variable, the greater its weight. The researcher uses the resulting weighted scores to rank the countries.

13. Variables Used in the Emerging Markets Potential Index
This exhibit defines the variables and relative weights in the index. The assigned weights can be adjusted up or down to fit the unique characteristics of any industry. For example, food industry firms may attach more weight to market size, while firms in the telecommunications equipment industry may give more weight to infrastructure and country risk. The researcher can add variables or countries to refine the tool for greater precision.

14. Market Potential Index for Emerging Markets
This exhibit reveals some interesting patterns. Russia ranks third in market size but 24th in economic freedom. It also ranks low in market intensity and market receptivity, revealing there are always trade-offs in selecting target countries. No single country is attractive on all dimensions. Along with desirable features, the researcher must also contend with less desirable ones. For example, both Singapore and Hong Kong are favorable in terms of commercial infrastructure, but they are city-states with small populations.
The top four countries in the index in this exhibit are all East Asian emerging economies. In recent years, these countries have made tremendous strides in market liberalization, industrialization, and modernization. Country rankings like those in the exhibit are not static; they change over time with macroeconomic events or country-specific developments.

15. Country Screening for Foreign Direct Investment
Researchers who attempt to identify the best locations
for FDI typically consider these variables:
Long-term prospects for growth and sizeable returns
Cost of doing business, based on available infrastructure, tax rates, wages, and worker skills
Country risk, including regulatory, financial, political, and cultural barriers, and intellectual property protections
Competitive environment
Government incentives, such as tax holidays, subsidized training, grants, or low-interest loans
When a firm considers a foreign investment, typical major considerations are cost of doing business, country risk factors, the competitive environment, and government incentives.

16. A.T. Kearney Foreign Direct Investment Confidence Index
The Index reveals that investors have high confidence in traditional investment destinations such as Britain and the United States. Advanced economies engage in substantial cross-investments in each other’s markets. For example, Europe and the United States are each other’s most important partners for FDI. However, China and India, which top the list, are of particular interest. Note that of the top ten destinations, seven are emerging markets: China, India, Hong Kong, Brazil, Singapore, United Arab Emirates, and Russia.

17. Country Screening for Global Sourcing
Global sourcing is the practice of procuring finished products, intermediate goods, and services from suppliers located abroad.
When seeking foreign sources of supply, managers examine factors like:
Cost and quality of inputs
Stability of exchange rates
Reliability of suppliers
Presence of a workforce with superior skills
Global sourcing and offshoring describe the practice of procuring finished products, intermediate goods, and services from suppliers located abroad. When seeking foreign sources of supply, managers examine such factors as cost and quality of inputs, stability of exchange rates, reliability of suppliers, and the presence of a workforce with superior technical skills.

18. The 2009 A.T. Kearney Global Services Location Index
This exhibit presents the Global Services Location Index. Note that virtually all the top ten countries are emerging markets, such as India, China, and Malaysia. Although the cost of labor is important, managers also cite productivity level, technical skills, and customer service skills as important factors. The index credits India and China (and, to a lesser extent, Brazil and Mexico) with superior people skills.

19. Task 4: Assess Industry Market Potential
The firm estimates the most likely share of sales that can be achieved in each target country, including consideration of market entry barriers. Firms should develop a 3- to 5-year forecast of industry sales.
Assess industry market potential in each market by examining criteria as:
Size and growth rate of the market and industry trends
Tariff and nontariff trade barriers to market entry
Standards and regulations that affect the industry
Availability and sophistication of distribution
Unique customer requirements and preferences
Industry-specific market potential indicators
The firm assesses the market potential for each country and develops a three- to five-year sales forecast, which includes items such as the growth rate of the market and the barriers to market entry that may be present.

20. Industry Market Potential
An estimate of the likely sales that can be generated by all firms in a particular industry during a specific time period
It is different from company sales potential, which refers to the share of industry sales the firm itself expects during a specific period.
Most companies forecast sales at least three years into the future for both industry market potential and company sales potential.
Industry market potential is an estimate of the likely sales for all firms in a particular industry over a specific period. It is different from company sales potential, the share of industry sales the focal firm itself can expect to achieve during a specific period. Most firms forecast both industry market potential and company sales potential at least three years into the future.

21. Examples of Industry-Specific Indicators
Cameras: Examine climate-related factors, such as the average number of sunny days in a typical year
Laboratory equipment: Examine government expenditures on health care
Cooling equipment: Examine the number of institutional buyers, such as restaurants and hotels
In addition to generic determinants of demand, each industry sector—from air conditioners to zippers—has its own industry-specific potential indicators or distinctive drivers of demand. Marketers of cameras, for example, examine climate-related factors such as the average number of sunny days in a typical year, given that most pictures are taken outdoors. In marketing laboratory equipment, the researcher might study the number of hospitals, clinics, hospital beds, and doctors, as well as the level of governmental expenditures on health care. These are all industry-specific market potential indicators.

22. Methods for Estimating Industry Market Potential
Simple trend analysis examines aggregate production for the industry as a whole.
Monitoring key industry- specific indicators examines unique industry drivers of market demand.
Monitoring key competitors to estimate their sales levels can provide an estimate of market potential.
Simple trend analysis quantifies the total likely amount of industry market potential by examining aggregate production for the industry as a whole, adding imports from abroad and deducting exports. Trend analysis provides a rough estimate of the size of current industry sales in the country.
Monitoring key industry-specific indicators examines unique industry drivers of market demand by collecting data from various sources. For example, Caterpillar, a manufacturer of earth-moving equipment, examines the volume of announced construction projects and the number of issued building permits.
By monitoring key competitors, the manager investigates the degree of major competitor activity in the countries of interest. If Caterpillar is considering Chile as a potential market, its managers investigate the current involvement of its number-one competitor, the Japanese firm Komatsu, in Chile and gather competitive intelligence to anticipate Komatsu’s likely future moves in Chile.

23. Methods for Estimating Market Potential (cont.)
Following key customers around the world can provide an estimate of likely sales in an industry that the firm supplies.
Tapping into supplier networks can offer valuable information for assessing sales and competitor activity.
Attending international trade fairs facilitates learning about market characteristics and sales potential.
Other methods for estimating market potential include:
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. Caterpillar follows its current customers, such as Bechtel and Fluor, as they bid for contracts or establish operations in specific foreign markets.
Tapping into supplier networks. Many suppliers serve multiple clients and can be a major source of information about competitors. Firms can gain valuable leads from current suppliers by asking them about the activities of competitors, as long as the questions are ethical and don’t expose competitors’ trade secrets and other proprietary information.
Finally, by attending a trade fair in the target country, a manager can learn a great deal about market characteristics that help indicate industry sales potential. Trade fairs are also helpful for identifying potential distributors and other business partners.

24. Task 5: Choose Foreign Business Partners
The firm decides on the type of foreign business partner, clarifies ideal partner qualifications, and then crafts an appropriate market entry strategy.
First, the firm determines what value-adding activities must be performed by foreign business partners; next, it seeks the appropriate partners.
The firm assesses and selects partners based on criteria such as industry expertise, commitment to the venture, access to distribution channels, financial strength, quality of staff, and appropriate facilities
The firm then must decide on which business partner in the foreign country would be best. Some considerations that must be analyzed are the value-adding activities that the partner should have, and which potential partner has the most expertise and internal strengths to help the expansion.

25. Types of Foreign Business Partners
Exporters tend to collaborate with foreign market intermediaries, such as distributors and agents.
Licensing partners are independent businesses that apply intellectual property to produce products in their own country.
Franchising partners are franchisees—independent businesses abroad that acquire rights and skills from the focal firm to conduct local operations.
International collaborative ventures include joint venture and strategic alliance partners.
Other partners include basic suppliers and those involved in global sourcing and contract manufacturing.
Business partners are critical to success in international business. Licensing partners are independent businesses that apply intellectual property to produce products in their own country. In franchising, the foreign partner is a franchisee, an independent business abroad that acquires rights and skills from the focal firm to conduct operations in its own market (such as in the fast-food or car-rental industries). The focal firm can also internationalize by initiating an international collaborative venture, a business activity undertaken jointly with other firms. Other types of international partnerships include global sourcing, contract manufacturing, and supplier partnerships.

26. Ideal Qualifications of Foreign Distributors
Financially sound and resourceful
Competent management
Qualified technical and sales staff
Willing and able to invest to grow the business
Access to distribution channels and end users
Strong industry knowledge
Known in the marketplace and well- connected with local government
Committed and loyal
One of the most important decisions for the focal firm is to identify the ideal qualifications of potential foreign partners. The firm should seek a good fit in terms of both strategy (common goals and objectives) and resources (complementary core competencies and value-chain activities). It is helpful to anticipate the potential degree of synergy with the prospective partner for the intermediate-term, three to six years into the future.

27. Task 6: Estimate Company Sales Potential
The firm estimates the most likely share of industry sales that the company can achieve over a specific period of time for each target market.
Firm develops 3- to 5-year forecast of its own sales in each target market, based on criteria such as capabilities of partners, access to distribution, competitive intensity, pricing and financing, market penetration timetable of the firm, and risk tolerance of senior managers.
Firm determine the factors that will influence company sales potential.
The next step is to determine company sales potential in each country. Company sales potential is an estimate of the share of annual industry sales the firm expects to generate in a particular target market. Arriving at this estimate is often more challenging than earlier steps in the process, because the researcher typically needs to obtain highly refined information from the market and make some fundamental assumptions to project the firm’s revenues and expenses three to five years into the future. These estimates are never precise and require quite a bit of judgment and creative thinking.

28. Company Sales Potential
An estimate of the share of annual industry sales that the firm expects to generate in a particular target market.
Requires obtaining highly refined information from the market.
Researcher must project the firm’s revenues and expenses for 3 to 5 years into the future; this is very challenging.
This estimate of future potential revenue is a very challenging task and will be looked at in detail in the following slides.

29. Factors that Determine Company Sales Potential
Intensity of the competitive environment: Existing competitors may react strongly against entrants.
Pricing and financing of sales: Attractiveness of pricing and financing to buyers and channel members.
Human and financial resources: Major factor in the proficiency and speed of company success.
Partner capabilities: Partner skills and resources determine speed and effectiveness of entry.
In arriving at an estimate of company sales potential in the foreign market, managers will collect and review various research findings and assess the following:
Intensity of the competitive environment. Local or third-country competitors are likely to intensify their own marketing efforts when confronted by new entrants.
Pricing and financing of sales. The degree to which pricing and financing are attractive to both customers and channel members is critical to initial entry and ultimate success.
Financial resources. Sufficient capital is a prerequisite for any project.
Human resources. Management must ensure it has personnel with sufficient capabilities in language, culture, and other areas to do business in target markets.
Partner capabilities. The competencies and resources of foreign partners influence how quickly the firm can enter and generate sales in the target market.

30. Factors that Determine Sales Potential (cont.)
Access to distribution channels: Ability to set up and use intermediaries and channel infrastructure.
Market penetration timetable: Fast or slow? Each has advantages and disadvantages.
Risk tolerance of senior managers
Special links, contacts, capabilities of the firm: The firm’s network in the market.
Reputation: Success may be faster if customers are already familiar with the firm’s brands and reputation.
Additional factors include:
Access to distribution channels. The ability to establish and make best use of channel intermediaries and distribution infrastructure in the target market determines sales.
Market penetration timetable. A key decision is whether managers opt for gradual or rapid market entry.
Risk tolerance of senior managers. Results depend on the level of resources top management is willing to commit, which in turn depends on management’s tolerance for risk.
Special links, contacts, and capabilities of the firm. The extent of the focal firm’s network in the market—its existing relationships with customers, channel members, and suppliers—can strongly affect venture success.
Reputation. The firm can succeed more quickly in the market if target customers are already familiar with its brand name and reputation.

31. A Framework for Estimating Company Sales Potential in the Foreign Market
There are several ways to estimate a company’s sales potential in a foreign market. We shall look at these in the slides that follow.

32. Methods for Estimating Company Sales Potential
Survey end users and intermediaries
Trade audits
Visit retail outlets and question channel members to assess competitors’ offerings and strengths
Reveals opportunities for new products, for differentiating existing products, and for marketing
Competitor assessment
Benchmark firm against main competitors in the market
Estimate the level of sales firm can potentially attract away from them
Survey of end users and intermediaries. The firm can survey a sample of customers and distributors to determine the level of potential sales.
Trade audits. Managers can visit retail outlets and question channel members to assess relative price levels of competitors’ offerings and perceptions of competitor strength.
Competitor assessment. The firm can benchmark itself against principal competitor(s) in the market and estimate the level of sales it can attract away from them. What rival firms will it have to outperform?

33. Methods for Estimating Company Sales Potential (cont.)
Obtaining estimates from local partners
Collaborators, such as distributors and franchisees, already familiar with the market can often provide reliable estimates.
Limited marketing efforts to “test the waters”
Helps gauge long-term sales potential
Provides better understanding of the market
Estimates from local partners. Collaborators, such as distributors, franchisees, or licensees, already experienced in the market are often in the best position to develop estimates of market share and sales potential.
Limited marketing efforts to test the waters. Some companies may choose to engage in a limited entry in the foreign market—a sort of test market—as a way of gauging long-term sales potential or of gaining a better understanding of the market.

34. The Method of Analogy
When using the analogy method, 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.
In the analogy method, the researcher draws on known statistics from one country to gain insights into the same phenomenon for another, similar country. For example, if the researcher knows the total consumption of citrus drinks in India, then—assuming citrus drink consumption patterns do not vary much in neighboring Pakistan—the researcher can infer the consumption in Pakistan. With proxy indicators, the researcher uses known information about one product category to infer potential about another product category, especially if the two are complementary. A proxy indicator of demand for professional hand tools might be the level of construction activity in the country; for a particular piece of surgical equipment, it might be the total number of surgeries performed.

35. 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.