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CHAPTER 7 - Country Evaluation and Selection LEARNING OBJECTIVES After reading this chapter, you should be able to: To grasp company strategies for sequencing.

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Presentation on theme: "CHAPTER 7 - Country Evaluation and Selection LEARNING OBJECTIVES After reading this chapter, you should be able to: To grasp company strategies for sequencing."— Presentation transcript:

1 CHAPTER 7 - Country Evaluation and Selection LEARNING OBJECTIVES After reading this chapter, you should be able to: To grasp company strategies for sequencing the penetration of countries To see how scanning techniques can help managers both limit geographic alternatives and consider otherwise overlooked areas To discern the major opportunity and risk variables a company should consider when deciding whether and where to expand abroad To know the methods and problems of collecting and comparing international information To understand some simplifying tools for helping decide where to operate To consider how companies allocate emphasis among the countries where they operate To comprehend why location decisions do not necessarily compare different countries’ possibilities Copyright © 2011 Pearson Education 12- 1

2 Introduction Because all companies have limited resources, they must be careful in making the following decisions: 1. In which countries to locate sales, production, and administrative and auxiliary services 2. The sequence for entering different countries 3. The amount of resources and efforts to allocate to each country where they operate Copyright © 2011 Pearson Education 12- 2

3 Location Decisions Affecting International Operations Copyright © 2011 Pearson Education 12- 3

4 Scanning versus Detailed Analysis Without scanning, a company may:  Overlook opportunities and risks  Examine too many or too few possibilities Scanning allows managers to examine most or all countries broadly and then narrow them to the most promising ones. In scanning, managers compare country information that is readily available, inexpensive, and fairly comparable — usually without having to incur the expense of visiting foreign countries. Instead they analyze publicly available information, such as from the Internet, and they communicate with experienced people e.g. Once managers narrow their consideration to the most promising countries, they need to compare the feasibility and desirability of each. At this point, unless they are satisfied enough to outsource all their production and sales, they almost always need to go on location to analyze and collect more specific information.

5 What Information is Important in Scanning? Opportunities ◦ Sales Expansion ◦ Resource Acquisition Risks ◦ Political Risk ◦ Monetary Risk ◦ Competitive Risk Copyright © 2011 Pearson Education 12- 5

6 Examining Economic and Demographic Variables 1.Obsolescence and leapfrogging of products Consumers in developing economies do not necessarily follow the same patterns as those in higher-income countries. In China, for example, consumers have leapfrogged the use of landline telephones by jumping from having no telephones to using cellular phones almost exclusively. 2. Prices If prices of essential products are high, consumers may spend more on these products than what one would expect based on per capita GDP, thus having less to spend on discretionary purchases. The expenditures on food in Japan, for instance, are higher than would be predicted by either population or income level because food is expensive and work habits promote eating out. 12- 6

7 Examining Economic and Demographic Variables 3.Income elasticity A common tool for predicting total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand changes in relation to income changes, the more elastic is the demand. Demand for necessities such as food is usually less elastic than is demand for discretionary products such as flat-screen TVs. 4. Substitution Consumers in a given country may more conveniently substitute certain products or services than consumers in some other countries. For example, there are fewer automobiles in Hong Kong than one would expect based on income and population, because the crowded conditions make the efficient mass transit system a desirable substitute for automobiles.

8 Examining Economic and Demographic Variables 5. Income Inequality Where income inequality is high, the per capita GDP figures are less meaningful, because many people have little to spend and many others have substantial income to spend, as in our example of luxury product sales in India. 6. Cultural Factors and Taste Countries with similar per capita GDPs may have different preferences for products and services because of values or tastes. For example, the large Hindu population in India reduces per capita meat consumption there. However, there is a large niche market of Indians who are neither Hindu nor vegetarian. 12- 8

9 Examining Economic and Demographic Variables 7. Trading Blocs Although a country may have a small population and GDP, its presence in a regional trading bloc gives its output access to a much larger market. For instance, Uruguay has a small domestic market, but its production has duty-free access to three other countries in the Southern Common Market (MERCOSUR). Copyright © 2011 Pearson Education 12- 9

10 Cost Considerations of Resource Acquisition Companies undertake international business to secure resources that are either not sufficiently available or too expensive in their home countries. They may purchase these resources from another organization, or they may establish foreign investments to exploit them. In either case, they must prioritize where they can best secure what they want such as in term of: Labor Infrastructure Ease of Transportation and Communications Government Incentives and Disincentives Copyright © 2011 Pearson Education 12- 10

11 Factors to Consider in Analyzing Risk Companies and their managers differ in their perceptions of what is risky. One company’s risk may be another’s opportunity. There are means by which companies may reduce their risks other than avoiding locations. There are trade-offs among risks. Copyright © 2011 Pearson Education 12- 11

12 Political Risk Analyzing Past Patterns Analyzing Opinions Examining Social and Economic Conditions Copyright © 2011 Pearson Education 12- 12

13 Monetary Risk Exchange Rate Changes ◦ Differences in the exchange rates can create gains or losses Mobility of Funds ◦ Liquidity among countries varies Copyright © 2011 Pearson Education 12- 13

14 Competitive Risk Making Operations Compatible (see Distance Framework table). Spreading Risk Following Competitors of Customers Heading Off Competition Copyright © 2011 Pearson Education 12- 14

15 Distance Framework Cultural Distance Administrative Distance Geographic Distance Economic Distance Attitude Creating Distance Different language Different ethnicities: lack of connective ethnic or social networks Different religions Different social norms Absence of colonial ties Absence of shared monetary/political association Political hostility Government policies Institutional weaknesses Physical remoteness Lack of a common border Lack of sea or river access Size of country Weak transportation or communication links Different in climates Difference consumer incomes Different costs and quality of: natural resources financial resources human resources infrastructure intermediate input information or knowledge The distance framework helps managers identify and assess the impact of distance of different types (Pankaj, 2001).

16 Collecting and Analyzing Data Companies undertake business research to reduce outcome uncertainties from their decisions and to assess their operating performance. Questions such as: Can we hire qualified personnel? Will the economic & political climate allow us to reasonable foresee our future? What is our market share? To answer those questions, information is needed at all levels of control and companies should compare the cost of information with its value. Copyright © 2011 Pearson Education 12- 16

17 Problems With Research Results and Data Limited Resources Misleading Data Reliance on Legally Reported Market Activities Poor Research Methodology Noncomparable Information Copyright © 2011 Pearson Education 12- 17

18 External Sources of Information Individualized Reports e.g. sold by consulting firms like Frost & Sullivan, etc. Specialized Studies e.g. directories of companies that operate in a given locale Service Companies e.g. most companies providing services to international clients like bank, transportation firms, etc. publish reports. Government Agencies e.g. US Dept. of Commerce compiles news about individual foreign countries, in Malaysia, info can be sought at MITI and MATRADE. International Organizations and Agencies e.g. info can be gathered from United Nations, WTO, IMF, OECD Trade Associations e.g. trade journals publish by the associations like FAMA, MPOB, etc. Copyright © 2011 Pearson Education 12- 18

19 Country Comparison Tools There are 2 most common tools in scanning 1. Grids ◦ May depict acceptable or unacceptable conditions ◦ Rank countries by important variables 2. Matrices allow companies to: ◦ Decide on indicators and weight them ◦ Evaluate each country on the weighted indicators Copyright © 2011 Pearson Education 12- 19

20 Simplified Market-Penetration Grid Copyright © 2011 Pearson Education 12- 20 VariableWeightCountry A Country B Country C Acceptable (A) or Unacceptable (B) 1. Allow 100% ownership BAA Return (higher rating is better) 1.Size of investment 2.Direct Cost 3.Tax rate 4.Market size 5.Market share Total 0 - 5 4234142341 3342233422 3413434134 Risk (lower rating is better) 1.Exchange problems 2.Political instability 3.Loose business laws 4.Corruption Index Total 0 - 5 12431243 32123212 23222322

21 OPPORTUNITY RISK MATRIX Which country is most desirable? Copyright © 2011 Pearson Education 12- 21 Decreased Risk Increased Opportunity A F E B C D

22 Allocating Among Locations There are three complementary strategies for international expansion. 1. Alternative Gradual Commitments 2. Geographic Diversification versus Concentration 3. Reinvestment and Harvesting Copyright © 2011 Pearson Education 12- 22

23 Alternative Gradual Commitments Companies may reduce risks from the liability of foreignness by: Going first to countries with characteristics similar to those of their home countries e.g. Malaysia & Indonesia Having experienced intermediaries handle operations for them. Operating in formats requiring commitment of fewer resources abroad. Moving initially to one or a few, rather than many, foreign countries. Copyright © 2011 Pearson Education 12- 23

24 Geographic Diversification versus Concentration Growth rate in each market Sales stability in each market Competitive lead time Spillover Effects Need for product, communication, and distribution adaptation Program control requirements Copyright © 2011 Pearson Education 12- 24

25 Reinvestment and Harvesting FDI-financial and human capital invested abroad Depending on the success of the investment, the company may reinvest or consider using the capital elsewhere Copyright © 2011 Pearson Education 12- 25

26 Noncomparative Decision Making Most companies examine proposals one at a time and accept them if they meet minimum threshold criteria. Copyright © 2011 Pearson Education 12- 26

27 Future: Will Prime Locations Change? Future growth rates will have implications for locations of markets and labor forces Technological innovation allows for new trends in urbanization as more people are able to work from locations of their choosing Copyright © 2011 Pearson Education 12- 27

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