Assignment 1: Discussion Questions—International Business Decision Making
The various factors impacting international business may be brought together into a process for evaluating international business opportunities. Choosing the right mode of entry is the next step.
Research evaluation of business opportunities and modes of entry using your textbook, University online library resources, and the Internet. Respond to the following:
- Explain how a business can assess international business opportunities giving examples. Do you think the size of the company matters in assessing an international business opportunity? Give reasons for your answer.
- In your opinion, what would be the single most effective way for a potential international business to gain entry into an international market? What are the apparent risks of the mode of entry you recommend? For at least one other mode of entry, explain why it would be less effective compared to the one you chose.
Write your response in 400 words or less. Apply current APA standards for writing style to your work. All written assignments and responses should follow APA rules for attributing sources.
By Wednesday, February 13, 2013
Assignment 2: Presentation—Starting an International Business
Business decisions are not made on a hunch or some vague idea of a good place to do business. Professionals assess business opportunities and modes of entry to choose the best alternative.
Research the topic using your textbook, University online library resources, and the Internet. Based on your research, develop a presentation. Your role is of an educational specialist in international business and your audience is a group of middle managers.
Discuss the following in your presentation:
- Steps to analyzing international business opportunities with specifics of what is involved in each step
- Alternative methods for gaining entry into an international business opportunity or market
Submit your work in a 10-slide PowerPoint presentation. Use the speaker notes area to write the information supporting the slides. Apply current APA standards for writing style to your work. All written assignments and responses should follow APA rules for attributing sources.
By Saturday, Feb 16,2013
Read the following chapters from : Wild, John J., Kenneth L. Wild & Jerry C.Y. Han. International Business: The Challenges of Globalization, 5th Edition. Pearson Learning Solutions
12 Analyzing International Opportunities
After studying this chapter, you should be able to
1 Explain each of the four steps in the market- and site-screening process.
2 Describe the three primary difficulties of conducting international market research.
3 Identify the main sources of secondary international data and explain their usefulness.
4 Describe the main methods used to conduct primary international research.
A LOOK BACK
Chapter 11 showed us how companies plan and organize themselves for international operations. We explored the different types of strategies and organizational structures that international companies use to accomplish their strategic goals.
A LOOK AT THIS CHAPTER
This chapter begins with an explanation of how managers screen potential new markets and new sites for operations. We then describe the main difficulties of conducting international market research. We also identify the information required in the screening process and where managers can go to obtain such information.
A LOOK AHEAD
Chapter 13 describes the selection and management issues surrounding the different entry modes available to companies going international. We examine the importance of an export strategy for exporters and the pros and cons of each entry mode.
Global Buzz Over Starbucks
Osaka, Japan — Starbucks (www.starbucks.com) began its global journey in 1996 with its first coffeehouse in Tokyo, Japan. Pictured below is a Starbucks located in the Japanese city of Osaka. Today Starbucks has around 1,500 coffeehouses in 43 markets outside North America. Although it has closed some underperforming stores, Starbucks still creates a buzz worldwide.
Starbucks brought European-style coffee to the United States and then took its American-style coffeehouses to Europe. The coffee giant was right that paper-cupped lattes and nonsmoking venues could take on Europe’s traditional cafés. Although in Britain since the late 1990s, Starbucks waited patiently before steaming into Zurich, Switzerland, in 2001 and into Paris, France, in 2004. Starbucks carefully researched Europe’s markets before opening its first European café in Zurich, and then branching out to other nations. With its multicultural and multilingual population, the Swiss market gave Starbucks a “tremendous opportunity to learn how to operate elsewhere in Europe,” revealed Mark McKeon, president of Starbucks Europe, Middle East, and Africa.
Source: © Andy Rain/CORBIS. All Rights Reserved.
At the same time, Starbucks introduced a coffee culture to tea lovers in China. Starbucks is encouraged by the fact that one-third of all Chinese households keep a jar of instant coffee on hand. Starbucks is trying to make coffee the drink of choice for the average 18- to 45-year-old Chinese consumer. “Per capita consumption of coffee in China is very small,” admitted Howard Behar, president of Starbucks Coffee International. “But what you have is a tremendous amount of people, so the market will grow.”
Starbucks founder and CEO, Howard Schultz, says that an integral component of Starbucks’ strategy is its image as a fair-trading multinational, which it acquired by promoting its “fair trade” coffee. As you read this chapter, consider how companies research, analyze, and select the international markets they will enter.1
Companies traditionally become involved in international business by choosing to enter familiar, nearby countries first. Managers feel comfortable entering nearby markets because they likely have already interacted with the people of those cultures and have at least some understanding of them. Companies in Canada, Mexico, and the United States often gain their initial international experiences in one another’s markets. Likewise, businesses in Asia often seek out opportunities in one another’s markets before pursuing investment opportunities outside the region.
Yet companies today find themselves bridging the gaps presented by space and culture far more often than in the past. For one thing, technological advances in communication and transportation continue to open markets around the globe. Some companies can realistically consider nearly every location on earth as either a potential market or as a site for business operations. The expansion of regional markets (such as the European Union) also causes companies to analyze opportunities farther from home. Businesses locate production facilities within regional markets because producing in one of a region’s countries provides duty-free access to every consumer in the trade bloc.
The rapidly changing global marketplace forces companies to view business strategies from a global perspective. Businesses today formulate production, marketing, and other strategies as components of integrated plans. For example, to provide a continuous flow of timely information into the production process, more and more firms locate research and development (R&D) facilities near their production sites abroad. Managers also find themselves screening and analyzing locations as potential markets and as potential sites for operations simultaneously. When Mercedes (www.mercedes.com) introduced the M-class sport utility vehicle to the U.S. market, executives also decided to build the vehicle there. The company did not merely estimate the size of the potential market for the vehicle, but simultaneously selected a suitable production site.
This chapter presents a systematic screening process for both markets and sites. After describing important cultural, political, legal, and economic forces affecting the screening process, we explain the difficulties of conducting international research. We then explore the central sources of existing market data and the prime methods for conducting international research firsthand.
Screening Potential Markets and Sites
Two important issues concern managers during the market- and site-screening process. First, they want to keep search costs as low as possible. Second, they want to examine every potential market and every possible location. To accomplish these two goals, managers can segment the screening of markets and sites into the following four-step process (see Figure 12.1):
1. Identify basic appeal
2. Assess the national business environment
3. Measure market or site potential
4. Select the market or site
This screening process involves spending more time, money, and effort on the markets and sites that remain in the later stages of screening. Expensive feasibility studies (conducted later in the process) are performed on a few markets and sites that hold the greatest promise. This approach creates a screening process that is cost effective yet does not overlook potential locations. Let’s now discuss each of the four steps above in detail.
Step 1: Identify Basic Appeal
We have already seen that companies go international either to increase sales (and thus profits) or to access resources. 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.
FIGURE 12.1 Screening Process for Potential Markets and Sites
Determining Basic Demand
The first step in searching for potential markets means finding out whether there is a basic demand for a company’s product. Important in determining this basic appeal is a country’s climate. For example, no company would try to market snowboards in Indonesia, Sri Lanka, or Central America because they receive no snowfall. The same product, on the other hand, is well suited for markets in the Canadian Rockies, northern Japan, and the Swiss Alps. Although this stage seems simple, it cannot be taken too lightly. A classic example is when, during its initial forays into international business, Wal-Mart (www.walmart.com) found ice-fishing huts in its Puerto Rico inventory and no snowshoes at its stores in Ontario, Canada.
Certain countries also ban specific goods. Islamic countries, for instance, forbid the importation of alcoholic products, and the penalties for smuggling are stiff. Although alcohol is available on the planes of international airlines such as British Airways (www.ba.com) and KLM (www.klm.com), it cannot leave the airplane and consumption cannot take place until the plane has left the airspace of the country operating under Islamic law.
Determining Availability of Resources
Companies that require particular resources to carry out local business activities must be sure they are available. Raw materials needed for manufacturing must either be found in the national market or imported. Yet imports may encounter tariffs, quotas, or other government barriers. Managers must consider the additional costs of importing to ensure that total product cost does not rise to unacceptable levels.
The availability of labor is essential to production in any country. Many companies choose to relocate to countries where workers’ wages are lower than they are in the home country. This practice is most common among makers of labor-intensive products—those for which labor accounts for a large portion of total cost. Companies considering local production must determine whether there is enough labor available locally for production operations.
Companies that hope to secure financing in a market abroad must determine the availability and cost of local capital. If local interest rates are too high, a company might be forced to obtain financing in its home country or in other markets in which it is active. On the other hand, access to low-cost financing may provide a powerful inducement to a company that is seeking to expand internationally. British entrepreneur Richard Branson opened several of his Virgin (www.virgin.com) Megastores in Japan despite its reputation as a tough market to crack. One reason for Branson’s initial attraction to Japan was a local cost of capital that was roughly one-third its cost in Britain.
Markets and sites that fail to meet a company’s requirements for basic demand or resource availability in step 1 are removed from further consideration.
Step 2: Assess the National Business Environment
If the business environments of all countries were the same, deciding where to market or produce products would be rather straightforward. Managers could rely on data that report the performance of the local economy and analyze expected profits from proposed investments. But as we saw in earlier chapters, countries differ significantly in their cultures, politics, laws, and economies. International managers must work to understand these differences and to incorporate their understanding into market- and site-selection decisions. Let’s examine how domestic forces in the business environment actually affect the location-selection process.
Although countries display cultural similarities, they differ in language, attitudes toward business, religious beliefs, traditions, customs, and countless other ways. Some products are sold in global markets with little or no modification. These products include industrial machinery such as packaging equipment, consumer products such as toothpaste and soft drinks, and many other types of goods and services. Yet many other products must undergo extensive adaptation to suit local preferences, such as books, magazines, ready-to-eat meals, and other products.
Cultural elements can influence what kinds of products are sold and how they are sold. A company must assess how the local culture in a candidate market might affect the salability of its product. Consider Coca-Cola’s (www.cocacola.com) experience in China. Many Chinese take a traditional medicine to fight off flu and cold symptoms. As it turns out, the taste of this traditional medicine—which most people do not find appealing—is similar to that of Coke. Because of Coca-Cola’s global marketing policy of one taste worldwide, the company had to overcome the aversion to the taste of Coke among Chinese consumers. It did so by creating a marketing campaign that associated drinking a Coke with experiencing a piece of American culture. What initially looked like an unattractive market for Coke became very successful through a carefully tailored marketing campaign.
Cultural elements in the business environment can also affect site-selection decisions. When substantial product modifications are needed for cultural reasons, a company might choose to establish production facilities in the target market itself. Yet serving customers’ special needs in a target market must be offset against any potential loss of economies of scale due to producing in several locations rather than just one. Today companies can minimize such losses through the use of flexible manufacturing methods. Although cellular phone manufacturer Nokia (www.nokia.com) produces in locations worldwide, it ensures that each one of its facilities can start producing any one of its mobile phones for its different markets within 24 hours.
A qualified workforce is important to a company no matter what activity it is to undertake at a particular site. Also, a strong work ethic among the local workforce is essential to having productive operations. Managers must assess whether an appropriate work ethic exists in each potential country for the purposes of production, service, or any other business activity. An adequate level of educational attainment among the local workforce for the planned business activity is also very important. Although product-assembly operations may not require an advanced education, R&D, high-tech production, and certain services normally will require extensive higher education. If the people at a potential site do not display an appropriate work ethic or educational attainment, the site will be ruled out for further consideration.
Political and Legal Forces
Political and legal forces also influence the market and site-location decision. Important factors include government regulation, government bureaucracy, and political stability. Let’s take a brief look at each of these factors.
As we saw in earlier chapters, a nation’s culture, history, and current events cause differences in attitudes toward trade and investment. Some governments take a strong nationalistic stance, whereas others are quite receptive to international trade and investment. A government’s attitude toward trade and investment is reflected in the quantity and types of restrictions it places on imports, exports, and investment in its country.
Government regulations can quickly eliminate a market or site from further consideration. First of all, they can create investment barriers to ensure domestic control of a company or industry. One way in which a government can accomplish this is by imposing investment rules on matters such as business ownership—for example, forcing foreign companies into joint ventures. Governments can extend investment rules to bar international companies entirely from competing in certain sectors of the domestic economy. The practice is usually defended as a matter of national security. Economic sectors commonly declared off-limits include television and radio broadcasting, automobile manufacturing, aircraft manufacturing, energy exploration, military-equipment manufacturing, and iron and steel production. Such industries are protected either because they are culturally important, are engines for economic growth, or are essential to any potential war effort. Host governments often fear that losing control in these economic sectors means placing their fate in the hands of international companies.
Second, governments can restrict international companies from freely removing profits earned in the nation. This policy can force a company to hold cash in the host country or to reinvest it in new projects there. Such policies are normally rooted in the inability of the host-country government to earn the foreign exchange needed to pay for badly needed imports. For instance, Chinese subsidiaries of multinational companies must convert the local currency (renminbi) to their home currency when remitting profits back to the parent company. Multinationals can satisfy this stipulation only as long as the Chinese government agrees to provide it with the needed home-country currency.
Third, governments can impose very strict environmental regulations. In most industrial countries, factories that produce industrial chemicals as their main output or as byproducts must adhere to strict pollution standards. Regulations typically demand the installation of expensive pollution-control devices and close monitoring of nearby air, water, and soil quality. While protecting the environment, such regulations also increase short-term production costs. Many developing and emerging markets have far less strict environmental regulations. Regrettably, some companies are alleged to have moved production of toxic materials to emerging markets to take advantage of lax environmental regulations and, in turn, lower production costs. Although such behavior is roundly criticized as highly unethical, it will occur less often as nations continue cooperating to formulate common environmental protection policies.
Finally, governments can also require that companies divulge certain information. Coca-Cola actually left India when the government demanded that it disclose its secret Coke formula as a requirement for doing business there. Coca-Cola returned only after the Indian government dropped its demand.
A lean and smoothly operating government bureaucracy can make a market or site more attractive. Yet a bloated and cumbersome system of obtaining approvals and licenses from government agencies can make it less appealing. In many developing countries, the relatively simple matter of obtaining a license to establish a retail outlet often means acquiring numerous documents from several agencies. The bureaucrats in charge of these agencies generally are little concerned with providing businesses with high-quality service. Managers must be prepared to deal with administrative delays and a maze of rules. For example, country managers for Millicom International Cellular (www.millicom.com) in Tanzania needed to wait 90 days to get customs clearance on the monthly import of roughly $1 million in cellular telephone equipment. Millicom endured this bureaucratic obstacle because of the local market’s potential.
Companies will endure a cumbersome bureaucracy if the opportunity is sufficient to offset any potential delays and expenses. Companies entering China cite the patience needed to navigate a maze of government regulations that often contradict one another and complain about the large number of permissions required from different agencies. The trouble stems from the fact that China is continually revising and developing its system of business law as its economy develops. But an unclear legal framework and inefficient bureaucracy are not deterring investment in China because the opportunities for both marketers and manufacturers are simply too great to ignore.
Stability can attract international business but social unrest can severely disrupt operations and drive out international firms. Here, a man jumps over burning tires during a riot in Paranaque City south of the capital Manila in the Philippines. Riots erupted as hundreds of families who claimed they were legally allowed to occupy land resisted the demolition teams. Illegal demolition is frequent in these urban centers where many impoverished rural workers reside.
Source: © Dennis M. Sabangan/epa/CORBIS. All Rights Reserved.
Every nation’s business environment is affected to some degree by political risk. As we saw in Chapter 3, political risk is the likelihood that a society will undergo political changes that negatively affect local business activity. Political risk can threaten the market of an exporter, the production facilities of a manufacturer, or the ability of a company to remove profits from the country in which they were earned.
The key element of political risk that concerns companies is unforeseen political change. Political risk tends to rise if a company cannot estimate the future political environment with a fair degree of accuracy. An event with a negative impact that is expected to occur in the future is not, in itself, bad for companies because the event can be planned for and necessary precautions taken. It is the unforeseen negative events that create political risk for companies.
Managers’ perceptions of a market’s political risk are often affected by their memories of past political unrest in the market. Yet managers cannot let past events blind them to future opportunities. International companies must try to monitor and predict political events that threaten operations and future profits. By investigating the political environment proactively, managers can focus on political risk and develop action plans for dealing with it.
But where do managers get the information to answer such questions? They may assign company personnel to gather information on the level of political risk in a country, or they may obtain it from independent agencies that specialize in providing political-risk services. The advice of country and regional specialists who are knowledgeable about the current political climate of a market can be especially helpful. Such specialists can include international bankers, political consultants, reporters, country-risk specialists, international relations scholars, political leaders, union leaders, embassy officials, and other local businesspeople currently working and living in the country in question.
Economic and Financial Forces
Managers must carefully analyze a nation’s economic policies before selecting it as a new market or site for operations. The poor fiscal and monetary policies of a nation’s central bank can cause high rates of inflation, increasing budget deficits, a depreciating currency, falling productivity levels, and flagging innovation. Such consequences typically lower investor confidence and force international companies to scale back or cancel proposed investments. For instance, India’s government finally reduced its restrictive trade and investment policies and introduced more open policies. These new policies encouraged investment by multinationals in production facilities and R&D centers, especially in the computer software industry.
Currency and liquidity problems pose special challenges for international companies. Volatile currency values make it difficult for firms to predict future earnings accurately in terms of the home-country currency. Wildly fluctuating currency values also make it difficult to calculate how much capital a company needs for a planned investment. Unpredictable changes in currency values can also make liquidating assets more difficult because the greater uncertainty will likely reduce liquidity in capital markets—especially in countries with relatively small capital markets, such as Bangladesh and Slovakia.
In addition to their home government’s resources, managers can obtain information about economic and financial conditions from institutions such as the World Bank, the International Monetary Fund, and the Asian Development Bank. Other sources of information include all types of business and economic publications and the many sources of free information on the Internet.
Transport costs and country image also play important roles in the assessment of national business environments. Let’s take a brief look at each of these forces.
COST OF TRANSPORTING MATERIALS AND GOODS
The cost of transporting materials and finished goods affects any decision about where to locate manufacturing facilities. Some products cost very little to transport through the production and distribution process, yet others cost a great deal. Logistics refers to management of the physical flow of products from the point of origin as raw materials to end users as finished products. Logistics weds production activities to the activities needed to deliver products to buyers. It includes all modes of transportation, storage, and distribution.
Management of the physical flow of products from the point of origin as raw materials to end users as finished products.
To realize the importance of efficient logistics, consider that global logistics is a $400 billion industry. We often think of the United States as an efficient logistics market because of its extensive interstate road system and rail lines that stretch from east to west. But because of overcrowded highways, 2 billion people-hours are lost to gridlock each year. That translates into $48 billion in lost productivity. Transport companies and cargo ports strenuously advertise their services precisely because of the high cost to businesses of inefficient logistics.
Because 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. For example, 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” or “Assembled in Brazil.” Although such labels do not affect all products to the same degree, they can present important positive or negative images and boost or dampen sales.
Products made in relatively developed countries tend to be evaluated more positively than products from less developed countries.2 This relation is due to the perception among consumers that the workforces of certain nations have superior skills in making particular products. For example, consumer product giants Procter & Gamble (www.pg.com) and Unilever (www.unilever.com) have manufacturing facilities in Vietnam. But Vietnamese consumers tend to shun these companies’ locally made Close-Up toothpaste and Tide detergent, and instead they seek the identical products and brands produced in neighboring countries, such as Thailand. As one young Vietnamese shopper explained, “Tide from Thailand smells nicer.” A general perception among Vietnamese consumers is that goods from Japan or Singapore are the best, followed by Thai goods. Unfortunately for Procter & Gamble and Unilever in Vietnam, many goods from other countries are smuggled in and sold on the black market, thereby denying the companies local sales revenue.
A country’s image can be positive in one product class but negative in another. For example, the fact that Volkswagen’s (www.volkswagen.com) new Beetle is made in Mexico for the U.S. market has not hurt the Beetle’s sales. But would affluent consumers buy a hand-built Rolls-Royce (www.rolls-roycemotorcars.co.uk) automobile if it were produced in Mexico? Because Rolls-Royce buyers pay for the image of a brilliantly crafted luxury car, the Rolls-Royce image probably would not survive intact if the company were to produce its cars in Mexico.
Finally, note that country image can and does change over time. For example, “Made in India” has traditionally been associated with low-technology products such as soccer balls and many types of textile products. But today world-class computer software companies increasingly rely on the software-development skills of engineers located in and around Madras and Bangalore in southern India.
Throughout our discussion of step 2 of the screening process (assessing the national business environment), we have presented many factors central to traditional business activities. To explore issues specific to entering international markets successfully over the Internet, see the Global Manager’s Briefcase titled, “Conducting Global e-Business.”
GLOBAL MANAGER’S BRIEFCASE Conducting Global e-Business
Generating sales in new geographic markets over the Internet is an increasingly popular method of expansion for large multinationals and entrepreneurs alike. Here are some issues managers should consider when entering new markets using the Internet.
■ Infrastructure. Before investing heavily in e-business, investigate whether your potential customers have easy access to the Internet. Determine whether their government is developing advanced digital networks.
■ Content. Companies must be informed about the different policies of each country through which their information travels in order to avoid liability. Key topics are truth in advertising; fraud prevention; and violent, seditious, or graphic materials.
■ Standards. It’s not always entirely clear which country has the power to establish standards of operations for e-business. Standards might be set up as trade barriers to keep international companies out of a domestic market.
■ Privacy. One strength of e-business is that consumer data can be collected easily and used to generate sales. But consumer groups in some countries view the collection of such data as an invasion of privacy. Consumers are particularly vehement if they are unaware this information is being collected and how it is being used.
■ Security. Companies must ensure their data communications are safe from unauthorized access or modification. Security technology, such as encryption, password controls, and firewalls, still needs support from a global infrastructure.
■ Intellectual property. International agreements govern and protect copyrights, databases, patents, and trademarks. Yet these issues will remain a global concern for e-business until a widely accepted legal framework is established for the Internet.
■ Electronic payments. Online use of credit cards remains a security concern for many consumers. Global electronic payment systems such as stored-value, smart cards, and other systems are in various stages of development and will alleviate many security issues.
■ Tariffs and taxation. International policies regarding which party in an international e-business transaction owes taxes to which nation are not yet fully developed. Countries differ widely on how these matters should be treated.
1. What are the four steps in the screening process?
2. Identify the main factors to investigate when identifying the basic appeal of a market or site for operations.
3. What key forces should be examined when assessing a nation’s business environment?
4. How do transport costs and country image affect the location decision?
Step 3: Measure Market or Site Potential
Markets and sites passing the first two steps in the screening process undergo further analysis to arrive at a more manageable number of potential locations. Despite the presence of a basic need for a product and an adequately stable national business environment, potential customers might not be ready or able to buy a product for a variety of reasons. Despite the availability of resources, certain sites may be unable to supply a given company with the level of resources it needs. Let’s now explore the factors that further influence the potential suitability of markets and sites for operations.
Measuring Market Potential
As barriers to trade are reduced worldwide, companies are looking to increase sales in industrialized and emerging markets alike. But businesses can seldom create one marketing plan for every market in which they sell their products. Nations enjoy different levels of economic development that affect what kinds of goods are sold, the manner in which they are sold, and their inherent features. Likewise, different levels of economic development require varying approaches to researching market potential. But how do managers estimate potential demand for particular products? Let’s take a look at the factors managers consider when analyzing industrialized markets and then examine a special tool for analyzing emerging markets.
The information needed to estimate the market potential for a product in industrialized nations tends to be more readily available than in emerging markets. In fact, for the most developed markets, research agencies exist for the sole purpose of supplying market data to companies. Euromonitor (www.euromonitor.com) is one such company with an extensive global reach in consumer goods. The company sells reports and does company-specific studies for many international corporations and entrepreneurs. Some of the information in a typical industry analysis includes:
■ Names, production volumes, and market shares of the largest competitors
■ Volume of exports and imports of the product
■ Structure of the wholesale and retail distribution networks
■ Background on the market, including population figures and key social trends
■ Total expenditure on the product (and similar products) in the market
■ Retail sales volume and market prices of the product
■ Future outlook for the market and potential opportunities
The value of such information supplied by specialist agencies is readily apparent—these reports provide a quick overview of the size and structure of a nation’s market for a product. Reports vary in their cost (depending on the market and product), but many can be had for around $750 to $1,500. The company also allows online purchase of reports in small segments for as little as $20 each. We discuss other sources for this type of market data later in this chapter.
Thus companies that enter the market in industrialized countries often have a great deal of data available on that particular market. What becomes important then is the forecast for the growth or contraction of a potential market. One way of forecasting market demand is determining a product’s income elasticity —the sensitivity of demand for a product relative to changes in income. The income-elasticity coefficient for a product is calculated by dividing a percentage change in the quantity of a product demanded by a percentage change in income. A coefficient greater than 1.0 conveys an income-elastic product, or one for which demand increases more relative to an increase in income. These products tend to be discretionary purchases, such as computers, video games, jewelry, or expensive furniture—generally not considered essential items. A coefficient less than 1.0 conveys an income-inelastic product, or one for which demand increases less relative to an increase in income. These products are considered essential and include food, utilities, and beverages. To illustrate, if the income-elasticity coefficient for carbonated beverages is 0.7, the demand for carbonated beverages will increase 0.7 percent for every 1.0 percent increase in income. Conversely, if the income-elasticity coefficient for MP3 players is 1.3, the demand for MP3 players will increase 1.3 percent for every 1.0 percent increase in income.
Sensitivity of demand for a product relative to changes in income.
The biggest emerging markets are more important today than ever. Nearly every large company engaged in international business is either already in or is considering entering the big emerging markets such as China and India. With their large consumer bases and rapid growth rates, they whet the appetite of marketers around the world. Although these markets are surely experiencing speed bumps along their paths of economic development, in the long term they cannot be ignored.
Companies considering entering emerging markets often face special problems related to a lack of information. Data on market size or potential may not be available, for example, because of undeveloped methods for collecting such data in a country. But there are ways companies can assess potential in emerging markets. One way is for them to rank different locations by developing a so-called market-potential indicator for each. This method is, however, only useful to companies considering exporting. Companies considering investing in an emerging market must look at other factors that we examine next in the discussion of measuring site potential. The main variables commonly included in market-potential analyses are:3
■ Market Size. This variable provides a snapshot of the size of a market at any point in time. It does not estimate the size of a market for a particular product, but rather the size of the overall economy. Market-size data allow managers to rank countries from largest to smallest, regardless of a particular product. Market size is typically estimated from a nation’s total population or the amount of energy it produces and consumes.
■ Market Growth Rate. This variable reflects the fact that, although the overall size of the market (economy) is important, so too is its rate of growth. It helps managers avoid markets that are large but shrinking and target those that are small but rapidly expanding. It is generally obtained through estimates of growth in gross domestic product (GDP) and energy consumption.
■ Market Intensity. This variable estimates the wealth or buying power of a market from the expenditures of both individuals and businesses. It is estimated from per capita private consumption and/or per capita gross domestic product (GDP) at purchasing power parity (see Chapter 4).
■ Market Consumption Capacity. The purpose of this variable is to estimate spending capacity. It is often estimated from the percentage of a market’s population in the middle class, thereby concentrating on the core of an economy’s buying power.
■ Commercial Infrastructure. This factor attempts to assess channels of distribution and communication. Variables may include the number of telephones, televisions, fax machines, or personal computers per capita; the density of paved roads or number of vehicles per capita; and the population per retail outlet. An increasingly important variable for businesses relying on the Internet for sales is the number of Internet hosts per capita. But because these data become outdated quickly, care must be taken to ensure accurate information from the most current sources.
■ Economic Freedom. This variable attempts to estimate the extent to which free-market principles predominate. It is typically a summary of government trade policies, government involvement in business, the enforcement of property rights, and the strength of the black market. A useful resource is the annual Freedom in the World report published by Freedom House (www.freedomhouse.org).
■ Market Receptivity. This variable attempts to estimate market “openness.” One way it can be estimated is by determining a nation’s volume of international trade as a percentage of gross domestic product (GDP). If a company wants to see how receptive a market is to goods from its home country, it can ascertain the amount of per capita imports entering the market from the home country. Managers can also examine the growth (or decline) in these imports.
■ Country Risk. This variable attempts to estimate the total risk of doing business, including political, economic, and financial risks. Some market-potential estimation techniques include this variable in the market-receptivity variable. This factor is typically obtained from one of the many services that rate the risk of different countries, such as Political Risk Services (www.prsgroup.com).
After each of these factors is analyzed, they are assigned values according to their importance to the demand for a particular product. Potential locations are then ranked (assigned a market-potential indicator value) according to their appeal as a new market. As you may recall, we discussed several of these variables earlier under the topics of national and international business environments. For example, country-risk levels are shown in Map 3.1 (pages 88–89), economic freedom is shown in Map 4.1 (pages 124–125), and market receptivity (or openness) is shown in Map 5.1 (pages 146–147). Map 12.1 captures one other variable, commercial infrastructure, by showing the number of fixed-line and mobile phone subscribers per 1,000 people in each nation. This variable is an important indicator of a nation’s overall economic development. Other variables that are also good proxies for this variable include the portion of a nation’s roads that are paved or the number of personal computers, fax machines, and Internet hosts it has. One key cautionary note, however, is that emerging markets often either lack such statistics or, in the case of paved roads, international comparison is difficult.
Measuring Site Potential