Chapter Two Country Selection and Entry Strategies
Learning Objectives 1. What two factors drive market economies, and how are these factors different in command economies? 2. How do Rostow s five stages of economic development apply to the concepts of most-, less-, and least-developed economies, emerging markets, newly industrialized countries, and transition economies? 3. What factors help create a national competitive advantage for an economy? 4. How do the five forces that increase competitive rivalries relate to industry-level competitive advantage? 5. How do the various modes of entry balance a company s level of control with its level of risk?
Learning Objective #1 1. What two factors drive market economies, and how are these factors different in command economies?
Economic Systems
Market Economy An economy in which most economic decisions are made in the marketplace is a market economy. The marketplace may be found anywhere money changes hands in a capitalist economic system. Supply and Demand Supply is the amount of goods and services that producers will provide at various prices. Demand is the amount or quantity of goods and services the consumers are willing to buy at various prices. The market price, or equilibrium price, represents the meeting place between supply and demand.
Components of Market Economies Profit Revenue exceeds costs Personal and business Private Property Rights Allow individuals to buy land, machinery, and other goods Competitive Marketplace Government does not interfere with prices or sales
Most Economically Free Countries
Command Economy A central authority makes all key economic decisions in a command economy. Socialism refers to economic systems where the state owns at least some parts of industry. Strong command economy Heavy governmental control will be present. Communism is an extreme form of socialism that bans private ownership of property. Moderate command economies A degree of private enterprise operates. The state owns all of the major resources.
Mixed Economy The marketplace guides part of the economic system and the government runs the other part. Government may oversee defense, education, building and repairing roads, and/or fire protection. Marketplace vends other items, including necessities, sundries, and luxuries. Most countries have mixed economies. One force, marketplace or government, tends to be more dominant.
Learning Objective #2 2. How do Rostow s five stages of economic development apply to the concepts of most-, less-, and least-developed economies, emerging markets, newly industrialized countries, and transition economies?
Economic Development Degree of economic development in a region or country drives many international marketing decisions. Development can be controversial and rooted in politics and conflicts between countries. Different levels of economic development
Stages of Economic Development
Initial Stages of Development Traditional Society Subsistence economy Agricultural primary occupation and means of production Limited technology and capital Preconditions for Takeoff Technology begins to develop Rudimentary transportation to encourage trade
Rapid Development Takeoff Manufacturing industries grow rapidly Airports, roads, and railways built A few leading industries support high levels of economic growth The Drive to Maturity Growth has spread to all parts of the economy and is self-sustaining Modern transportation systems embedded Rapid urbanization Traditional industries may start to decline
Final Stage and Application The Age of Mass Consumption Rapid rise of tertiary, third-wave support industries Decline in manufacturing Citizens enjoy abundance, prosperity, and a variety of purchasing choices At each stage, the presence and growth of potential target markets changes.
Emerging Markets Emerging markets are countries that are moving through the transformation from developing to developed. Mexico, South Africa, and several countries in Asia Big Emerging Markets (BEMs) Emerging markets with a large population BRIC countries Brazil, Russia, India, and China Large regional (and increasing global) economic and political footprint
Newly Industrialized Countries (NICs) For NICs, rapid economic development places them between less- and moredeveloped stages. China, Taiwan, South Korea, Mexico, Brazil NICs are always emerging markets, but emerging markets are not always NICs Government plays a clear role in NICs and less so in some emerging markets
Characteristics of NICs
Transition Economies Occur in formerly communist countries with centrally planned economies as the country transitions to a free market economy. Eastern Europe, China Opportunity for growth Increased standard of living Increased purchasing power Gaps in market may be filled by foreign companies
Features of Transition Economies
Struggles for Transition Economies Split population Younger consumers more comfortable with the change Older consumers may desire return to old system Economic growth more beneficial for urban than for rural consumers Corruption a large problem limiting growth The task may be difficult, but the resources are scarce.
Transparency International Corruption Index
Bottom-of-the-Pyramid Low-income, bottom-of-the-pyramid customers are most likely to reside in least-developed economies or in Rostow s traditional societies. The potential does exist for products that are tailored to these consumers. As an economy moves forward and infrastructure emerges, the opportunities tend to grow and expand impressively.
Learning Objective #3 3. What factors help create a national competitive advantage for an economy?
National Competitive Advantage The basis of global economic leadership Michael Porter s Diamond Model Demand conditions Related and supporting industries Firm strategy, structure, and rivalry Factor conditions Government
Demand Conditions The unique features of demand in a nation make up that country s demand conditions. Domestic consumers may be more or less representative of the global consumers. Consumers who move the global taste in a category or industry help a nation become global leaders in that category. France and fashion South Korea and technology
Related and Supporting Industries Support from various other companies that provide inputs, support production, or facilitate other aspects of an industry together count as related and supporting industries. Nations with this type of support network exhibit one of the conditions needed to have a national competitive advantage in that industry. Nokia in Finland is surrounded by needed related and supporting industries.
Firm Strategy, Structure, and Rivalry Nations differ in terms of how the government allows companies to be formed, maintained, and structured, including control of domestic and potentially foreign competitors. This results in differences in firm strategy, structure, and rivalry In Italy, companies tend to be smaller, family owned, and privately held. In Germany companies tend to be large and highly structured, and employ managers with technical backgrounds.
Factor Conditions Factor conditions include components needed for production of goods or services, such as labor and infrastructure. Each industry has specific factors associated with success in that field. Traditionally, these factors were natural endowments that nations possessed without effort. Labor or land or various natural resources such as oil or minerals Increasingly, resources are created such as trained human resources. Factor conditions most clearly lead to national competitive advantage when specialization exists. The American film industry has the various directors, actors, producers, and cinematographers needed.
Government Government, and how government interacts with the free market, plays a role in creating national competitive advantage. Industry innovation results from competition and governmental activities can assist this. Support for education Encouraging cooperation between related industries Assisting in the development of new technologies and emerging industries Policies that increase competition while supporting innovation help create national competitive advantage.
Learning Objective #4 4. How do the five forces that increase competitive rivalries relate to industry-level competitive advantage?
Industry-Level Competitive Advantage
Threat of New Entrants The threat of new entrants affects the nature of local, national, and international competition. The large size of the markets in Big Emerging Markets alone sparks interest and increases the chance of new entrants. Barriers to entry can be used by companies to prevent or limit new entrants. Potential barriers include brand equity, large initial cost requirements, regulations, monopolies over-distribution or needed resources, and/or lack of specific, hard-to-learn knowledge.
Threat of Substitute Products The existence of substitute products increases competitive intensity. Different substitute products exist in international markets. When consumers can switch from product to product, companies face stronger pressure from competitors to get consumers to make the switch. Switching costs increase Consumer loyalty increase Brand loyalty, unique product benefits, and repeat purchase rewards all decrease switching.
Bargaining Power of Suppliers Companies within an industry typically use the same supplier or a small group of suppliers for the resources needed, including labor and raw materials. Suppliers of these resources with strong bargaining power increase the competition within the industry. Supplier bargaining power increases when only one or a small number of companies serve as supplier. Steps to lower the bargaining power of suppliers: Buy the supplier. Supply the resource internally. Find substitutes for the resource, often by looking internationally.
Bargaining Power of Consumers Consumers possess bargaining power. When only a few individuals purchase a product, such as can be the case in business-to-business marketing, those buyers hold more power. Small numbers of consumers increase competition. Price sensitivity increases consumer power due to the increased likelihood of a customer switching to a lowerpriced competitor. Methods to decrease consumer bargaining power: Brand loyalty Opening new markets or increasing market share Growth in market size
Rivalry Among Competitors Together, the four forces above work to increase rivalry among competitors. Company-specific factors also increase rivalries among competitors. Widely accessible knowledge and processes result in more rivalry than does specialized, difficult-to-imitate knowledge. Innovation, especially when legally protected, can reduce competition within an industry. When every company in an industry competes based on similar, duplicable factors, rivalry becomes intense.
Economic Forces and International Marketing Economic forces affect culture. Sons are highly valued for their ability to work, whereas daughters may be viewed as an expense. Development increases materialism. Economic forces affect language. New terms for new technologies Economic forces affect political and legal systems. Laws governing property rights and commerce Laws can speed up or slow down development. Economic forces affect infrastructure. Growth leads to more complex and developed infrastructure.
Sustainability and International Marketing As countries develop economically, sustainability becomes an increasing concern. How can economic development be done sustainably? Economic development increases global consumption of resources. Energy Water
Net Virtual Water Globally
Global Water Consumption Footprints
Learning Objective #5 5. How do the various modes of entry balance a company s level of control with its level of risk?
Modes of Entry
Exporting The product is shipped in one manner or another into a foreign market. Typical initial method to enter a market Little control after products leaves home country Two broad methods: Direct sales Use of an intermediary The Internet has led to a growth in direct sales.
Licensing A contract that grants a company (the licensee) the legal right to use another company s brand, image, and other marketing components Can provide a quick, low-cost method for entering a foreign market The licensee holds additional knowledge about the local market that increases the chance for success. Primary concern is lack of control. Local partner behavior may detract from the image of the company. May make poor marketing choices.
Franchising The contractual agreement to implement a business model McDonald s, KFC, 7-Eleven, Supercuts, and Jani-King In return for an up-front fee, signees obtain access to the company s colors, images, and products, which offers greater control over the marketing process by the parent company. The risk is a poor franchisee. Signee may ignore contract or make decisions that hurt the company. Costs accrue to control signees.
Joint Ventures Some companies choose to partner with local businesses when entering a country. When these legal partnerships involve an investment, a division of ownership, and the creation of a new legal entity, the newly created business is joint venture. The categories of joint ventures include: Majority owned, where the foreign company owns 51% or more of the joint venture; Minority owned, where the foreign company owns 49% or less of the joint venture; 50% / 50%, or an equal split of ownership.
Joint Venture Advantages and Disadvantages Advantages: Local partners provide access to local connections. Local partners understand the local business environment. Sharing of risk lessens potential losses. Costs may be lowered. Disadvantages: Lost or leaked proprietary knowledge. Partners may misappropriate company assets and may even break the joint venture and then use that knowledge to succeed in separate, independent business ventures. Conflicts between partners can also occur.
Strategic Alliances A formal agreement between companies to work together to achieve a common goal. In contrast to joint ventures, a separate legal entity does not get created. Resource sharing, project funding, and knowledge transfer all happen within most strategic alliances. Many strategic alliances investigate problems that affect all or most members of an industry. Sharing research on a new technological breakthrough or combining resources to enter a new market are two common goals for strategic alliances. Advantage Limited financial commitment and fewer formal legal lessens risk. Disadvantage Exposure to a potential partners leaving or stealing technology.
Wholly Owned Subsidiary A 100% ownership stake in a business in that country Must comply with local regulations, adjust to local cultural standards and mores, operate in the native language, fit with local economic conditions, and be supportable through the local infrastructure. Company is able to use its own brand, logo, and color scheme, and maintains control over both managerial operations and marketing decisions. Primary advantage is complete control. Primary disadvantage is lack of shared risk and high cost. Also, fail to have a local contact to facilitate entry success.
Types of Wholly Owned Subsidiaries Acquisitions, the company purchases a local business that is then transformed into the subsidiary. Greenfield investment, the company builds the subsidiary from the ground up. China has a unique type the wholly foreign-owned enterprise The subsidiary maintains special economic status within China. These businesses typically manufacture goods solely for export to foreign markets.
Entry Mode Failure and Exit Put a plan in place regarding market exit pre-entry. Set clear, measurable goals regarding entry success with set deadlines. Failure may result from many things. Poor planning External, unpredictable forces When leaving, focus on maintaining the relationships built. Settle contracts fairly. Focus on maintaining company reputation. The partner in the country being exited might also be a potential partner in a separate country. It is always possible that the firm will choose to enter the market again at a later date.
Group Assignment Please think of an Peruvian product that you would like to market internationally. Go through the different ways that a product could be introduced in a new country. Pick a country that you would like to market to and list the costs, advantages and disadvantages associated with each mode of entry: exporting, licensing, franchising, wholly-owned subsidiary, joint venture and strategic alliance. Pick the one you think would represent the best option for the product and country of entry.