Foreign Entry Business Considerations

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Foreign Entry Business Considerations

  1. 1. Foreign Entry – Business Considerations Business Conditions & its Impact
  2. 2. <ul><li>Entering Foreign markets is not an easy task. Companies are taking enormous risks by entering into new markets. New markets poses new challenges while enticing with new opportunity. </li></ul><ul><li>Market Research is the necessary first step before expanding abroad. </li></ul>
  3. 3. Key Points <ul><li>Global market research involves issues like: </li></ul><ul><li>Current Market potential </li></ul><ul><li>Future Market Growth Estimates </li></ul><ul><li>Political environment </li></ul><ul><li>Business Environment </li></ul><ul><li>Trade Bloc Membership </li></ul><ul><li>Competitive Environment </li></ul><ul><li>Entry Barriers </li></ul>
  4. 4. Political risks evaluation is the first level Go or No-Go decision maker <ul><li>Political Risk Factors: </li></ul><ul><li>General Instability </li></ul><ul><ul><li>Revolution, Coup, Riots, Violence, Terrorism etc. </li></ul></ul><ul><li>Expropriation </li></ul><ul><ul><li>Asset seizure, Nationalization, Contract Revocation </li></ul></ul><ul><li>Operations </li></ul><ul><ul><li>Import Restrictions, Local content Requirements, Taxes Export Requirements </li></ul></ul><ul><li>Finance </li></ul><ul><ul><li>Exchange Rate Risks, Limitations on repatriations of Profits, Investments limitations etc </li></ul></ul>
  5. 5. Political Risks <ul><li>Once Political risks are evaluated, marketing basics can be considered </li></ul><ul><li>US Government Department of Commerce releases Political Risks Assessment data for companies </li></ul><ul><li>Cultural also acts as Political risks, Often times Cultural factors are not visible in foreign markets </li></ul><ul><ul><li>E.g: KFC’s controversy in India </li></ul></ul><ul><li>Financial stability of a country can be assessed from the investment rating for that country </li></ul><ul><ul><li>Moody’s, Standard & Poor’s </li></ul></ul>
  6. 6. Buying Political Risk Information <ul><li>Several independent research companies sell political risk analysis reports. A typical report consists of: </li></ul><ul><ul><li>Highlights </li></ul></ul><ul><ul><li>Comment & Analysis </li></ul></ul><ul><ul><li>Databank: History of key domestic & international economic indicators </li></ul></ul><ul><ul><li>Forecast Scenarios: A 5 year & 18 month forecasts based on various political scenarios </li></ul></ul><ul><ul><li>Political Framework: The political system, Policies & key politicians in the country </li></ul></ul><ul><ul><li>Background Information of that Country </li></ul></ul>
  7. 7. Basic Environment Factors <ul><li>Physical Environment </li></ul><ul><ul><li>Climate, Weather, Propensity for Natural disasters etc determines consumption & demand factors </li></ul></ul><ul><li>Socio-Cultural Factors </li></ul><ul><ul><li>Religion, Culture, Society, Education levels </li></ul></ul><ul><li>Economic Environment </li></ul><ul><ul><li>Income levels, Disposal Income, Saving rate, GDP, etc </li></ul></ul><ul><li>Regulatory Environment </li></ul><ul><ul><li>Local Government rules & regulation which enable or inhibit certain business practices </li></ul></ul>
  8. 8. Macro Segmentation <ul><li>There are about 200 countries to invest in!! </li></ul><ul><li>Macro Segmentation means grouping countries with similar characteristics which are important for marketing purposes. </li></ul><ul><ul><li>Socio-demographic data, Economic data </li></ul></ul><ul><ul><li>Affiliation to a Free Trade Area </li></ul></ul><ul><ul><li>GDP, GNP, Economic growth </li></ul></ul><ul><ul><li>Culture, Political systems </li></ul></ul><ul><li>Countries are grouped together for Cluster Analysis, A simplified method of analyzing a country. </li></ul>
  9. 9. Cluster of Countries <ul><li>Its easier to cluster or group countries based on growth potential & Competition. </li></ul><ul><li>Final selection stage requires secondary data, subjective judgments and experiences during visits to that country. </li></ul><ul><li>Often times managers use “Guesstimate” for missing data or other information </li></ul><ul><li>It is good to do sensitivity analysis for various competitive scenarios </li></ul>
  10. 10. Researching Competitors <ul><li>Local markets abroad will have competitors, both Domestic & Global. </li></ul><ul><li>Competitive landscape must be analyzed </li></ul><ul><li>SEC 10K or similar disclosure data </li></ul><ul><li>Information from suppliers, customers & middlemen for competitors </li></ul><ul><li>Key strengths of foreign competitors are not easily reveled & remains hidden </li></ul><ul><ul><li>E.g: Keiretsu network in Japan </li></ul></ul>
  11. 11. Bureaucratic – Business Relationship <ul><li>De-Regulation, Trade liberalization & Privatization of Industry has led to chaotic conditions. Forecasting the competitive environment in such countries is tough </li></ul><ul><li>In most countries, Bureaucratic-Business relationships act as a strong business advantage for the entrenched players </li></ul><ul><li>Telecommunications, Healthcare, Defense, Broadcasting media sectors are highly regulated in most countries. </li></ul><ul><ul><li>Rules always favor Local businesses </li></ul></ul>
  12. 12. Entry Evaluation Procedure Country Identification Preliminary Screening Final Selection In-Depth Screening Market Size, GDP, Growth rate Political, Economic & Business Risks Market Potential, Attractiveness Risks, Costs, Benefits, ROI
  13. 13. Special Criteria <ul><li>Competitive Factors </li></ul><ul><ul><li>Follow your competition into a new country or preempt competition to gain first mover advantage </li></ul></ul><ul><li>Learn from Leading Markets </li></ul><ul><ul><li>Enter a leading market to learn from competition, customers, suppliers </li></ul></ul><ul><ul><li>E.g: Japanese Car manufactures in Germany, Philips in Japan </li></ul></ul><ul><li>Leading Markets may not necessarily be the largest market but they are very strong at the high end of the product line. Customers there have high demands </li></ul>
  14. 14. Getting Country Data <ul><li>Primary Sources </li></ul><ul><ul><li>WTO, OEDC, World Bank, IMF reports </li></ul></ul><ul><ul><li>US Department of Commerce </li></ul></ul><ul><ul><li>Foreign Consulates </li></ul></ul><ul><ul><li>Trade associations </li></ul></ul><ul><li>Primary data is usually available through websites </li></ul><ul><li>Useful for preliminary analysis, to short list countries for consideration </li></ul>
  15. 15. Country Reports <ul><li>Secondary Sources : A large number of private market research companies collect, compile and sell business data about various countries. </li></ul><ul><li>Popular ones are: </li></ul><ul><ul><li>ACNielsen Taylor Nelson Sofres, Dentsu Research Inc, United Information Group, NFO worldwide, Lexus-Nexus, Dun & Bradstreet </li></ul></ul><ul><li>Private agencies provide more in-depth data analysis which is useful in making final decision. </li></ul><ul><li>Private agencies also provide in-depth Market research reports – Market size, potential, attractiveness etc </li></ul>
  16. 16. Forecasting Foreign Sales <ul><li>Market Research should give both market size and market share that can be achieved in foreign country. </li></ul><ul><li>Often historical data for a product in foreign country may not be available. Economic & demographic data may not be sufficient. </li></ul><ul><li>“ Bootstrap” forecast is then done & is based on past data from other markets (such as home building to predict sales of appliances) </li></ul><ul><li>Often needs innovative methods to forecast sales in foreign markets </li></ul>
  17. 17. Mazda’s Shorthand Forecast <ul><li>Developed by Mazda in 1981 </li></ul><ul><li>First projected industry sales is polled from various sources </li></ul><ul><li>Second, Market share for imports is polled from the same source </li></ul><ul><li>Third, Japanese share among imports is estimated </li></ul><ul><li>Finally, the company’s share is estimated </li></ul><ul><li>Sales = Industry sales x Market Share </li></ul><ul><li>Short cut method is not accurate & not applicable for all industries. Trade barriers, Product life cycle & other factors must be considered </li></ul>
  18. 18. Stages in Product Lifecycle 1 2 3 4 5 6 Legend 1: Pioneer 2: Early Adopter 3: Early Majority 4: Late Majority 5: Late Adopter 6: Laggards Sales Time
  19. 19. Product Life Cycle <ul><li>Sales forecast also depends on Product Life cycle. </li></ul><ul><ul><li>In early stages, little data is available for statistical forecasting. </li></ul></ul><ul><ul><li>In later stages when past sales and market share data are available more sophisticated methods can be used </li></ul></ul><ul><li>Three types of forecasting techniques can be used in early stages: </li></ul><ul><ul><li>“ Build-up” Method </li></ul></ul><ul><ul><li>Forecasting by Analogy </li></ul></ul><ul><ul><li>Judgmental Method </li></ul></ul>
  20. 20. Judgmental Forecasts <ul><li>Jury Technique </li></ul><ul><ul><li>Expert Pooling </li></ul></ul><ul><ul><li>Panel Consensus </li></ul></ul><ul><ul><li>Delphi method </li></ul></ul><ul><li>Time Series Extrapolation </li></ul><ul><li>Regression-Based Forecasts </li></ul><ul><ul><li>The Size Component </li></ul></ul><ul><ul><li>Willingness to buy </li></ul></ul><ul><ul><li>Ability to Buy </li></ul></ul><ul><ul><li>Sales per Customer </li></ul></ul><ul><ul><li>Market Sales </li></ul></ul>
  21. 21. Forecasting Market Share <ul><li>Predicting Competition </li></ul><ul><li>Identifying Competitors </li></ul><ul><li>Domestic Competitors </li></ul><ul><li>Foreign Competitors </li></ul>
  22. 22. Closing Thoughts <ul><li>Foreign Entry decisions involve country selection based on political risks, business environment, and rules and regulations of trade </li></ul><ul><li>Once a country to enter is identified, Through Market research needs to be done </li></ul><ul><li>In New markets, the best market research is subjective in nature as hidden factors such as country of origin effects, consumer preferences to local products & other intangibles are not known. </li></ul><ul><li>Consultants & research firms help, so use them! </li></ul>

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