Foreign Entry – Business Considerations

Business Conditions & its Impact

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.

Market Research is the necessary first step before expanding abroad.

Key PointsGlobal market research involves issues like:• Current Market potential• Future Market Growth Estimates• Political environment• Business Environment• Trade Bloc Membership• Competitive Environment• Entry Barriers

Political risks evaluation is the first level Go or No-Go decision maker

Political Risk Factors:1. General Instability

• Revolution, Coup, Riots, Violence, Terrorism etc.2. Expropriation

• Asset seizure, Nationalization, Contract Revocation 3. Operations

• Import Restrictions, Local content Requirements, Taxes Export Requirements

4. Finance • Exchange Rate Risks, Limitations on repatriations of

Profits, Investments limitations etc

Political Risks

• Once Political risks are evaluated, marketing basics can be considered

• US Government Department of Commerce releases Political Risks Assessment data for companies

• Cultural also acts as Political risks, Often times Cultural factors are not visible in foreign markets– E.g: KFC’s controversy in India

• Financial stability of a country can be assessed from the investment rating for that country– Moody’s, Standard & Poor’s

Buying Political Risk Information

Several independent research companies sell political risk analysis reports. A typical report consists of:– Highlights– Comment & Analysis– Databank: History of key domestic & international

economic indicators– Forecast Scenarios: A 5 year & 18 month forecasts based on

various political scenarios– Political Framework: The political system, Policies & key

politicians in the country– Background Information of that Country

Basic Environment Factors• Physical Environment

– Climate, Weather, Propensity for Natural disasters etc determines consumption & demand factors

• Socio-Cultural Factors– Religion, Culture, Society, Education levels

• Economic Environment– Income levels, Disposal Income, Saving rate, GDP, etc

• Regulatory Environment– Local Government rules & regulation which enable or inhibit

certain business practices

Macro Segmentation

• There are about 200 countries to invest in!!• Macro Segmentation means grouping countries with

similar characteristics which are important for marketing purposes. – Socio-demographic data, Economic data– Affiliation to a Free Trade Area– GDP, GNP, Economic growth– Culture, Political systems

• Countries are grouped together for Cluster Analysis, A simplified method of analyzing a country.

Cluster of Countries• Its easier to cluster or group countries based on

growth potential & Competition.• Final selection stage requires secondary data,

subjective judgments and experiences during visits to that country.

• Often times managers use “Guesstimate” for missing data or other information

• It is good to do sensitivity analysis for various competitive scenarios

Researching Competitors• Local markets abroad will have competitors, both

Domestic & Global.• Competitive landscape must be analyzed• SEC 10K or similar disclosure data• Information from suppliers, customers & middlemen

for competitors• Key strengths of foreign competitors are not easily

reveled & remains hidden– E.g: Keiretsu network in Japan

Bureaucratic – Business Relationship

• De-Regulation, Trade liberalization & Privatization of Industry has led to chaotic conditions. Forecasting the competitive environment in such countries is tough

• In most countries, Bureaucratic-Business relationships act as a strong business advantage for the entrenched players

• Telecommunications, Healthcare, Defense, Broadcasting media sectors are highly regulated in most countries. – Rules always favor Local businesses

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

Special Criteria

• Competitive Factors– Follow your competition into a new country or preempt

competition to gain first mover advantage• Learn from Leading Markets

– Enter a leading market to learn from competition, customers, suppliers

– E.g: Japanese Car manufactures in Germany, Philips in Japan

• 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

Getting Country Data• Primary Sources

– WTO, OEDC, World Bank, IMF reports– US Department of Commerce– Foreign Consulates– Trade associations

• Primary data is usually available through websites• Useful for preliminary analysis, to short list

countries for consideration

Country Reports

• Secondary Sources : A large number of private market research companies collect, compile and sell business data about various countries.

• Popular ones are:– ACNielsen Taylor Nelson Sofres, Dentsu Research Inc,

United Information Group, NFO worldwide, Lexus-Nexus, Dun & Bradstreet

• Private agencies provide more in-depth data analysis which is useful in making final decision.

• Private agencies also provide in-depth Market research reports – Market size, potential, attractiveness etc

Forecasting Foreign Sales

• Market Research should give both market size and market share that can be achieved in foreign country.

• Often historical data for a product in foreign country may not be available. Economic & demographic data may not be sufficient.

• “Bootstrap” forecast is then done & is based on past data from other markets (such as home building to predict sales of appliances)

• Often needs innovative methods to forecast sales in foreign markets

Mazda’s Shorthand Forecast• Developed by Mazda in 1981• First projected industry sales is polled from various

sources• Second, Market share for imports is polled from the

same source• Third, Japanese share among imports is estimated• Finally, the company’s share is estimated• Sales = Industry sales x Market Share• Short cut method is not accurate & not applicable for

all industries. Trade barriers, Product life cycle & other factors must be considered

Stages in Product Lifecycle

1 2 3 4 5 6

Legend

1: Pioneer2: Early Adopter3: Early Majority4: Late Majority5: Late Adopter6: Laggards

Sales

Time

Product Life Cycle• Sales forecast also depends on Product Life cycle.

– In early stages, little data is available for statistical forecasting.– In later stages when past sales and market share data are

available more sophisticated methods can be used• Three types of forecasting techniques can be used in

early stages:– “Build-up” Method– Forecasting by Analogy– Judgmental Method

Judgmental Forecasts• Jury Technique

– Expert Pooling– Panel Consensus– Delphi method

• Time Series Extrapolation• Regression-Based Forecasts

– The Size Component– Willingness to buy– Ability to Buy– Sales per Customer– Market Sales

Forecasting Market Share• Predicting Competition• Identifying Competitors• Domestic Competitors• Foreign Competitors

Closing Thoughts• Foreign Entry decisions involve country selection

based on political risks, business environment, and rules and regulations of trade

• Once a country to enter is identified, Through Market research needs to be done

• 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.

• Consultants & research firms help, so use them!