analyzing global industries trevor hunter king’s university college
TRANSCRIPT
Analyzing Global Industries
Trevor HunterKing’s University College
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Analyzing Global Industries
• Different countries have different comparative advantages
• Comparative advantage is relative – what is a benefit to one firm may not be a benefit to another:– Swiss are known for excellence in watch-making – this is
no benefit to car manufacturer
• Firms must understand how to determine relative comparative advantage that it can leverage – the fit between firm needs and what the country offers which can differ depending on each
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Analyzing Global Industries
• Internationalization can take the form of A LOT of different operations (more on this later)
• What the firm needs depends upon why it is going, but more importantly, what it is going to do there
• Fit comes from being able to get what the firm needs to do what it does from a given country
Analyzing Global IndustriesEconomic
Societal
Political
Technological
Threat ofnew
entrants
Bargainingpower of
buyers
Threat ofsubstitutes
Bargainingpower ofsuppliers
IndustryRivalry among
existing competitors
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Analyzing Global Industries
• Understanding what the firm can get from the country involves understanding the Market and the Industry Market•What is the structure?•Who are the customers?•Where are they located?•What do they want?•What has to be done to get them to choose us?
Industry•Who are the competitors? •Who is strong? •Who is weak?•What do they do?•Where are they located?•What do they do there?
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Market Stucture
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Market Structure
• Structure can be influenced by the cost to operate in given industry– High costs generally lead to monopoly, low to
competitive
• Structure influences firm behaviour in terms of:– Pricing– Product differentiation
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Market Structure
• Market structure affects a nation’s relative comparative advantage:– Competitive: May or may be difficult to
differentiate but might provide acquisition target– Monopoly: May be impossible to enter but
monoplolist could be a great partner– Oligopoly: Will face strong but limited competition
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Market Concentration
• Measure of the distribution of power among competing firms in an industry– High levels: power is concentrated in few hands– Low levels: power is more evenly distributed among
firms
• Can be measured using:– sales– output– value added– assets– employment
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Market Concentration
• Concentration Ratio: Taking the share of the largest firms (as many as useful) based on whatever measure you deem important (i.e. sales, output etc.)
• CR2 = Concentration ratio of the 2 largest firms
• CR10 = Concentration ratio of the 10 largest firms
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Market Concentration
• Herfindahl-Hirschmann Index: Calculated by summing the squares of the individual market shares of all the firms in the market
• More accurate because it includes all firms, but complete data are needed
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Market Concentration
• Important to know to judge the strength of competitors and likelihood of success when entering markets or to help decide who would be a good partner or supplier to help gain a competitive advantage.
• This is a domestic market measure
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Porter’s Five ForcesThreat of
newentrants
Bargainingpower of
buyers
Threat ofsubstitutes
Bargainingpower ofsuppliers
IndustryRivalry among
existing competitors
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Porter’s Five Forces
• Model is used to analyze the competitive environment of a given country’s industry
• Helps firms determine if the industry is one in which they can or would like to compete (if they are looking to expand their market), and if it is a good place to operate (if they are looking for cost reductions)
Industry Rivalry
• Competition can be based on policies relating to:– Price (but cartels and price leadership)– Product– Promotion– Place
• Or strategies relating to:– mergers & acquisitions – innovation
Industry Rivalry
• Competition intensity is a proxy for how hard it will be to find a market and/or how innovative the firms in the industry may be
• Competition more intense when:– large number of competing firms– firms are of similar size/market share– market is growing slowly– low product differentiation– capacity added in large increments
New Entrants
• New entrants increases the number of firms in the industry and increases capacity and competition intensifies reducing the likelihood of sustainable profits
• If there have not been new entrants to the industry for a while, it may be a monopolistic or oligopolistic situation
• Either could be good or bad depending upon the firm’s needs (ME or E)
New Entrants
• Likelihood of new entrants depends on nature and height of barriers to entry:– absolute cost barriers– product differentiation– economies of scale– excess capacity– reaction of established firms– extent of vertical integration– contracts with suppliers or customers
Buyers
• Whether customer buying power is a good or bad thing depends upon what position you will have in the industry– If you are a Seller = bad: You will not have the
power to set prices and will face many expectations that may reduce your profit
– If you are a Buyer = good: Your costs will be lower because you will be able to push around your suppliers
• You want to enter industries with high customer power if you are entering the country due to Eff. reasons
Buyers
• Customers have more power when: – number of customers is large – customers see products as differentiated– customers earning good profits – products are not significant % of buyer's costs– customers unable to integrate vertically
backwards
Suppliers
• Whether supplier buying power is a good or bad thing depends upon what position you will have in the industry– If you are a Supplier = good: You will be able to
set prices resulting in high profits– If you are a Buyer = bad: Your costs will be higher
which will negatively affect profit• You want to enter industries with high
supplier power if you are entering the country due to ME reasons
Suppliers
• Suppliers have more power when:– supply industry has large number of firms– suppliers sell undifferentiated products– suppliers are threatened by ground-breaking new
products i.e. substitutes– suppliers unable to integrate vertically forward– firms are not important customers to suppliers
Substitutes• Firms not only face competition from others in their
industry but also from firms that offer similar products/services that are different but provide the customer the same or a better outcome for a lower price or with more ease of use or acquisition
• The threat of losing customers comes from how easy it is for them to switch to a substitute and how similar the outcome will be
• Countries with lots of potential substitutes are good if you are there for E but bad if you are there for ME
Substitutes• Substitute goods or services:
– produced by a different industry– carrying out the same function for customers – but providing the service in a different way
• Examples:– trains and planes– music downloads and CDs– tin cans, glass bottles, plastic containers– TV reception – antenna, cable, satellite
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The Business Environment
• The external environment comprises external influences that affect a firm’s decisions and performance
• Affected by complexity and turbulence • Changing faster and becoming less predictable
due to: – Increased globalization– Technology innovations– Rise of the BRIC’s
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The Business Environment
• Complexity:– Increased diversity of customers, suppliers, rivals
and the PEST environment with which firms must interact
– Makes it more difficult to understand and evaluate information and develop appropriate responses hence, increased risk
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The Business Environment
• Turbulence:– Rapid, unexpected change– Increased due to the widening and deepening of
PEST forces’ interconnections– An occurrence in one country is no longer isolated
there, due to interconnections, it will have larger and longer repercussions (i.e. the tsunami in Japan resulting in Honda plant shutdowns in the USA)
The Business EnvironmentThe expanded environment that comes from globalization presents opportunities and threats to firms:
Opportunities:• Access to larger markets –
ME• Access to lower factor costs
– E• Access to innovations• Access to more favourable
regulatory environments
Threats• Currency risks (inflation,
devaluations) that reduce profits
• Political risk, expropriation of assets, unfavourable regulations
• Supply chain disruptions• Wars, natural disasters
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The Business Environment
• Analyzing the business environment to determine which country (if any) has a relative comparative advantage and what aspect of internationalization may affect the firm – this is key to being prepared and developing strategy
• Innumerable factors can create issues for the firm that can cause problems or provide opportunities
Issues Management
• What are issues?– Concerns, problems, claims made or held by
internal or external stakeholders– They may be real or imagined but both have the
power to create problems for the firm
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Issues Management
• Dealing with issues in the external environment that can affect the internal operations of the firm.
• The firm has a responsibility to be involved with and aware of specific public issues that may directly or indirectly affect the firm.
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Nature of Public Issues
• Arise out of a problem affecting many interests in society and the need for collective action to deal with it successfully.
• Many parties involved, often with differing perspectives and agendas.
• Socially motivated – requires socially responsive behaviour from the firm.
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Nature of Public Issues
• Complexity of public issues increases for MNC’s:– Number of stakeholders increased– Differences in perspectives exacerbated by
cultural and/or language differences– Number of locations– Distance, infrastructure and communications
problems
Stakeholders
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The Business Environment
• Six steps for an Issue Preparedness System:1. Identification2. Assess the urgency and likelihood of occurrence3. Research and Analysis4. Identify relevant stakeholders, their importance
and the impact on/from each5. Strategy development6. Strategy implementation
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Issue Identification
• Scanning the environment to discover developing trends and issues that may affect the firm.
• Involves people at various levels of the firm – those on the front lines often know more than management.
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Issue Identification
TheFirm
Economic
Political
SocialTech
CorporateResearch
“State ofthe Art”
Competitor’sResearch
MarketForecasts
GDP
Legislation
Business/Govt.Relations
PressureGroups
DemographicChange
NewLifeStyles
ChangingValues
ConsumerSpending
Source: Wilson, 1974
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Issue Identification
• From information, forecasts for several years out must be made and monitored and adjusted.
• Information can be used to screen out non-issues, long and short term impacts and severity of affect – more information the better.
• Want to identify issues and problems at early stage of life cycle – more time to respond.
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Research and Analysis
• Analyzing issues with highest priority.• Must involve numerous people from affected
functional area groups.• Consultants often useful here (academics,
etc.).
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Evaluation of Issues
Impact on Company
High Medium Low
High
Medium
Low
ProbabilityofOccurrence
High Priority
Medium Priority
Low Priority
Source: Brown, 1979
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Stakeholder Mapping
Minimal effort
Keep satisfied
Key players
Keep informed
Level of interest
Level of power
high
low
low high
Source: Mendelow cited in Johnson, G., Scholes, K, and Whittington, R. (2009)
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Research and Analysis
• Typical questions to ask:– What is the scope of the issue in terms of
potential impact? Will it affect the whole company or parts? Will it affect the environment in which the firm operates?
– Who are the main stakeholders, what are their interests and what relationship do we have to them?
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Research and Analysis
• Typical questions to ask:– How rapidly is the issue developing or changing?
What stage is it at and where will it be when a strategy is developed?
– Is the issue likely to become part of formal government policy in the near future? How will this affect the firm’s operations?
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Research and Analysis
• It is crucial that priorities be made since the firm cannot do thorough analysis on every issue – save limited resources.
• Must determine alternative company positions with respect to the issue and evaluate the pros and cons of taking each.
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Strategy Development
• The “best” alternative.• Must reflect the best thinking and be based
on solid research.• Needs to fit with the resources and
capabilities of the firm while addressing the issue.
• Needs to address the likelihood, impact and affect on stakeholders
Strategy
GOALS STRATEGY
INTERNAL ANALYSIS
EXTERNAL ANALYSIS
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Strategy
ImplicationsFor the firm(3-5 yrs.)
Forecasts of Long-TermMacro Trends (AlternativeScenarios) (5-10 yrs.)
Identification of Short-TermMicro Events/Developments(<5 yrs.)
Strategy
Firm Resources
Adapted from Wilson, 1979
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Implementation
• The strategy must be communicated to the appropriate people.
• Develop specific tactics for changing corporate behaviour, influencing public opinion, lobbying government, developing a court case – depending upon the chosen strategy.
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Implementation
• Need to develop internal and external communication network.– Internal – information needs to reach the
appropriate actors– External – the stakeholders need to know how
and what the firm is doing to meet their expectations in order to be deemed legitimate
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Evaluation of Strategy
• Systems must be designed to evaluate the success and effectiveness of the strategy.
• Points of reflection and direction change need to be built in to provide flexibility due to learning and experience.
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Typical Strategic Responses
• Four typical responses by firms when they encounter issues:
1. Reactive2. Accommodative3. Proactive4. Interactive
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Reactive
• Usually firms make no attempt to anticipate public issues, but use all their resources to fight change blocking any resolution to the issue that might change their corporate behaviour.
• Seat belts in the 1970s
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Accommodative
• Businesses adapt to changes involved with a public issue as best as it can and attempts to get on with business.
• Simply goes with the flow as opposed to fight something that might hurt its business or capitalize on issue to improve its business.
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Proactive
• Businesses develop a mechanism to anticipate issues that will affect its business the most.
• Firms try to influence the issue by trying to change the environment in which the issue arises, thereby eliminating the issue altogether before it emerges.
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Interactive
• Businesses recognize the legitimacy of the issue and the forum for public issue institutionalization.
• Firms work within the institutional framework (engage in debate etc.) to put forth their perspective to get a “win-win” situation through negotiation and participation.
Assessing Country Attractiveness
Trevor HunterKing’s University College
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Assessing Country Attractiveness
• Firms tended to enter markets that are both culturally similar and geographically proximal
• In the past 20 years, due to lower entry barriers, improved technology and globalization, many firms are “born global” - 25% of sales from outside their home market in less than 3 years
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Assessing Country Attractiveness
• Many companies are moving right to FDI• FDI – Foreign Direct Investment: the
establishment or acquisition of actual physical assets in a foreign country (i.e. production facilities, distribution network) that are owned by the firm
• Costly, risky and a full embracing of internationalization
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Assessing Country Attractiveness
• Reasons to engage in FDI:– Market Access: Despite the growth of free trade,
entry barriers (tariffs, local content requirements, taxes etc.) still remain that discourage imports – ME
– Lower Production Costs: Offshoring may provide production factors at a reduced cost increasing profits – depends on productivity levels, transportation costs etc.
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Assessing Country Attractiveness
• Reasons to engage in FDI:– Natural Resources: Deposits are not equally
distributed around the world, nor are they easily moved
– Competition from DC MNC’s: Firms don’t want to be later movers to developing countries
– Other Assets: Management talent, innovation that are located elsewhere
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Assessing Country Attractiveness
• What makes a country attractive? - Relative Comparative Advantage– Variations in economic environment– Growth rates– Political stability– Levels of disposable income– Available resources– Government incentives– Competition
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Assessing Country Attractiveness
• These days, in order to gain high rates of return, higher risk is involved
• Most of the untapped markets are in politically unstable, low income countries (BRIC, Africa, Southeast Asia)
• Entering these countries requires analysis and screening to see if there is a reason to go, what to expect and how to mitigate risks
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Assessing Country Attractiveness
• Professional sources– IMD World Competitiveness Yearbook– Economic Intelligence Unit
• Free Resources– Online Resource Centre– GlobalEDGE– World Economic Forum– World Bank
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Assessing Country Attractiveness
• Organizations– IMF– OECD– UNCTAD– WTO– CIA
• Problems with data– Out of date or unavailable information– Political manipulation– Definitional problems– Informal/Shadow economies– Conversion to a common currency
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Assessing Country Attractiveness
INITIAL SCREENING
ASSESS GENERAL MARKET OR SITE POTENTIAL
ASSESS GENERAL BUSINESS ENVIRONMENT
PRODUCT/SERVICE MARKET ASSESSMENT
PRODUCTION SITE ASSESSMENT
UNDERTAKE RISK ANALYSIS
SELECT MARKET OR SITE
Initial Screening
• First step is to eliminate countries that will not work by determining if there are basic levels of demand (ME) or required resources (E)
• Data collected from sources can provide guidance
Market Potential
• Develop indicators to assess the potential market – not just the size of the market but the potential for sales
• Market indicators:– GDP, GDP per capita, growth rate, trade stats– Market size and growth rate– Quality of demand - Ownership of cars, TVs,
telephones, computers, energy usage, internet usage etc.
Site Potential
• Companies that are intending to produce abroad need to see if there are appropriate levels of production factors at the appropriate cost– Access to raw materials, labour, finance– Access to energy, communications and transport– Quality and cost of resources– Country risk
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Assess the General Business Environment
• Political and Legal Environment– Government regulation
• Restrictions• Taxes• Incentives
– Legal Regime • Employment law• Health and safety law• Environmental policy
– Bureaucracy
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Economic and Financial Environment
• Economic and financial conditions will affect a firm’s profits from a given country– Inflation– Interest rates– Exchange rates– Credit availability– Financial stability– Rates of return
Socio-cultural Environment
• Cultural distance can make it difficult to operate the way you want – could lead to ethical issues. Cross-cultural problems are often the greatest barrier to gaining a competitive advantage operating in a different country:– Language– Religion– Culture/Customs – Demographic trends– Health/Education– Urbanisation– Labour force availability and skills– Wage levels/Working hours– Unionisation– Environmental concerns
Technological Environment
• A weak infrastructure can reduce or eliminate location advantages:– Science and technology infrastructure– Patent protection– Road network/Public transport– Telephony/Internet capacity– Air transport– Ports– Power supply and reliability
Product /Service Market Assessment
• Not all countries offer the “right” location to sell products/services – ME driver. The market characteristics must be assessed:– Size and growth rate of market– Major competitors– Prices, marketing, and promotions of competitors– Distribution networks– Marketing strategies
Product /Service Market Assessment
• Not all countries offer the “right” location to sell products/services – ME driver. The market characteristics must be assessed:– Marketing strategies– Production capacity– Cost structure– Entry– Substitutes– Power of buyers and sellers
• Even if from a competitive standpoint things look good, the country’s relative comparative advantage may be lower depending on:– Local standards and regulations– Value of imports and exports of the
product/service– Tariffs and other trade regulations– Local cultural factors
Product /Service Market Assessment
Production Site Assessment
• Entering a country to produce goods (Eff.) requires determining if the efficiencies sought are possible:– Start-up procedures/ ownership regulations– Availability, cost and quality of resources– Infrastructure– Financial system– Investment incentives
Country Risk
• The possibility of the business environment changing in such a way that reduces or eliminates a country’s relative comparative advantage
• Predictable vs. unpredictable risk• Cannot eliminate risk:
• Plan for it - Scenario planning• Hedge against it• Exit strategy
Country Risk
• Changes in political leadership/philosophy• Civil unrest• Corruption/organized crime• Weak leadership/governance• Reliability of the infrastructure• Supply chain disruption• Economic risks• Wars/terrorism/piracy
Country attractiveness grid
Factor Country A
Country B
Country C
Market potential
Size of market 4 3 3Growth rate 2 3 4
…….
Ease of doing business
Starting a business 3 3 4
Getting credit 3 2 3
………
Risk
Political risk 1 3 2
Supply chain disruption 2 3 2
………….