global market opportunity assessment

Global MarketOpportunity Assessment Global MarketOpportunity Assessment

c h a p t e r

Learning Objectives

In this chapter, you will

learn about:

> Estimating Market Demand in Emerging Marketsand Developing CountriesEstimating the demand for products or services in emerging markets and developingeconomies is a challenging task for managers. These countries have unique com-mercial environments and may lack reliable data, market research firms, andtrained interviewers. Consumers may consider research activities an invasion of pri-vacy, and some survey respondents may try to please researchers by telling themwhat they want to hear, rather than providing fully honest and accurate information.

Just three emerging markets—China, India, and Brazil—have a combined GDPof more than $15 trillion, significantly more than the United States. Africa is amongthe biggest worldwide markets for mobile phone sales, growing to over 100 millionusers in just a few years. While most Africans can’t afford a cell phone, the trend illus-trates an often-overlooked point: developing economies are huge markets for productsand services. For instance, Unilever and Procter & Gamble are among the companiesthat market shampoo and other necessities in India. Narayana Hrudayalaya is anIndian firm that sells health insurance to countless customers for pennies per month.

Estimating market demand in such countries requires managers to be flexibleand creative. Let’s consider the case of two firms trying to estimate the demand forwallpaper and adhesive bandages (band-aids) in Morocco.

12

344

1. An overview of global marketopportunity assessment

2. Analysis of organizationalreadiness to internationalize

3. Assessment of the suitability ofproducts and services forforeign markets

4. Screening countries to identifytarget markets

5. Assessment of industry marketpotential

6. Selection of foreign businesspartners

7. Estimating of company salespotential

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 344

In Morocco, the wealthier people live in villas or condominiums, which arepotential target markets for sales of wallpaper. Import statistics are often not veryhelpful, because the government usually records wallpaper imports by weight andvalue. Companies sell wallpaper by the roll, and different qualities and designs willhave different weights. Such information is of little use in estimating the number ofmodern households that will buy wallpaper.

One wallpaper company used three approaches to estimate demand for wallpa-per. First, managers used a recent study that reported the number of water heaterspurchased in Morocco. Managers assumed that if households purchased this impor-tant, “modern” convenience, they also would likely want to purchase wallpaper. Sec-ond, managers accessed government statistics that disclosed the level of domesticwallpaper sales, discretionary income by type of household, and home constructiondata. Third, managers surveyed the lifestyle of a sample of local consumers. Theirfindings revealed that Moroccans usually shop for wallpaper as a complementarydecoration to fitted carpets. Among married couples, it is generally the wife whodecides the style and decoration of the home. Customers tend to be well-to-do; theyinclude professionals, merchants, and high-ranking administrators. Each of theseapproaches provided this wallpaper company with separate estimates of its market

345

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 345

346 Chapter 12 Global Market Opportunity Assessment

size for wallpaper. The company then triangu-lated a single estimate. Specifically, the companywas interested in the degree to which the threeseparate estimates converged. Researchersblended their own judgment into these findings inorder to ultimately arrive at a reasonably reliableestimate of demand for wallpaper.

In the case of adhesive bandages, avail-able data revealed that 70 percent of demandfor pharmaceutical items—including adhesivebandages—was met by wholesalers concen-trated in Casablanca, Morocco’s capital city.The country imported all its adhesive ban-dages. Demand was quickly growing, due torapid population growth, free hospitalizationand medication for the needy, and reimburse-ment programs for medical and drug expenses.Although the government published import sta-tistics, the information was confusing, becausedata on band-aid imports was mixed togetherwith data on other types of adhesives. More-over, the band-aid data was superficial andincomplete. Finally, widespread smuggling andgray-marketing of adhesive bandages throughunofficial distribution channels complicatedestimates of demand.

In an effort to gather more information,researchers interviewed band-aid sales per-

sonnel from firms such as Johnson & Johnsonand Curad. Their findings revealed that con-sumers tend to be price sensitive when buyingband-aids, and that they rely on doctors andpharmacists to recommend well-known brands.Researchers eventually arrived at a reason-able estimate of band-aid sales by assimilat-ing data from various sources. They visitednumerous retail stores to ask about sales, pre-vailing retail prices, competitive brands, andconsumer attitudes toward prices and brands.Researchers also tallied statistics from theUnited Nations Development Program andother aid agencies that donate medical sup-plies to developing countries.

As you can see, estimating demand in for-eign markets is challenging, but managers canovercome the challenges through creative use ofmarket research. <Sources: Amine, Lyn and S. Tamer Cavusgil. (1986). “Demand Esti-mation in a Developing Country Environment: Difficulties, Tech-niques, and Examples,” Journal of the Market Research Society 28(1): 43–65; Cavusgil, S. Tamer, P. Ghauri, and M. Agarwal. (2002).Doing Business in Emerging Markets: Entry and Negotiation Strate-gies. Thousand Oaks, CA: Sage; Prahalad, C. K. (2005). “Aid Is Notthe Answer,” The Wall Street Journal Aug 31, p. A8; Wilkes, V. (2005).“Marketing and Market Development: Dealing with a Global Issue:Contributing to Poverty Alleviation,” Corporate Governance 5 (3):61–69; U.S. Commercial Service and the U.S. Department of State.(2005). Country Commercial Guide Morocco Fiscal Year 2005,retrieved at www.buyusainfo.net.

Global market opportunityFavorable combination ofcircumstances, locations, ortiming that offers prospects forexporting, investing, sourcing, orpartnering in foreign markets.

An Overview of Global Market OpportunityAssessment

The choices managers make determine the future of the firm. Making goodchoices depends on objective evidence and hard data about which products andservices to offer, and where to offer them. The more managers know about anopportunity, the better equipped they will be to exploit it. This is particularly truein international business, which usually entails greater uncertainty and unknownsthan domestic business.1

Central to a firm’s research is identifying and defining the best businessopportunities in the global marketplace to pursue. Global market opportunityrefers to a favorable combination of circumstances, locations, or timing that offersprospects for exporting, investing, sourcing, or partnering in foreign markets. Invarious foreign locations, the firm may perceive opportunities to: sell its productsand services; establish factories or other production facilities to produce its offer-ings more competently or more cost-effectively; procure raw materials, compo-nents, or services of lower cost or superior quality; or enter into collaborativearrangements with foreign partners. Global market opportunities can enhancecompany performance, often far beyond what the firm can normally achieve in itshome market.

CAVUMC12_344-379hr 10/15/07 11:27 AM 46

In this chapter, we discuss six key tasks that the manager should perform todefine and pursue global market opportunities. Exhibit 12.1 illustrates the objec-tives and outcomes typically associated with each task. Such a formal process isespecially appropriate in pursuing a marketing or collaborative venture opportu-nity. As the exhibit shows, the six key tasks are:

1. Analyze organizational readiness to internationalize.

2. Assess the suitability of the firm’s products and services for foreign markets.

3. Screen countries to identify attractive target markets.

4. Assess the industry market potential, or the market demand, for the prod-uct(s) or service(s) in selected target markets.

5. Select qualified business partners, such as distributors or suppliers.

6. Estimate company sales potential for each target market.

In carrying out this systematic process, the manager will need to employobjective selection criteria by which to make choices, as listed in the final column ofExhibit 12.1. Let’s examine each task in detail.

Task One: Analyze OrganizationalReadiness to Internationalize

Before undertaking a substantial investment in international business, whether itis launching a product abroad or sourcing from a foreign supplier, the firm shouldconduct a formal assessment of its readiness to internationalize. A thorough eval-uation of organizational capabilities is useful, both for firms new to internationalbusiness and for those with considerable experience. Such a self-audit is similar toa SWOT analysis (that is, an evaluation of the firm’s Strengths, Weaknesses,Opportunities, and Threats). Here, managers peer into their own organization todetermine the degree to which it has the motivation, resources, and skills neces-sary to successfully engage in international business.

Concurrently, management also examines conditions in the external businessenvironment by conducting formal research on the opportunities and threats thatface the firm in the markets where it seeks to do business. Here, managers researchthe specific needs and preferences of buyers, as well as the nature of competing prod-ucts, and the risks involved in entering foreign markets.

Management’s goal in analyzing organizational readiness to internationalize isto figure out what resources the firm has and the extent to which they are sufficientfor successful international operations. In this way, managers assess the firm’sreadiness to venture abroad. During this process, management considers the firm’sdegree of international experience, the goals and objectives that management envi-sions for internationalization, the quantity and quality of skills, capabilities, andresources available for internationalization, and the extent of actual and potentialsupport provided by the firm’s network of relationships. If it is discovered that thefirm lacks one or more key resources, management must commit necessary person-nel and time before allowing the contemplated venture to go forward.

As an example, consider Home Instead, Inc., a small U.S. firm that providesservices for the elderly who choose to live independently at home but requirecompanionship, assistance with meal preparation, and help with shopping andhousekeeping. Following an assessment of its readiness to internationalize, man-agement perceived substantial international opportunities—particularly inJapan—but also recognized deficiencies in certain key capabilities. So, the com-pany hired Ms. Yoshino Nakajima, who is fluent in Japanese and an expert on theJapanese market, to be vice president for international development. Ms. Nakajima

Task One: Analyze Organizational Readiness to Internationalize 347

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 347


Task Objective Outcomes Selection criteria

Exhibit 12.1 Key Tasks in Global Market Opportunity Assessment

1. Analyze organi-zational readi-ness to interna-tionalize

To provide an objectiveassessment of the com-pany’s preparedness toengage in international business activity.

A list of firm strengthsand weaknesses, in thecontext of internationalbusiness, and recommen-dations for resolving defi-ciencies that hinderachieving company goals.

Evaluate factors neededfor international businesssuccess:• Relevant financial and

tangible resources• Relevant skills and

competencies• Senior management com-

mitment and motivation

2. Assess the suit-ability of thefirm’s productsand services forforeign markets

To conduct a systematicassessment of the suitabil-ity of the firm’s productsand services for interna-tional customers.To evaluate the degree offit between the product orservice and customerneeds.

• Determination of factorsthat may hinder productor service market poten-tial in each target market.

• Identification of needsfor the adaptations thatmay be required for ini-tial and ongoing marketentry.

Assess the firm’s productsand services with regard to:• Foreign customer charac-

teristics and requirements• Government-mandated

regulations• Expectations of channel

intermediaries• Characteristics of com-

petitors’ offerings

3. Screen countriesto identify targetmarkets

To reduce the number ofcountries that warrant in-depth investigation aspotential target markets toa manageable few.

Identification of five to sixhigh-potential countrymarkets that are mostpromising for the firm.

Assess candidate countriesthat the firm may enterwith regard to:• Market size and growth

rate• Market intensity (that is,

buying power of the resi-dents in terms of incomelevel)

• Consumption capacity(that is, size and growthrate of the country’s middle class)

• Country’s receptivity toimports

• Infrastructure appropri-ate for doing business

• Degree of economic freedom

• Political risk

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 348

Task Objective Outcomes Selection criteria

Task One: Analyze Organizational Readiness to Internationalize 349

4. Assess industrymarket potential

To estimate the most likelyshare of industry saleswithin each target country.To investigate and evaluateany potential barriers tomarket entry.

• 3 to 5-year forecasts ofindustry sales for eachtarget market

• Delineation of marketentry barriers in industry

Assess industry marketpotential in the target coun-try by considering:• Market size, growth

rate, and trends in theindustry

• The degree of competi-tive intensity

• Tariff and nontariff tradebarriers

• Standards and regula-tions

• Availability and sophisti-cation of local distribution

• Unique customer require-ments and preferences

• Industry-specific marketpotential indicators

5. Select qualifiedbusiness partners

To decide on the type offoreign business partner,clarify ideal partner quali-fications and plan entrystrategy.

• Determination of valueadding activitiesrequired of foreign business partners

• List of attributes desiredof foreign business partners

• Determination of value-adding activitiesrequired of foreign business partners

Assess and select interme-diaries and facilitatorsbased on:• Manufacturing and mar-

keting expertise in theindustry

• Commitment to theinternational venture

• Access to distributionchannels in the market

• Financial strength• Quality of staff• Technical expertise• Infrastructure and facili-

ties appropriate for themarket

6. Estimate company salespotential

To estimate the most likelyshare of industry sales thecompany can achieve, overa period of time, for eachtarget market.

• 3 to 5-year forecast ofcompany sales in eachtarget market

• Understanding of fac-tors that will influencecompany sales potential

Estimate the potential tosell the firm’s product orservice, with regard to:• Capabilities of partners• Access to distribution• Competitive intensity• Pricing and financing• Market penetration

timetable of the firm• Risk tolerance of senior

managers

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 349

launched the franchise in Japan, where it captured substantial market share. Next,management tapped into the global network of 1,700 trade specialists of the U.S.Commercial Service, a government agency that provided the firm with leads andcontacts in countries it had identified as the best target markets. Now Home Insteadhas numerous franchises in Australia, Canada, Ireland, and Portugal. Its interna-tional operations are thriving.2

A formal analysis of organizational readiness to internationalize requiresmanagers to address the following questions:

• What does the firm hope to gain from international business? Various objectivesand goals are possible, including increasing sales or profits, following keycustomers who locate abroad, challenging competitors in their home mar-kets, or pursuing a global strategy of establishing production and market-ing operations at various locations worldwide.

• Is international business expansion consistent with other firm goals, now or inthe future? The firm should manage internationalization in the context ofits mission and business plan. Over time, firms have various opportuni-ties. Managers should evaluate one venture against others that might beundertaken in the domestic market to ensure that internationalization isthe best use of firm resources.

• What demands will internationalization place on firm resources, such as manage-ment, personnel, and finance, as well as production and marketing capacity?How will the firm meet such demands? Management must confirm that thefirm has enough production and marketing capacity to serve foreignmarkets. Nothing is more frustrating to the management team and theinternational channel than not being able to fill orders due to insufficientcapacity. For instance, when Cirrus Logic, Inc., a manufacturer of audiomicrochips, wanted to expand its ability to market chips to internationalcustomers like Bose, LG Electronics, and Sony, it had to increase its man-ufacturing capacity first.3

• What is the basis of the firm’s competitive advantage? Here, managers evaluatethe reasons for the firm’s current success. Firms derive competitiveadvantage from doing things better than competitors. It might be basedon strong R&D capabilities, sourcing of superior input goods, cost-effectiveor innovative manufacturing capacity, skillful marketing, or a highlyeffective distribution channel. It is important to understand what advan-tages the firm has, so that managers can apply these advantages effec-tively in foreign markets.

Managers can use diagnostic tools to facilitate a self-audit of the firm’s readi-ness to internationalize. One of the best-known tools is CORE (COmpanyReadiness to Export), developed by Professor Tamer Cavusgil in the early 1980s (seewww.globalEDGE.msu.edu). CORE has been adopted and used widely by indi-vidual enterprises, consultants, and the U.S. Department of Commerce. SinceCORE has benefited from extensive research on the factors that contribute to suc-cessful exporting, it also serves as an ideal tutorial for self-learning and training.

CORE asks managers questions about their organizational resources, skills,and motivation to arrive at an objective assessment of the firm’s readiness to suc-cessfully engage in exporting. It also generates assessments on both organiza-tional readiness and product readiness. This self-assessment tool helps managersrecognize the useful assets they have and the additional resources they need tomake internationalization succeed. The assessment emphasizes exporting, since itis the typical entry mode for most newly internationalizing firms.

Assessing organizational readiness to internationalize is an ongoingprocess. Managers need to continuously verify the firm’s ability to modify itsproducts and processes to suit conditions in local markets. For example, Levi


CAVUMC12_344-379hr 10/15/07 11:27 AM Page 350

Task Two: Assess the Suitability of the Firm’s Products and Services for Foreign Markets 351

Levi makes tight-fit jeans toaccommodate the Japanesephysique and loose-fitting jeansto accommodate tastes in Islamiccountries.

Strauss is the world’s largest manufacturer oftrousers, notably denim jeans, which are soldworldwide. Countries differ in their tastesand fashions, which creates the need for firmsto adapt products and services. Levi has hadto assess its ability to undertake marketingadaptations in various markets. For example,in Islamic countries, women are discouragedfrom wearing tight-fitting attire, so Levi madea line of loose-fitting jeans. When Levi firstentered Japan, local preferences and thesmaller physique of many Japanese meantthat the firm had to make its famous bluejeans tighter and smaller.

In addition to considering local customs,preferences, and physical makeup, Levi alsoadapts to local regulations. Levi often re-shot TVcommercials in countries such as Australia andBrazil because local regulations insist on domes-tically produced commercials. Differences in cli-mate also necessitate changes; for instance, inhot climates, customers prefer thinner denim inbrighter colors, and shorts. Management hashad to regularly assess the firm’s capacity toaccommodate the adaptations required fornumerous individual markets.4

Task Two: Assess theSuitability of the Firm’sProducts and Services for Foreign Markets

Once management has confirmed the firm’s readiness to internationalize, it nextascertains the degree to which its products and services are suitable for foreignmarkets. Most companies produce a portfolio of offerings, some or all of whichmay hold the potential for generating international sales.

Factors Contributing to Product Suitability forInternational MarketsThere are various ways to gauge the viability of offerings in foreign markets. Theproducts or services with the best international prospects tend to have the follow-ing four characteristics:

1. Sell well in the domestic market. Those products and services that are receivedwell at home are likely to succeed abroad, especially where similar needs andconditions exist. The manager should examine why the product or service isreceived well at home and then identify foreign markets with similar demandrequirements.

2. Cater to universal needs. For example, buyers all over the world demandpersonal-care products, medical devices, and banking services. Internationalsales may be promising if the product or service is relatively unique or hasimportant features that are hard to duplicate by foreign firms.

3. Address a need not well served in particular foreign markets. Potential may exist indeveloping countries or elsewhere, where the product or service does not cur-rently exist, or where demand is just beginning to emerge.

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 351


4. Address a new or emerging need abroad. For some products and services, demandmight suddenly emerge following a disaster or other largescale or emergenttrend. For example, a major earthquake in Turkey can create an urgent needfor portable housing. Rising AIDS cases in South Africa can create a need forpharmaceuticals and medical supplies. Growing affluence in various emerg-ing markets can create a growing demand for restaurants and hospitality ser-vices. Managers need to monitor such trends, so they can be prepared to enterthe right market at the right time.

Key Issues for Managers to Resolve in DeterminingProduct PotentialHere are some of the key questions managers should answer to determine theinternational market potential of a particular product or service:

• Who initiates purchasing? For example, homemakers are usually the chiefdecision-makers for household products. Professional buyers make pur-chases on behalf of firms.

• Who uses the product or service? For instance, children consume variousproducts, but their parents may be the actual buyers. Employees consumevarious products, but their company makes the purchases.

• Why do people buy the product or service? That is, what specific needsdoes the product or service fulfill? These needs vary around the world.For example, Honda sells gasoline-powered generators that consumers inadvanced economies use for recreational purposes; consumers in devel-oping economies may buy these for basic household heating and lighting.

• Where do consumers purchase the product or service? Once the researcherunderstands where the offering is typically purchased, it is useful to visitpotential buyers to find out the extent of their potential interest. Thesestore audits also provide useful information on whether the product orservice must be adapted to specific market needs, as well as how to price,promote, and distribute it.

• What economic, cultural, geographic, and other factors in the target mar-ket can limit sales? Countries vary substantially in terms of buyer-incomelevels, preferences, climate, and other factors that can inhibit or facilitatepurchasing behavior. Managers should investigate such factors and adapttheir offers accordingly.

One of the simplest ways to find out if a product or service holds promise forgenerating international sales is to ask potential intermediaries in the target mar-ket about the potential of a product in their markets. A manager can also reviewimporter or distributor lists, available from government sources, trade associa-tions, or directories online or in libraries.

Data on the extent to which the target country has imported a product over time isalso very useful for understanding current and future potential demand. Data may beavailable from various sources, such as http://export.gov, http://www.stat-usa.gov,or globalEDGE™. The level of exports should be investigated as well, because somecountries, such as Singapore or Hong Kong, are used mainly as a transit point forinternational products and, therefore, may not actually be major users.

Another useful method for determining a product’s marketability is to attendan industry trade fair in the target market or region and interview prospectivecustomers or distributors. Since trade fairs often cover entire regions, such as Asiaor Europe, this approach is efficient and cost effective for simultaneously learningabout the market potential of several countries.

For successful international ventures, most firms focus on offering productsand services that fit its resources and competitive advantages and can be pro-

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 352

duced from existing production facilities with minimal adaptation. The managerstarget those markets that are most likely to accept their offering and which havehigh profit and long-term potential growth.

Task Three: Screen Countries to IdentifyTarget Markets

Screening for the best country to target is a fundamental decision in interna-tional business, whether the firm is engaged in importing, investing, or export-ing. Firms that seek to source from foreign suppliers need to identify countrieswhere capable suppliers are located. Once a firm chooses a particular country, itneeds to ensure that conditions for importing from that country are favorable.For firms looking to make a direct investment in foreign markets, it is best tofocus on countries that promise long-term growth and substantial returns, whileposing relatively low political risk. Finally, exporting firms should target coun-tries with low tariff barriers, steady demand, and qualified intermediaries.

Exporters typically use trade statistics that reveal exports or imports by coun-try and product and allow the researcher to compare the size of the market amongcandidate countries. Statistics on how much of the product is already beingexported to the target market help gauge the market’s viability for accepting salesof the offering. By examining statistics over a period of years, a manager candetermine which markets are growing and which are shrinking. The exporter canpurchase research reports from professional market research consultants that pro-vide descriptions, assessments, and key statistics on particular markets. Forinstance, the U.S. Department of Commerce conducts and publishes numerousmarket surveys, such as The Water Supply and Wastewater Treatment Market inChina, Automotive Parts and Equipment Industry Guide in Europe, and the CountryCommercial Guide for Brazil.

The choice of country markets is particularly important in the early stagesof internationalization. Failure to choose the right markets will not only resultin a financial loss, but the firm will incur opportunity costs as well. That is, bychoosing the wrong markets, the firm ties up resources that it might havemore profitably employed somewhere else. When entry is planned throughforeign direct investment (FDI), choosing the right market is especially critical,because FDI is very costly. As you learned in Chapter 1, FDI is an internation-alization strategy in which the firm establishes a physical presence abroadthrough acquisition of productive assets such as capital, technology, labor,land, plant, and equipment. With FDI entry, the cost of abandoning the mar-ket and terminating relationships can easily exceed millions of dollars.

Some firms target psychically similar countries—that is, countries similar tothe home country in terms of language, culture, and other factors. These countriesfit management’s comfort zone. For instance, Australian firms often choose NewZealand, the United Kingdom, or the United States as their first target marketsabroad. Many choose the United Kingdom rather than France or Italy as their firstEuropean target. The choice is logical, because English is spoken in New Zealand,the United Kingdom, and the United States, and these cultures bear similaritiesto that of Australia. As their managerial experience, knowledge, and confi-dence increase, these firms expand into more complex and culturally distant mar-kets, such as China or Japan.

In the contemporary era, however, firms have become more venturesome as wellas more knowledgeable regarding foreign-market entry. As a result, many target non-traditional, higher-risk countries. The born-global companies exemplify this trend.Ongoing globalization tends to mitigate the foreignness of markets and—thanks toadvances in communication and transportation technologies—have reduced the costand risk of reaching out to culturally distant countries, including emerging markets.

Task Three: Screen Countries to Identify Target Markets 353

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 353


As firms become more know-ledgeable about foreign markets,they are venturing into countrieswith different languages and cul-tures. U.S.-based Motorola sellsmobile phones in Vietnam. TheUnited States imports agriculturaland other products from Vietnam.

When screening countries, it is best formanagers to target markets that are growingrapidly or in which the offered product or ser-vice is relatively new to the market. Markets inwhich there are numerous competitors or inwhich the product is already widely used areunattractive, because existing rivals maystrongly resist the entry of newcomers.

The nature of information necessary forcountry screening varies by product type orindustry. For example, in marketing consumerelectronics, the researcher would emphasizecountries with large populations of peoplewith adequate discretionary income andample energy production and consumption.For farming equipment, the researcher wouldconsider countries with substantial agricul-tural land and farmers who enjoy relativelyhigh incomes. For health care insurance, theresearcher targets countries that have numer-ous hospitals and doctors.

In the process of screening for attractivecountry markets, managers need to monitor arange of economic, political, and cultural fac-tors. These factors affect the internationalbusiness environment in major ways, andpoint to various opportunities and threats that

firms analyze and evaluate. Read the Global Trend feature to learn about a num-ber of current trends that affect the global market environment.

Targeting Regions or Gateway CountriesOften, the firm may target a region or a group of countries rather than individualcountries. Compared to targeting one country at a time, targeting a group of coun-tries is more cost effective, particularly when the markets have similar demandconditions, business regulations, and culture. A good example is the EuropeanUnion, which comprises some 27 countries that are relatively similar in terms ofincome level, regulations, and infrastructure. When entering Europe, firms oftendevise a pan-European strategy that considers many member countries of theEuropean Union, rather than planning separate efforts in individual countries.

In other cases, the firm may target so-called gateway countries, or regional hubs,which serve as entry points to nearby or affiliated markets. For example, Singa-pore has traditionally served as the gateway to southeast Asian countries, HongKong is an important gateway to China, Turkey is a good platform for entering thecentral Asian republics, and Finland provides business-friendly access to the for-mer Soviet Union. Firms base their operations in a gateway country so they canserve the larger adjacent region.

Screening Methodology for Potential Country MarketsWith almost 200 countries around the world, it is neither cost effective nor practi-cal to target all of them. Thus, management must choose markets that offer thebest prospects. There are two basic methods for accomplishing this: gradual elim-ination and indexing and ranking.

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 354

> GLOBAL TREND

Global Macro Trends That Affect International Business

Managers must regularly assessthe long-term trends in itsproduct markets, as well as

shifting aspects of technology andglobalization. Firms succeed whenthey ride these currents—those thatswim against them usually struggle.For instance, in sectors such as bank-ing, telecommunications, and technol-ogy, almost two-thirds of recentorganic growth in western firms (that is,growth from increasing sales) hasresulted from being in the right mar-kets and regions. By identifying andanalyzing key trends, it is possible toforecast long-term directional changesthat affect the firm’s future fortunes.

What current trends are interna-tional managers tracking that will makethe future world very different from theworld of today? A recent study byMcKinsey, a consulting firm, identifiedthe following macroeconomic trendsas transforming the global economy.

Centers of economic activity thatwill undergo a major shift, not justglobally, but also regionally. The loca-tions of global economic activities areshifting due to economic liberalization,technological advances, capital marketdevelopments, and demographicshifts. Today, Asia (excluding Japan)accounts for 13 percent of world GDP,while western Europe accounts formore than 30 percent. By 2025, theseproportions may reverse, as mostglobal economic activity shifts towardAsia. Some industries and functions inAsia—manufacturing and IT services,for example—will be the major benefi-ciaries. Elsewhere, emerging marketsare becoming centers of activity as well.

Need to increase organizationalproductivity. Populations are agingacross the developed countries, mean-ing there are fewer young people towork and pay taxes. This demographicshift requires higher levels of efficiencyand creativity from both the public andprivate sectors. Governments mustperform their services less expen-

sively and with greater efficiency.They will gradually apply private-sec-tor approaches in the provision ofsocial services. Otherwise, there is arisk that aging populations will reducethe overall level of global wealth. Theshift is creating opportunities for firmsin certain product and service sectors,such as finance and health care.

More consumers, especially inthe developing economies. Almost abillion new consumers will enter theglobal marketplace through 2015, aseconomic growth in emerging marketspushes them beyond the thresholdlevel of $5,000 in annual householdincome, a point when people begin tospend on discretionary goods. In theperiod up to 2015, consumers’ spend-ing power in emerging economies willincrease to more than $9 trillion, nearthe current spending power of westernEurope. Consumers everywhere willincreasingly leverage information andcommunications technologies toaccess the same products and brands.These shifts require firms to devisenew products and marketing strate-gies. For example, firms are increas-ingly employing the Internet to reachnew markets and deepen relationswith existing customers.

The shifting talent battlefield.The shift to knowledge-intensive indus-tries highlights a growing scarcity ofknowledge workers. Increasing inte-gration of global labor markets (e.g.,China, India, and Eastern Europe) isopening vast new talent sources.Emerging markets now have tens ofmillions of university-educated youngprofessionals, more than double thenumber in advanced economies. Totake advantage of this trend, firmsincreasingly leverage information andcommunication technologies toemploy well-educated individualslocated in the emerging markets andelsewhere.

Growing demand for naturalresource. As economic growth accel-

erates, especially in emerging mar-kets, use of natural resources will growat unprecedented rates. Demand foroil is likely to grow by 50 percentthrough the year 2025. This shift por-tends new opportunities for firms inthe global energy sector. In China,demand for copper, steel, and alu-minum has tripled in recent years, sug-gesting new opportunities for miningcompanies. Meanwhile, water short-ages are increasingly common in muchof the world. Climate change and thegradual decay of the ozone levelrequire attention. Addressing thesechallenges is costly, and will likely slowgrowth. Innovation in technology, reg-ulation, and the use of resources iscentral to creating a world that canboth drive robust economic growthand sustain environmental demands.

Widespread access to informa-tion. Knowledge is increasingly avail-able to people worldwide. Forinstance, the presence of searchengines such as Google makes seem-ingly limitless information instantlyavailable. Knowledge productionitself is growing. For example, world-wide patent applications have beenrising annually at 20 percent. Compa-nies are applying new models ofknowledge production, access, distri-bution, and ownership.

Managers need to understand theimplications of these macroeconomictrends, along with customer needs andcompetitive developments. In such anevolving environment, the role of mar-ket research and competitive intelli-gence is growing. Managers whoaccount for these trends in their strat-egy development will be best placed tosucceed in the global marketplace.Thinking about these trends will betime well spent for any future manager.

Sources: Davis, I., and E. Stephenson. (2006).“Ten Trends to Watch in 2006,” The McKinseyQuarterly, retrieved January, 2006 atwww.mckinsey.com; Porter, Eduardo. (2003).“Buying Power of Hispanics Is Set to Soar,”Wall Street Journal, April 18, p. B1.

355

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 355

MarketMarket Market Market Consumption

Country Size Growth Rate Intensity Capacity

Rank Index Rank Index Rank Index Rank IndexChina 1 100 1 100 25 23 12 59Hong Kong 24 1 20 23 1 100 13 54Singapore 27 1 18 27 9 59 11 62Taiwan 12 5 6 57 11 57 — —Israel 25 1 12 45 2 79 4 82South Korea 7 12 16 30 5 63 2 99Czech Rep. 23 2 9 48 13 55 3 97Hungary 26 1 24 14 3 76 1 100India 2 44 3 63 22 37 7 77Poland 14 5 27 1 10 58 6 80


Gradual Elimination The firm that applies gradual elimination starts with alarge number of prospective target countries and then gradually narrows itschoices by examining increasingly specific information. As indicated inExhibit 12.1 on pages 348–349, the firm aims to reduce to a manageable fewthe number of countries that warrant in-depth investigation as potential tar-get markets. The objective is to identify five or six high-potential countrymarkets that are most promising for the firm. Research can be expensive. Tosave time and money, it is essential to eliminate unattractive markets asquickly as possible. At the same time, it is wise to be open-minded and con-sider all reasonable markets. For example, targeting developing economieswith a product that is not yet widely consumed may be more profitable thantargeting saturated and more competitive markets in Europe, Japan, andNorth America.

In the early stages, market research proceeds in a stepwise manner, in whichthe researcher follows a funnel approach of obtaining general information first,then specific information next. The researcher initially obtains information onmacro-level market-potential indicators, such as population- or income-relatedmeasures, to identify a short list of countries (perhaps five or six) that representthe most attractive markets. Such broad screening data are readily available fromsources such as globalEDGE ™.

Once managers identify the most promising markets, they employ morespecific and precise indicators to narrow the choices. For example, a managermay use current import statistics of the particular product to determine thepotential desirability of a target market. This information is readily available,because most countries record the flow of imported and exported products tolevy import duties and to determine the value of their own exports. Mostcountries also make these statistics available to international organizations,such as the United Nations (see www.comtrade.un.org/db/) and the Organi-

Exhibit 12.2 Application of Indexing and Ranking Methodology: Emerging Market Potential Indicators, 2007

Note: Only top 10 countries are provided here; consult www.globaledge.msu.edu for the complete list.

Source: globalEDGETM (www.globaledge.msu.edu/ibrd/marketpot.asp).

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 356

Commercial Economic Market Country OverallInfrastructure Freedom Receptivity Risk Index

Rank Index Rank Index Rank Index Rank Index Rank Index16 45 27 1 22 3 13 49 1 1002 97 6 79 2 75 2 90 2 966 83 10 71 1 100 1 100 3 931 100 8 76 5 23 3 87 4 793 94 3 86 4 26 5 63 5 785 90 7 78 10 13 4 65 6 754 91 2 93 9 15 6 63 7 737 78 4 83 8 16 8 62 8 64

25 17 17 44 27 1 16 39 9 558 71 5 82 14 7 9 58 10 46


zation for Economic Cooperation and Development (OECD; www.oecd.org).By analyzing research data and gradually narrowing the choices, theresearcher identifies the one or two most promising markets for further explo-ration.

Indexing and Ranking The second primary method for choosing the mostpromising foreign markets is indexing and ranking, in which the researcher assignsscores to countries for their overall market attractiveness. For each country, theresearcher first identifies a comprehensive set of market-potential indicators andthen uses one or more of these indicators to represent a variable. Weights areassigned to each variable to establish its relative importance: the more important avariable, the greater its weight. The researcher uses the resulting weighted scoresto rank the countries.

This indexing and ranking method is illustrated by the Emerging MarketPotential (EMP) Indicators methodology, developed by the senior author ofthis book, Tamer Cavusgil,5 and featured at globalEDGE™.6 Exhibit 12.2 pre-sents the resulting index. It ranks the emerging markets—some of the world’smost-promising developing countries. The Exhibit highlights a collection ofvariables that are useful for describing the attractiveness of countries aspotential target markets. Exhibit 12.3 defines the variables and relativeweights used in the Exhibit.

Among the variables in Exhibit 12.3, market size and market growth rate areespecially important for measuring market potential.7 They address the ques-tion “Is the market big enough and does it have a future?” If a country’s pop-ulation is large and its per–capita income is substantial, it is probably a goodprospect for international sales. By itself, however, a sizable market is insuffi-cient. The market should also be growing at a stable or substantial rate, par-ticularly in terms of population or income. Countries with robust incomegrowth are desirable targets. For each country, a researcher examines population,

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 357


Variable Definition Weight (out of 100) Example Measurement Indicators

Market size Proportion of the coun-try’s population con-centrated in urbanareas

20 • Urban population

Marketgrowthrate

Pace of industrializa-tion and economicdevelopment

12 • Annual growth rate of commercial energy use• Real GDP growth rate

Marketintensity

Buying power of thecountry’s residents

14 • Per-capita gross national income, based onpurchasing power parity

• Private consumption as a percentage of GDP

Market consumptioncapacity

Size and growth rate ofthe country’s middleclass

10 • Percentage share of middle-class incomeand consumption

Commercialinfrastructure

Ease of access to mar-keting, distribution,and communicationchannels

14 • Telephone mainlines (per 100 habitants)• Cellular mobile subscribers per 100

inhabitants• Paved road density• Internet hosts per million people• Population per retail outlet• Television sets per capita

Economicfreedom

Degree to which thecountry has liberalizedits economy

10 • Trade and tax policies• Monetary and banking policies• Government consumption of economic

output• Capital flows and foreign investment• Property rights• Extent of black market activity

Marketreceptivityto imports

Extent to which thecountry is open toimports

12 • Per-capita imports• Trade as percentage of GDP

Countryrisk

Level of political risk 8 • Country risk rating

Total 100

Exhibit 12.3 Variables Used for Country Screening in the Emerging Market Potential (EMP) Indicators Index

national income, and growth statistics for the previous 3 to 5 years. A keyquestion is whether or not market growth has been consistent year to year. Inaddition to large, fast-growing markets, a researcher should identify somesmaller but fast-emerging markets that may provide ground-floor opportuni-ties. There are likely to be fewer competitors in new markets than in estab-lished ones. Countries in which the product is not currently available or inwhich competitors have only recently entered may also be promising targets.

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 358


As we discussed in Chapter 9 on emerging markets, the size and growth rate ofthe middle class are critical indicators of promising targets.

The middle class is measured by the share of national income available to mid-dle-income households. These middle-class consumer households are the bestprospect for a typical marketer because the wealthier class in most emerging mar-kets is relatively small and the poorest segment has little spending capacity. Therelative size of the middle class, and the pace with which it is growing, also indi-cate how national income is distributed in that country. If income is not equallydistributed, the size of the middle class will be limited and the market will not bevery attractive.

While the middle class is an important indicator for estimating the size of for-eign markets, as also elaborated in Chapter 9, per capita income measure mayunderestimate the true potential of emerging markets due to such factors as theexistence of a large, informal economy.

In Exhibit 12.2, an analysis of the rankings for each of the dimensions revealssome interesting patterns. For example, China ranks first in market size, buttwenty-fifth in market intensity and last in economic freedom. It also ranks low ininfrastructure. As this observation reveals, there are always trade-offs in targetingcountry markets. No single country is attractive on all dimensions. Along withmore-desirable features, the researcher must also contend with less-desirable fea-tures. For example, both Singapore and Hong Kong are favorable targets in termsof economic freedom, but they are city-states with small populations.

The top four countries in the index in Exhibit 12.2 are all in East Asia. In recentyears, East Asian economies have made tremendous strides in market liberaliza-tion, industrialization, and modernization. South Korea is a champion of economicgrowth, with annual per-capita GDP growth of almost 6 percent. The level of percapita GDP in the past 40 years has advanced tenfold. South Korean firms havebecome world leaders in many industries, such as shipbuilding, mobile communi-cations, and flat-screen televisions. The country is the world’s test market for state-of-the-art wireless and Internet services and applications. South Korean firms usepioneering technologies that are years ahead of their competitors and are poised toovertake other countries in mobile technology, broadband, and other leading com-munications technologies. Asia’s rapid economic development is a primary factorin the current phase of globalization.8

Country rankings of the type indicated in Exhibit 12.2 are not static. Rankingschange over time as shifts occur in each country because of macroeconomic eventsor country-specific developments. For example, while India ranks relatively high,it may dramatically fall if a new political regime reverses market liberalization. Therecent accession of Hungary and Poland into the European Union should improvethe economic prospects of these countries. The introduction of modern bankingsystems and legal infrastructure should increase Russia’s attractiveness as anexport market. Chile has achieved substantial progress in economic reforms andhigher living standards. However, economic stagnation has led to a drop inArgentina’s market attractiveness.

A final point relates to the rather generic and broad nature of the variablessuggested by ranking indicators. They are only a general guide for identifyingpromising country markets. The ranking and indexing methodology is intendedfor use in the early stages of qualifying and ranking countries. Much moredetailed analysis is needed once a firm identifies a handful of target markets. Theresearcher will eventually need to supplement the indicators for specific indus-tries. Indicators to emphasize when researching soft drink markets, for example,vary substantially from those used for researching medical equipment. For med-ical equipment, the researcher will probably gather additional data on health careexpenditures, number of physicians per capita, and number of hospital beds per-capita. Firms in the financial services sector will require specific data on commercial

CAVUMC12_344-379hr1 10/22/07 10:59 AM Page 359


risk. In addition, depending on the industry, researchers may apply differentweights to each market-potential indicator. For example, population size is rela-tively less important for a firm that markets yachts than for one that sells footwear.Each firm must assign appropriate weights to each indicator, depending on itsspecific circumstances.

Screening Countries for Direct Investment and GlobalSourcingThe discussion so far has taken the perspective of a firm seeking the best countrymarkets for exporting. However, firms internationalize through other entrymodes as well—such as FDI—to set up production and assembly facilities abroad,and to source goods from foreign suppliers. While the goal of delineating a hand-ful of prospective countries remains the same in these entry modes, the researchermay employ a different set of criteria for country screening. Let’s discuss how thedesirable country attributes differ for FDI and global sourcing.

Country Screening for Foreign Direct Investment FDI amounts to invest-ing in physical assets, such as a factory, marketing subsidiary, or regional head-quarters, in a foreign country. Such investments are usually undertaken for thelong term. Accordingly, the types of variables to consider differ from those appro-priate for export entry. For example, the availability in the target market of skilledlabor and managerial talent are relatively more important to consider for FDIentry than exporting. Researchers identifying the best locations for FDI entrywould normally consider the following variables:

• Long-term prospects for growth

• Cost of doing business: potential attractiveness of the country based onthe cost and availability of commercial infrastructure, tax rates andwages, access to high-level skills and capital markets

• Country risk: regulatory, financial, political, and cultural barriers, and thelegal environment for intellectual property protection

• Competitive environment: intensity of competition from local and foreignfirms

• Government incentives: availability of tax holidays, subsidized training,grants, or low-interest loans

As in the case of screening countries for export opportunities, there are severalsources of publicly accessible studies for screening countries for FDI. A usefulresource is provided by the United Nations Conference on Trade and Develop-ment (UNCTAD). UNCTAD’s FDI Indices methodology benchmarks both FDI per-formance and potential, ranking countries by how well they perform as recipientsor originators of FDI (www.unctad.org). Another resource is provided by the con-sulting firm, A. T. Kearney, which prepares an annual Foreign Direct InvestmentConfidence Index, (www.atkearney.com). The index tracks how political, economic,and regulatory changes affect the FDI intentions and preferences of the world’stop 1,000 firms. By surveying executives at these firms, the index captures themost important variables to consider from the 65 countries that receive more than90 percent of global FDI investments.

Exhibit 12.4 displays the results of the A. T. Kearney Index. The index revealsthat advanced economies in western Europe, as well as Australia, Japan, and theUnited States, possess high investor confidence. In other words, firms prefer theselocations for making FDI-based investments. These locations are popular due totheir relative size and business-friendly infrastructure. The advanced economiesengage in substantial cross-investments in each other’s markets. For example,

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 360


Europe and the United States are each others’ most important partners for FDI.Their transatlantic economy represents over $2.5 trillion in total foreign affiliatesales, and it mutually supports nearly a quarter of the world’s entire foreign affil-iate workforce employed by MNEs abroad.

Note that of the top ten destinations in the A. T. Kearney Index, six are emergingmarkets: China, India, Poland, Russia, Brazil, and Hong Kong. Investors preferChina because of its huge size, fast-growing consumer market, and position as anexcellent site for low-cost manufacturing. China also enjoys superior access to exportmarkets, favorable government incentives, low-cost structure, and a stable macro-economic climate. However, executives see India as the world’s leader for businessprocess and outsourcing IT services. India has a highly educated workforce, strongmanagerial talent, established rule of law, and transparent transactions and rules.

Country Screening for Global Sourcing Global sourcing and offshoringrefer to the procurement of finished products, intermediate goods, and servicesfrom suppliers located abroad. Sourcing is critically important to all types offirms. As with FDI decisions, the types of screening variables managers considerin sourcing are often distinct from those they consider for exporting. When seek-ing foreign sources of supply, managers will examine such factors as cost andquality of inputs, stability of exchange rates, reliability of suppliers, and the pres-ence of a work force with superior technical skills.

A. T. Kearney also prepares an annual Offshore Location Attractiveness Index(www.atkearney.com). This index assists managers to understand and compare thefactors that make countries attractive as potential locations for offshoring of serviceactivities such as IT, business processes, and call centers. A. T. Kearney evaluates coun-tries across 39 criteria, categorized into three dimensions:

• Financial structure takes into account compensation costs (for example,average wages), infrastructure costs (for electricity and telecom systems),and tax and regulatory costs (such as tax burden, corruption, and fluctu-ating exchange rates).

• People skills and availability accounts for a supplier ’s experience andskills, labor-force availability, education and linguistic proficiency, andemployee-attrition rates.

Values calculatedon a 0 to 3 scale

Low confidence High confidence

ChinaIndia

United StatesUnited Kingdom

PolandRussiaBrazil

AustraliaGermany

Hong KongHungary

Czech RepublicTurkeyFranceJapan

2.197 (=)

1.951 (+)

1.420 (–)

1.398 (=)

1.363 (+)

1.341 (+)

1.336 (+)

1.276 (–)

1.267 (–)

1.208 (–)

1.157 (+)

1.136 (+)

1.133 (+)

1.097 (–)

1.082 (–)

(=) = Maintained ranking

(+) = Moved up

(–) = Moved down

Exhibit 12.4A. T. Kearney Foreign DirectInvestment Confidence IndexSOURCE: Copyright © A.T. Kearney, 2005. Allrights reserved. Reprinted with permission.

CAVUMC12_344-379hr1 10/22/07 10:59 AM Page 361

• Business environment assesses economic and political aspects of the coun-try, commercial infrastructure, cultural adaptability, and security of intel-lectual property.

Exhibit 12.5 presents the Offshore Location Attractiveness Index. Note that 9of the top 10 countries in the index are emerging markets, such as India,China, and Brazil. Although important, the cost of labor is only one of severalfactors in the decision to source inputs from abroad. Managers also cite pro-ductivity level, technical skills, and customer service skills as important fac-tors. The index credits India and China (and to a lesser extent Russia and thePhilippines) for educational achievement. Among developed economies, theindex credits New Zealand, Canada, and Ireland with other strengths, such ashighly developed infrastructure, English fluency, low country risk, and highdegree of global integration.

Task Four: Assess Industry MarketPotential

The methods for screening countries discussed so far are most useful for gainingcomparative insights into individual markets and for reducing the complexity ofchoosing appropriate foreign locations. Once the number of potential countrieshas been reduced to a manageable number—say five or six—the next step is toconduct in-depth analysis of each of these country markets. Rather than examin-ing broad, macro-level indicators, as done in earlier stages, the researcher narrows


IndiaChina

MalaysiaCzech Republic

SingaporePhilippines

BrazilCanada

ChilePoland

HungaryNew Zealand

ThailandMexico

ArgentinaCosta Rica

South AfricaAustraliaPortugalVietnam

RussiaSpain

IrelandIsrael

Turkey

2.09

1.36

0.73

0.92

1.36

0.94

0.86

1.94

0.70

0.88

0.90

1.38

0.57

0.74

0.74

0.67

0.94

1.38

0.88

0.35

0.89

1.38

1.39

1.06

0.64

People skills and availability

Business environment

Financial structure

Exhibit 12.5 A. T. Kearney’s Offshore Location Attractiveness Index

SOURCE: Copyright © A.T. Kearney, 2006. All rights reserved. Reprinted with permission.

CAVUMC12_344-379hr1 10/22/07 11:00 AM Page 362

the focus to examine industry-level market potential indicators, because marketpotential is industry specific.

In task four, the researcher estimates the current and future levels of salesexpected for the particular industry as a whole. This is termed industry marketpotential—an estimate of the likely sales that can be expected for all firms in theparticular industry for a specified period of time. In other words, it is an aggregateof the sales that may be realized by all companies in the industry. Industry marketpotential is different from company sales potential, which refers to the share ofindustry sales the focal firm itself can expect to achieve during a given year. Mostfirms forecast sales at least three years into the future, of both industry marketpotential and company sales potential.

Estimating industry market potential enables the manager to refine the analy-sis and identify the most attractive countries for the firm’s product or service. Byexamining country-level characteristics more closely at this stage, the manager isable to decide which countries to retain for subsequent analysis of company salespotential. In addition to gaining industry-specific insights into the select markets,managers will be able to formulate an understanding of the degree to which thefirm needs to adapt its product and marketing approaches.

To develop an estimate of industry market potential, managers need data andinsights on the following variables:

• Market size, growth rate, and trends in the specific industry• Tariff and nontariff trade barriers to enter the market• Standards and regulations that affect the industry• Availability and sophistication of local distribution• Unique customer requirements and preferences• Industry-specific market potential indicators

In addition to generic determinants of demand, each industry sector—fromfire alarms to zippers—has its own industry-specific potential indicators ordistinctive drivers of demand. Marketers of cameras, for instance, examine cli-mate-related factors such as the average number of sunny days in a typicalyear, given that most pictures are taken outdoors. In marketing laboratoryequipment, the researcher might examine data on the number of hospitals, clin-ics, hospital beds, and doctors, as well as the level of governmental expendi-tures on health care. A manufacturer of electric generators might examine therate of industrialization and dependence on hydroelectricity. A marketer ofcooling equipment and industrial filters will consider the number of institu-tional buyers, such as restaurants and hotels. These are all industry-specificmarket potential indicators.

Managers also evaluate factors that affect the marketing and use of the prod-uct, such as consumer characteristics, culture, distribution channels, and busi-ness practices. Intellectual property rights and enforcement vary around theworld. Managers should therefore evaluate regulations, trademarks, and prod-uct liability, and formulate strategies for protecting the firm’s critical assets. Theresearcher should also ascertain the existence and nature of subsidy and incen-tive programs, from home and foreign governments, that the firm can access toobtain capital and to reduce the cost of foreign market entry.

A key question is whether industry market growth has been consistent fromyear to year. In addition to large, fast-growing markets, the researcher shouldidentify some smaller but fast-emerging markets that may provide ground-flooropportunities. There are fewer competitors in markets that are opening for thefirst time. For example, most of the 60,000 pubs in the United Kingdom haverecently come under the ownership of big chains, which are injecting substantialcapital and trying to attract new clientele by serving food, a shift that will greatly

Task Four: Assess Industry Market Potential 363

Industry market potentialAn estimate of the likely salesthat can be expected for all firmsin the particular industry for aspecified period of time.

CAVUMC12_344-379hr 10/15/07 11:27 AM Page 363


increase opportunities for firms in the restaurantfood industry. The market research firm MintelInternational estimated that food sales to Britishpubs will increase several billion dollarsthrough the late 2000s. This represents a bigchange in British pub culture and a large newmarket for firms in the food industry.9

Growth rates tend to be substantially higherin new industries or those undergoing rapidinnovation. For each country, the researchershould bear in mind that the product is likely tobe in a different phase of its product life cycle.Countries in which the product is not currentlyavailable or in which competitors have onlyrecently introduced the product may be espe-cially promising targets.

Practical Methods for Managers to Assess IndustryMarket PotentialManagers can use a variety of practical methods to estimate industry marketpotential:

• Simple trend analysis. This method quantifies the total likely amount of indus-try market potential by examining aggregate production for the industry asa whole, adding imports from abroad and deducting exports. This gives arough estimate of the size of the current industry sales in the country.

• Monitoring key industry-specific indicators. The manager examines uniqueindustry drivers of market demand by collecting data from a variety ofsources. For example, Caterpillar, a manufacturer of earthmoving equip-ment, examines the volume of announced construction projects, numberof issued building permits, growth rate of households, infrastructuredevelopment, and other pertinent leading indicators as a way of antici-pating countrywide sales of its construction equipment.10

• Monitoring key competitors. To gain insights into the potential of a particu-lar country, the manager investigates the degree of major competitoractivity in the countries of interest. For example, if Caterpillar is consider-ing Chile as a potential market, he or she investigates the current involve-ment in Chile of its number one competitor, the Japanese firm Komatsu.Caterpillar gathers competitive intelligence to anticipate Komatsu’s likelyfuture moves.

• Following key customers around the world. Using this approach, the firm fol-lows its major accounts as they enter new markets. Automotive supplierscan anticipate where their services will be needed next by monitoring theinternational expansion of their customers, such as Honda or MercedesBenz. Similarly, Caterpillar follows current customers in the constructionindustry (such as Bechtel) as these customers bid for contracts or establishoperations in specific foreign markets.

• Tapping into supplier networks. Many suppliers serve multiple clients andcan be a major source of information about competitors. Firms can gainvaluable leads from current suppliers by inquiring with them about com-petitor activities.

• Attending international trade fairs. Industry trade fairs and exhibitions areexcellent venues for managers to obtain a wide range of information onpotential foreign markets. By attending a trade fair in the target country, a

More British pubs are servingfood, creating a new marketpotential for firms in the foodcatering industry.

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 364

Task Five: Select Foreign Business Partners 365

manager can learn a great deal about market characteristics that can helpto estimate industry sales potential. Trade fairs are also helpful for identi-fying potential distributors and other business partners.

Data Sources for Estimating Industry Market PotentialFor each target country, the manager seeks data that directly or indirectly reportlevels of industry sales and production, as well as the intensity of exports andimports in the product category of interest. A particularly useful informationsource is the National Trade Data Base (NTDB), available from the U.S. Depart-ment of Commerce’s STAT-USA11 and www.export.gov databases. Specificreports available from the NTDB include the following:

• Best Market Reports identify the top ten country markets for specific indus-try sectors.

• Country Commercial Guides analyze countries’ economic and commercialenvironments.

• Industry Sector Analysis Reports analyze market potential for sectors suchas telecommunications.

• International Market Insight Reports cover country and product-specifictopics, providing various ideas for approaching markets of interest.

In developing market estimates of any kind, managers must be creative andmust consult any resource that may shed light on the task at hand. Data andresources are rarely complete and precise in international market research. Con-sider the example of Teltone Inc. The firm wished to enter Mexico with its inex-pensive brand of cellular telephones and needed to estimate industry-widedemand. It consulted numerous sources, including reports by the InternationalTelecommunications Union (in Geneva, Switzerland), the National Trade DataBank, and several United Nations publications. Managers researched the size ofthe Mexican upper class and its average income, the nature of support infrastruc-ture for cellular systems in Mexico, and the nature and number of retail storesthat could handle cell phones. Teltone managers also came across some statisticsfrom the National Telecommunications Trade Association on the number of com-petitors already active in Mexico and their approximate sales volumes. Fromthese sources, the company was able to arrive at a rough estimate of market sizefor telephones and prevailing prices in Mexico.

The Recent Grad in IB feature on the next page profiles Javier Estrada, whofound exciting opportunities in his young career in international market research.

Task Five: Select Foreign Business Partners

As we discussed in Chapter 3, business partners are critical to the success of thefocal firm in international business. These partners include distribution-channelintermediaries, facilitators, suppliers, and collaborative venture partners, suchas joint venture partners, licensees, and franchisees. Once a target market hasbeen selected, the focal firm needs to decide on the type of partners it needs forits foreign-market venture. It also needs to identify suitable partner candidates,negotiate the terms of its relationship with chosen partners, and support as well asmonitor the conduct of chosen partners. The firm’s success depends on its abilityto perform these tasks well.

There are many examples of partnering in international business. Exporterstend to collaborate with foreign-market intermediaries such as distributorsand agents. Firms that choose to sell their intellectual property, such as know-how, trademarks, and copyrights, tend to work through foreign licensees. These

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 365

RECENT GRAD IN IB>

Javier Estrada graduated from astate university several years agowith a bachelor’s degree in busi-

ness. Upon graduation, Javier went towork for the United Nations WorldFood Programme (WFP) in Guatemalaand Honduras. Fluent in Spanish,Javier was the youngest U.N. officer inLatin America. He was given the taskof monitoring the functioning andexecution of all WFP projects. Theexperience taught Javier about inter-national management and logistics inthe high-pressure environment of thevarious disasters the United Nationsfaced in Central America.

Ever adventurous, Javier nextmoved to the Dominican Republic,where, at the age of 24, he took aposition as director of research in thelocal office of Bates Advertising, aglobal ad agency that handledaccounts such as Wendy’s, Purina, andBell South. In this position, Javierinvestigated the local target market—how the market responded to keybrands, the level of market share, andthe most effective way of reaching tar-get markets with advertising and othermarketing communications tools.According to Javier, “the real chal-lenge in international advertising is notin the large, established brands, but inthe small, poorly positioned one.”

A typical day for Javier includedmeetings with colleagues to discuss theprogress of market research projectsand assessing the next steps on behalfof his clients. Javier implemented con-sumer surveys to find out what specificbenefits Latin American consumerswere seeking. He used the informationfrom this research to craft advertisingcampaigns ideally tailored to customerneeds and attitudes. In creating sur-veys, Javier researched various sec-ondary data sources on the Internetand in Bates’ private library. He visited

Santa Domingo to get a moreauthentic feel for the market and tomeet with local experts. He also used acomprehensive report prepared by theUnited States Department of Com-merce International Trade Administra-tion (ITA) on the target market.

Javier developed Spanish-languagequestionnaires to gain an even deeperunderstanding of the market. Javiersent out questionnaires to a randomsample of typical consumers through-out the Dominican Republic. He thenanalyzed the completed question-naires and presented the results to hissuperiors. Findings from these studieshelped Javier prepare reports with rec-ommendations on the most appropri-ate advertising strategies for theDominican Republic.

Success Factors“My parents felt strongly that our livesshould be influenced not only by thequality of our education, but also byour travels. . . . In school we were farfrom the wealthiest kids, but we weredefinitely among the most traveled.”Javier was lucky enough to live in sev-eral countries during his teens andtwenties. He comments: “You reallyget to know yourself when you arecompletely alone in a whole new cul-ture, and reestablishing a network offriends and work contacts.” Interna-tional experience contributed toJavier’s independent spirit and his abil-ity to function successfully anywhere inthe world.

In his market research position,Javier enjoyed going to other coun-tries and meeting different people.

”My job provided the chance tohelp companies develop marketing pro-grams that were really appropriate fortheir customers. If you really understandyour customer, you have tremendousresponsibility to use the information

wisely and honestly. . . . Of course, Iwouldn’t have received the job if I had-n’t worked hard in school. Good man-agement training provided me withthe skills to perform effectively. Sensi-tivity is important, since you need to beable to communicate with people whoare culturally different from you. Youneed a strong empathy for your cus-tomers, and you need to try to identifyexactly which research questions theyare trying to address. . . .”

What’s Ahead?Javier has ever-higher goals for hiscareer. He has been long concernedabout poverty issues in Latin Amer-ica, and his experiences with theUnited Nations had a profoundeffect on him. Javier pursued a mas-ter’s degree in social policy and plan-ning from the London School of Eco-nomics. Having worked in bothbusiness and development, Javierfound his passion in integrating hisbusiness skills with social planning atthe governmental level. Recently,Javier headed a major charity organi-zation in Mexico. Eventually hewants to pursue a political career. Hesays, “I need to dream big.”

Javier’s major: Business

Objectives: Integrating business skillswith social planning in a public agencyand pursuing a career in politics

Jobs held since graduating:

• United Nations World FoodProgramme in Guatemala andHonduras

• Director of Research, BatesAdvertising, Dominican Republic

• Director of a major charity in Mexico

366

Javier Estrada

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 366

licensing partners are independent businesses that apply intellectual property toproduce products in their own country. In the case of internationalization throughfranchising, the foreign partner is a franchisee—an independent business abroadthat acquires rights and skills from the focal firm to conduct operations in its ownmarket (such as in the fast-food or car-rental industries). Alternatively, the focalfirm may internationalize by initiating an international collaborative venture,which entails business initiatives undertaken jointly with other local or interna-tional partners. These collaborations may be project-based or may involve equityinvestments. Other types of international business partnerships include globalsourcing, contract manufacturing, and supplier partnerships. We describe thesepartnerships in greater detail in Chapters 13 through 16.

Criteria for Selecting a PartnerPerhaps the most important decision for the focal firm is to identify the ideal qual-ifications of potential foreign partners. In general, the firm should seek a good fitin terms of both strategy (common goals and objectives) and resources (comple-mentary core competencies and value-chain activities). It is helpful to anticipatethe potential degree of synergy with the prospective partner for the intermediate-term, say 3 to 6 years into the future. Managers must be assured of a harmoniouspartnership in a dynamic environment.

Brunswick Corporation, a leading manufacturer of bowling equipment, con-siders the following criteria when screening for potential foreign distributors:

• Financially sound and resourceful, so that they can invest in the ventureand ensure their future growth

• Competent and professional management, with qualified technicaland sales staff

• Willing and able to invest in the focal firm’s business and grow the business• Possessing a good knowledge of the industry, and has access to distribution

channels and end-users• Known in the marketplace and well-connected with local government (as

political clout is helpful especially in emerging markets)• Committed and loyal in the long run

Firms also seek partners with complementary expertise. For example, whilethe focal firm may bring engineering and manufacturing expertise to the partner-ship, the local distributor may bring knowledgeof local customers and distribution channels.

These and similarly desirable characteristicsare not always available in prospective partners.If a company enters a foreign market late, then itmay have to pick the second best or an evenless-qualified partner. This implies that the firmshould be ready and able to strengthen the part-ner’s capabilities by transferring appropriatemanagerial and technical know-how over time.

Searching for ProspectivePartnersThe process of screening and evaluating busi-ness partners can be overwhelming. It is anongoing task for most internationally-activefirms. To identify prospective partners andgather background information, managers

Task Five: Select Foreign Business Partners 367

Licensing Arrangement wherethe owner of intellectual propertygrants a firm the right to use thatproperty for a specified period oftime in exchange for royalties orother compensation.

Franchising Arrangementwhereby the focal firm allowsanother the right to use an entirebusiness system in exchange forfees, royalties, or other forms ofcompensation.

International collaborativeventure Cross-border businessalliance where partnering firmspool their resources and sharecosts and risks to undertake anew business initiative. Alsoreferred to as an internationalpartnership or an internationalstrategic alliance.

Firms seeking a foreign businesspartner look for a variety of quali-fications, including common goalsand objectives and competentmanagement.

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 367

consult various sources as well as conduct field research. Commercial banks,consulting firms, trade journals, and industry magazines, as well as countryand regional business directories, such as Kompass (Europe) and Dun andBradstreet are very helpful in developing a list of partner candidates. Manynational governments offer inexpensive services that assist firms in findingpartners in specific foreign markets. The knowledge portal globalEDGE™(www.globalEDGE.msu.edu) provides additional resources, including sev-eral diagnostic tools, to help managers make systematic choices about alter-native partner candidates.

Field research through onsite visits and gathering research from independentsources and trade fairs are crucial in the early stages of assessing a partner. Com-panies also find it useful to ask prospective partners to prepare a formal businessplan before entering into an agreement. The quality and sophistication of such aplan provides insights into the capabilities of the prospective partner and servesas a test of the partner’s commitment.

Task Six: Estimate Company Sales Potential

Once managers have singled out several promising country markets, verifiedindustry market potential, and assessed the availability of qualified businesspartners, the next step is to estimate company sales potential in each country.Company sales potential is an estimate of the share of annual industry salesthat the firm expects to generate in a particular target market. Estimatingcompany sales potential is often much more challenging than earlier tasks. Itrequires the researcher to obtain highly refined information from the market.The researcher needs to make certain fundamental assumptions about themarket and project the firm’s revenues and expenses for 3 to 5 years into thefuture. The estimates are never precise and require quite a bit of judgmentalanalysis.

Determinants of Company Sales PotentialIn arriving at an estimate of company sales potential in the foreign market, man-agers will collect and review various research findings and assess the following:

• Partner capabilities. The competencies and resources of foreign partners,including channel intermediaries and facilitators, tend to determine howquickly the firm can enter and generate sales in the target market.

• Access to distribution channels. The ability to establish and make best use ofchannel intermediaries and distribution infrastructure in the target mar-ket determines how much sales the firm can achieve.

• Intensity of the competitive environment. Local or third-country competitorsare likely to intensify their own marketing efforts when confronted by newentrants. Their actions are often unpredictable and not easily observed.

• Pricing and financing of sales. The degree to which pricing and financingare attractive to both customers and channel members is critical to initialentry and to ultimate success.

• Human and financial resources. The quality and quantity of the firm’sresources are a major factor in determining the proficiency and speedwith which success can be achieved in the market.

• Market penetration timetable. A key decision is whether managers opt forgradual or rapid market entry. Gradual entry gives the firm time todevelop and leverage appropriate resources and strategies, but may cedesome advantages to competitors in getting established in the market.


Company sales potential Anestimate of the share of annualindustry sales that the firmexpects to generate in a particulartarget market.

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 368

Task Six: Estimate Company Sales Potential 369

Rapid entry may allow the firm to surpass competitors and obtain first-mover advantages, but it can tax the firm’s resources and capabilities.

• Risk tolerance of senior managers. Results are a function of the level ofresources that top management is willing to commit, which in turndepend on the extent of management’s tolerance for risk in the market.

• Special links, contacts, and capabilities of the firm. The extent of the focal firm’snetwork in the market—its existing relationships with customers, channelmembers, and suppliers—can have a strong effect on venture success.

• Reputation. The firm can succeed faster in the market if target customersare already familiar with its brand name and reputation.

Such a comprehensive assessment should lead to general estimates of poten-tial sales, which managers can compare to actual sales results of incumbent firmsin the market, when such data are available.

Thus, the process of estimating company sales is more like starting frommultiple angles, then converging on an ultimate estimate that relies heavily onjudgment. Exhibit 12.6 provides one framework managers may use to estimatecompany sales. Managers would combine information about customers, interme-diaries, and competition, and see if such an analysis points to a reasonable esti-mate. Often, managers prepare multiple estimates based on best case, worst case,and most-likely case scenarios. Note also that arriving at such estimates willrequire assumptions from the manager as to the degree of firm effort, price aggres-siveness, possible competitive reactions, degree of intermediary effort, and so on.Finally, note that sales prospects for a company hinges on factors both controllableby management (e.g., prices charged to intermediaries and customers), as well asuncontrollable factors (e.g., intensity of competition). Ultimately, the process ofarriving at a sales estimate is more of an art than a science.

Customer receptivity• Perceived benefits of product• Promotional effort directed to customers

Competitive positioningof focal brand

• Unique selling proposition of product• What are its superior features compared to competitive offerings

Channel effort andproductivity

• Margins and incentives offered to distribution intermediaries

Competition• Intensity• Relative strength• Potential reactions to market entrants

CompanySales

Potential

Customer characteristics• Demographics• Growth of demand• Size of customer segment• Intensity• Purchasing power

Pricing• The cost of product landed in the foreign market (a function of international shipping costs, tariffs, etc.)• Customary margins for distributors• Whether the firm pursues a penetration versus skimming pricing

Exhibit 12.6A Framework forEstimating CompanySales Potential in theForeign Market

CAVUMC12_344-379hr1 10/20/07 8:56 AM Page 369

Practical Approaches to Estimating Company Sales PotentialIt is critical for managers to begin with the factors suggested in Exhibit 12.6. Inaddition, experienced managers find the following activities to be especially help-ful in estimating company sales potential in a foreign market:

• Survey of end-users and intermediaries. The firm can survey a sample of cus-tomers and distributors to determine the level of potential sales.

• Trade audits. Managers may visit retail outlets and question channel mem-bers to assess relative price levels of competitors’ offerings and perceptionsof competitor strength. In this approach, managers estimate market poten-tial through the eyes of the trade (intermediaries) responsible for handlingthe product in the market. The trade audit can also indicate opportunitiesfor new modes of distribution, identify types of alternative outlets, andprovide insights into company standing relative to competitors.

• Competitor assessment. The firm may benchmark itself against principal com-petitor(s) in the market and estimate the level of sales it can potentiallyattract away from them. What rival firms will have to be outperformed? Ifkey competitors in a given market are large, powerful firms, competinghead-on could prove costly and lead to failure. Keep in mind, however, thateven in those countries dominated by large firms, research may reveal mar-ket segments that are underserved or ignored altogether. Such market nichesmay be attractive, particularly for smaller firms with modest sales goals.

• Obtaining estimates from local partners. Collaborators such as distributors,franchisees, or licensees already experienced in the market are often bestpositioned to develop estimates of market share and sales potential.

• Limited marketing efforts to test the waters. Some companies may choose toengage in a limited entry in the foreign market—a sort of test market—as away of gauging long-term sales potential or gaining a better understanding ofthe market. From these early results, it is possible to forecast longer-term sales.

In addition to these approaches, other techniques are also useful in the devel-oping-country and emerging-market settings, where information sources areespecially limited. These are analogy and proxy indicators. We illustrated theseapproaches in the opening vignette.

• Analogy. When using the analogy method, the researcher draws on knownstatistics from one country to gain insights into the same phenomenonfor another, similar country. For instance, if the researcher knows thetotal consumption of citrus drinks in India, then—assuming that citrus-drink consumption patterns do not vary much in neighboring Pakistan—a rough estimate of Pakistan’s consumption can be made, making anadjustment, of course, for the difference in population. Another illustra-tion would be for the marketer of antibiotics. If the firm knows fromexperience that X number of bottles of antibiotics are sold in a countrywith Y number of physicians per thousand people, then it can beassumed that the same ratio (of bottles per 1,000 physicians) will apply ina similar country.

• Proxy indicators. By using proxy indicators, the researcher uses informa-tion known about one product category to infer potential about anotherproduct category. For the wallpaper marketer in the opening vignette, auseful proxy was the water heaters. This simple approach may lead topractical results especially if the two products exhibit a complementarydemand relationship. For example, a proxy indicator of demand for pro-


CAVUMC12_344-379hr 10/15/07 11:28 AM Page 370

In Conclusion 371

fessional hand tools in a country may be the level of construction activ-ity in the country. Surrogate indicators of potential for a particular pieceof surgical equipment in a market may include the total number of surg-eries performed.

In Conclusion

The decision to internationalize is never easy. Some firms are attracted to for-eign markets by the promise of revenues and profits; others are drawn by theprospect to increase production efficiency; still others internationalize due tocompetitive pressures or to keep pace with rivals. Whatever the rationale,when companies fail in their international business ventures, it is oftenbecause they neglect to conduct a systematic and comprehensive assessmentof global market opportunity.

Although we present the six tasks for global market opportunity assess-ment in a sequential manner, firms do not necessarily pursue them in succes-sion. Indeed, firms often pursue two or more of the tasks simultaneously. Inaddition, the process is highly dynamic. Market conditions change, partnerperformance may fluctuate, and competitive intensity will increase. Thesedynamic events require managers to constantly evaluate their decisions andcommitments. Management must be open to making course changes as cir-cumstances dictate.

Of the six key tasks, some of the choices that managers will make are inter-related. For example, the choice of a business partner is very much a functionof the country. The type of distributor to use is likely to vary from market tomarket, be it the Netherlands or Nigeria. The degree of political risk firms canexpect in the latter case implies a need for a politically well-connected busi-ness partner. Similarly, in a nontraditional market such as Vietnam, the firmmay opt for a partner who can serve both as a distributor and cultural adviser.

The local business partner is crucial to the success of the cross-border ven-ture. Seasoned executives contend that even the most attractive country can-not compensate for a poor partner. While the quantity and quality of marketinformation about individual countries have increased substantially, mostmanagers tend to struggle in their ability to identify qualified and interestedbusiness partners. This is especially true in emerging markets that may lackan abundance of competent and professional intermediaries, suppliers, jointventure partners, or facilitators. The most qualified partners are likely to bealready subscribed and representing other foreign firms. This necessitates therecruitment of second- or even third-best candidates, and then committingadequate resources to upgrade their technical and managerial skills.

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 371

CLOSING CASE

372

Advanced Biomedical Devices: Assessing Readiness to ExportAdvanced Biomedical Devices, Inc. (ABD), is headquar-tered in Maryland, and plans to initiate exporting activi-ties. The company just completed the process of assess-ing its readiness to export, using CORE (COmpanyReadiness to Export). ABD was founded by Dr. RichardBentley, a well-known British surgeon who developed amedical device that helps the wound-healing process.Dr. Bentley was so committed to the ground-breakingtechnology that he left his surgery practice and foundedABD in the United States. ABD’s product line includesseveral innovative devices called Speedheal, namedbecause of their ability to accelerate the healing rate ofwounds following surgery. Speedheal also reduces post-surgery pain because it keeps the wound area fromswelling. Speedheal oxygenates the wound area bypulsing electrons through the bandage covering thewound. The devices are very small and portable. Variousversions exist for different types of surgeries: handsurgery, face lifts, abdominal procedures, and so on.

Dr. Bentley launched ABD with a skillful manage-ment team. The team includes managers who haveworked extensively in the European market and havetraveled and worked periodically in the Pacific Rim andLatin America. In addition, ABD’s manufacturing directoris from Germany, and another manager had lived inFrance and Malaysia for several years.

Substantial demand for Speedheal helped torapidly increase sales, approaching 20 percent annualgrowth in some years. Over time, employment at ABDgrew to 85 people and sales expanded, primarilythrough medical product distributors, to hospitals andclinics throughout the United States. The firm’s successhad stimulated the entry of competitors offering similarproducts, but rivals never achieved the degree ofminiaturization in ABD’s products. Miniaturizationremains one of Speedheal’s competitive advantages.ABD management’s projections for future growthremain promising.

Dreams of International ExpansionTop management turned its thoughts to internationaliza-tion and generating sales outside of the United States.ABD had received unsolicited orders from abroad andhad learned a great deal about handling internationaltransactions, including foreign exchange, letters ofcredit, and logistics. While ABD’s plan to internationalizewas in its early stages, management intended to expandbeyond occasional export sales. The long-term motiva-tion was to target key world markets.

One expected benefit of internationalization wasthe opportunity for ABD to learn from global competi-tors and markets. Many trends that start in foreign mar-kets eventually reach the United States, and often thebest way to track them is to do business internationally.Management also believed it could reduce ABD’s over-all risks by selling to a variety of foreign markets. Finally,management believed that by internationalizing, com-petitors with similar products could be preempted inspecific foreign markets.

International Strategic IntentDr. Bentley and his management team formulated somequestions about ABD’s internationalization decision.They knew that the answers to these questions wouldrepresent the company’s first real strategic direction forgoing international, ABD’s strategic intent. Managementwanted to develop a comprehensive strategic plan thatwould lay the foundation for international success. Fol-lowing a series of meetings, the team reached consen-sus on the following key elements of ABD’s initial strate-gic direction:

• Top management will strongly commit to interna-tionalization, and ABD will pursue foreign marketsaggressively. The firm will hire a vice president forinternational operations within the coming year.

• ABD will invest up to 20 percent of the firm’s earn-ings in export opportunities.

• ABD will begin building distributor relationships in anumber of countries.

• ABD will establish a marketing subsidiary in at leastone foreign location within three to five years, andhire sales personnel who select and manage the dis-tributors in their market area.

• Management will take steps to ensure that all inter-national ventures reach profitability within two yearsof their launch.

• Management will develop international marketingplans for each target market, each with its own budget.

• Plans call for international sales to reach 35 percentof total sales within four years.

• ABD will establish an annual budget of $220,000 tofinance international activities for each of the firstthree years. Of that, about $60,000 will be devotedto market research to determine the best targetmarkets and to understand competitors.

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 372

Closing Case 373

Product Readiness for ExportFollowing approval of the strategic intent, Dr. Bentleyand his management team addressed questions aboutthe challenges of internationalization. The first questiondealt with training sales representatives in foreign mar-kets to sell medical devices to hospitals and clinics, theprimary end-markets for ABD products. Sales repsrequire training because they deal with doctors, nurses,and other professionals who are deeply involved in deci-sion making about purchases of hospital supplies.Because training costs can be high in foreign markets,Dr. Bentley wanted to ensure ABD was prepared tomake this investment as part of succeeding abroad.

Dr. Bentley also raised the issue of after-sales service.Because ABD’s products were seldom defective, the solu-tion for a defective product was to replace it rather thantrying to make a repair. U.S. customers counted on a readybackup stock in the event of product defects. ABDplanned to employ the same solution for its foreign opera-tions, and management assumed there would be no needfor a separate staff to deal with after-sales service. BecauseSpeedheal devices are small and lightweight but valuable,per-unit transportation costs are very low. In fact, in urgentsituations abroad, ABD often solved customer servicecomplaints by shipping a replacement device by air.

Eventually, the management team came to realizethat pricing for foreign markets was complex andwould require substantial market research. Whilepricing in the United States was well understood,management realized there was much it did not knowabout foreign pricing. Dr. Bentley and several man-agers had attended trade fairs in Europe and hadconcluded that ABD’s prices were not too expensive,particularly since no other firms offered similarwound-healing products. In fact, ABD had filled unso-licited orders from the European Union and foundthat customers never challenged its pricing. Never-theless, management decided that some researchwas needed to refine their pricing approach.

Next, the team discussed foreign inventory manage-ment. Because the devices are cheap to transport by airfreight, distributors can replenish inventories quickly andeconomically. This was a significant benefit to distribu-tors, on the one hand, because they would not have tomaintain much inventory to support sales. On the otherhand, Speedheal devices are sensitive to changes intemperature and humidity, and function best when ware-housed in climate-controlled facilities. Such warehousingis increasingly common, so ABD should have no problemlocating the right warehousing in Europe and elsewhere.

ABD’s management realized that the firm’s flexiblepackaging put them in a good position to enter foreignmarkets, and they were prepared to modify the product invarious ways that might be required for foreign markets.

Management instinctively understood the importance ofdesigning products that meet worldwide standards andregulations. The team knew, for example, that productstargeted to Europe would have to meet two standards: theCE mark, a mandatory safety mark required of toys,machinery, and low-voltage equipment; and ISO standards,aimed at making the development, manufacturing, andsupply of products and services efficient, safe, and clean.

Knowledge, Skills, and ResourcesIn a subsequent meeting, the ABD team consideredless-tangible aspects of the firm’s readiness to interna-tionalize. Management knew that critical self-assess-ment was vital to the long-term success of the firm.They gradually realized that internationalization wouldincur numerous additional costs. For example, theyneeded additional working capital for foreign ware-housing, longer shipping times, and maintaining largerinventories abroad. While letters of credit would beused when first opening new markets, managementwould opt for open-account payment systems (payablein 30 or 60 days, depending on the market).

Dr. Bentley also considered the appropriate growthrate for the firm. Management knew of companies thatbegan exporting but were interrupted when foreigndemand grew too quickly, or when an imbalance devel-oped between domestic and international sales. In somecases, a company’s business could increase rapidly,demanding the firm to supply a volume of product thatgreatly exceeded production capacity. In other cases,the company’s domestic sales dropped sharply, requir-ing management to divert all efforts to rescuing domes-tic operations, thus disrupting the export program.

Management had much to learn about the costsABD would incur in getting into specific foreign markets.There would be costs for legal help, freight forwarding,international transportation, and customs duties. Therewould also be costs for bank charges, rental costs forestablishing foreign offices, and expenses for gettingapprovals for certain regulatory issues. ABD’s manage-ment was not completely clear on the amount of thesecosts, but they were willing to learn.

Competitive intelligence was another concern. Infact, another incentive for internationalization was tolearn more about global competitors. While some of themajor medical device manufacturers were marketing inthe United States, others were based strictly abroad.ABD would have to research and understand the strate-gies and marketing practices of the important competi-tors. Dr. Bentley recognized the importance of gettingpatent coverage on his inventions around the world, andof protecting the intellectual property rights of his firm.He plans to retain legal counsel, at home and abroad, toensure ABD’s critical assets are protected from patent

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 373


infringements. ABD plans to hire lawyers to developsuitable distribution and agent agreements, sales agree-ments, licensing, and to deal with local employmentlaws.

ABD’s management believed the firm’s initial for-eign markets would be Australia, Canada, WesternEurope, and Japan, because they have the largest pro-portion of affluent consumers with the ability to pay forsophisticated medical care. Therefore, ABD had gath-ered information about the markets and competition inthose countries, but recognized that it needed to domuch more.

Managerial Capabilities for Long-TermInternationalizationOne concern was whether management would beable to cope with deepening internationalization. Inthe end, the ABD team recognized that, at minimum,they were right to take painstaking efforts to deter-mine the firm’s readiness to export. Extensive meet-ings and preliminary research provided the basis fordeveloping initial strategies and action programs, aswell as the basis for identifying improvements tomake the company stronger in the coming monthsand years.This case was written by Myron M. Miller, Michigan State University(retired), in association with Professor S. Tamer Cavusgil.

Case Questions

1. Do you believe that ABD’s products are in a state ofreadiness to begin exporting to Europe? Why orwhy not? Are the products ready for exporting toemerging markets (e.g., China, Russia, Mexico) thatmay have little experience with the high-tech solu-tions afforded by Speedheal products? What fac-tors suggest that Speedheal products might enjoysubstantial demand in all types of foreign markets?

2. Does management at ABD possess the appropriateknowledge, skills, and capabilities for international-ization? Why or why not? What steps should man-agement take to better prepare the firm, managers,and employees to internationalize?

3. Refer to Exhibit 12.1, “Key Tasks in Global MarketOpportunity Assessment” on page 348. Evaluate ifABD accomplished each task well or poorly. Did ABDachieve each of the objectives set out for the tasks?

4. If you were a member of ABD’s management team,what countries would you recommend that ABD tar-get first? As a manager, you would need to justifyyour recommendation. Carry out an investigation byexamining characteristics of specific countries toarrive at your recommendation. <

AACSB: Reflective Thinking, Analytical Skills

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 374

375

Key Termscompany sales potential, p. 368franchising, p. 367global market opportunity, p. 346

industry market potential, p. 363international collaborative venture,

p. 367

licensing, p. 367

Summary

In this chapter, you learned about:

1. An overview of global market opportunityassessment Global market opportunity assessment refers to afavorable combination of circumstances, locations,or timing that offer prospects for exporting, invest-ing, sourcing, or partnering in foreign markets. Thefirm may perceive opportunities to sell, establishfactories, obtain inputs of lower cost or superiorquality, or enter collaborative arrangements withforeign partners that support the focal firm’s goals.Global market opportunities help the firm improveits performance, often far beyond what it can achievein the home market. Managers continuously seek themost relevant data and knowledge to make the mostof international opportunities. This chapter discussessix key tasks that managers perform in defining andpursuing global market opportunities. See Exhibit12.1 for a summary of these tasks.

2. Analysis of organizational readiness to inter-nationalizeAs the first task, management assesses the firm’sreadiness to internationalize. Similar to a SWOTanalysis (that is, an evaluation of the firm’sStrengths, Weaknesses, Opportunities, andThreats), management assesses the firm’sstrengths and weaknesses regarding its ability todo international business. Managers assess theexternal business environment by conducting for-mal research on the opportunities and threats thatface the firm. The objective of assessing readinessto internationalize is to figure out what resourcesthe firm has and the extent to which they areappropriate for successful international opera-tions. The firm must develop resources that itlacks. Diagnostic tools, such as CORE (COmpanyReadiness to Export), facilitate a self-audit of thefirm’s readiness to internationalize.

3. Assessment of the suitability of productsand services for foreign marketsProducts and services that are good candidates formarketing successfully abroad are those that sell wellin the domestic market, cater to universal needs,address a need not well served in the target market,or address a new or emergent need abroad. Manage-ment should ask specific questions to determine theproduct’s or service’s international market potential.For example, who initiates purchasing in the market?Who uses the offering? Why do people buy it? Whereis the product or service purchased? What economic,cultural, geographic, and other factors can limitsales?

4. Screening countries to identify target marketsWhether the firm is engaged in importing (sourcingfrom abroad), investing, or exporting, the choice ofcountry is critical, particularly in the early stages ofinternationalization. Failure to choose the rightmarkets is costly not only for its own sake, but alsobecause of opportunity costs. The best markets arethose that are large and fast-growing. The nature ofinformation necessary for country screening variesby product type and industry. There are two basicmethods for screening country markets: gradualelimination and ranking and indexing.

5. Assessment of industry market potentialOnce a firm reduces the number of potential coun-try targets to a manageable number—say five orsix—the next step is to conduct in-depth analysesof each of these country markets. The researcherexamines industry-level market potential indica-tors. Industry market potential refers to an esti-mate of the likely sales that can be expected for allfirms in the particular industry for a specificperiod of time. An estimate of industry marketpotential enables the manager to hone in on a few

CHAPTER ESSENTIALS

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 375


Apply Your Understanding AACSB: Communication, Reflective Thinking

1. Target is a large retailer with about 1,500 stores in theUnited States, but very few in other countries. Targethas a reputation for merchandising thousands of chicyet inexpensive products for the home, includingapparel, furniture, electronics, sporting goods, andtoys. Management is looking to open stores in majorEuropean cities, but due to limited floor space, it isunable to offer all its usual products. Target hires youas a consultant to decide which products from thefirm’s U.S. product line to offer in Europe. In otherwords, your task is to identify Target products suit-able for global business. Although a challenging task,you know of various criteria that Target can apply to

identify the most appropriate products. Write a briefreport in which you describe these criteria and offersome examples to back up your ideas. Be sure to jus-tify your answer using the advice and other informa-tion included in this chapter.

2. Cuesta Corporation, an SME manufacturer of varioustypes of scented hand and body soaps, hires VictoriaRidge to locate foreign markets. She seeks your helpin deciding how to proceed. You have decided tolend Victoria a hand, before she washes out of thesoap business. You advise Victoria that markets forscented soap are fairly saturated within advanced

Test Your Comprehension AACSB: Reflective Thinking

1. What is a global market opportunity? What opportu-nities do firms seek abroad?

2. Identify and explain the six major tasks that managersundertake in global market opportunity assessment.

3. Identify the major issues that managers considerwhen they perform a formal analysis of organiza-tional readiness to internationalize.

4. What are the typical characteristics of products orservices that have the best prospects for selling in for-eign markets?

5. Summarize the screening methodology for potentialcountry markets.

6.What are the typical variables used in indexing andranking method?

7.What types of variables should the researcher con-sider when screening for export markets, foreigndirect investment, and global sourcing?

8.What is involved in assessing industry market potential?

9.What are the major issues to consider when selectingforeign business partners?

10.How can firms go about estimating company salespotential?

most promising countries. In addition to genericdeterminants of demand, each industry sector hasits own industry-specific potential indicators. Amongthe methods for assessing industry market poten-tial are simple trend analysis, monitoring keyindustry-specific indicators, monitoring key com-petitors, following key customers around theworld, tapping into supplier networks, andattending international trade fairs.

6. Selection of foreign business partnersInternational business partners include distribu-tion channel intermediaries, facilitators, suppliers,and collaborative venture partners such as jointventure partners, licensees, and franchisees. Man-agement in the focal firm must decide the types ofpartners it needs, identify suitable partner candi-dates, negotiate the terms of relationships with

chosen partners, and support as well as monitorthe conduct of chosen partners.

7. Estimation of company sales potentialCompany sales potential refers to the share of annualindustry sales that the firm can realistically achieve. Itis the best estimate of how much the firm believes itcan sell in the target market over a given time period.Estimating company sales potential requires theresearcher to obtain highly refined information fromthe market. Among the most influential determinantsof company sales potential are: partner capabilities,access to distribution channels in the target market,intensity of the competitive environment, pricing andfinancing of sales, quality of human and financialresources, the timetable for market entry, risk toler-ance of senior managers, the firm’s contacts and capa-bilities, and being well-known in the market.

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 376

Chapter Essentials 377

economies. However, you are aware of numerousemerging markets that the industry has overlooked.Using your knowledge of Exhibit 12.2, “EmergingMarket Potential Indicators,” on pages 356–357develop a list of the top five emerging markets thatVictoria should target. These are the emerging mar-kets that, based on your research, offer the greatestprospects for generating sales. Be sure to justify yourchoice of countries, based on indicators from thischapter such as market size, market growth rate,market intensity, and market consumption capacity.

3. Upon graduation, a company that makes and sellsaccessories for luxury automobiles hires you. The

company hopes to expand into foreign markets. Yourboss comes into your office and hands you a list ofcountries that he believes hold the greatest potentialfor international sales. You peruse the list and noticethat your boss has based his analysis on per capitaincome levels of the target countries, reasoning thatconsumers with the highest incomes are most likely toown luxury cars. Nevertheless, his analysis is basedon traditional per capita income, without regard topurchasing power parity. In addition, you feel thatsome other key indicators of demand are neglected.Mustering your courage, you decide to propose animproved methodology for picking countries. Whatshould be the principal features of this methodology?

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 377

Internet Exercises(http://globalEDGE.msu.edu)

Refer to Chapter 1, page 27, for instructions onhow to access and use globalEDGE™.

1. China is an attractive market partly because ofits large size and growing affluence. Beforethey begin exporting to China, most firms con-duct market research to acquire a fuller under-standing of the country’s market situation. Twouseful sites for conducting research are theChina Business Information Center (CBIC;www.export.gov/china) and UK Trade andInvestment (www.uktradeinvest.gov.uk). At theCBIC, for example, firms can find out if theyare “China Ready.” They can access tradeleads and read current news about doing busi-ness in China. Suppose you get a job with afirm that markets various products, including:(a) breakfast cereal, (b) popular music on CDs,and (c) laptop computers, and wants to beginexporting to China. For each of these threeproduct categories, using the Web sites givenabove and globalEDGE™, prepare a wish listof the information that the firm should gatherprior to making a decision to export to China.

2. Wal-Mart is now the largest retailer in theUnited States, Canada, and Mexico. However,Wal-Mart still gets only about a quarter of itssales from outside the United States. ColesMyer is the largest retailer in Australia, and getsvery little of its sales from outside Australia (its

main foreign market is nearby New Zealand).Assess the international retailing sector usingonline resources, such as globalEDGE™ and A.T. Kearney (www.atkearney.com). Based onyour research: (a) What factors should these topretailers consider in choosing countries forinternationalizing their operations? (b) What arethe best target markets for these companies toexpand to? (c) What types of questions shouldmanagement at each firm ask in assessing theirreadiness to internationalize?

3. The U.S. Census Bureau tracks foreign trade sta-tistics. Visit the site at www.census.gov and findthe most recent versions of the report “Profile ofU.S. Exporting Companies” by entering this titlein the search engine. Peruse the report andaddress the following questions: (a) What typesof companies export from the United States?That is, what is the breakdown by company typeof U.S. exporters? For example, are the exportersmainly large or small firms? Do they operatemainly in the manufacturing, agricultural, or ser-vices sectors? (b) What is the role of small andmedium-sized exporters in U.S. trade? What per-cent of U.S. exporters are these types of firms,and what proportion of total exports do theyaccount for? (c) What countries are the threefavorite targets of U.S. exporters? According tothe report, what factors make these countries thetop markets for U.S. firms?

378

AACSB: Reflective Thinking, Use of Information Technology

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 378

Global Market Opportunity Assessment for Cancer InsuranceCancer is a leading cause of premature death. Major types of cancer include skin, lung, stomach,

breast, and prostate cancer. It is a life-threatening disease that is often difficult and expensive to treat, with medicalbills running into the hundreds of thousands of dollars. In many countries, people buy health insurance to pay thecosts of medical care. Health insurance companies such as AFLAC and American International Group (AIG) special-ize in supplemental policies to cover specialized cancer care.

Managerial ChallengeGiven limited resources, managers must identify themost appropriate countries to target with their productsand services. Because decisions about which marketsto enter can be very challenging, managers conductresearch on the available choices. Initially, managerssystematically narrow the number of potential targetcountries using Global Market Opportunity Assess-ment. In this exercise, your challenge is to assessmarkets for supplemental cancer insurance in vari-ous countries.

BackgroundCompanies and governments often provide citizenswith basic medical insurance. However, these policiesmay not fully cover the high cost of life-threateningailments such as cancer. Moreover, most people lackcomprehensive health insurance against cancer.Thus, people often purchase supplemental healthinsurance. A sizeable market for comprehensivecancer insurance exists around the world. There arenumerous health insurance companies that offercancer insurance. When seeking to sell insuranceabroad, these firms need to find out what countriesoffer the best sales prospects. Because the choice ofpotential markets can be overwhelming, managersuse Global Market Opportunity Assessment(GMOA).

Managerial Skills You Will GainIn this C/K/R Management Skill Builder©, as aprospective manager, you will:

1. Learn the factors to consider when screening coun-tries for foreign market entry.

2. Understand how these factors relate to maximizingthe firm’s competitive advantages.

3. Screen foreign markets to identify the most appro-priate markets to target with the firm’s productsand services.

Your TaskIn this exercise, your task is to conduct a Global MarketOpportunity Assessment to identify the most promisingcountry to target for sales of supplemental cancer insur-ance. You will examine variables that can help you esti-mate the size of relevant industry sales within each of fourpossible target countries. Your assessment of each targetcountry will be based on industry-specific indicators ofdemand for cancer insurance.

Go to the C/K/R Knowledge Portal©www.prenhall.com/cavusgilProceed to the C/K/R Knowledge Portal© to obtain theexpanded background information, your task andmethodology, suggested resources for this exercise, andthe presentation template.

Management Skill Builder©CKR Cavusgil Knight Riesenberger

379

AACSB: Reflective Thinking, Analytical Skills

CAVUMC12_344-379hr 10/15/07 11:28 AM Page 379

global market opportunity assessment

Documents

sales of wallpaper

wallpaper company

estimating market demand

wallpaper imports

demand forwallpaper

market research firms

worldwide markets

huge markets