chapter 7 - country evaluation and selection learning objectives after reading this chapter, you...
TRANSCRIPT
CHAPTER 7 - Country Evaluation and Selection
LEARNING OBJECTIVESAfter reading this chapter, you should be able to:
To grasp company strategies for sequencing the penetration of countries
To see how scanning techniques can help managers both limit geographic alternatives and consider otherwise overlooked areas
To discern the major opportunity and risk variables a company should consider when deciding whether and where to expand abroad
To know the methods and problems of collecting and comparing international information
To understand some simplifying tools for helping decide where to operate
To consider how companies allocate emphasis among the countries where they operate
To comprehend why location decisions do not necessarily compare different countries’ possibilities
Copyright © 2011 Pearson Education 12-1
Introduction
Because all companies have limited resources,
they must be careful in making the following decisions:
1. In which countries to locate sales, production, and administrative and auxiliary services
2. The sequence for entering different countries
3. The amount of resources and efforts to allocate to each country where they operate
Copyright © 2011 Pearson Education 12-2
Scanning versus Detailed Analysis
Without scanning, a company may: Overlook opportunities and risks Examine too many or too few possibilities
Scanning allows managers to examine most or all countries broadly and then narrow them to the most promising ones. In scanning, managers compare country information that is readily available, inexpensive, and fairly comparable—usually without having to incur the expense of visiting foreign countries.
Instead they analyze publicly available information, such as from the Internet, and they communicate with experienced people e.g. http://www.doingbusiness.org
Once managers narrow their consideration to the most promising countries, they need to compare the feasibility and desirability of each. At this point, unless they are satisfied enough to outsource all their production and sales, they almost always need to go on location to analyze and collect more specific information.
What Information is Important in Scanning?
Opportunities◦Sales Expansion◦Resource Acquisition
Risks◦Political Risk◦Monetary Risk◦Competitive Risk
Copyright © 2011 Pearson Education 12-5
Examining Economic and Demographic Variables
1.Obsolescence and leapfrogging of products
Consumers in developing economies do not necessarily follow the same patterns as those in higher-income countries. In China, for example, consumers have leapfrogged the use of landline telephones by jumping from having no telephones to using cellular phones almost exclusively.
2. Prices If prices of essential products are high, consumers may
spend more on these products than what one would expect based on per capita GDP, thus having less to spend on discretionary purchases. The expenditures on food in Japan, for instance, are higher than would be predicted by either population or income level because food is expensive and work habits promote eating out. 12-
6
Examining Economic and Demographic Variables
3. Income elasticityA common tool for predicting total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand changes in relation to income changes, the more elastic is the demand. Demand for necessities such as food is usually less elastic than is demand for discretionary products such as flat-screen TVs.
4. Substitution
Consumers in a given country may more conveniently substitute certain products or services than consumers in some other countries. For example, there are fewer automobiles in Hong Kong than one would expect based on income and population, because the crowded conditions make the efficient mass transit system a desirable substitute for automobiles.
Examining Economic and Demographic Variables5. Income Inequality
Where income inequality is high, the per capita GDP figures are less meaningful, because many people have little to spend and many others have substantial income to spend, as in our example of luxury product sales in India.
6. Cultural Factors and Taste
Countries with similar per capita GDPs may have different preferences for products and services because of values or tastes. For example, the large Hindu population in India reduces per capita meat consumption there. However, there is a large niche market of Indians who are neither Hindu nor vegetarian.
12-8
Examining Economic and Demographic Variables
7. Trading BlocsAlthough a country may have a small population and GDP, its presence in a regional trading bloc gives its output access to a much larger market. For instance, Uruguay has a small domestic market, but its production has duty-free access to three other countries in the Southern Common Market (MERCOSUR).
Copyright © 2011 Pearson Education 12-9
Cost Considerations of Resource Acquisition
Companies undertake international business to secure resources that are either not sufficiently available or
too expensive in their home countries. They may purchase these resources from another organization, or they
may establish foreign investments to exploit them. In either case, they must prioritize where they can best secure what they want such as in term of: Labor Infrastructure Ease of Transportation and Communications Government Incentives and Disincentives
Copyright © 2011 Pearson Education 12-10
Factors to Consider in Analyzing RiskCompanies and their managers differ in
their perceptions of what is risky.One company’s risk may be another’s
opportunity.There are means by which companies may
reduce their risks other than avoiding locations.
There are trade-offs among risks.
Copyright © 2011 Pearson Education 12-11
Political Risk
Analyzing Past PatternsAnalyzing OpinionsExamining Social and Economic
Conditions
Copyright © 2011 Pearson Education 12-12
Monetary Risk
Exchange Rate Changes◦Differences in the exchange rates can
create gains or losses Mobility of Funds
◦Liquidity among countries varies
Copyright © 2011 Pearson Education 12-13
Competitive Risk
Making Operations Compatible (see Distance Framework table).
Spreading RiskFollowing Competitors of CustomersHeading Off Competition
Copyright © 2011 Pearson Education 12-14
Distance Framework
Cultural Distance
Administrative Distance
Geographic Distance
Economic Distance
Attitude Creating Distance
Different languageDifferent ethnicities: lack of connective ethnic or social networksDifferent religionsDifferent social norms
Absence of colonial tiesAbsence of shared monetary/politicalassociationPolitical hostilityGovernment policiesInstitutional weaknesses
Physical remotenessLack of a common borderLack of sea or river accessSize of countryWeak transportation or communication linksDifferent in climates
Difference consumer incomesDifferent costs and quality of:• natural resources• financial resources• human resources• infrastructure• intermediate input• information or knowledge
The distance framework helps managers identify and assess the
impact of distance of different types (Pankaj, 2001).
Collecting and Analyzing Data
Companies undertake business research to reduce
outcome uncertainties from their decisions and to
assess their operating performance. Questions such as: Can we hire qualified personnel? Will the economic & political climate allow us to
reasonable foresee our future? What is our market share?
To answer those questions, information is needed at all
levels of control and companies should compare the cost
of information with its value.
Copyright © 2011 Pearson Education 12-16
Problems With Research Results and DataLimited ResourcesMisleading DataReliance on Legally Reported Market
ActivitiesPoor Research MethodologyNoncomparable Information
Copyright © 2011 Pearson Education 12-17
External Sources of Information Individualized Reports e.g. sold by consulting firms like
Frost & Sullivan, etc. Specialized Studies e.g. directories of companies that
operate in a given locale Service Companies e.g. most companies providing services
to international clients like bank, transportation firms, etc. publish reports.
Government Agencies e.g. US Dept. of Commerce compiles news about individual foreign countries, in Malaysia, info can be sought at MITI and MATRADE.
International Organizations and Agencies e.g. info can be gathered from United Nations, WTO, IMF, OECD
Trade Associations e.g. trade journals publish by the associations like FAMA, MPOB, etc.
Copyright © 2011 Pearson Education 12-18
Country Comparison Tools
There are 2 most common tools in scanning
1. Grids◦ May depict acceptable or unacceptable
conditions◦ Rank countries by important variables
2. Matrices allow companies to:◦ Decide on indicators and weight them◦ Evaluate each country on the weighted
indicators
Copyright © 2011 Pearson Education 12-19
Simplified Market-Penetration Grid
Copyright © 2011 Pearson Education 12-20
Variable Weight
Country A
Country B
CountryC
Acceptable (A) or Unacceptable (B)1. Allow 100% ownership
B A A
Return (higher rating is better)1. Size of investment2. Direct Cost3. Tax rate4. Market size5. Market shareTotal
0 - 542341
33422
34134
Risk (lower rating is better)1. Exchange problems2. Political instability3. Loose business laws4. Corruption IndexTotal
0 - 51243
3212
2322
OPPORTUNITY RISK MATRIX Which country is most desirable?
Copyright © 2011 Pearson Education 12-21
Dec
reas
ed R
isk
Increased Opportunity
AF
E
B
CD
Allocating Among Locations
There are three complementary strategies for international expansion.1. Alternative Gradual Commitments2. Geographic Diversification versus
Concentration3. Reinvestment and Harvesting
Copyright © 2011 Pearson Education 12-22
Alternative Gradual Commitments
Companies may reduce risks from the liability offoreignness by:• Going first to countries with characteristics similar to
those of their home countries e.g. Malaysia & Indonesia
• Having experienced intermediaries handle operations for them.
• Operating in formats requiring commitment of fewer resources abroad.
• Moving initially to one or a few, rather than many,foreign countries.
Copyright © 2011 Pearson Education 12-23
Geographic Diversification versus ConcentrationGrowth rate in each marketSales stability in each marketCompetitive lead timeSpillover EffectsNeed for product, communication, and
distribution adaptationProgram control requirements
Copyright © 2011 Pearson Education 12-24
Reinvestment and Harvesting
FDI-financial and human capital invested abroad
Depending on the success of the investment, the company may reinvest or consider using the capital elsewhere
Copyright © 2011 Pearson Education 12-25
Noncomparative Decision Making
Most companies examine proposals one at a time and accept them if they meet minimum threshold criteria.
Copyright © 2011 Pearson Education 12-26