International market selection and segmentation

Week 7

Learning objectives

• International market selection and identify the problems in achieving it

• International market segmentation and selection process

• Distinguish been preliminary and fine-grained screening

• Distinguish between alternative market expansion strategies• Distinguish between concentration and diversification in

market expansion

Definition

• International market selection (IMS) is the process of – opportunities evaluation – leading to the choice of foreign markets in which to compete.

Albaum & Duerr (2011)

Reasons for identifying right market• Factor of success or failure• This decision influences the nature of foreign

marketing programme in the selected countries

• Geographic location of selected markets affects the firm’s ability to coordinate foreign operations.

IMS: SMEs Vs LSEsSME LSE

• Reaction to a stimulus provided by change agent such as unsolicited order, government agencies, chamber of commerce.

• Exporter simply responds to an opportunity in a given market.

• IMS is based on following criteria:1. Low psychic and cultural distance2. Low geographic distance• First choice for the SMEs are their immediate

neighbours• Compared to old SMEs (estd. Before 1960) ,

young SMEs (estd. In 1989 or later) are internationalizing more rapidly because they are sub- suppliers to large firms.

• Basically they are pulled out to international market by their large customers and their international network.

• LSEs with existing operation in many countries decide in which of them to introduce new product.

• LSEs can be more proactive because they have access to more accurate information in the form of primary data

Potential determinants of the firm’s choice of foreign markets

International market segmentation

Steps 1 and 2: Criteria for effective market segmentation

• Segments ideally should possess the following set of properties:– Identifiable( measurable): per capita income– Substantiality/profitability: the degree to which segments are

sufficiently large and/or profitable for e.g. market size– Accessible: the degree to which the resulting segments can be

effectively reached and served for e.g. road conditions, internet access, storage

– Stable: socio-political factors– Actionability: make things happen for e.g. sufficient resources

to formulate effective marketing programmes

8Source: Kotabe and Helsen (2011), Hollensen (2011)*

Basis of International Market Segmentation

General characteristicsGeographicLanguagePolitical factorsDemographyEconomyIndustrial structureTechnologySocial organizationReligionEducation

Specific characteristicsCultureLifestylePersonalityAttitudes and tastes

High degree of measurability, accessibility, and actionability

Low degree of measurability, accessibility, and actionability, but high degree of relevance

Hollensen (2011)*

General characteristics

General characteristics

General characteristics

General characteristics

Specific characteristics

Step 3: Screening of markets/countries

Stage 3.1Preliminary Screening

(based on external screening criteria)

Stage 3.2 Fine-grained

Screening(firm’s competitive power)

The Business Environment Risk Index (BERI) is a useful tool for coarse-grained, macro-oriented

screening of international markets

Purpose - Identify prime markets

Hollensen (2011)*

Preliminary screening

• Number of markets is reduced by coarse grained, macro oriented screening methods based on criteria such as:– Restriction on export of goods from one country

to another– Gross national product per capita– Cars owned per 1000 of the population

Stage 3.1: Preliminary screening: Criteria included in the overall BERI index

• Economic Political stability• Growth• Currency convertibility• Labour cost/ productivity• Short-term credit• Long-term loans/venture

capital• Attitudes towards the foreign

investor and profits

• Nationalisation• Monetary inflation• Enforceability of contracts• Bureaucratic delays• Communications: phone, fax,

internet access.• Local management• Professional services

Preliminary Screening

BERI

Business Enviroment Risk Index (BERI) Germany

Criteria Weigths Rating*(0-4) Overall BERI

Political Stability 3 4 12Econimic Growth 2.5 2 5Currency Convertability 2.5 3 7.5Labour Cost/Productivity 2 2 4Short-Term Credit 2 4 8Long-Term Loans/Venture Capital 2 4 8Attitude Towards the Foreign Investor 1.5 4 6Nationalization 1.5 2 3Monetary Inflation 1.5 3 4.5Balance of Payments 1.5 4 6Enforcebility of Contracts 1.5 4 6Bureaucratic Delays 1 2 2Communications: Phone, Fax, Internet Access 1 4 4Local Management and Partner 1 4 4Professional Services and Contractors 0.5 4 2Total 25 82

Germany

BERI Index• 0= unacceptable: 1= poor: 2= average condition: 3= above average

conditions: 4= superior conditions• Total points greater than 80

– favourable environment for investors, advanced economy• 70-79

– not so favourable but still an advanced economy• 55-69

– an immature economy with investment potential• 40-54

– a high risk country probably an LDC. Quality of management has to be superior to realize potential

• Less than 40– very high risk. Would only commit capital if there were some

extraordinary justification.

Stage 3.2: Fine-grained Screening

• BERI index – focuses only on the political risk of entering new markets, – therefore the approach that includes the competences of the firm is

needed.

• Powerful aid to the identification of the ‘best opportunity’ target country is the application of – Market, country attractiveness/competitive strength matrix

Dimensions of market/country attractiveness

• Market size• Market growth• Buying power of customers• Market seasons• Average industry margin• Competitive conditions

• Market prohibitive conditions• Government regulations• Infrastructure• Economic and political

stability• Psychic distance

Dimensions of competitive strength

• Market share• Marketing ability and capacity• Products to fit market demands• Price• Contribution margin• Image

• Technology position• Product quality• Market support• Quality of distributors• Financial resources• Access to distribution

channels

Questionnaire for locating

countries on a market

attractiveness/competitive

strength matrix

Weighting:100%=critical s.f.80%=Prerequisite s.f. 60%=Important s.f.40%= Of some importance20%=Standard

Source: Hollensen (2011)*

Factors 1Very poor

2Poor

3Medium

4Good

5Very good

%Weight factor

Result(grading*weight

)Market size 4 20% 0.80Market growth 3 25% 0.75Trade agreements and tariffs

2 10% 0.20

Consumption habits 3 30% 0.90

Economic stability, inflation rates, currency

2 15% 0.30

TOTAL 2.95

Factors 1Very poor

2Poor

3Medium

4Good

5Very good

%Weight factor

Result(grading*weight)

Product quality 4 25% 1.00Financial resources 3 20% 0.60

Access to distribution channels

4 15% 0.60

Image 2 25% 0.50

Technology 3 15% 0.45TOTAL 3.15

Relative competitive strength: with regard to the strongest competitor

Market attractiveness

The market attractiveness/ competitive strength matrix

Source: Hollensen (2011)*

Categories of Markets• A countries:

– Primary markets offering the best opportunities for long-term strategic development. – Here the company might want to establish a permanent presence and should do

thorough research.

• B countries: – Secondary markets where opportunities are there but political and economic risk is

high to make long term commitments. – Market should be handled in more pragmatic way due to potential risk.

• C countries: – Tertiary markets with high risk. Therefore the allocation of the resources will be

minimal. – Objectives in this countries will be short term and opportunistic. – No real commitment by company and no significant research will be carried out.

Step 4: Develop segments in each qualified country/across countries

• Demographics• popular criteria- easily measurable• Demographic variables- Age, gender, occupation,

population

• Socioeconomic variables

- Per capita income- Socioeconomic Strata (SES) Analysis: upper class, middle-to-

upper class, middle class, lower class, poverty level

27

UK Socioeconomic grouping% of population

Group Social status Occupation of head of households

3 A Upper middle Higher managerial, administrative or professional

14 B Middle Intermediate managerial, administrative or professional

27 C1 Lower middle Supervisory or clerical, junior managerial, administrative or professional

25 C2 Skilled working Skilled manual workers

19 D Working Semi-skilled and unskilled manual workers

12 E Those at lowest level of subsistence

State pensioners or widows, casual or lowest-grade workers

Source: Brassington & Pettitt (2006) Principles of Marketing 4e, Pearson Education.

The major American social classes

Source: Kotler and Armstrong (2012) Marketing: an introduction, 11thed.

International Market Segmentation Approaches 1. Standard country segmentation:

• classify prospective countries geographically based on a single dimension • E.g. per capita income

2. Aggregate segmentation: • classify based on multiple dimensions , such as socio-economic, political, etc.

criteria available from secondary sources ( world bank, UNESCO) • E.g. Nestlé’s

3. Disaggregate international consumer segmentation: • Here the focus is the individual consumer. • First choose one or more segmentation bases ( lifestyle, demographic, values),

then • identify consumer segments in terms of consumer similarities with respect to

chosen bases. Problem: targeting a geographically dispersed consumer segment can become logistical nightmare.

30

Aggregate segmentation:

Nestlé’s Geographic segmentation of the Americas

Source: Kotabe and Helsen (2011)31

International Market Segmentation Approaches 4. Two-stage international segmentation:

Step 1: Macro-segmentation ( classification of countries into different groups);

Step 2- Micro-segmentation ( selecting product/services for each country)

Benefits - Segments more responsive to marketing efforts - More focus on consumer needs rather than on socio-economic or cultural variables - More accessible derived segments

The IMS screening process

Source: Hollensen (2011)

International market expansion strategy

• Two questions:

1. Should we enter markets:

– incrementally?

• Where firm lacks experience in foreign market and wishes to edge gradually or

– Simultaneously?

• entry into multiple markets-requiring substantial and management resources

2. Will entry be concentrated or diversified across international markets?

Market expansion strategy: The ‘Waterfall’ Vs. ‘Shower’ Approaches

Waterfall approach

• Based on assumption that initially a product or technology may be so new or expensive that only the advanced countries can use it or afford it.

• Overtime the price will fall until it is inexpensive enough for developing and less developed countries to buy it.

Waterfall approach

• Firm may decide to enter on an incremental or experimental basis– Entering first a single key market in order to build

an experience in international operations – And then subsequently entering into other

markets one after the another

Waterfall approach

• Entry on an incremental basis into small market is preferable – Where firm lacks experience in foreign markets

and wishes to edge gradually into international markets

– If the firm is entering international market late and faces entrenched local competition

– If the firm is small and has limited resources– If the firm is risk averse

Shower approach

• Entering number of market simultaneously.• Firms does this to leverage its core competences and

resources rapidly across a broader market base to seize an emerging opportunity.

• Enables firms to achieve economies of scale in production and marketing.

• This is desirable if the product or service is innovative or is technologically advanced.

• Should be backed by substantial financial and management resources.

Shower approach- example of Sanex• Sanex – shower gel.• Market basis- growing shower gel market in

Europe• Market expansion strategy- launch the product

simultaneously on a number of European market.

• Reasons for this strategy- to obtain a first mover advantage, benefit financially before other come up with a similar product.

Appropriate expansion strategy for SME

Concentration Vs Diversification

• Concentrate resources on limited number of similar markets? OR

• Diversify across a number of different markets

Concentration and diversification

Market/ customer target group

Concentration diversification

Concentration

Diversification

Country

Few customer in few

countries

Few customer groups in many

countries

Many customer groups in few

countries

Many customer group in many

countries.

ANY QUESTION???