International Business
Session 5
Understanding and Analyzing
International Markets
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Political
P
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Economic
E
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Social/Cultural
S
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Technological
T
PEEST, PESTEL, PESTLE, SLEPT,
STEEPLED, PEST LIED
(L)egal
 (E)nvironmental (Ecological/Physical)
(E)thical
(E)ducational
 (D)emographic
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Understanding and Analyzing
International Markets
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Political
- includes (L)egal, (E)nvironmental
law/policy
Economic
- includes (E)nvironmental climate
and weather
Social/Cultural
- includes (D)emographic,
(E)thical, (E)ducational,
(E)nvironmental attitudes
Technological
P
E
S
T
Key Variables
Politics
Social / Cultural and Demographic
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Political System
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Dimensions of culture
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Legal System
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Beliefs and Attitudes
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Laws (affecting business)
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Language
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National Trade Policies
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Religion
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Government Stability and Risk
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Population and Age Structure
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Openness to FDI
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Education
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Urban/Rural Composition
Economics and Market Characteristics
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Economic System
Technical
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Per Capita GDP and Growth Rate
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Infrastructure
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Purchasing Power
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ICT level
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Inflation Rate
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Productivity
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Middle Class Size
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Cost and Accessibility of Energy
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Currency Convertibility and Trends
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Processes and Supply Chain
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Medical
Economic Systems
Command Economies (Centrally Planned)
 Market Economies
 Mixed Economies
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Command (Centrally Planned) Economies
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The state is responsible for making all decisions:
What goods and services the country produces; Quantity
of production; Prices at which they are sold; and
Distribution
The state owns all wealth, land, and capital, and allocates
resources based on which industries they want to develop.
Command economies were common in the 20th century;
they proved so inefficient that most have gradually died
out.
Central planning is less efficient than market forces in
synchronizing supply and demand.
Today many countries exhibit some characteristics of
command economies- examples- China, India, Russia, and
certain countries in Central Asia, Eastern Europe, and the
Middle East.
Market Economies
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Decisions regarding production levels, consumption,
investment, and savings resulting from the interaction
of supply and demand (market forces).
Economic decisions are left to individuals and firms.
Government intervention in the marketplace is
limited.
Capitalism (private ownership of production) is
closely aligned with market economies.
State should establish a legal system that protects
private property and contractual agreements.
Government may also intervene to address the
inequalities that market economies sometimes
produce.
Mixed Economies
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Exhibits market and command economy features, thus
combining state intervention and market mechanisms.
Most industries are under private ownership, and
entrepreneurs freely establish, own, and operate
corporations- but the government also controls certain
functions, such as pension programs, labor regulation,
minimum wage levels, and environmental regulation.
The state usually funds public education, health care, and
other vital services and owns enterprises in
transportation, telecommunications, and energy.
Examples- France, Germany, Japan, Norway,
Singapore, and Sweden, government often works
closely with business and labor interests to determine
industrial policy, regulate wage rates, and/or provide
subsidies to support specific industries.
Laws affecting business
National Legal Environment – doingbusiness.org
 Laws directed against foreign firms
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◦ Restrictions on Income Repatriation
◦ Controls on Operating Forms and Practices
◦ Expropriation, Confiscation, Nationalization
Environmental laws
 Marketing and Advertising laws
 Level of economic freedom
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Levels of International Strategy
International Strategic Management
External Analysis
Environmental
Conditions &
Trends
Opportunities
and
Threats
Inventory of
Distinctive
Competencies
Strengths
and
Weaknesses
Internal Analysis
Strategy Formation
Identify
& Evaluate
Options
Choose
Strategy
Strategy
Implementation
Pressures for Global Integration
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Economies of Scale. Concentrating manufacturing in a few select
locations to achieve economies of mass production.
Capitalize on converging consumer trends and universal
needs. Companies such as Nike, Dell, ING, and Coca-Cola offer
products that appeal to customers everywhere.
Uniform service to global customers. Services are easiest to
standardize when firms can centralize their creation and delivery.
Global sourcing of raw materials, components, energy, and
labor. Sourcing of inputs from large-scale, centralized suppliers
provides benefits from economies of scale and consistent
performance.
Global competitors. Global coordination is necessary to monitor
and respond to competitive threats in foreign and domestic
markets.
Availability of media that reaches customers in multiple
markets. Firms now take advantage of the Internet and crossnational television to advertise their offerings in numerous
countries simultaneously.
International Business: Strategy,
Management, and the New Realities
14
Pressures for Local Responsiveness
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Unique resources and capabilities available to the firm. Each
country has national endowments that the foreign firm should
access.
Diversity of local customer needs. Businesses, such as clothing
and food, require significant adaptation to local customer needs.
Differences in distribution channels. Small retailers in Japan
understand local customs and needs, so locally responsive MNEs
use them.
Local competition. When competing against numerous local
rivals, centrally-controlled MNEs will have difficulty gaining market
share with global products that are not adapted to local needs.
Cultural differences. For those products where cultural
differences are important, such as clothing and furniture, local
managers require considerable freedom from HQ to adapt the
product and marketing.
Host government requirements and regulations. When
governments impose trade barriers or complex business
regulations, it can halt or reverse the competitive threat of foreign
firms.
International Business: Strategy,
Management, and the New Realities
15
Pressures for Global Efficiencies
International Strategy Forms
High
Global
Strategy
Home
Replication
Transnational
Strategy
Multidomestic
Strategy
Low
Low
High
Pressures for Local Responsiveness
Where would you place these
companies?
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Toshiba
BMW
Unilever
Intel
City University
Disney
Citibank
Nokia
Carrefour
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Boeing
Vodafone
Texas Instruments
Microsoft
Coca-cola
Nestle
Colgate Palmolive
KPMG
Heineken
GMOA (Global Market Opportunity
Assessment) Six Steps
Conduct an internal assessment of the firm’s readiness to initiate international
business activity.
Assess the suitability of the firm’s products and services for foreign markets.
Systematically identify the best markets to target with the chosen product(s) or
service(s).
Estimate the industry market potential, or the “market demand”, for the
product(s) or service(s) in selected target markets.
Screen and select qualified business partners, such as distributors or suppliers.
Estimate the company sales potential for each target market.
1: Key Questions to assess Readiness
• What does the firm hope to gain from international
business?
• Is international business expansion consistent with other
firm goals, now or in the future?
• What demands will internationalization place on
company resources, such as management, personnel, and
finance, as well as production and marketing capacity?
How will such demands be met?
• What is the basis of the firm’s competitive advantage?
Motivations for Internationalization
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Efficiency
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Economies of scale – access to a large number of new customers/markets
Exploit another country’s resources – labor raw materials, etc.
Extend the product life cycle
Operational flexibility – shift production to other countries as costs,
exchange rates, etc., change over time
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Strategic
◦ First mover in a product – favorable access to customers
◦ Cross-subsidization – use position in one country to subsidize position in
another country
◦ Leverage ownership advantages
Motivations for Internationalization
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Risk
◦ Diversify macroeconomic risks – economic growth and recessions vary
across countries
◦ Diversify operational risk – labor problems, earthquakes, wars
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Learning
◦ Acquire new capabilities in diverse competitive environments
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Reputation
◦ Crossover customers from one market to another
2: Key Questions to assess Suitability
• Sell well in the domestic market?
• Cater to universal needs?
• Address a need not well served in particular foreign
markets?
• Address a new or emergent need abroad?
3: Systematically Screening Countries
Start with large number
 Quickly reduce to about 5 using broad
macro statistics (market size, growth,
middle class, etc.)
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First considerations for country screening
Cultural Similarity (language)
 Gateway (Singapore, Hong Kong, Turkey)
 Region (EU, NAFTA)
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Criteria Relevant to
Country Screening for FDI
Long-term prospects for growth, as well as the potential for
exports
 Cost of doing business: Potential attractiveness of the country
based on the cost and availability of commercial
infrastructure, tax rates and wages, access to high-level skills
and capital markets
 Country risk: Regulatory, financial, political, and cultural
barriers and the legal environment for intellectual-property
protection
 Competitive environment: Intensity of competition from local
and foreign firms
 Government incentives: Availability of tax holidays, subsidized
training costs, grants, or low-interest loans.
 A.T. Kearney’s FDI Confidence Index: www.atkearney.com
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Criteria Relevant to
Country Screening for Global Sourcing
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cost and quality of inputs, stability of exchange rates; reliability
of suppliers; and the presence of a work force with superior
technical skills
A.T. Kearney’s Offshore Location Attractiveness Index evaluates
according to 3 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 fluctuating exchange
rates);
People skills and availability accounts for supplier’s
experience and skills, labor force availability, education and
linguistic proficiency, and employee attrition rates;
Business environment assesses economic and political
aspects of the country, commercial infrastructure, cultural
adaptability, and security of intellectual property.
4: Industry Market Potential Analysis
Objective: To estimate the size of relevant industry
sales within each target country; To investigate and
evaluate any potential barriers to market entry.
Outcomes: 3 to 5- year forecasts of industry sales
for each target market. Delineation of market entry
barriers in industry
Criteria: Market size, growth rate, and trends in the
industry; The degree of competitive intensity; Tariff
and non-tariff trade barriers; Standards and
regulations; Availability and sophistication of local
distribution; Unique customer requirements and
preferences; Industry-specific market potential
indicators.
Indicators of Industry Market Potential
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Market size, growth rate, and trends in the
specific industry
Tariff and non-tariff 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
Practical Methods for Estimating Industry Market
Potential
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Simple Trend Analysis. Likely industry market potential is derived
from aggregate production for the industry as a whole, adding imports
from abroad and deducting exports.
Monitoring Key Industry-Specific Indicators. Caterpillar, examines
announced construction projects, building permits, growth rate of
households, infrastructure development, and other pertinent leading
indicators.
Monitoring Key Competitors. If Caterpillar is considering Chile as a
potential market, it investigates the current involvement in Chile of its
number-one competitor, the Japanese firm Komatsu.
Following Key Customers around the World. Automotive suppliers
can anticipate where their services will be needed next by monitoring
the international expansion of their customers such as Honda or
Mercedes Benz.
Tapping into Supplier Networks. Firms can gain valuable leads from
current suppliers by inquiring with them about competitor activities.
Attending International Trade Fairs. Industry trade fairs and
exhibitions are excellent venues for managers to obtain valuable
information on foreign markets.
National Trade Data Bank (STAT-USA)
Best Market Reports identify the top 10
country markets for specific industry sectors.
 Country Commercial Guides analyze
economic and commercial environments of
countries.
 Industry Sector Analysis reports analyze
market potential for sectors such as
telecommunications.
 International Market Insight reports cover
country and product-specific topics, providing
various ideas for approaching markets of
interest.
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5: Foreign Partner Selection
Objectives: To decide on the type of foreign
business partner; clarify ideal partner qualifications;
and plan mode of entry.
Outcomes: Determination of most suitable types of
foreign business partners. List of attributes desired
of foreign business partners. Determination of
value-adding activities foreign business partner
contribute.
Criteria: manufacturing and marketing expertise in
the industry; commitment to the international
venture; access to distribution channels in the
market; financial strength; quality of staff; technical
expertise; infrastructure & facilities.
6: Estimate Company Sales Potential
Objective: To estimate the most likely share of
industry sales the company can achieve, over a
period of time, for each target market.
Outcomes: 3 to 5-year forecast of company
sales in each target market. Understanding of
factors that will influence company sales
potential.
Criteria: Capabilities of partners; access to
distribution; competitive intensity; pricing and
financing; market penetration timetable of the
firm; risk tolerance of senior managers.
Estimating Company Sales Potential
is More of an Art than a Science
The process of estimating company sales is more like
starting from multiple angles, and then converging on an
ultimate estimate that relies heavily relying on judgment.
 Managers combine information about customers,
intermediaries, and competition.
 Often, managers prepare multiple estimates based on
‘best case,’ ‘worst case,’ and ‘most likely case’ scenario.
 Arriving at such estimates will require assumptions as
to: the degree of firm effort; price aggressiveness;
possible competitive reactions; degree of intermediary
effort; etc.
 Sales prospects for a company hinges on factors both
controllable by the firm (e.g., prices charged to
intermediaries and customers), as well as uncontrollable
factors (e.g., intensity of competition).
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The Method of Analogy
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When using the analogy method, the researcher draws
on known statistics from one country to gain insights
into the same phenomenon for a similar country.
If the researcher knows the total consumption of citrus
drinks in India then -- assuming that citrus drink
consumption patterns do not vary much in the
neighboring Pakistan – a rough estimate of Pakistan’s
consumption can be made, making an adjustment, of
course, for the difference in population.
If the marketer of antibiotics knows from experience
that X number of bottles of antibiotics are sold in a
country with a Y number of physicians per thousand
people, then it can be assumed that the same ratio (of
bottles per 1,000 physicians) will apply in a ‘similar’
country.
38
Proxy Indicators for Estimating
Company Sales Potential
By using proxy indicators, the researcher uses
information known about one product category to
infer findings about another product category.
 This approach may lead to practical results especially
if the two products exhibit a complementary demand
relationship.
 A proxy indicator of demand for professional hand
tools in a country may be the level of construction
activity in the country. Surrogate indicators of
potential for a particular piece of medical equipment
in a market may include total number of hospital beds
and total number of surgeries performed.
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39
GMOA Cancer Insurance
BACKGROUND:
 Companies and National Governments
provide basic medical insurance
 But, usually does not fully cover high costs of
specialized cancer treatments
 Therefore, sizable world market for
specialized insurance
GMOA Cancer Insurance
TASK:
What countries offer the best prospects?
In which foreign markets can supplemental
cancer insurance be profitably sold?
GMOA Cancer Insurance
COUNTRY SCREENING (initial):
 market size (usually assessed by examining
each country’s population);
 growth rate (typically the growth rate of
each country’s population); and
 market intensity (the buying power of each
county’s residents in terms of income
level)
GMOA Cancer Insurance
RESULT:
Argentina, China, France, and Japan
Next Step: estimate the likelihood of sales
potential
GMOA Cancer Insurance
INDUSTRY MARKET POTENTIAL:
 Population
 Human Development Index Value
 Adult Literacy Rate
 Population Age 65 and over
 Heath Expenditure Per Capita
 Private Expenditure on Health
 Physicians per 100,000 People
 Prevalence of Smoking
GMOA Cancer Insurance
Where to Research:
 Human Development Report (HDR) by the
United Nations Development Program
(UNDP; www.undp.org)
 World Bank (www.worldbank.org)
 International Monetary Fund (www.imf.org)
 GlobalEDGE™ (globaledge.msu.edu)
Argentina
Population
Human Development
Index Value (scale rating)
Adult Literacy Rate
(percent)
Population Age 65 and
Over (% of total
population)
Health Expenditure Per
Capita (amount)
Private Expenditure on
Health (% of GDP)
Physicians per 100,000
people (number)
Prevalence of Smoking
(% of all adults)
China
France
Japan
Argentina
China
France
Japan
Population
40,000,000
1,327,000,000
62,000,000
128,000,000
Human Development
Index Value (scale
rating)
0.863
0.768
0.942
0.949
Adult Literacy Rate
(percent)
97.2%
90.9
99.0
99.0
Population Age 65 and
Over (% of total
population)
10.1%
7.5
16.6
19.2
Health Expenditure Per
Capita (amount)
$1,067
278
2,902
2,244
Private Expenditure on
Health (% of GDP)
4.6%
3.6
2.4
1.5
Physicians per 100,000
people (number)
301
106
337
198
Prevalence of Smoking
(% of all adults)
29%
36
26
31
GMOA Cancer Insurance
Which Market is most attractive?
 What additional factors would you want
to consider?
 What other markets do you think would
be attractive for this product?
 What does your managerial judgment say
about this decision?
 Would the Czech Republic be a good
market?
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