Analyzing Global Industries
Trevor Hunter
King’s University College
Analyzing Global Industries
• Different countries have different comparative
advantages
• Comparative advantage is relative – what is a benefit
to one firm may not be a benefit to another:
– Swiss are known for excellence in watch-making – this is
no benefit to car manufacturer
• Firms must understand how to determine relative
comparative advantage that it can leverage – the fit
between firm needs and what the country offers
which can differ depending on each
2
Analyzing Global Industries
• Internationalization can take the form of A
LOT of different operations (more on this
later)
• What the firm needs depends upon why it is
going, but more importantly, what it is going
to do there
• Fit comes from being able to get what the firm
needs to do what it does from a given country
3
Analyzing Global Industries
Economic
Political
Threat of
new
entrants
Bargaining
power of
suppliers
Industry
Rivalry among
existing competitors
Bargaining
power of
buyers
Threat of
substitutes
Societal
Technological
4
Analyzing Global Industries
• Understanding what the firm can get from the
country involves understanding the Market
and the Industry
Market
•What is the structure?
•Who are the customers?
•Where are they located?
•What do they want?
•What has to be done to
get them to choose us?
Industry
•Who are the competitors?
•Who is strong?
•Who is weak?
•What do they do?
•Where are they located?
•What do they do there?
5
Market Stucture
6
Market Structure
• Structure can be influenced by the cost to
operate in given industry
– High costs generally lead to monopoly, low to
competitive
• Structure influences firm behaviour in terms
of:
– Pricing
– Product differentiation
7
Market Structure
• Market structure affects a nation’s relative
comparative advantage:
– Competitive: May or may be difficult to
differentiate but might provide acquisition target
– Monopoly: May be impossible to enter but
monoplolist could be a great partner
– Oligopoly: Will face strong but limited competition
8
Market Concentration
• Measure of the distribution of power among
competing firms in an industry
– High levels: power is concentrated in few hands
– Low levels: power is more evenly distributed among
firms
• Can be measured using:
–
–
–
–
–
sales
output
value added
assets
employment
9
Market Concentration
• Concentration Ratio: Taking the share of the
largest firms (as many as useful) based on
whatever measure you deem important (i.e.
sales, output etc.)
• CR2 = Concentration ratio of the 2 largest
firms
• CR10 = Concentration ratio of the 10 largest
firms
10
Market Concentration
• Herfindahl-Hirschmann Index: Calculated by
summing the squares of the individual market
shares of all the firms in the market
• More accurate because it includes all firms,
but complete data are needed
11
Market Concentration
• Important to know to judge the strength of
competitors and likelihood of success when
entering markets or to help decide who would
be a good partner or supplier to help gain a
competitive advantage.
• This is a domestic market measure
12
Porter’s Five Forces
Threat of
new
entrants
Bargaining
power of
suppliers
Industry
Rivalry among
existing competitors
Bargaining
power of
buyers
Threat of
substitutes
13
Porter’s Five Forces
• Model is used to analyze the competitive
environment of a given country’s industry
• Helps firms determine if the industry is one in
which they can or would like to compete (if
they are looking to expand their market), and
if it is a good place to operate (if they are
looking for cost reductions)
14
Industry Rivalry
• Competition can be based on policies relating
to:
– Price (but cartels and price leadership)
– Product
– Promotion
– Place
• Or strategies relating to:
– mergers & acquisitions
– innovation
15
Industry Rivalry
• Competition intensity is a proxy for how hard
it will be to find a market and/or how
innovative the firms in the industry may be
• Competition more intense when:
–
–
–
–
–
large number of competing firms
firms are of similar size/market share
market is growing slowly
low product differentiation
capacity added in large increments
16
New Entrants
• New entrants increases the number of firms in
the industry and increases capacity and
competition intensifies reducing the likelihood
of sustainable profits
• If there have not been new entrants to the
industry for a while, it may be a monopolistic
or oligopolistic situation
• Either could be good or bad depending upon
the firm’s needs (ME or E)
17
New Entrants
• Likelihood of new entrants depends on nature
and height of barriers to entry:
– absolute cost barriers
– product differentiation
– economies of scale
– excess capacity
– reaction of established firms
– extent of vertical integration
– contracts with suppliers or customers
18
Buyers
• Whether customer buying power is a good or
bad thing depends upon what position you
will have in the industry
– If you are a Seller = bad: You will not have the
power to set prices and will face many
expectations that may reduce your profit
– If you are a Buyer = good: Your costs will be lower
because you will be able to push around your
suppliers
• You want to enter industries with high customer
power if you are entering the country due to Eff.
reasons
19
Buyers
• Customers have more power when:
–
–
–
–
–
number of customers is low
customers see your products as undifferentiated
customers earning good profits
products are not significant % of buyer's costs
customers are able to integrate vertically
backwards
20
Suppliers
• Whether supplier buying power is a good or
bad thing depends upon what position you
will have in the industry
– If you are a Supplier = good: You will be able to
set prices resulting in high profits
– If you are a Buyer = bad: Your costs will be higher
which will negatively affect profit
• You want to enter industries with high
supplier power if you are entering the country
due to ME reasons
21
Suppliers
• Suppliers have more power when:
– supply industry has small number of firms
– suppliers sell differentiated products
– suppliers are not threatened by ground-breaking
new products i.e. substitutes
– suppliers are able to integrate vertically forward
– customers are not important to suppliers
22
Substitutes
• Firms not only face competition from others in their
industry but also from firms that offer similar
products/services that are different but provide the
customer the same or a better outcome for a lower
price or with more ease of use or acquisition
• The threat of losing customers comes from how easy
it is for them to switch to a substitute and how
similar the outcome will be
• Countries with lots of potential substitutes are good
if you are there for E but bad if you are there for ME
23
Substitutes
• Substitute goods or services:
– produced by a different industry
– carrying out the same function for customers
– but providing the service in a different way
• Examples:
–
–
–
–
trains and planes
music downloads and CDs
tin cans, glass bottles, plastic containers
TV reception – antenna, cable, satellite
24
The Business Environment
• The external environment comprises external
influences that affect a firm’s decisions and
performance
• Affected by complexity and turbulence
• Changing faster and becoming less predictable
due to:
– Increased globalization
– Technology innovations
– Rise of the BRIC’s
25
The Business Environment
• Complexity:
– Increased diversity of customers, suppliers, rivals
and the PEST environment with which firms must
interact
– Makes it more difficult to understand and evaluate
information and develop appropriate responses
hence, increased risk
26
The Business Environment
• Turbulence:
– Rapid, unexpected change
– Increased due to the widening and deepening of
PEST forces’ interconnections
– An occurrence in one country is no longer isolated
there, due to interconnections, it will have larger
and longer repercussions (i.e. the tsunami in
Japan resulting in Honda plant shutdowns in the
USA)
27
The Business Environment
The expanded environment that comes from globalization
presents opportunities and threats to firms:
Opportunities:
Threats
• Access to larger markets –
• Currency risks (inflation,
ME
devaluations) that reduce
profits
• Access to lower factor costs
–E
• Political risk, expropriation
of assets, unfavourable
• Access to innovations
regulations
• Access to more favourable
• Supply chain disruptions
regulatory environments
• Wars, natural disasters
28
The Business Environment
• Analyzing the business environment to
determine which country (if any) has a relative
comparative advantage and what aspect of
internationalization may affect the firm – this
is key to being prepared and developing
strategy
• Innumerable factors can create issues for the
firm that can cause problems or provide
opportunities
29
Issues Management
• What are issues?
– Concerns, problems, claims made or held by
internal or external stakeholders
– They may be real or imagined but both have the
power to create problems for the firm
30
Issues Management
• Dealing with issues in the external
environment that can affect the internal
operations of the firm.
• The firm has a responsibility to be involved
with and aware of specific public issues that
may directly or indirectly affect the firm.
31
Nature of Public Issues
• Arise out of a problem affecting many
interests in society and the need for collective
action to deal with it successfully.
• Many parties involved, often with differing
perspectives and agendas.
• Socially motivated – requires socially
responsive behaviour from the firm.
32
Nature of Public Issues
• Complexity of public issues increases for
MNC’s:
– Number of stakeholders increased
– Differences in perspectives exacerbated by
cultural and/or language differences
– Number of locations
– Distance, infrastructure and communications
problems
33
Stakeholders
34
The Business Environment
•
Six steps for an Issue Preparedness System:
1.
2.
3.
4.
Identification
Assess the urgency and likelihood of occurrence
Research and Analysis
Identify relevant stakeholders, their importance
and the impact on/from each
5. Strategy development
6. Strategy implementation
35
Issue Identification
• Scanning the environment to discover
developing trends and issues that may affect
the firm.
• Involves people at various levels of the firm –
those on the front lines often know more than
management.
36
Issue Identification
Competitor’s
Research
“State of
the Art”
Market
Forecasts
GDP
Changing
Values
Economic
The
Firm
Tech
Consumer
Spending
New
Life
Styles
Social
Demographic
Change
Corporate
Research
Legislation
Source: Wilson, 1974
Political
Pressure
Groups
Business/Govt.
Relations
37
Issue Identification
• From information, forecasts for several years out
must be made and monitored and adjusted.
• Information can be used to screen out non-issues,
long and short term impacts and severity of affect –
more information the better.
• Want to identify issues and problems at early stage
of life cycle – more time to respond.
38
Research and Analysis
• Analyzing issues with highest priority.
• Must involve numerous people from affected
functional area groups.
• Consultants often useful here (academics,
etc.).
39
Evaluation of Issues
Impact on Company
High
Probability
of
Occurrence
High
Medium
Low
High Priority
Medium Priority
Medium
Low Priority
Low
Source: Brown, 1979
40
Stakeholder Mapping
Level of interest
low
high
high
Level of
power
Keep
satisfied
Minimal
effort
Key
players
Keep
informed
low
Source: Mendelow cited in Johnson, G., Scholes, K, and Whittington, R. (2009)
41
Research and Analysis
• Typical questions to ask:
– What is the scope of the issue in terms of
potential impact? Will it affect the whole company
or parts? Will it affect the environment in which
the firm operates?
– Who are the main stakeholders, what are their
interests and what relationship do we have to
them?
42
Research and Analysis
• Typical questions to ask:
– How rapidly is the issue developing or changing?
What stage is it at and where will it be when a
strategy is developed?
– Is the issue likely to become part of formal
government policy in the near future? How will
this affect the firm’s operations?
43
Research and Analysis
• It is crucial that priorities be made since the
firm cannot do thorough analysis on every
issue – save limited resources.
• Must determine alternative company
positions with respect to the issue and
evaluate the pros and cons of taking each.
44
Strategy Development
• The “best” alternative.
• Must reflect the best thinking and be based
on solid research.
• Needs to fit with the resources and
capabilities of the firm while addressing the
issue.
• Needs to address the likelihood, impact and
affect on stakeholders
45
Strategy
INTERNAL
ANALYSIS
GOALS
STRATEGY
EXTERNAL
ANALYSIS
46
Strategy
Forecasts of Long-Term
Macro Trends (Alternative
Scenarios) (5-10 yrs.)
Implications
For the firm
(3-5 yrs.)
Firm
Resources
Strategy
Identification of Short-Term
Micro Events/Developments
(<5 yrs.)
Adapted from Wilson, 1979
47
Implementation
• The strategy must be communicated to the
appropriate people.
• Develop specific tactics for changing corporate
behaviour, influencing public opinion,
lobbying government, developing a court case
– depending upon the chosen strategy.
48
Implementation
• Need to develop internal and external
communication network.
– Internal – information needs to reach the
appropriate actors
– External – the stakeholders need to know how
and what the firm is doing to meet their
expectations in order to be deemed legitimate
49
Evaluation of Strategy
• Systems must be designed to evaluate the
success and effectiveness of the strategy.
• Points of reflection and direction change need
to be built in to provide flexibility due to
learning and experience.
50
Typical Strategic Responses
•
1.
2.
3.
4.
Four typical responses by firms when they
encounter issues:
Reactive
Accommodative
Proactive
Interactive
51
Reactive
• Usually firms make no attempt to anticipate
public issues, but use all their resources to
fight change blocking any resolution to the
issue that might change their corporate
behaviour.
• Seat belts in the 1970s
52
Accommodative
• Businesses adapt to changes involved with a
public issue as best as it can and attempts to
get on with business.
• Simply goes with the flow as opposed to fight
something that might hurt its business or
capitalize on issue to improve its business.
53
Proactive
• Businesses develop a mechanism to anticipate
issues that will affect its business the most.
• Firms try to influence the issue by trying to
change the environment in which the issue
arises, thereby eliminating the issue
altogether before it emerges.
54
Interactive
• Businesses recognize the legitimacy of the
issue and the forum for public issue
institutionalization.
• Firms work within the institutional framework
(engage in debate etc.) to put forth their
perspective to get a “win-win” situation
through negotiation and participation.
55
Assessing Country Attractiveness
Trevor Hunter
King’s University College
Assessing Country Attractiveness
• Firms tended to enter markets that are both
culturally similar and geographically proximal
• In the past 20 years, due to lower entry
barriers, improved technology and
globalization, many firms are “born global” 25% of sales from outside their home market
in less than 3 years
57
Assessing Country Attractiveness
• Many companies are moving right to FDI
• FDI – Foreign Direct Investment: the
establishment or acquisition of actual physical
assets in a foreign country (i.e. production
facilities, distribution network) that are owned
by the firm
• Costly, risky and a full embracing of
internationalization
58
Assessing Country Attractiveness
• Reasons to engage in FDI:
– Market Access: Despite the growth of free trade,
entry barriers (tariffs, local content requirements,
taxes etc.) still remain that discourage imports –
ME
– Lower Production Costs: Offshoring may provide
production factors at a reduced cost increasing
profits – depends on productivity levels,
transportation costs etc.
59
Assessing Country Attractiveness
• Reasons to engage in FDI:
– Natural Resources: Deposits are not equally
distributed around the world, nor are they easily
moved
– Competition from DC MNC’s: Firms don’t want to
be later movers to developing countries
– Other Assets: Management talent, innovation that
are located elsewhere
60
Assessing Country Attractiveness
• What makes a country attractive? - Relative
Comparative Advantage
– Variations in economic environment
– Growth rates
– Political stability
– Levels of disposable income
– Available resources
– Government incentives
– Competition
61
Assessing Country Attractiveness
• These days, in order to gain high rates of
return, higher risk is involved
• Most of the untapped markets are in
politically unstable, low income countries
(BRIC, Africa, Southeast Asia)
• Entering these countries requires analysis and
screening to see if there is a reason to go,
what to expect and how to mitigate risks
62
Assessing Country Attractiveness
• Professional sources
– IMD World Competitiveness Yearbook
– Economic Intelligence Unit
• Free Resources
– Online Resource Centre
– GlobalEDGE
– World Economic Forum
– World Bank
63
Assessing Country Attractiveness
• Organizations
–
–
–
–
–
IMF
OECD
UNCTAD
WTO
CIA
• Problems with data
–
–
–
–
–
Out of date or unavailable information
Political manipulation
Definitional problems
Informal/Shadow economies
Conversion to a common currency
64
Assessing Country Attractiveness
INITIAL SCREENING
ASSESS GENERAL MARKET OR SITE POTENTIAL
ASSESS GENERAL BUSINESS ENVIRONMENT
PRODUCT/SERVICE MARKET
ASSESSMENT
PRODUCTION SITE
ASSESSMENT
UNDERTAKE RISK ANALYSIS
SELECT MARKET OR SITE
65
Initial Screening
• First step is to eliminate countries that will
not work by determining if there are basic
levels of demand (ME) or required
resources (E)
• Data collected from sources can provide
guidance
66
Market Potential
• Develop indicators to assess the potential
market – not just the size of the market but
the potential for sales
• Market indicators:
– GDP, GDP per capita, growth rate, trade stats
– Market size and growth rate
– Quality of demand - Ownership of cars, TVs,
telephones, computers, energy usage, internet
usage etc.
67
Site Potential
• Companies that are intending to produce
abroad need to see if there are appropriate
levels of production factors at the appropriate
cost
– Access to raw materials, labour, finance
– Access to energy, communications and transport
– Quality and cost of resources
– Country risk
68
Assess the General Business
Environment
• Political and Legal Environment
– Government regulation
• Restrictions
• Taxes
• Incentives
– Legal Regime
• Employment law
• Health and safety law
• Environmental policy
– Bureaucracy
69
Economic and Financial
Environment
• Economic and financial conditions will affect a
firm’s profits from a given country
– Inflation
– Interest rates
– Exchange rates
– Credit availability
– Financial stability
– Rates of return
70
Socio-cultural Environment
• Cultural distance can make it difficult to operate the way you
want – could lead to ethical issues. Cross-cultural problems
are often the greatest barrier to gaining a competitive
advantage operating in a different country:
– Language
– Religion
– Culture/Customs
– Demographic trends
– Health/Education
– Urbanisation
– Labour force availability and skills
– Wage levels/Working hours
– Unionisation
– Environmental concerns
71
Technological Environment
• A weak infrastructure can reduce or eliminate
location advantages:
– Science and technology infrastructure
– Patent protection
– Road network/Public transport
– Telephony/Internet capacity
– Air transport
– Ports
– Power supply and reliability
72
Product /Service Market
Assessment
• Not all countries offer the “right” location to
sell products/services – ME driver. The market
characteristics must be assessed:
– Size and growth rate of market
– Major competitors
– Prices, marketing, and promotions of competitors
– Distribution networks
– Marketing strategies
73
Product /Service Market
Assessment
• Not all countries offer the “right” location to
sell products/services – ME driver. The market
characteristics must be assessed:
– Marketing strategies
– Production capacity
– Cost structure
– Entry
– Substitutes
– Power of buyers and sellers
74
Product /Service Market
Assessment
• Even if from a competitive standpoint things
look good, the country’s relative comparative
advantage may be lower depending on:
– Local standards and regulations
– Value of imports and exports of the
product/service
– Tariffs and other trade regulations
– Local cultural factors
75
Production Site Assessment
• Entering a country to produce goods (Eff.)
requires determining if the efficiencies sought
are possible:
– Start-up procedures/ ownership regulations
– Availability, cost and quality of resources
– Infrastructure
– Financial system
– Investment incentives
76
Country Risk
• The possibility of the business environment
changing in such a way that reduces or
eliminates a country’s relative comparative
advantage
• Predictable vs. unpredictable risk
• Cannot eliminate risk:
• Plan for it - Scenario planning
• Hedge against it
• Exit strategy
77
Country Risk
•
•
•
•
•
•
•
•
Changes in political leadership/philosophy
Civil unrest
Corruption/organized crime
Weak leadership/governance
Reliability of the infrastructure
Supply chain disruption
Economic risks
Wars/terrorism/piracy
78
Country attractiveness grid
Factor
Country
A
Country
B
Country
C
Size of market
4
3
3
Growth rate
2
3
4
Starting a business
3
3
4
Getting credit
3
2
3
Political risk
1
3
2
Supply chain disruption
2
3
2
Market potential
…….
Ease of doing business
………
Risk
………….
79