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A Framework for International Market Selection-revised

A Framework for International Market Selection
As a company seeks to expand internationally, not every potential foreign market will be of equal strategic
importance for the firm. Firm’s need to consider carefully how each new market they might enter fits into
their strategic goals for the future. At the same time, the ability for a firm to exploit a new international
market, in other words to actually capture the potential benefits of that market, must also be considered in
the decision. This note presents a conceptual framework1 for analyzing and comparing potential
international markets that combines these two key dimensions: the strategic importance of the market, and
the ability to exploit the market in order to provide guidelines to firms in analyzing international market
selection options.
Strategic Importance of the Market:
The strategic importance of the market encompasses both market potential and learning potential that a
potential new market offers:
Market Potential: market potential includes both 1) market size,
and 2) market growth expectations for a particular line of business.
For example, when Nokia, the Finnish telecommunications firm
was deciding whether to pursue opportunities in the U. K. or in
Malaysia, it eventually decided to place its operations for 4G
mobile network equipment development, along with an official
physical store presence, in Malaysia, due to the rapid market
growth in the Malaysian telecom sector.
Learning Potential: learning potential includes: the presence of
sophisticated and demanding consumers for a given product or service; and the pace at which relevant
technologies are evolving in the region. The presence of sophisticated consumers puts pressure on a firm to
raise their standards for product or service quality, speed of product development, cost competitiveness,
and other attributes considered by consumers. Such consumer pressure forces firms to constantly
innovate.2 When a firm enters a market in which the consumers are
particularly demanding, this pressure helps the firm to learn at a high
standard and develop capabilities that will make them more competitive
in the future, not just in that particular market, but on the global stage.
For example, the Japanese cosmetics firm Shiseido attributes much of its
innovative development in cosmetics and skin care to the pressure put on
the company in its French operations by the very demanding and
sophisticated French consumers of beauty care products.
The pace at which technology is evolving in a given region includes the strength of research institutions and
Framework derived from Anil K. Gupta and Vijay Govindarajan, “ Managing Global Expansion: A Conceptual Framework,”
Business Horizons, March-April 2000, pp. 45-54.
This logic is consistent with the concept of “demand conditions” in Porter’s Diamond of National Advantage discussed earlier in the course; however,
it is important to keep in mind that Porter’s Diamond Model is used to explain why specific home country conditions fosters competitiveness in a
particular industry. In the Framework for Market Selection, we are concerned with what makes a market attractive to the foreign entrant.
universities focused on relevant technological research to the firm’s line(s) of business or related industries.
In addition, strong local competitors also enhances the learning potential for a firm in entering a given
A final related element to consider in terms of learning potential is the degree to which the lessons learned
in a given country market, or the success achieved in that market, can be transferred to other country
markets. Country markets in which consumers are considered highly knowledgeable, and where the
industry has international recognition tend to signal trends and influence over other country markets and
thus can offer further global opportunities for entering firms.
Ability to Exploit the Market:
A firm’s ability to exploit the market is driven by two key factors: distance barriers (i.e. CAGE Framework
factors), and intensity of local competition.
Distance Barriers: Distance barriers include the barriers to
entering an international market that are created by cultural
distance, administrative distance, geographic distance and
economic distance4 Walmart’s experience in Germany is a
good example to illustrate how some of the barriers of
cultural distance can derail a firm’s foreign market success,
despite the attractiveness of the market itself. Walmart
entered Germany in 1997, drawn to what was at the time a
$370 billion retail market. However, Walmart struggled in
Germany due to issues with cultural distance from both consumers and employees. The more greenconscious German consumers were not impressed with the high amount of packaging and plastic bags used
in Walmart’s products and shopping format. In addition, the Walmart custom of smiling greeters unnerved
shoppers in Germany where it is not a cultural norm to smile at strangers. Walmart’s requirement of
employees to engage in group chanting and calisthenics before beginning their shifts did not resonate
culturally with the more restrained German employees. Walmart ultimately exited the German market nine
years after entering.
In addition to the issues of cultural distance, as illustrated above, firms also need to contend with issues of
administrative distance, such as differing government regulations between countries, or political tension
between home and host countries. For example, the variance in intellectual property protection between
the United States and India, for example, has caused a number of U.S. pharmaceutical firms to re-focus their
R&D efforts in India from drug development to clinical trials. An example of political tension affecting
international business can be seen in how the significant trade tension between the United States and China
drove Tesla to invest in local production in China in order to avoid the cost and risk of rising import tariffs on
automobiles into China.
Geographic distance between a firm’s home base and a prospective foreign market raises potential
challenges in supply chain as well as logistical challenges of management oversight and coordination of
This logic is consistent with the concepts of “factor conditions,” “related and supporting industries,” and “rivalry” in Porter’s Diamond of National
Advantage discussed earlier in the course. As mentioned in prior footnote, it is important to keep in mind that Porter’s Diamond Model is used to
explain why specific home country conditions fosters competitiveness in a particular industry. In the Framework for Market Selection, we are concerned
with what makes a market attractive to the foreign entrant.
4 For further discussion of these dimensions, see Webinar on “The CAGE Framework”
strategy. Beyond the actual distance in kilometres, the degree of development of transportation
infrastructure in the target country also needs to be considered. For example, in order to reach consumers
in rural villages in Ghana, the Danish firm FanMilk invested heavily into a new distribution model of bicycle
Finally, economic distance, such as differences in consumer incomes, or differences in communication
infrastructure are also key issues that must be considered in assessing the viability of markets to enter. For
example, Walmart’s struggles in Brazil can be largely attributed to Walmart’s inability to reduce their cost
structure enough to meet the lower price demands of consumers whose disposable income dropped
following Brazil’s economic slowdown after 2010.
In sum, the higher the distance barriers between a firm’s home market and prospective future country
markets, the lower is the ability of the firm to exploit that particular country market.
Intensity of Local Competition: a firm’s ability to
exploit a new international market is also hindered by
prevalent competition, both from local firms, and other
foreign firms who are already established. For
example, although there are low regulatory barriers in
the U.S. retail industry for foreign entrants, and
relatively low cultural distance between the U.S. and
U.K., the U.K. retail chain Marks & Spencer experienced
huge challenges in exploiting the U.S. market, and
ultimately exited, due to intensity of competition in the U.S. supermarket sector.
A Framework for International Market Selection
Figure 1 presents a framework that combines the two primary dimensions discussed above—strategic
importance of the market and ability to exploit the market and allows firms to position their current and
prospective country markets in relation to each other.
Figure 1: A Framework for Market Selection
Strategic Importance
of the Market
Ignore for
Ability to Exploit the Market