The international market selection process

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1 1 The international market selection process

2 Agenda International market selection process Segmentation Steps for the IMS Entry modes 2

3 Market segmentation (I) The process of dividing a market into distinct subsets (segments) of consumers with common needs or characteristics.

4 Market segmentation (II) 4

5 Slide: 5

6 Market segmentation (II) 6

7 Market segmentation (IV) Measurability: the degree to which the size, purchasing power of a market segment can be measured. Accessibility: the degree to which a market segment can be reached and served. Substantiality/profitability: the degree to which a market segment is sufficiently large or profitable. Actionability: the degree to which effective programmes can be designed for attracting and servicing a given market segment.

8 Market Targeting Strategies There are three market coverage strategies: 1. Undifferentiated 2. Multisegment (Differentiated) 3. Concentration (Niche)

9 Agenda International market selection process Segmentation Steps for the IMS Entry modes 9

10 International Market Segmentation The firm Environment Step 1: Selection of segmentation criteria Step 2: Development of segments Step 3: Screening of segments Step 4: Microsegmentation Market entry

11 Step 1/2: Defining criteria General characteristics Geographic Language Political factors Demography Economy Industrial structure Technology Social organization Religion Education High degree of measurability, accessibility, and actionability, but a low degree of relevance Specific characteristics Culture Lifestyle Personality Attitudes and tastes Low degree of measurability, accessibility, and actionability, but high degree of relevance

12 Step 3: Screening of markets/countries (I) A) Preliminary screening Restriction in the export of goods from one country to another; Gross national product per capita Car owned per of the population Population per hospital bed. Geographic proximity BERI Index Business Environment Risk Index (example) 12

13 Step 3: Screening of markets/countries (II) 13

14 OPPORTUNITY MATRIX FOR HENKEL IN ASIA PACIFIC 14 Hellmut Schutte, Henkel s Strategy for Asia Pacific, Long Range Planning, 28 (1), 1995, p. 98

15 Step 3: Screening of markets/countries (III) Market/country attractiveness Competitive strength 15 Market size (total and segments) Market growth (total and segments) Buying power of customers Market season and fluctations Avarage industry margin Competitive conditions (concentration, intensity, entry barrieres, ecc.) Government regulations (price controls, local content, ecc.) Infrastructure Economic and political stability Market share Marketing ability and capacity (country specific know-how) Products fit to market demands Price Image Product quality Market support Quality of distributors and service Financial resources

16 Step 3: Screening of markets/countries (II) B) Fine grained screening 16

17 Step 4: Microsegmentation Once the prime markets have been identified, firms then use standard tecniques to segment markets within countries. 17

18 Micromarket segmentation

19 Critical to the success of the Ford s marketing strategy in China is Mei (meaning beautiful in Chinese). Mei represents the twenty-something, single urban, collegeeducated female, who earns $880 to $1,500 a month and plans to buy her first car. This is Ford s target market for the rollout of the new Fiesta in China. China s car market is the second biggest in the world (behind the United States). Yet, although passenger vehicle sales rose almost 7 percent in 2008, sales of Ford brand cars dropped 10 percent. Ford hopes that the new Fiesta will halt the sales decline. The new Ford Fiesta is the first of Ford s global car strategy that centers on the idea of selling car models worldwide in order to save on development costs and gain economies of scale. The new model was first revealed at the 2008 Geneva car show. Ford planned to launch the car first in Asia in 2009, then in Europe, and ultimately in North America. The new Fiesta has the same size as the old small-car Fiesta that was sold in Europe but it is lighter and more environmentally friendly with its high-fuel efficiency. To prepare for the launch of the Fiesta in China, Ford ran an immersion event that was designed to put senior Ford and ad agency executives in touch with the Mei target customers. During the event, these executives spent one afternoon with fifteen women in the Fiesta age group to get insights into their lives, attitudes, and goals. All of the women spent a lot of time on the internet. Guided by the research findings, Ford developed an ad campaign to connect with its prospects that started in March The campaign centered on lifestyle magazines and the internet, with emphasis on social networking sites. The ads aspired to be edgy without being offensive. The ads featured attractive men and women, bright colors and hipmusic. A second campaign targeting Mei s parents focused on the Fiesta s safety. The research also underlined differences between Chinese and European consumers: Chinese car buyers want more options so that they can personalize their vehicles. As a result, Ford decided to offer four color combinations on the Fiesta in China, compared to just two in Europe 19

20 Transnational clustering of the western European market

21 DIFFERENT SEGMENT SCENARIOS universal or global segments 21

22 Agenda International market selection process Segmentation Steps for the IMS Choose the Mode of Entry 22

23 ENTRY MODES ENTRY MODES EXPORTING INTERMEDIATE INVESTMENT DIRECT INDIRECT GREENFILED BROWNFIELD RISK CONTROL FLEXIBILITY

24 Export Modes Direct export modes: manufacturer sells directly to an importer, agent or distributor, locate in the foreign target market. 24

25 Direct export modes Distributors Independent merchants who take possession and usually title of goods for resale. Usually will seek exclusive rights for a specific territory Represent the manufacturer/exporter in all aspects of sales and service May or may not handle other or competing products Agents Represents an exporting company, and sells to wholesalers, retailers and sometimes end-users in the home country. Do not take title to goods Typically paid on commission May represent other companies products as well

26 Indirect export modes Indirect export modes: manufacturer uses independent export organizations located in its own country Export buying agent: it is a representative of foreign buyers who resides in the exporter s home country. Broker: the chief function of a broker is to bring together a buyer and a seller. The broker is a specialist in performing the contractual function. Export management company: it is a specialist company set up to act as the export department for a range of companies. Trading companies: they play a central role in such diverse areas as shipping, warehousing, finance, technology transfer, planning resources development, insurance, etc. Piggyback: the export-inexperienced SME, the rider, deals with a larger company (the carrier ) which already operates in certain foreign markets. 26

27 Export modes Distributor 27

28 INTERMEDIATE ENTRY MODES Contract Manufacturing Licensing Franchising Joint Ventures/ Strategic Alliances

29 Contract Manufacturing Contract manufacturing allows the firm to have foreign production without making a final commitment Benetton relies upon a contractual network of small overseas manufacturers

30 Licensing Thelicensorgivesarighttothelicenseeagainstpayment, e.g. a right to manufacture a certain product based on a patent against some agreed royalties. 30

31 RIGHTS THAT MAY BE OFFERED IN A LICENSING AGREEMENT Patent covering a product or process Manufacturing know-how not subject to a patent Technical advice and assistance Marketing advice and assistance Use of a trade mark/trade name

32 Contracting maintains your complete ownership of the product. You agree on a price for manufacturing the product, and the manufacturer delivers the number of units you request. Licensing: This arrangement puts all the risk on the manufacturer. Under a licensing agreement, you agree to let a manufacturer make as many copies of your product as it can, and you get paid a licensing fee. The manufacturer will expect to make money on the product as well, so you must be prepared to make less on a percentage basis than you would if you retained full ownership of the rights to the product 32

33 FRANCHISING The franchisor gives a right to the franchisee against payment, e.g. the right to use a total business/concept, including use of trade marks (brands), against some agreed royalty.

34 Licensing vs. franchising Licensing Products, or even a single product, are the common element Licenses are usually taken by wellestablished businesses Terms of years are common Licensees enjoy a substantial measure of free negotiations. Franchising Covers the total business, including knowhow, intellectual rights, goodwill, trade marks and business contacts. Tends to be a start-up situation, certainly as regards the franchisee The franchisee agreement is normally for 5 years. There is a standard fee structure and any variation within an individual franchise system would cause confusion and mayhem. 34

35 INTERNATIONAL FRANCHISING WITH PAPA JOHN S (PJ) Franchise Support Training. PJ provides training and development solutions and assistance with the development of trainers and training solutions. Restaurant openings. PJ offers assistance with determining the ideal site, review of market trade areas and site criteria, the build-out of the restaurant, and ordering of equipment. Operations. The company assists the franchisee with creating strategies and tactics to improve the operations, market penetration, and human resources development. Food and supply chain. PJ develops partnerships with suppliers in each country to ensure that international franchisees receive the highest-quality ingredients and supplies at the best possible prices. Marketing. PJ offers assistance in menu creation, long-term strategic planning, grand openings, and other marketing programs. Information services. The firm s information services department offers knowledge and tools to international franchisees to manage their operations. Quality management. PJ has three teams that support Research & Development, Quality Assurance, and Quality Control worldwide. Length of Contract: Theinitialtermistenyears,withanoptiontorenewforanadditional10-yearterm if certain criteria are met. Franchise Fee: US$25,000 Ongoing Fees: Royalty fee of 5 percent of net sales is due monthly 35

36 International Joint Ventures (I) Equity JV two or more partners have different relative ownership shares (equity percentages) in the new venture. Example: Chrysler and Mitsubishi Automotive Nonequity JV (strategic alliance) agreements are carried out through contract rather than ownership sharing Example: Chrysler s supplier network Problems: partner selection; definition of mutual beneficial working agreement; management skills 36

37 International Joint Ventures (II) 37

38 Foreign direct investment (FDI) Direct investment in the foreign country Higher risk, lower flexibility!

39 Foreign direct investment (FDI) 1.Acquisition: taking over an existing business quick entry and may provide access to distribution channels and existing customer base might be the only feasible way to establish operations when the market is saturated, highly competitive or has substantial entry barriers 2. Greenfield investment: building from the ground may be necessary when acquisition targets are unavailable, too costly or obsolete 3. Brownfield investment: combination of existing business and upgrading investment

40 ENTRY MODES & STRATEGIES EXPORT MODES 100% resource EXTERNALIZATION ( control; risk; flexibility) INTERMEDIATE MODES Partial resource EXTERNALIZATION (shared risk and control; shared ownership) INVESTMENT MODES 100% resource INTERNALIZATION ( control; risk; flexibility)

41

42 Impossibile visualizzare l'immagine. IMPORTANT FACTORS THAT AFFECT THE FOREIGN ENTRY MODES DECISIONS

43 Transaction costs «A firm will tend to expand until the cost of organizing an extra transaction within the firm will become equal to the cost of carrying out the same transaction by means of an exchange on the open market» (coase, 1937, p. 395). Transaction costs emerge when markets fail to operate under the requirements of perfect competition. Firms internalize, integrate vertically, to reduce transaction costs. If the transaction costs through externalization (importer) are higher than the control through an internal hierarchical system, then the firm should seek internationalization of activities in wholly owned subsidiaries. 43

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