SOME TOOLS FOR COMPARING COUNTRIES
SOME TOOLS FOR COMPARING COUNTRIES
Environmental Scanning
The preceding discussions dealt with indicators of opportunity and risk. But do firms generally seek out information? What information do they deem most important? Where do they get their information? Between the mid-1970s and the late 1980s, international companies became much more sophisticated in their environmental scanning, the systematic assessment of external conditions that might affect their operations. A majority of international firms now employ at least one executive continuously to conduct environmental scanning, and the most sophisticated of these tie the scanning to the planning process and integrate information on a worldwide basis. Companies are most likely to seek economic and competitive information in their scanning process, and they depend heavily on managers based abroad to supply them with information. Their primary concerns are with profit repatriation and devaluation.33
Grids
A grid may be used to compare countries on whatever factors are deemed important. Table 16.2 is an example of a grid with information placed into three major categories. Certain countries may be eliminated immediately
Ranfrom consideration because of characteristics decision makers find unaccept-able. These are in the first category of variables, where country I can be elim-
inated. Values and weights are assigned to items so that a country may be ranked according to attributes that are important to the decision maker. In the same table, for example, country II is graphically pinpointed as a high return-low risk, country III as a low return-low risk, country IV as a high return-high risk, and country V as a low return-high risk.34
Both the variables and the weights should vary by product and company, depending on the firm's internal situation and consequent objectives. The grid technique is useful even when comparative analysis is not made because a company may be able to set a minimum score necessary for either investing additional resources or committing further funds to a more detailed feasibility study. Grids do tend to get cumbersome, however, as the number of variables increases. Furthermore, while they are useful in ranking, they often obscure interrelationships among countries.
Opportunity-Risk Matrix
One way of showing more clearly the summary of data that could be included on a grid is to plot risk on one axis and opportunity on the other, a technique used by many companies, such as Borg-Warner.35 Figure 16.2 is an example that is simplified to include only six countries. The grid shows that the company has current operations in four of the countries (all except countries A
and E). Of the two nonexploited countries, country A has low risk but low opportunity and country E has low risk and high opportunity. If resources
are to De spent m a new area, country E appears to be a better bet than
country A. In the other four countries there are large commitments in country F, medium in countries C and D, and small in country B. In the future time
horizon being examined, it appears that country F will have low risk along with high opportunity. The situation in country D is expected to improve during the studied period. Country C's situation is deteriorating, and country B's is mixed (it has better opportunity but more risk). Note that the world averages being used for comparison also shift during the period under consideration. The importance of the matrix is to reflect the placement of a country relative to other countries.
But how are values plotted on such a matrix? It is up to the company to determine what factors are good indicators of risk and opportunity; these factors then must be weighted to reflect their importance. For instance, on the risk axis the company may give 40 percent (.4) of the weight to expropriation risk, 25 percent (.25) to foreign-exchange controls, 20 percent (.2) to civil disturbances and terrorism, and 15 percent (.15) to exchange-rate change: This makes a total allocation of 100 percent. Each country then would be rated on a scale of 1 to 10 for each of the variables, with 10 indicating the best score and 1 indicating the worst. The score on each item is multiplied by the weight allocated for the variable. For instance, if country A were given a rating of 8 on the expropriation-risk variable, the 8 would be multiplied by .4 for a score of 3.2. All of country A's risk-variable scores are then summed to give the placement of country A on the risk axis. Management would follow a similar procedure to find the plot location on the opportunity axis. Once the scores are determined for each country, management can determine the average score for risk and the average score for opportunity, thereby dividing the matrix into quadrants.
A key element of the sample matrix, and one that is not always included in practice, is the projection of the future country location. The utility of such a placement is obvious if the projections are realistic. Therefore, it is useful to have forecasts made by people who are not only knowledgeable about the countries but also knowledgeable about forecasting methods.
Country Attractiveness-Company Strength Matrix
Another commonly used matrix approach has been devised to highlight a
company's specific product advantage on a country-by-country basis. This
was briefly explained in the case on Ford. For its tractor operations, for ex-
ample, Ford uses this type of matrix. On the country attractiveness scale, countries are ranked from highest to lowest attractiveness for tractors specifically; on the other scale, Ford ranks its competitive strength in tractors by country. The method of performing the ranking is the same as for the opportunity-risk matrix. Ford's weighted scale for country attractiveness includes such variables as market size, market growth, price controls, red tape, requirements for local content and exports, inflation, trade balance, and political stability. Ford's competitive strength weighted scale includes market share, market-share position, its product fit for the needs of the country, absolute profit per unit, percentage profit on cost, quality of Ford's distribution in comparison with competitors, and the fit of Ford's promotion program for the country in comparison with competitors.36
Figure 16.3 illustrates this type of matrix for market expansion before countries are plotted into their positions. The company should attempt to concentrate its activities in the countries that appear in the top left-hand corner of the matrix and to take as much equity as possible in investments there. In this position country attractiveness is the highest and the firm has the best competitive capabilities to exploit the opportunities. In the top right-hand corner, the country attractiveness is also high, but the company has a weak competitive strength for that market—perhaps because it lacks the right product. If it is not too costly, the company might attempt to gain greater domination in those markets by remedying its competitive weakness. Otherwise, it might consider either divestment (reducing its investment) or strengthening the position through joint venture operations with another firm whose assets are complementary. Investments ordinarily should not be made in
areas in the bottom right-hand corner, and divestment should be attempted. Income may be "harvested" by pulling out all possible cash that can be generated while, at the same time, not replacing depreciated facilities. Licensing still offers potential because it may generate some income without having to make investment outlays. In other areas the company must analyze situations selectively in order to decide which approach to take. These are marginal areas which require specific judgment.
DIVERSIFICATION VERSUS CONCENTRATION STRATEGIES |
Ultimately, a firm may gain a sizable presence and commitment in most countries of the world; however, there are different paths to reach that position. At one extreme, in a diversification strategy the company may move rapidly into most foreign markets, gradually increasing its commitments within each of them. This could be done, for example, through a liberal licensing policy for a given product so that there are sufficient resources for this initial widespread expansion. The company eventually may increase its involvement by internalizing activities that it initially had contracted to other firms. At the other extreme, in a concentration strategy the company might move only to one or a few foreign countries until it developed a very strong involvement and competitive position there. There are, of course, hybrids of these two strategies: for example, moving rapidly to most markets but increasing the commitment in only a few. The following discussion centers on those major variables a firm should consider when deciding whether to use a diversification or concentration strategy.37 (See Table 16.3.)
Sales Response Function
The sales response function refers to the amount of sales created at different levels of marketing expenditures. If, for example, the first $100,000 of marketing expenditure in a given country yielded $ 1 million of sales, the next $100,000 yielded $800,000, and the third yielded $600,000, this would be a decreasing response. On the other hand, if the first $100,000 in a country yielded $600,000, the second yielded $800,000, and the third yielded $1 million, it would be an increasing response. There are products that follow each pattern over similar expenditure levels. If the company had $300,000 to spend on a marketing program for which there is the same decreasing response in each country, the company would create more sales by spreading entry over three countries. This would yield $3 million ($1M. + 1M. + 1M.), whereas a concentration on one country would yield only $2.4 million ($1M. + 0.8M. + 0.6 M.). If the same $300,000 were spent on a product with an increasing response, however, a concentration strategy would yield better results: $2.4 million ($0.6M. + 0.8 + 1M.) as opposed to $1.8 million ($0.6M. + 0.6M. + 0.6M.).
Growth Rate in Each Market
When the growth rate in each market is high, it is usually preferable for a firm to concentrate on a few markets because it will cost a great deal to maintain market share, and costs per unit are typically lower for the market-share leader. Slower growth in each market may allow the company to have enough resources to build and maintain a market share in a number of different countries.
Sales Stability in Each Market
International diversification has been shown to have an even stronger relationship to profit stability than product diversification.38 Recall the Ford case at the beginning of the chapter and the earlier description of how earnings and sales are smoothed because of operations in various parts of the world. This is because there are leads and lags in the business cycles. Additionally, a company whose assets and earnings base are in a variety of countries will be less affected by occurrences within a single nation. A strike or expropriation therefore will affect earnings from only a small portion of total corporate assets. Currency devaluations in some countries may be offset by revaluations in other countries.
The more stable sales and profits are within a single market, the less need there is for a diversification strategy. Likewise, the more interrelated markets are, the less smoothing is achieved by selling in each. For example, Ford would seemingly get less of a smoothing effect between France and Germany (because their economies are so interrelated through the EC) than between either of those two countries and the United States.39
Competitive Lead Time
We have shown that one of the reasons for using nonequity arrangements as a means of serving foreign markets is to beat competitors into the market. The use of these external arrangements helps the companies to spread into more markets than if they were to use only their own resources. If a company assesses that it has a long lead time before competitors can likely copy or supersede its advantages, then it may be able to maintain control of the expansion by following a concentration strategy and still beat competitors into other markets.
Spillover Effects
Spillover effects refer to situations whereby the marketing program in one country results in awareness of the product in other countries. This can happen, for example, if the product is advertised through media viewed on a cross-national basis. In such situations a diversification strategy has advantages because additional customers may be reached with little additional incremental cost.
Need for Product, Communications, and Distribution Adaptation
Products and the marketing of them may have to be altered for sale in foreign markets. The adaptation process is often costly and, if so, may lead to two factors that favor a concentration strategy: First, the additional costs may limit the resources the firm has for expansion in many different markets; second, the fixed costs incurred for adaptation cannot be as easily spread over sales in other countries as a means of reducing total unit costs.
Program Control Requirements
The more necessary it is that the company control what is happening in the foreign country where the product is being sold, the more likely that it should develop a concentration strategy. This is because more of the firm's resources
will need to be used to maintain that control. The need for more control could come about for a number of reasons, including fear that an external arrangement will create a competitor or the need for highly technical assistance to customers.
Extent of Constraints
Constraints on what a firm can do may come about internally or externally. In resource availability, for example, the higher the constraints, the more likely a concentration strategy is. Assume that the key resource for introducing a new product into the foreign markets is the availability of certain specialized technical personnel. If there is a shortage of these personnel both within and outside the company, the company will be constrained in the number of countries to which it can expand rapidly. Or if there are constraints in where they can be moved, the company may find it difficult to expand into many different markets rapidly.
Environmental Scanning
The preceding discussions dealt with indicators of opportunity and risk. But do firms generally seek out information? What information do they deem most important? Where do they get their information? Between the mid-1970s and the late 1980s, international companies became much more sophisticated in their environmental scanning, the systematic assessment of external conditions that might affect their operations. A majority of international firms now employ at least one executive continuously to conduct environmental scanning, and the most sophisticated of these tie the scanning to the planning process and integrate information on a worldwide basis. Companies are most likely to seek economic and competitive information in their scanning process, and they depend heavily on managers based abroad to supply them with information. Their primary concerns are with profit repatriation and devaluation.33
Grids
A grid may be used to compare countries on whatever factors are deemed important. Table 16.2 is an example of a grid with information placed into three major categories. Certain countries may be eliminated immediately
Ranfrom consideration because of characteristics decision makers find unaccept-able. These are in the first category of variables, where country I can be elim-
inated. Values and weights are assigned to items so that a country may be ranked according to attributes that are important to the decision maker. In the same table, for example, country II is graphically pinpointed as a high return-low risk, country III as a low return-low risk, country IV as a high return-high risk, and country V as a low return-high risk.34
Both the variables and the weights should vary by product and company, depending on the firm's internal situation and consequent objectives. The grid technique is useful even when comparative analysis is not made because a company may be able to set a minimum score necessary for either investing additional resources or committing further funds to a more detailed feasibility study. Grids do tend to get cumbersome, however, as the number of variables increases. Furthermore, while they are useful in ranking, they often obscure interrelationships among countries.
Opportunity-Risk Matrix
One way of showing more clearly the summary of data that could be included on a grid is to plot risk on one axis and opportunity on the other, a technique used by many companies, such as Borg-Warner.35 Figure 16.2 is an example that is simplified to include only six countries. The grid shows that the company has current operations in four of the countries (all except countries A
and E). Of the two nonexploited countries, country A has low risk but low opportunity and country E has low risk and high opportunity. If resources
are to De spent m a new area, country E appears to be a better bet than
country A. In the other four countries there are large commitments in country F, medium in countries C and D, and small in country B. In the future time
horizon being examined, it appears that country F will have low risk along with high opportunity. The situation in country D is expected to improve during the studied period. Country C's situation is deteriorating, and country B's is mixed (it has better opportunity but more risk). Note that the world averages being used for comparison also shift during the period under consideration. The importance of the matrix is to reflect the placement of a country relative to other countries.
But how are values plotted on such a matrix? It is up to the company to determine what factors are good indicators of risk and opportunity; these factors then must be weighted to reflect their importance. For instance, on the risk axis the company may give 40 percent (.4) of the weight to expropriation risk, 25 percent (.25) to foreign-exchange controls, 20 percent (.2) to civil disturbances and terrorism, and 15 percent (.15) to exchange-rate change: This makes a total allocation of 100 percent. Each country then would be rated on a scale of 1 to 10 for each of the variables, with 10 indicating the best score and 1 indicating the worst. The score on each item is multiplied by the weight allocated for the variable. For instance, if country A were given a rating of 8 on the expropriation-risk variable, the 8 would be multiplied by .4 for a score of 3.2. All of country A's risk-variable scores are then summed to give the placement of country A on the risk axis. Management would follow a similar procedure to find the plot location on the opportunity axis. Once the scores are determined for each country, management can determine the average score for risk and the average score for opportunity, thereby dividing the matrix into quadrants.
A key element of the sample matrix, and one that is not always included in practice, is the projection of the future country location. The utility of such a placement is obvious if the projections are realistic. Therefore, it is useful to have forecasts made by people who are not only knowledgeable about the countries but also knowledgeable about forecasting methods.
Country Attractiveness-Company Strength Matrix
Another commonly used matrix approach has been devised to highlight a
company's specific product advantage on a country-by-country basis. This
was briefly explained in the case on Ford. For its tractor operations, for ex-
ample, Ford uses this type of matrix. On the country attractiveness scale, countries are ranked from highest to lowest attractiveness for tractors specifically; on the other scale, Ford ranks its competitive strength in tractors by country. The method of performing the ranking is the same as for the opportunity-risk matrix. Ford's weighted scale for country attractiveness includes such variables as market size, market growth, price controls, red tape, requirements for local content and exports, inflation, trade balance, and political stability. Ford's competitive strength weighted scale includes market share, market-share position, its product fit for the needs of the country, absolute profit per unit, percentage profit on cost, quality of Ford's distribution in comparison with competitors, and the fit of Ford's promotion program for the country in comparison with competitors.36
Figure 16.3 illustrates this type of matrix for market expansion before countries are plotted into their positions. The company should attempt to concentrate its activities in the countries that appear in the top left-hand corner of the matrix and to take as much equity as possible in investments there. In this position country attractiveness is the highest and the firm has the best competitive capabilities to exploit the opportunities. In the top right-hand corner, the country attractiveness is also high, but the company has a weak competitive strength for that market—perhaps because it lacks the right product. If it is not too costly, the company might attempt to gain greater domination in those markets by remedying its competitive weakness. Otherwise, it might consider either divestment (reducing its investment) or strengthening the position through joint venture operations with another firm whose assets are complementary. Investments ordinarily should not be made in
areas in the bottom right-hand corner, and divestment should be attempted. Income may be "harvested" by pulling out all possible cash that can be generated while, at the same time, not replacing depreciated facilities. Licensing still offers potential because it may generate some income without having to make investment outlays. In other areas the company must analyze situations selectively in order to decide which approach to take. These are marginal areas which require specific judgment.
DIVERSIFICATION VERSUS CONCENTRATION STRATEGIES |
Ultimately, a firm may gain a sizable presence and commitment in most countries of the world; however, there are different paths to reach that position. At one extreme, in a diversification strategy the company may move rapidly into most foreign markets, gradually increasing its commitments within each of them. This could be done, for example, through a liberal licensing policy for a given product so that there are sufficient resources for this initial widespread expansion. The company eventually may increase its involvement by internalizing activities that it initially had contracted to other firms. At the other extreme, in a concentration strategy the company might move only to one or a few foreign countries until it developed a very strong involvement and competitive position there. There are, of course, hybrids of these two strategies: for example, moving rapidly to most markets but increasing the commitment in only a few. The following discussion centers on those major variables a firm should consider when deciding whether to use a diversification or concentration strategy.37 (See Table 16.3.)
Sales Response Function
The sales response function refers to the amount of sales created at different levels of marketing expenditures. If, for example, the first $100,000 of marketing expenditure in a given country yielded $ 1 million of sales, the next $100,000 yielded $800,000, and the third yielded $600,000, this would be a decreasing response. On the other hand, if the first $100,000 in a country yielded $600,000, the second yielded $800,000, and the third yielded $1 million, it would be an increasing response. There are products that follow each pattern over similar expenditure levels. If the company had $300,000 to spend on a marketing program for which there is the same decreasing response in each country, the company would create more sales by spreading entry over three countries. This would yield $3 million ($1M. + 1M. + 1M.), whereas a concentration on one country would yield only $2.4 million ($1M. + 0.8M. + 0.6 M.). If the same $300,000 were spent on a product with an increasing response, however, a concentration strategy would yield better results: $2.4 million ($0.6M. + 0.8 + 1M.) as opposed to $1.8 million ($0.6M. + 0.6M. + 0.6M.).
Growth Rate in Each Market
When the growth rate in each market is high, it is usually preferable for a firm to concentrate on a few markets because it will cost a great deal to maintain market share, and costs per unit are typically lower for the market-share leader. Slower growth in each market may allow the company to have enough resources to build and maintain a market share in a number of different countries.
Sales Stability in Each Market
International diversification has been shown to have an even stronger relationship to profit stability than product diversification.38 Recall the Ford case at the beginning of the chapter and the earlier description of how earnings and sales are smoothed because of operations in various parts of the world. This is because there are leads and lags in the business cycles. Additionally, a company whose assets and earnings base are in a variety of countries will be less affected by occurrences within a single nation. A strike or expropriation therefore will affect earnings from only a small portion of total corporate assets. Currency devaluations in some countries may be offset by revaluations in other countries.
The more stable sales and profits are within a single market, the less need there is for a diversification strategy. Likewise, the more interrelated markets are, the less smoothing is achieved by selling in each. For example, Ford would seemingly get less of a smoothing effect between France and Germany (because their economies are so interrelated through the EC) than between either of those two countries and the United States.39
Competitive Lead Time
We have shown that one of the reasons for using nonequity arrangements as a means of serving foreign markets is to beat competitors into the market. The use of these external arrangements helps the companies to spread into more markets than if they were to use only their own resources. If a company assesses that it has a long lead time before competitors can likely copy or supersede its advantages, then it may be able to maintain control of the expansion by following a concentration strategy and still beat competitors into other markets.
Spillover Effects
Spillover effects refer to situations whereby the marketing program in one country results in awareness of the product in other countries. This can happen, for example, if the product is advertised through media viewed on a cross-national basis. In such situations a diversification strategy has advantages because additional customers may be reached with little additional incremental cost.
Need for Product, Communications, and Distribution Adaptation
Products and the marketing of them may have to be altered for sale in foreign markets. The adaptation process is often costly and, if so, may lead to two factors that favor a concentration strategy: First, the additional costs may limit the resources the firm has for expansion in many different markets; second, the fixed costs incurred for adaptation cannot be as easily spread over sales in other countries as a means of reducing total unit costs.
Program Control Requirements
The more necessary it is that the company control what is happening in the foreign country where the product is being sold, the more likely that it should develop a concentration strategy. This is because more of the firm's resources
will need to be used to maintain that control. The need for more control could come about for a number of reasons, including fear that an external arrangement will create a competitor or the need for highly technical assistance to customers.
Extent of Constraints
Constraints on what a firm can do may come about internally or externally. In resource availability, for example, the higher the constraints, the more likely a concentration strategy is. Assume that the key resource for introducing a new product into the foreign markets is the availability of certain specialized technical personnel. If there is a shortage of these personnel both within and outside the company, the company will be constrained in the number of countries to which it can expand rapidly. Or if there are constraints in where they can be moved, the company may find it difficult to expand into many different markets rapidly.
Comments
Post a Comment