Chapter 13

CHAPTER 13 COUNTRY EVALUATION AND SELECTIONCase: Ford Motor Company By 1930 Ford was manufacturing orassembling automobiles in twenty foreign countries Emphasis on 100% control over foreign Expansion Political Conditions also shaped the company's foreign expansion 1998, Ford sells in over 200 countries and territories and has production in 30. I - INTRODUCTION Examining international geographic strategies is important because companies seldom have enough resources to take advantage of all opportunities. Committing human, technical, and financial resources to one locale may mean forgoing projects in other areas. Because companies' motives and competencies may differ substantially, what may be a very attractive country for one company may , at the same time , be unattractive for another A - Choosing Sites for Marketing and Production Companies must determine where to market and where to produce. Companies also must ascertain where to locate such specialized units as R&D departments and regional headquarters. Market-location and production-location B - Overall Geographic Strategy In essence a company needs to decide where to operate and what portion of operations to place within each country II - SCANNING FOR ALTERNATIVES Scanning is useful because otherwise a company might consider too few or too many possibilities. A - Risk of Overlooking Opportunities As a company tries to optimize its sales or minimize its costs, it can easily overlook or disregard some promising options. Further, certain locales sometimes are lumped together and rejected before being sufficiently examined for expansion possibilities. B - Risk of Examining Too Many Opportunities A detailed analysis of every alternative might result in maximized sales, but the cost of so many studies would erode profits C - The Environmental Climate In any company, decision-makers' perception of the environmental climate , those external conditions in host countries that could significantly affect the success or failure of a foreign business enterprise will determine whether a detailed feasibility study will be undertaken and the terms under which a project will be initiated. III - INFLUENTIAL VARIABLES: OPPORTUNITIES Investment decisions are made on the basis of expected opportunities versus risks. Opportunities, in turn, are determined by revenues less costs. Examining key variables helps companies: a) Determine the order of entry b) Set the rates of resource allocation among Countries A - Market Size Sales potential is probably the most important variable in ascertaining which locations will be considered and whether an investment will be made Indicators of Market Size: GNP, per capita income, growth rates, size of the middle class, and level of industrialization. Ex: The triad market of the United States, Japan, and Western Europe accounts for about half the world's total consumption, and an even higher proportion of purchases of computers, consumer electronics, and machine tools. Asian economies, Latin economies B - Ease and Compatibility of Operations - Geographic, Language and Market Similarities Companies are highly attracted to countries that are located nearby, share the same language, and have similar market conditions. - Fit with Company Capabilities and Policies There is the best chance for a proposal to be accepted when a location offers size, technology and other factor familiar to a company personnel Allows ownership Impose no restrictions on remittance of profits C - Costs and Resource Availability Costs, especially labor costs are an important factor in the production-location decision Other costs: raw materials, capital, taxes Availability of specific skills Availability of infrastructure to allow for the efficient movement of supplies and finished products. Availability of banks, universities, insurance groups, public accountants, customs brokers, etc. Product Image also dictate location of investment - Red Tape IV - INFLUENTIAL VARIABLES: RISK A - Risk and Uncertainty -Should return on investment be calculated on the basis of the entire earnings of a foreign subsidiary or just on the earnings that can be remitted to the parent? - Does it make sense to accept a low return in one country if doing so will help the company's competitive position elsewhere? B - Competitive Risk A company's innovative advantage may be short-lived. Even when the company has a substantial competitive lead time. Companies also may develop strategies to find countries in which there is least likely to be significant competition. C - Monetary Risk If a company's expansion occurs through direct investment abroad, access to the invested capital and the exchange rate on its earnings are key considerations. Liquidity Preference D - Political Risk A major concern of international companies is that the political climate will change in such a way that their operating position will deteriorate. Ex: during the period of apartheid in South Africa, many foreign investors were affected by boycotts. Approaches to Predicting Political Risk: a) Analysis of Past Patterns b) Opinion Analysis c) Instability Assessment V - BUSINESS RESEARCH Business research is undertaken to reduce uncertainties in the decision process, to expand or narrow the alternatives under consideration, and to assess the merits of existing programs. How much research: Companies should compare the cost of information with its value. Problems with Data: lack, currency, inaccuracy, data discrepancies External Sources of Information: Country Reports: The Economist Intelligence Unit Specialized Studies Service Companies Governmental Agencies International Agencies Trade Associations Information Service Companies Comparability problems: differences in collection methods, definitions, distortion in currency conversions. VI - TOOLS FOR COMPARING COUNTRIES Environmental Scanning: systematic assessment of external conditions that might affect a companies operations. A - Grids A grid may be used to compare countries on whatever factors are deemed important. Both the variables and the weights will vary by product and company. Grids rank countries by important variables B - Opportunity-Risk Matrix A company can decide on indicators and weight them, evaluate each country on the weighted indicators. It is up to the company to determine which factors are good indicators of risk and opportunity, the factors then must weighted to reflected their importance. One key ingredient of this matrix: projection of the future country location. The matrix is important as a reflection of the placement of a country relative to other countries. C - Country Attractiveness - Company Strength Matrix This matrix highlights the fit of a company's product to the country. Country Factors: market size, growth prospects, price controls, red tape, requirements for local content and exports, inflation, trade balance, political stability Company Strength: market share, market share position, product fit to the country's needs, absolute profit per unit, percentage profit on cost, quality of products, fit of the company's promotion program to the country in comparison with that of its competitors. Problems: a) a company may choose to stay in a market to prevent competitors from using their dominance there to fund expansion elsesewhere, b) often difficult to separate the attractiveness of country from a company's position, and c) some of the recommended take a defeatist attitude to a company's competitive position. VII - DIVERSIFICATION VERSUS CONCENTRATION STRATEGIES Strategies for ultimately reaching a high level of commitment in many countries are: - Diversification: fast expansion in many markets - Concentration: go to one or a few and build up fast before going to others. - Growth Rate in Each Market: Fast growth favors concentration because companies must use resources to maintain market share. Sales Stability in Each Market: The more stable that sales and profits are within a single market, the less advantage there is from a diversification strategy. Competitive Lead Time: the first to enter a market often gains advantage in terms of brand recognition and because it can line up the best suppliers, distributors, and local partners. Spillover Effects: marketing program in one country results in awareness of the product in other countries. In this case a diversification strategy has positive impacts. Need for Product, Communications, and Distribution Adaptation: favors concentration VIII - DIVESTMENT STRATEGIES Companies must decide how to get out of operations if: a) They no longer fit the overall strategy b) There are better alternative opportunities. chapter 17

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