International businesses have the fundamental goals of expanding market share, revenues, and profits. They often achieve these goals by entering new markets or by introducing new products into markets in which they already have a presence. A firm’s ability to do this effectively hinges on its developing a through understanding of a given geographical or product market. To successfully increase market share, revenue, and profits, firms must normally follow three steps,
- Assess alternative markets
- Evaluate the respective costs, benefits, and risks of entering each, and
- Select those that hold the most potential for entry or expansion.
1. Assessing alternative foreign markets
In assessing alternative foreign market a firm must consider a variety of factor including the current and potential sizes of the markets, the levels of competition the firm will face, their legal and political environment, and socio-cultural factors that may affect the firm’s operations and performance. Information about some of these factors is relatively objective and easy to obtain.
- Market potential: The first step in foreign market selection is assessing market potential. Many publications such as those listed in “Building Global Skills” provide data about population, GDP, per capita GDP, public infrastructure, and ownership of such goods as automobiles and televisions. The decisions a firm draws from these information often depend upon the positioning of its products relative to those of the competitors. A firm producing high quality products at premium prices will find richer market attractive but may have more difficulty penetrating a poorer market. Conversely a firm specializing in low priced, lower quality goods may find the poorer market even more lucrative than the richer market.
- Level of competition: Firm must consider in selecting a foreign market is the level of competition in the market both the current level and the likely future level. To assess the competitive environment it should identify the number and sizes of firms already competing in the market, their relative market share, their pricing and their distribution strategies, and their relative strength and weaknesses, both individually and collectively. It must then weigh these factors against actual market conditions and its own competitive position.
- Legal and political environment: A firm contemplating entry into a particular market also needs to understand the host country’s trade policies and its general legal and political environment. A firm may choose to forgo exporting its goods to a country that has high tariffs and other trade restriction in favor of exporting to one that has fewer or less significant barriers. Government stability is an important factor in foreign market assessment.
- Socio-cultural influences: Manger assessing foreign markets must also consider socio-cultural influences, because of their subjective nature, are often difficult to quantify. To reduce the uncertainty associated with these factors, firms often focus their initial internationalization in countries culturally similar to their home markets.
2. Evaluating costs, benefits, and risks
The next step in foreign market assessment is a careful evaluation of the costs, benefits, and risks associated with doing business in a particular foreign market.
- Costs: Two types of costs are relevant at this point: direct and opportunity. Direct costs are those firm incurs in entering a new foreign market and include costs associated with setting up a business operation, transferring managers to run it, and shipping equipment, and merchandise. The firm also incurs opportunity costs, because the firm has limited resources, entering one market may preclude or delay its entry in another.
- Benefits: Among the most obvious potential benefits are the expected sales and profits from the markets. Other includes lower acquisition and manufacturing costs, foreclosing of markets to competitors, competitive advantage, access to new technology, and the opportunity to achieve synergy with other operations.
- Risks: Of course, few benefits are achieved without some degree of risk. Generally, a firm entering a new market incurs the risk of exchange rate fluctuation, additional operating complexity, and direct financial losses due to inaccurate assessment of market potential. In extreme cases, it also faces the risk of loss through government seizure of property or due to war or terrorism.
3. Most potentiality for entry or expansion
The factors of ownership advantages, location advantages and internationalization advantages are the most potentiality for an organization for entry or expansion. Other factors to be considered include the firm’s need for control, the availability of resources, and the firm’s global strategy.