This article was written by Mr. Jeffrey P. Graham and it originally appeared on the now defunct Citibank international business portal. Copyright © Citibank. All Rights Reserved.
How you decide to go about analyzing foreign markets will depend in large part upon your reason for going global. All of the six principal reasons why companies decide to go global share similar characteristics in terms of how to organize the methods for doing the market analysis. What is important to recognize is the fact that your company has to develop a unique design based upon its specific goals and more importantly, its budget and existing capacity. The actual process of doing the analysis will be extremely subjective. Unfortunately, too much of what is written in general business publications about this issue is too vague and often makes assumptions that are not very closely related to your company's specific circumstances.
While it seems intuitive, the reality is that many business executives facing a decision about going global too often fail to understand one very basic fact: you can not do an analysis, if you have nothing to analyze. In some ways, deciding which markets to pursue is a very easy decision because those markets that are highly developed will almost always be preferable. The bulk of the analysis task is in gathering the information first and then understanding how this information is relevant to your company's specific goals and its circumstances. In Assessing Your Potential, we listed six of the most common reasons why companies make a decision about going global. There is a seventh reason that is often forgotten: receiving foreign inquiries. In fact, it is unclear as to how many companies who either import or export or who become engaged in some other type of international business activity, do so because they received an unsolicited inquiry from a foreign company.
Choosing Markets to AnalyzeWe would like to add a brief word about choosing foreign markets to analyze. The most important criteria for choosing which markets to analyze is very simple: can consumers and/or end users afford your product or service or does the proposed business venture have any real potential for success? In some instances, especially in the case of products that fit into the mature industry category, your choices will be limited because of price competition from foreign manufacturers. In other cases, there will be existing barriers to entry.
One very common mistake made by many executives is what we shall call, "foreign vacation syndrome". Foreign vacation syndrome comes in two types. Type# 1 is when an executive goes on vacation and notices that his/her product is not being widely sold in the foreign country. Type# 2 is when an executive falls in love with a particular country while on vacation and then decides to try to make contacts with locals so that he/she can anticipate doing business in this country with an eye for using this as a way to write off trips for business purposes that are really for pleasure. Both types are disastrous reasons for choosing a foreign target market. Type# 1 assumes that nobody locally is smart enough to recognize a demand for a particular product and be successful at importing and selling it. This is wrong for many reasons, but two stand out: 1) this assumes that you are smarter than the local business people who live there and know the market dynamics and 2) it furthermore assumes that there is in fact a demand for your product or service. If it is not being sold, there is very probably a good reason why this is the case. Type# 2 is bad because it violates simple business principles at best. Worse, it could lead to illegal business activities that could have very serious consequences.
The other common mistake is what we shall call "foreign contact syndrome". This syndrome is usually the result of a social meeting, usually one at which alcohol is being served. The executive meets somebody who claims to know somebody who can help him/her enter the market and "get around" existing laws and/or market players. Besides the fact that this almost always adds another channel or layer to any transaction, it assumes that the contact has the capability to perform specific tasks that are essential to any international business transaction. This person usually does not have a business card and almost always answers all basic questions with "no problem". It would surprise many to know just how many otherwise intelligent business people fall into this trap. Such things as charm and attractive looks influence some executives. Others are fooled simply because they have had too much to drink.
Gathering InformationThis is really the essential aspect of analyzing markets. You have to gather as much information as possible about those markets where you might have an opportunity to do business. In spite of the fact that there are many free or low cost information sources available to you, there is a significant cost in time and resources in gathering information about foreign markets. The following sub-headings are both relevant topics and sources of information.
Domestic Government Agencies
The largest compiler of data about foreign markets in the world is the U.S. Department of Commerce. Some of this information is available free and some involves paying a small fee. Other federal agencies also provide significant amounts of data that is available on their websites (some of which will be listed below) or by way of CD-ROM or printed publications available through the Government Printing Office. Some business executives, eager to reduce costs, tend to want to rely primarily upon government sources of data because of price considerations. One problem with this approach is that most of the information is dated, that is it might be 2-3 years old depending upon which government agency is responsible for collecting it. For the sake of efficiency, locate the nearest library to you that functions as a government depository. It will have on hand many hard to locate Government Printing Office publications that will be very helpful. You should familiarize yourself with Business America, because it has excellent how-to articles about exporting and other international business issues.
The following U.S. government agency websites provide a variety of useful information to assist you in analyzing foreign markets:
Private Agencies and Other Private SourcesThere are several private agencies both here and abroad that collect and disseminate market analysis and other important data about foreign markets. Such groups as industry & trade organizations, local chambers of commerce and other business development groups provide a wealth of information about foreign markets. Probably the most neglected resources are industry associations and industry-focused publications. Your local library will have many publications such as trade directories and statistics from different foreign sources in print format that are not yet available online. There are also some company-sponsored websites that provide access to many little known but valuable resources, both printed and online. There are thousands of websites on the Internet that can provide you with access to free or low cost information. We are listing a few of the best sites below:
Economic Resources on the Internet
Communicating with International Business ProfessionalsUnless you hire somebody in-house, at some point along the way, you will have to speak with an international business specialist. What type of specialist will depend upon what type of business activity in which your company has chosen to engage. Generally speaking, however, you will be dealing with an international business specialist who is a generalist. This person might refer to you to another international business specialist who focuses on one specific area and can better assist you in analyzing foreign markets. Following is a brief explanation of some of the specialists that you might encounter in the analysis phase of going global:
· International trade intermediary. This is by far the most familiar international business professional to people who really do not understand global business. Unfortunately, this specialist is also the most misunderstood. Typically, trade intermediaries perform their function as part of a global trading company. Actually, a global trading company is the intermediary or serves the intermediary function, that is it facilitates the sale and distribution of goods and services from its client to foreign customers. Its name aptly describes its role; namely, it facilitates trade on a global basis. Many people believe that the trade intermediary is merely a middleman who serves as a go between for the buyer and seller and who maintains this position while keeping both parties ignorant of each other's identities. Not true. In most cases, the buyer and seller are aware of each other but need the intermediary to securely and successfully settle the transaction. Many executives considering exporting come to know about what is called an export management company. An export management company is nothing more than a specialized global trading company. Successful global trading companies maintain global networks of distributors and other facilitator contacts worldwide and are very knowledgeable about whether or not your product or service is appropriate for a particular foreign market based upon their own and others' experiences in that market. · International or foreign freight forwarder. One of the most important people that you will ever meet especially if you are importing or exporting goods. The foreign freight forwarder is responsible for actually assisting your company to ship its goods from the factory or warehouse to its foreign destination. As such, it is normally the logistics specialist. Foreign freight forwarders are usually specialists in trade laws and understand such things as quotas, restrictions, phyto-sanitary regulations, packing requirements and hidden trade barriers. Because they track shipments to various markets as part of their transport function, they compile piles of statistics about what products are being shipped where, at what price and in what quantities. They deal with trucking companies, airlines, steamship lines and railroads. The Journal of Commerce, http://www.joc.com, the daily newspaper most known for its cargo and shipping information is actually an excellent resource for a wide variety of foreign market analysis. The paper is must reading for anybody actively involved in import-export and the website has an excellent search engine which gives you access to back issues of the newspaper. · International freight consolidator. Actually, a specialized type of international freight forwarder that is also very helpful, especially to the small shipper/exporter. International freight consolidators buy large of amounts of cargo space at the premium rate, which is lower than that for small shipments. They then consolidate several smaller shipments from different customers and allow these customers to ship their cargo at lower prices that would normally be unavailable to them. International freight consolidators like their counterparts have a wide knowledge of foreign markets and can offer you a lot of assistance in analyzing different foreign markets. · International accounting firms. A stalwart for multinational corporations who face different laws and tax issues in different jurisdictions. However, most of the big firms also have international business practices that offer services to small and medium sized companies who need assistance in going global. It would not be unusual, for example, to consult an accounting firm if your company was going to license technology overseas or wanted to sell franchises. While all of the major firms do provide some free information, PriceWaterhouseCoopers, http://www.pwcglobal.com/, excels as it publishes several how-to guides as well as detailed analysis of most foreign markets. These guides provide unique insights gathered by local PriceWaterhouseCoopers offices around the world and furthermore help the reader to discern the relevance of what is often considered very complex data. Many of these guides are available free of charge by contacting a local PriceWaterhouseCoopers office. · International law firms. Too many companies have neglected to obtain good legal advice about their global activities and have paid a very heavy price for their negligence. You should consult an attorney for any global transaction not covered by a letter of credit or documentary draft. Licensing technology, selling franchises, entering strategic alliances, any foreign real estate transaction or trying to raise capital funds in foreign markets would all be examples of matters best handled by a qualified international law firm. You may initially gasp at the hourly fees, but gasping is better than choking on silly mistakes that could actually bring down your company. · International insurance companies. Most import-export transactions require cargo insurance and it is not optional. Other types of business activities may require a wide variety of insurance. Many companies typically want some type of credit insurance in order to be able to sell to foreign clients on open account, which is often considered more favorable. · International banks. International banks are the primary means by which most import-export transactions are settled, usually by way of letter of credit or documentary draft. The international department of your bank will employ a letter of credit reviewer, import-export clerk or documents examiner. All are qualified international specialists who know how to review the documents required for most import-export transactions. International banks also handle certain types of foreign exchange transactions and help companies to manage their exposure to risk that the value of a transaction will change unexpectedly. International banks are also well known for publishing numerous how-to guides about international business transactions. International banks also publish foreign country analysis booklets that discuss market and trade statistics as well as giving in-depth overviews of various markets.
Assessing Political Risk
For many smaller companies, political risk is an afterthought. One reason for this, especially in the United States, is the excellent work done by OPIC, the Overseas Private Investment Corporation, http://www.opic.gov/. OPIC is a federal government agency that sells political risk insurance to American companies to cover export transactions and direct investments in over 140 countries.
While it is true that political risk is well managed by OPIC, it's not just a question of money. All aspects of going global require time, money and human resources. While it may be possible to cover your financial risk in terms of money, political risk has far reaching effects that go beyond any financial consequences. First of all, risk is a regional phenomenon. That is to say, the risk for one country can be adversely affected by its regional risk. This means that it is likely that other countries in the region that are perhaps not as risky as country X may become riskier as X becomes riskier. More importantly, however, is the human toll of political risk. Political risk can jeopardize people's personal safety and endanger their lives. In certain regions, this very real danger can follow people home and also jeopardize friends and relatives. Such personal tragedy as can happen in some regions of the world will have a demoralizing effect on the psyche of all employees in a company. It is now a fact that smaller companies can become involved in transactions and/or ventures that make their participation very worthwhile from a financial viewpoint and that makes analyzing political risk more than just an academic exercise anymore. Therefore, political risk becomes a question of balancing the cost benefit analysis against the very real personal dangers that exist in some regions of the world. You can replace the equipment and you can always make more money. You cannot replace the people or easily repair the spirits of those left to pick up the pieces. Be prudent.
The Process of AnalysisOK. You've spent time, money and resources gathering up every bit of information that you could find about several foreign markets. You've consulted international business professionals and by now you're sick of the update meetings to discuss everybody's progress. Now you have to do the actual analysis. Scary thought isn't it? Not to worry.
Essential Factors To ConsiderThere are some very basic factors that must be considered in making your decision about going global:
1. Size of the market. This is simple enough. Is the demand in a specific market for your product large enough to act as an incentive to enter?
2. Are there significant barriers to entry? Are there regulatory issues that make the cost of entry prohibitive? Is the market easily accessible for transport? Do the channels of distribution add too many layers and make the price non-competitive?
3. What is the competition? How many other companies sell similar products and with what amount of success? How skilled are local distributors in penetrating the market?
4. Can you sell to other markets nearby? Some markets are going to present thin profit margins, but compensate for this fact by being gateways to other local markets. This is also true of transport issues as well for landlocked markets.
5. Product/service localization issues. Is your product or service OK to sell as is or do you need to invest in localizing it for local tastes?
6. Business infrastructure. Is there a sufficient business infrastructure to support sale and distribution of your product and/or services? Are there good port facilities? How are the highways? Is there easy access by air? What kind of telephone service is available and how good is it? Is there local Internet access available? If you are buying or selling perishables, how good are port area refrigeration facilities?
7. Local business customs. In spite of our continued head-in-the-sand attitude in the United States, petty bribery is a fact of life in many parts of the world. How does this fact affect your ability to do business and compete with foreign companies who are not hampered by anti-bribery laws? Are there any local customs that could be perceived as a particular competitive advantage for your company?
8. Political risk. Is the government stable? Is there unrest there because of income distribution inequities or other similar factors? Is the government friendly to our country?
9. Banking and financial institutions. Is the central bank stable? Does it have a history of measured behavior or does it intervene often? Are currency rates stable or fluctuating within a reasonably small range? Are local banks trustworthy enough and capable enough to handle letter of credit transactions or documentary drafts?
Analyzing a foreign market is only one aspect of making the final decision about going global. It will balance all of the above-mentioned factors with your company's international business capability and its budget. How much weight is given to any one factor is very subjective and will vary from one company to another. However, it is important to realize that if you answer the questions regarding these factors and there are more negatives than positives, you might want to look at other opportunities. As a rule, you want to investigate market opportunities in the largest, strongest and best-developed economies first. You then want to consider emerging economies and finally less developed economies.
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