With so many prospective countries available for expansion, one critical issue for the global entrepreneur is foreign market selection. Thunderbird Professor Robert D. Hisrich, Ph.D., shares a five-step approach to the problem in his new book, “International Entrepreneurship: Starting, Developing, and Managing a Global Venture” (Sage Publications, Feb. 18, 2009). Here is an extended excerpt from the book, which is available in bookstores or at amazon.com:
By Robert D. Hisrich
With so many prospective countries available, critical issues for the global entrepreneur are foreign market selection and entry strategy (the focus of Chapter 7). Should you enter the top prospective country or should you employ a more regional focus? Should you choose the largest market possible or one that is easier to understand and navigate? Is a more developed foreign market preferable to one that is developing?
These are just some of the questions confronting the global entrepreneur when deciding which market to enter. The market selection decision should be based on past sales and competitive positioning, as well as assessment of each foreign market alternative. Data needs to be systematically collected on both a regional and a country basis. A region can be a collection of countries such as the European Union or an area within a country such as the southeastern part of China.
A systematic process is needed to establish a ranking of the foreign markets being considered. Why is ranking markets so important? Ranking helps avoid the problem of so many entrepreneurs — doing a poor job of establishing a rigorous market selection process and relying too much on assumptions and gut feelings.
As discussed in Chapter 1, there are significant differences between doing global and domestic business. These differences and the entire global decision process require that the market selection process be a series of steps in which informed decisions are made at each step based on as much information as possible.
This data for each item should be for at least three years so that a trend is evident. The global entrepreneur must always remember that a single data point does not make a trend, so any less than three periods of data needs to be interpreted cautiously. The same data collected and analyzed for market selection will also be used to develop the appropriate entry strategy and marketing plan.
Foreign Market Selection Model
Although there are several market selection models available, one good method employs a five-step approach: (1) develop appropriate indicators, (2) collect data and convert into comparable indicators, (3) establish an appropriate weight for each indicator, (4) analyze the data, and (5) select the appropriate market from the market rankings.
In step one, appropriate indicators need to be developed based on past sales, competitive research, experience, and discussions with other global entrepreneurs. Specific indicators for the company need to be developed in three general areas: overall market indicators, market growth indicators, and product indicators.
Market size indicators generally center on population, per capita income, market for the specific product for consumer products and for types of companies and their sales, and profits of particular industrial products. In terms of market growth, the overall country growth (gross domestic product, or GDP) should be determined as well as the growth rate for the particular market of the venture. Finally, appropriate product indicators, such as export of the specific product category to the market and the number of sales leads and interest, should be established.
Step two is collecting data for each of these indicators and converting the data so that comparisons can be made. Both primary data (original information collected for the particular requirement) and secondary data (published data already existing) needs to be collected.
Typically, secondary data is collected first to establish what information still needs to be collected through primary research. When collecting international secondary data, there are several problems that vary to some extent based on the stage of economic development of the country.
These problems include (1) comparability (the data for one country will not be the same as data of another); (2) availability (some countries have much more country data than others, usually reflecting the stage of economic development); (3) accuracy (sometimes the data collected has not been collected using vigorous standards or is even biased due to the interests of the government of the country; the latter is particularly a problem in nonmarket-oriented economies); and (4) cost (the United States has the Freedom of Information Act, which makes all government collected data that does not pertain to security or defense available to all).
For example, one global entrepreneur was interested in opening the first western health club in Moscow. He was going to charge two rates: a higher hard currency rate to foreigners and a lower ruble rate to Russians and other citizens of countries in the former Soviet Union.
In determining the best location, he was interested in finding areas of the city where most foreigners lived. After significant searching to no avail and a high degree of frustration, he finally was able to buy the data needed from the former KGB (Soviet Union security branch).
When researching foreign markets, you will usually want economic and demographic data such as population, GDP, per capita income, inflation, literacy rate, unemployment, and education levels. There are many sources for this and other foreign information at government agencies, Web sites, and embassies.
One important source of data is STAT-USA and its National Trade Data Bank (NTDB), which is managed by the U.S. Department of Commerce. The STAT-USA database has good information, due in part to the large number of government agencies contributing information.
This results in a large number of international reports such as Country Reports, Country Analysis Briefs (CABS), Country Commercial Guides (CCG), Food Market Reports, International Reports and Reviews, Department of State Background Notes, and Import/Export Reports.
Another good source of data is trade associations and U.S. and foreign embassies. Although trade associations are a good source of domestic and international data, sometimes more specific information can be obtained by contacting the U.S. Department of Commerce industry desk officer or the economic attaché in the appropriate U.S. or foreign embassy.
The collected data then needs to be converted for each selected indicator to a point score so that each indicator of each country can be numerically ranked against the other countries. Various methods can be used to achieve this, each of which involves some judgment by the global entrepreneur. Another method is to compare country data for each indicator against global standards.
The third step establishes appropriate weights for the indicators that reflect the importance of a particular indicator in predicting foreign market potential. For one company manufacturing hospital beds, the number and types of hospitals, the age of the hospitals and its beds, and the government expenditure on health care and its socialized system were the best country indicators in selecting a foreign market.
This procedure results in each indicator receiving a weight that reflects the relative importance of the indicator. The assignment of points and weights, as well as the selection of indicators, varies greatly from one global entrepreneur to another and indeed are somewhat arbitrary. Regardless, this requires intensive thinking and internal discussion, which results in far better market selection decisions.
Step four involves analyzing the results. When looking at the data, the global entrepreneur should carefully scrutinize and question the results. Look for errors because mistakes can be easily made. Also, a “what if” analysis should be conducted by changing some of the weights and seeing how the results vary.
The fifth and final step is selection of a market to enter and follow-up markets so that an appropriate entry strategy can be selected and a market plan developed. China, India, Ireland, and Germany are countries ICU Global, a videoconferencing provider, is targeting, according to founder and chief executive Stephen McKenzie.
The company currently employs six people in the UK and with turnover of approximately £3m this year. But McKenzie says it’s easy to expand into other countries even when you’re a small business so long as you can provide “the same quality assurance to end users.” He adds, “Technology allows you to provide full-support, virtual operations in other countries.”
The countries in question have been selected because they offer the greatest opportunities for ICU Global. “It’s good to have a base in Germany because you can easily access the rest of Europe,” McKenzie offers. “Meanwhile, Ireland has a large number of companies from continental Europe and the United States investing in it, so there is good opportunity in the context of new technology. Then, there’s a thriving technology center in India” (Woods, 2008).
Developing Foreign Market Indicators
While some global entrepreneurs, especially those who have some degree of success in their domestic markets, have an idea of the best foreign markets to enter based on some sales or past experience, most do not. Especially for this latter group, it is important to identify some indicators of potential success in foreign markets to assist in the selection process.
Internal Company Indicators
Several internal company indicators can be used to develop foreign market indicators, including competitive information, information from fellow global entrepreneurs, previous leads and sales, and trade show information. Good indicators of foreign markets with good potential are ones that a company’s competitors are entering. Because this assumes that the competitive company has done its homework in selection, care must be taken in using this approach.
Another good internal way to establish foreign market indicators is to discuss the various markets with noncompeting global entrepreneurs. Since globalization is a topic entrepreneurs like to discuss and assist in, these individuals can provide significant information on their experience in specific foreign markets and advice on the potential of your company’s product success in those markets. The time and experience of the global entrepreneur in these countries can supply exceptional inside knowledge. Perhaps you can even establish a mentoring relationship with a more experienced global entrepreneur.
A third source for developing marketing indicators is your own company’s past sales and leads. Leads and actual sales, while doing business domestically, from out-of-country markets are by far the best indicators of foreign market potential. Care needs to be taken to ensure that potential leads really are meaningful and not just distributors trying to establish product lines for their country without much, if any, analysis of the market potential. A sale to a foreign country is another matter because this signifies that at least for one customer your product can compete.
The final source for developing foreign market indicators are leads from domestic and foreign trade shows. These are usually the most important gatherings for firms and buyers in a particular product area and as such provide a great opportunity to gather market information to determine market potential in various countries. They also provide an opportunity for you to gather competitive information on both domestic and foreign products.
Robert D. Hisrich, Ph.D., is the Garvin Professor of Global Entrepreneurship and director of Thunderbird’s Walker Center for Global Entrepreneurship. He is also president of H&B Associates, a marketing and management consulting firm he founded.