Target Market Selection
Few companies can afford to enter all markets open to them. Even the world’s largest companies, such as
General Electric or Nestle, must exercise strategic discipline in choosing the markets they serve. They must
also decide when to enter them and weigh the relative advantages of a direct or indirect presence in
different regions of the world. Small and midsize companies are o#en constrained to an indirect presence.
For them, the key to gaining a global competitive advantage is o#en creating a worldwide resource network
through alliances with suppliers, customers, and some!mes competitors. A good strategy for one company,
however, might have li$le chance of succeeding for another.
History shows that picking the most attractive foreign markets, determining the best !me to enter them,
and selec!ng the right partners and level of investment has proven difficult for many companies, especially
when it involves large emerging markets, such as China. For example, it is now generally recognized that
Western carmakers entered China far too early and over invested, believing a first-mover advantage would
produce superior returns. The reality was very different. Most companies lost large amounts of money, had
trouble working with local partners, and saw their technological advantage erode due to leakage. None
achieved the sales volume needed to jusify their investment.
Even highly successful global companies o#en first sustain substantial losses on their overseas ventures, and
occasionally have to trim back their foreign operations or even abandon en!re countries or regions in the
face of ill-!med strategic moves or fast-changing competitive circumstances. For example, not all of Wal-
Mart’s global moves have been successful—a continuing source of frustration to investors. In 1999, the
company spent $10.8 billion to buy the Bri!sh grocery chain Asda. Not only was Asda healthy and
profitable, it was already positoned as “Wal-Mart lite.” Today, Asda is lagging well behind its number-one
rival, Tesco. Even though Wal-Mart’s UK opera!ons are profitable, sales growth has been down in recent
years, and Asda has missed profit targets for several quarters running and is in danger of slipping further in
the UK market.
This result comes on top of Wal-Mart’s costly exit from the German market. In 2005, it sold its 85 stores
there to rival Metro at a loss of $1 billion. Eight years a#er buying into the highly compe!!ve German
market, Wal-Mart execu!ves, accustomed to using Wal-Mart’s massive market muscle to squeeze suppliers,
admi$ed they had been unable to a$ain the economies of scale it needed in Germany to beat rivals’ prices,
prompting an early and expensive exit.
What makes global market selection and entry so difficult? Research shows there is a pervasive the-grass-is always-
greener effect that infects global strategic decision making in many companies—especially those
without global experience—and causes them to overes!mate the a$rac!veness of foreign markets
(Ghemawat, 2001). Distance, unless well-understood and compensated for, can be a major impediment to
global success. Cultural differences can lead companies to overes!mate the appeal of their products or the
strength of their brands; administrative differences can slow expansion plans, reduce the ability to a$ract
the right talent, and increase the cost of doing business; geographic distance impacts the effectiveness of
communication and coordination; and economic distance directly influences revenues and costs.
Learning Topic
A related issue is that developing a global presence takes !me and requires substantial resources. Ideally,
the pace of international expansion is dictated by customer demand. Some!mes it is necessary, however, to
expand ahead of direct opportunity in order to secure a long-term competitive advantage. But as many
companies that entered China in anticipation of its membership in the World Trade Organization have
learned, early commitment to even the most promising long-term market makes earning a satisfactory
return on invested capital difficult. As a result, an increasing number of firms, particularly smaller and
midsized ones, favor global expansion strategies that minimize direct investment. Strategic alliances have
made vertical or horizontal integration less important to profitability and shareholder value in many
industries. Alliances boost contributions to fixed costs while expanding a company’s global reach. At the
same !me, they can be powerful resources on technological advancement and can greatly expand
opportunities to create the core competencies needed to effectively compete on a worldwide basis.
Finally, a complicating factor is that a global evaluation of market opportunities requires a multidimensional
perspective. In many industries, we can distinguish between “must” markets—markets in which a company
must compete in order to realize its global ambitions—and “nice-to-be-in” markets—markets in which
participation is desirable but not critical. “Must” markets include those that are cri!cal from a volume
perspective, markets that define technological leadership, and markets in which key competitive ba$les are
played out. In the cell phone industry, for example, Motorola looks to Europe as a primary competitive
ba$leground, but it derives much of its technology from Japan and sales volume from the United States.
Measuring Market Attractiveness
Four key factors in selecting global markets are (1) a market’s size and growth rate, (2) a particular country or
region’s institutional contexts, (3) a region’s competitive environment, and (4) a market’s cultural,
administrative, geographic, and economic distance from other markets the company serves.
Market Size and Growth Rate
There is no shortage of country information for making market portfolio decisions. A wealth of country-level
economic and demographic data are available from a variety of sources, including governments,
multinational organizations such as the United Nations or the World Bank, and consulting firms specializing
in economic intelligence or risk assessment. However, while valuable from an overall investment
perspective, such data o#en reveal li$le about the prospects for selling products or services in foreign
markets to local partners and end users or about the challenges associated with overcoming other elements
of distance. Yet many companies s!ll use this information as their primary guide to market assessment
simply because country market statistics are readily available, whereas real product market information is
o#en difficult and costly to obtain.
Furthermore, a country or regional approach to market selection may not always be best. Even though The odor Levi$’s vision of a global market for uniform products and services has not come to pass, and global strategies exclusively focused on the “economics of simplicity” and the selling of standardized products all over the world rarely pay off, research increasingly supports an alternative “global segmentation” approach to the issue of market selection, especially for branded products. In particular, surveys show that a growing number of consumers, especially in emerging markets, base their consumption decisions on attributes beyond direct product benefits, such as their perception of the global brands behind the offerings.
Specifically, research by John Quench (2003) and others suggests that consumers increasingly evaluate global brands in cultural terms and factor three global brand attributes into their purchase decisions: (1) what a global brand signals about quality, (2) what a brand symbolizes in terms of cultural ideals, and (3) what a brand signals about a company’s commitment to corporate social responsibility. This creates opportunities for global companies with the right values and the savvy to exploit them to define and develop target markets across geographical boundaries and create strategies for global segments of consumers. Specifically, consumers who perceive global brands in the same way appear to fall into one of four groups:
Global citizens rely on the global success of a company as a signal of quality and innovation. At the same !me, they worry whether a company behaves responsibly on issues like consumer health, the environment, and worker rights.
Global dreamers are less discerning about, but more ardent in their admiration of, transnational companies. They view global brands as quality products and readily buy into the myths they portray.
They also are less concerned with companies’ social responsibilities than global citizens.
An!global are skeptic!cal that global companies deliver higher-quality goods. They particularly dislike brands that preach American values and o#en do not trust global companies to behave responsibly.
Given a choice, they prefer to avoid doing business with global firms.
Global agnostic!cs do not base purchase decisions on a brand’s global attributes. Instead, they judge a global product by the same criteria they use for local brands (Quelch, 2003; Holt, Quelch, & Taylor,2004).
Companies that use a global segment approach to market selection, such as Coca-Cola, Sony, or Microsoft, therefore must manage two dimensions for their brands. They must strive for superiority on basics like the brand’s price, performance, features, and imagery, and, at the same !me, they must learn to manage the brand’s global characteristics, which o#en separate winners from losers. In the late 1990s, Samsung launched a global advertising campaign that showed the South Korean giant excelling, !me a#er !me, in engineering, design, and aesthetics. By doing so, Samsung convinced consumers that it successfully competed directly with technology leaders across the world, such as Nokia and Sony. As a result, Samsung was able to change the perception that it was a down-market brand, and it became known as a global provider of leading-edge technologies. This brand strategy, in turn, allowed Samsung to use a global segmentation approach to making market selection and entry decisions.
Institutional Contexts
Khanna, Palepu, and Sinha (2005) developed a five-dimensional framework to map a particular country or region’s institutional contexts. Specifically, they suggest careful analysis of a country’s political and social systems, openness, product markets, labor markets, and capital markets.
A country’s political system affects its product, labor, and capital markets. In socialist societies like China, for
instance, workers cannot form independent trade unions in the labor market, which affects wage levels. A
country’s social environment is also important. In South Africa, for example, the government’s support for
the transfer of assets to the historically disenfranchised na!ve African community has affected the development of the capital market.
The more open a country’s economy, the more likely it is that global intermediaries can freely operate there, which helps multinationals function more effectively. From a strategic perspective, however, openness can be a double-edged sword. A government that allows local companies to access the global capital market neutralizes one of the key advantages of foreign companies.
Even though developing countries have opened up their markets and grown rapidly during the past decade, multinational companies struggle to get reliable information about consumers. Market research and advertising are o#en less sophisticated and, because there are no well-developed consumer courts and advocacy groups in these countries, people can feel they are at the mercy of big companies.
Recruiting local managers and other skilled workers in developing countries can be difficult. The quality of local credentials can be hard to verify, there are relatively few search firms and recruiting agencies, and the high-quality firms that do exist focus on top-level searches, so companies scramble to identify middle-level managers, engineers, and floor supervisors.
Capital and financial markets in developing countries o#en lack sophis!ca!on. Reliable intermediaries like
credit-raising agencies, investment analysts, merchant bankers, or venture capital firms may not exist, and
multinationals cannot count on raising debt or equity capital locally to finance their opera!ons.
Emerging economies present unique challenges. Capital markets are o#en relatively inefficient. Dependable sources of information are scarce, while the cost of capital is high and venture capital is virtually nonexistent. Because of a lack of high-quality educational institutions, labor markets may lack well-trained people, requiring companies to fill the void. Because of an underdeveloped communications infrastructure, building a brand name can be difficult just when good brands are highly valued because of the lower product quality of the alternatives. Finally, nurturing strong relationships with government officials o#en is necessary to succeed. Even then, contracts may not be well enforced by the legal system.
Competitive Environment
The number, size, and quality of competitive firms in a particular target market compose a second set of factors that affect a company’s ability to successfully enter and compete profitably. While country-level economic and demographic data are widely available for most regions of the world, competitive data are much harder to come by, especially when the principal players are subsidiaries of multinational corporations.
As a consequence, competitive analysis in foreign countries, especially in emerging markets, is difficult and
costly to perform and its findings do not always provide the level of insight needed to make good decisions.
Nevertheless, a comprehensive competitive analysis provides a useful framework for developing strategies
for growth and for analyzing current and future primary compe!tors and their strengths and weaknesses.
BRIC Countries: A Key Challenge for Carmakers
Today, automobile manufacturers face a critical challenge—deciding which BRIC countries (Brazil, Russia, India, and China) to bet on. In each, as per capita income rises, so will per capita car ownership —not in a straight line but in classic S-curve. Rates of vehicle ownership stay low during the first phases of economic growth, but as the GDP or purchasing power of a country reaches a level of sustained broad prosperity, and as urbanization reshapes the work pa$erns of a country, vehicle sales take off.
But that is where the similarities end. Each of the four BRIC nations has a completely different set of
market and industry dynamics that make choices about which countries to target, including making
difficult decisions about which markets to avoid, extremely difficult.
For one thing, vehicle manufacturing is a high-profile industry that generates enormous revenue, employs millions of people, and is o#en a proxy for a nation’s manufacturing prowess and economic influence. Governments are extensively involved in regulating or influencing virtually every aspect of the product and the way the industry operates—including seeing emissions and safety standards, licensing distributors, and seeing tariffs and rules about how much manufacturing must take place locally. This reality makes the job of understanding each market and appreciating the differences more vital. For example, a summary overview of the BRIC nations reveals the differences among these markets and the operating complexities in all of them.
Brazil, with Russia, is one of the smaller BRIC countries, with 188 million people (by comparison, China and India each have more than 1 billion, and Russia has 142 million). Yet car usage is already relatively high—104 cars in use per 1,000 people, which is nearly 10 !mes the rate of usage in India, according to the Economist Intelligence Unit. Because of this high usage rate, growth projections for Brazil are relatively low—more in line with developed nations than with the other BRIC countries.
On the plus side, Brazil is socioeconomically stable, with increasing wealth and a maturing finance system that is helping to propel growth among rural, first-!me buyers who prefer compact cars. Few domes!c brands exist, as the market is dominated by GM, Ford, Fiat, and Volkswagen. Prompted by generous government incentives, high import taxes, and exchange rate risks, foreign automakers have invested significantly in Brazil, which has thus become an unrivaled production hub for the rest of South America. Brazilian consumers live in a country with large rural areas and very rough terrain. They demand fairly large, SUV-like cars, made with small, economical engines and flex-fuel power trains friendly to the country’s bio fuel industry. When a La!n American family buys its first automobile,
chances are it was made in Brazil.
Even though Russia is the smallest of the BRIC countries in population, it has the highest auto adoption of the four—213 cars in use per 1,000 people. (Western Europe, by comparison, has 518, according to the Economist Intelligence Unit.) Yet Global Insight expects future sales growth to average 6.5 percent from 2008 to 2013, far outpacing Brazil (2 percent), Western Europe (1.2 percent), and Japan and Korea (0.2 percent).
Given Russia’s proximity to Europe, consumer preferences there are more akin to those of the developed markets than to those of China or India, and expensive, status-enhancing European models remain popular, although European safety features, interior components, and electronics are o#en stripped out to reduce costs. For vehicle manufacturers, the attractions of the Russian market include an absence of both local partnership requirements and significant local competitors. But there is high political risk. So far, the Russian government has permitted foreign carmakers to operate relatively freely, but the Kremlin’s history of meddling in private enterprise and undercutting private ownership worries some executives. These concerns were heightened in November 2008, when Russia implemented tariffs against car imports in hopes of avoiding layoffs that might spark labor unrest among the country’s 1.5 million car industry workers.
India has 1.1 billion people, but its level of car adoption is s!ll low, with only 11 cars in use per 1,000 people. The upside is higher potential growth. Among the BRIC countries, India is expected to have the fastest-growing auto sales. Sales of subcompact cars have been strong, even during the global recession. The popularity of these small cars combines with India’s energy shortages and the country’s chronic pollution to provide foreign carmakers with an ideal opportunity to further develop electric power train technologies there.
Until the early 1990s, foreign automobile manufacturers were mostly shut out of India. That has changed radically. Today, foreign automakers are welcomed and the government promotes foreign ownership and local manufacturing with tax breaks and strong intellectual property protection. And because foreign companies were shut out for a long period of !me, India has capable manufacturers and suppliers for foreign vehicle manufacturers to partner with. Local competition is strong but is thus far concentrated among three players: Maru! Suzuki India, Ltd., Tata, and the Hyundai Corpora!on, which is well established in India.
China is almost as large as the other three countries combined in total auto sales and production. Its overall auto usage is just 18 cars per 1,000 households, but annual sales growth is expected to be almost 10 percent. Its size and growth potential make China a dominant force in the industry going forward. New models and technologies developed there will almost certainly become available elsewhere.
The Chinese government plays a central role in shaping the auto industry. Current ownership policies mandate that foreign vehicle manufacturers enter into 50-50 joint ventures with local automakers, and poor intellectual property rights enforcement puts the design and engineering innovations of foreign car companies at constant risk. At the same !me, to cope with energy shortages and rampant pollution, the Chinese government is strongly encouraging research and development on alternative power trains, including electric cars and gasoline-electric hybrids. As a result, Chinese car companies may develop significant power-train capabilities ahead of their competitors.
Like their Indian counterparts, Chinese car companies have outpaced global automakers in developing cars specifically for emerging markets. A few Western companies are competitive, like Volkswagen AG, which has sold its Santana models in China through a joint venture (Shanghai Volkswagen Automotive Company) since 1985. Some Chinese carmakers, like BYD Company, aspire to become global leaders in the industry, but many suffer from a talent shortage and inexperience in managing across borders. This situation may prompt them to acquire all or part of distressed Western automobile companies in the near future or to hire skilled auto executives from established companies and their suppliers.
In short, each of the four BRIC nations has a completely different set of market and industry dynamics,
and the same is true for many other developing nations. Meanwhile, the number of autos in use in the
developing world is projected to expand almost six-fold by 2018.
Cultural, Administrative, Geographic, and Economic Distance
Explicitly considering the four dimensions of distance can drama!cally change a company’s assessment of the relative attractiveness of foreign markets. In his book The Mirage of Global Markets, David Arnold (2004) describes the experience of Mary Kay Cosme!cs (MKC) in entering Asian markets. MKC is a direct marketing company that distributes its products through independent beauty consultants who buy and resell cosmetics and toiletries to contacts either individually or at social gatherings. When considering market expansion in Asia, the company had to choose between entering Japan or China first. Country-level data showed Japan to be the most attractive op!on by far. It had the highest per capita level of spending on cosmetics and toiletries of any country in the world, disposable income was high, it already had a thriving direct marketing industry, and it had a high proportion of women who did not participate in the workforce.
MKC learned, however, a#er participating in both markets, that the market opportunity in China was far greater, mainly because of economic and cultural distance. Chinese women were far more motivated than their Japanese counterparts to boost their income by becoming beauty consultants. Thus, the entrepreneurial opportunity represented by what MKC describes as “the career” (i.e., becoming a beauty consultant) was a far be$er predictor of the true sales potential than high-level data on incomes and expenditures. As a result of this experience, MKC now employs an additional business-specific indicator of market potential within its market assessment framework—the average wage for a female secretary in a country (Arnold, 2004, p. 34).
MKC’s experience underscores the importance of analyzing distance. It also highlights the fact that different
product markets have different success factors. Some are brand sensitive, while pricing or intensive distribution are key to success in others. Country-level economic or demographic data do not provide much help in analyzing such issues. Only locally gathered marketing intelligence can provide true indications of a market’s potential size and growth rate and its key success factors.
Tata Making Inroads into China
Not content with just India, Mumbai-based Tata Group, the maker of the $2,500 Nano small car, is developing a small car for China. The platform is being designed and developed by a joint Indian and Chinese team based in China. The alliance won a new project for the complete design and development of a vehicle platform for a leading original equipment manufacturer for a small car for the China’s domestic market. The team is integrating components in automotive modules to radically improve manufacturability and bring down total cost.
Meanwhile, in 2009, Nanjing Tata Auto Comp Systems began supplying automotive interior products to Shanghai General Motors and Changan Ford Automobile Company Products, including plastic vents, outlet parts, and cabin air-ventila!on grilles. In the same year, Nanjing Tata began supplying General Motors Corpora!on in Europe. Eventually, the plant will supply global automakers in North America
and Europe as well as in emerging markets, such as China.
Nanjing Auto is a wholly owned subsidiary of Tata Auto Comp Systems, which is the automotive part manufacturing arm of India’s Tata Motors. The company has 30 manufacturing facili!es, mainly in India,
and production capabili!es in automo!ve plas!cs and engineering. It also has 15 joint ventures with Tier 1 supplier companies, mainly in India.
The company has almost completed construc!on of the 280,000-square-foot Nanjing plant at a cost of
approximately $15 million. The first phase included capacity to make parts for air vents, handles, cup holders, ashtrays, glove boxes, and floor consoles. When completed, the plant will have double the current capacity and will also produce instrument panels, door panels, and larger parts. The plant is operated by local Chinese employees. Only a few managers are Indian.
In its bid to become a $1 billion global automotive supplier by 2008, Tata Auto Comp had to expand into China. Total passenger car sales in India in 2007 were slightly more than 1.4 million units. In China, the number was more than 5.2 million units, according to data from Automotive Resources Asia, a division of J. D. Power and Associates. Tata Motors sold 221,256 passenger cars in India in 2007. In the same year, Shanghai General Motors sold 495,405 cars. “We see huge poten!al in China. To us, China is not just a manufacturing base, but a window to the global market. Our investments are keeping this promising future in mind,'” says the Tata Auto Comp’s chief executive officer (Chow, 2006).
Glossary
References
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global segments Comprised of consumers who evaluate global brands in cultural terms and factor global brand attributes into their purchase decisions institutional contexts Comprised of a country or region’s political and social systems, openness, product markets, labor markets, and capital markets “must” markets Those markets in which a firm must compete in order to realize its global ambitions “nice-to-be-in” markets Markets in which participation is desirable but not critical Khanna, T., Palepu, K. G., & Sinha, J. (2005, June). Strategies that fit emerging markets. Harvard Business
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