Analyzing Global Industries Trevor Hunter King’s University College

Analyzing Global Industries

Trevor HunterKing’s University College

King's University College 2


• Different countries have different comparative advantages

• Comparative advantage is relative – what is a benefit to one firm may not be a benefit to another:– Swiss are known for excellence in watch-making – this is

no benefit to car manufacturer

• Firms must understand how to determine relative comparative advantage that it can leverage – the fit between firm needs and what the country offers which can differ depending on each



• Internationalization can take the form of A LOT of different operations (more on this later)

• What the firm needs depends upon why it is going, but more importantly, what it is going to do there

• Fit comes from being able to get what the firm needs to do what it does from a given country

Analyzing Global IndustriesEconomic

Societal

Political

Technological

Threat ofnew

entrants

Bargainingpower of

buyers

Threat ofsubstitutes

Bargainingpower ofsuppliers

IndustryRivalry among

existing competitors



• Understanding what the firm can get from the country involves understanding the Market and the Industry Market•What is the structure?•Who are the customers?•Where are they located?•What do they want?•What has to be done to get them to choose us?

Industry•Who are the competitors? •Who is strong? •Who is weak?•What do they do?•Where are they located?•What do they do there?


Market Stucture


Market Structure

• Structure can be influenced by the cost to operate in given industry– High costs generally lead to monopoly, low to

competitive

• Structure influences firm behaviour in terms of:– Pricing– Product differentiation


Market Structure

• Market structure affects a nation’s relative comparative advantage:– Competitive: May or may be difficult to

differentiate but might provide acquisition target– Monopoly: May be impossible to enter but

monoplolist could be a great partner– Oligopoly: Will face strong but limited competition


Market Concentration

• Measure of the distribution of power among competing firms in an industry– High levels: power is concentrated in few hands– Low levels: power is more evenly distributed among

firms

• Can be measured using:– sales– output– value added– assets– employment



• Concentration Ratio: Taking the share of the largest firms (as many as useful) based on whatever measure you deem important (i.e. sales, output etc.)

• CR2 = Concentration ratio of the 2 largest firms

• CR10 = Concentration ratio of the 10 largest firms



• Herfindahl-Hirschmann Index: Calculated by summing the squares of the individual market shares of all the firms in the market

• More accurate because it includes all firms, but complete data are needed



• Important to know to judge the strength of competitors and likelihood of success when entering markets or to help decide who would be a good partner or supplier to help gain a competitive advantage.

• This is a domestic market measure


Porter’s Five ForcesThreat of

newentrants

Bargainingpower of

buyers

Threat ofsubstitutes

Bargainingpower ofsuppliers

IndustryRivalry among

existing competitors


Porter’s Five Forces

• Model is used to analyze the competitive environment of a given country’s industry

• Helps firms determine if the industry is one in which they can or would like to compete (if they are looking to expand their market), and if it is a good place to operate (if they are looking for cost reductions)

Industry Rivalry

• Competition can be based on policies relating to:– Price (but cartels and price leadership)– Product– Promotion– Place

• Or strategies relating to:– mergers & acquisitions – innovation

Industry Rivalry

• Competition intensity is a proxy for how hard it will be to find a market and/or how innovative the firms in the industry may be

• Competition more intense when:– large number of competing firms– firms are of similar size/market share– market is growing slowly– low product differentiation– capacity added in large increments

New Entrants

• New entrants increases the number of firms in the industry and increases capacity and competition intensifies reducing the likelihood of sustainable profits

• If there have not been new entrants to the industry for a while, it may be a monopolistic or oligopolistic situation

• Either could be good or bad depending upon the firm’s needs (ME or E)

New Entrants

• Likelihood of new entrants depends on nature and height of barriers to entry:– absolute cost barriers– product differentiation– economies of scale– excess capacity– reaction of established firms– extent of vertical integration– contracts with suppliers or customers

Buyers

• Whether customer buying power is a good or bad thing depends upon what position you will have in the industry– If you are a Seller = bad: You will not have the

power to set prices and will face many expectations that may reduce your profit

– If you are a Buyer = good: Your costs will be lower because you will be able to push around your suppliers

• You want to enter industries with high customer power if you are entering the country due to Eff. reasons

Buyers

• Customers have more power when: – number of customers is large – customers see products as differentiated– customers earning good profits – products are not significant % of buyer's costs– customers unable to integrate vertically

backwards

Suppliers

• Whether supplier buying power is a good or bad thing depends upon what position you will have in the industry– If you are a Supplier = good: You will be able to

set prices resulting in high profits– If you are a Buyer = bad: Your costs will be higher

which will negatively affect profit• You want to enter industries with high

supplier power if you are entering the country due to ME reasons

Suppliers

• Suppliers have more power when:– supply industry has large number of firms– suppliers sell undifferentiated products– suppliers are threatened by ground-breaking new

products i.e. substitutes– suppliers unable to integrate vertically forward– firms are not important customers to suppliers

Substitutes• Firms not only face competition from others in their

industry but also from firms that offer similar products/services that are different but provide the customer the same or a better outcome for a lower price or with more ease of use or acquisition

• The threat of losing customers comes from how easy it is for them to switch to a substitute and how similar the outcome will be

• Countries with lots of potential substitutes are good if you are there for E but bad if you are there for ME

Substitutes• Substitute goods or services:

– produced by a different industry– carrying out the same function for customers – but providing the service in a different way

• Examples:– trains and planes– music downloads and CDs– tin cans, glass bottles, plastic containers– TV reception – antenna, cable, satellite


The Business Environment

• The external environment comprises external influences that affect a firm’s decisions and performance

• Affected by complexity and turbulence • Changing faster and becoming less predictable

due to: – Increased globalization– Technology innovations– Rise of the BRIC’s



• Complexity:– Increased diversity of customers, suppliers, rivals

and the PEST environment with which firms must interact

– Makes it more difficult to understand and evaluate information and develop appropriate responses hence, increased risk



• Turbulence:– Rapid, unexpected change– Increased due to the widening and deepening of

PEST forces’ interconnections– An occurrence in one country is no longer isolated

there, due to interconnections, it will have larger and longer repercussions (i.e. the tsunami in Japan resulting in Honda plant shutdowns in the USA)

The Business EnvironmentThe expanded environment that comes from globalization presents opportunities and threats to firms:

Opportunities:• Access to larger markets –

ME• Access to lower factor costs

– E• Access to innovations• Access to more favourable

regulatory environments

Threats• Currency risks (inflation,

devaluations) that reduce profits

• Political risk, expropriation of assets, unfavourable regulations

• Supply chain disruptions• Wars, natural disasters



• Analyzing the business environment to determine which country (if any) has a relative comparative advantage and what aspect of internationalization may affect the firm – this is key to being prepared and developing strategy

• Innumerable factors can create issues for the firm that can cause problems or provide opportunities

Issues Management

• What are issues?– Concerns, problems, claims made or held by

internal or external stakeholders– They may be real or imagined but both have the

power to create problems for the firm



Issues Management

• Dealing with issues in the external environment that can affect the internal operations of the firm.

• The firm has a responsibility to be involved with and aware of specific public issues that may directly or indirectly affect the firm.


Nature of Public Issues

• Arise out of a problem affecting many interests in society and the need for collective action to deal with it successfully.

• Many parties involved, often with differing perspectives and agendas.

• Socially motivated – requires socially responsive behaviour from the firm.


Nature of Public Issues

• Complexity of public issues increases for MNC’s:– Number of stakeholders increased– Differences in perspectives exacerbated by

cultural and/or language differences– Number of locations– Distance, infrastructure and communications

problems

Stakeholders



• Six steps for an Issue Preparedness System:1. Identification2. Assess the urgency and likelihood of occurrence3. Research and Analysis4. Identify relevant stakeholders, their importance

and the impact on/from each5. Strategy development6. Strategy implementation


Issue Identification

• Scanning the environment to discover developing trends and issues that may affect the firm.

• Involves people at various levels of the firm – those on the front lines often know more than management.



TheFirm

Economic

Political

SocialTech

CorporateResearch

“State ofthe Art”

Competitor’sResearch

MarketForecasts

GDP

Legislation

Business/Govt.Relations

PressureGroups

DemographicChange

NewLifeStyles

ChangingValues

ConsumerSpending

Source: Wilson, 1974



• From information, forecasts for several years out must be made and monitored and adjusted.

• Information can be used to screen out non-issues, long and short term impacts and severity of affect – more information the better.

• Want to identify issues and problems at early stage of life cycle – more time to respond.


Research and Analysis

• Analyzing issues with highest priority.• Must involve numerous people from affected

functional area groups.• Consultants often useful here (academics,

etc.).


Evaluation of Issues

Impact on Company

High Medium Low

High

Medium

Low

ProbabilityofOccurrence

High Priority

Medium Priority

Low Priority

Source: Brown, 1979


Stakeholder Mapping

Minimal effort

Keep satisfied

Key players

Keep informed

Level of interest

Level of power

high

low

low high

Source: Mendelow cited in Johnson, G., Scholes, K, and Whittington, R. (2009)



• Typical questions to ask:– What is the scope of the issue in terms of

potential impact? Will it affect the whole company or parts? Will it affect the environment in which the firm operates?

– Who are the main stakeholders, what are their interests and what relationship do we have to them?



• Typical questions to ask:– How rapidly is the issue developing or changing?

What stage is it at and where will it be when a strategy is developed?

– Is the issue likely to become part of formal government policy in the near future? How will this affect the firm’s operations?



• It is crucial that priorities be made since the firm cannot do thorough analysis on every issue – save limited resources.

• Must determine alternative company positions with respect to the issue and evaluate the pros and cons of taking each.


Strategy Development

• The “best” alternative.• Must reflect the best thinking and be based

on solid research.• Needs to fit with the resources and

capabilities of the firm while addressing the issue.

• Needs to address the likelihood, impact and affect on stakeholders

Strategy

GOALS STRATEGY

INTERNAL ANALYSIS

EXTERNAL ANALYSIS


Strategy

ImplicationsFor the firm(3-5 yrs.)

Forecasts of Long-TermMacro Trends (AlternativeScenarios) (5-10 yrs.)

Identification of Short-TermMicro Events/Developments(<5 yrs.)

Strategy

Firm Resources

Adapted from Wilson, 1979


Implementation

• The strategy must be communicated to the appropriate people.

• Develop specific tactics for changing corporate behaviour, influencing public opinion, lobbying government, developing a court case – depending upon the chosen strategy.


Implementation

• Need to develop internal and external communication network.– Internal – information needs to reach the

appropriate actors– External – the stakeholders need to know how

and what the firm is doing to meet their expectations in order to be deemed legitimate


Evaluation of Strategy

• Systems must be designed to evaluate the success and effectiveness of the strategy.

• Points of reflection and direction change need to be built in to provide flexibility due to learning and experience.


Typical Strategic Responses

• Four typical responses by firms when they encounter issues:

1. Reactive2. Accommodative3. Proactive4. Interactive


Reactive

• Usually firms make no attempt to anticipate public issues, but use all their resources to fight change blocking any resolution to the issue that might change their corporate behaviour.

• Seat belts in the 1970s


Accommodative

• Businesses adapt to changes involved with a public issue as best as it can and attempts to get on with business.

• Simply goes with the flow as opposed to fight something that might hurt its business or capitalize on issue to improve its business.


Proactive

• Businesses develop a mechanism to anticipate issues that will affect its business the most.

• Firms try to influence the issue by trying to change the environment in which the issue arises, thereby eliminating the issue altogether before it emerges.


Interactive

• Businesses recognize the legitimacy of the issue and the forum for public issue institutionalization.

• Firms work within the institutional framework (engage in debate etc.) to put forth their perspective to get a “win-win” situation through negotiation and participation.

Assessing Country Attractiveness

Trevor HunterKing’s University College



• Firms tended to enter markets that are both culturally similar and geographically proximal

• In the past 20 years, due to lower entry barriers, improved technology and globalization, many firms are “born global” - 25% of sales from outside their home market in less than 3 years



• Many companies are moving right to FDI• FDI – Foreign Direct Investment: the

establishment or acquisition of actual physical assets in a foreign country (i.e. production facilities, distribution network) that are owned by the firm

• Costly, risky and a full embracing of internationalization



• Reasons to engage in FDI:– Market Access: Despite the growth of free trade,

entry barriers (tariffs, local content requirements, taxes etc.) still remain that discourage imports – ME

– Lower Production Costs: Offshoring may provide production factors at a reduced cost increasing profits – depends on productivity levels, transportation costs etc.



• Reasons to engage in FDI:– Natural Resources: Deposits are not equally

distributed around the world, nor are they easily moved

– Competition from DC MNC’s: Firms don’t want to be later movers to developing countries

– Other Assets: Management talent, innovation that are located elsewhere



• What makes a country attractive? - Relative Comparative Advantage– Variations in economic environment– Growth rates– Political stability– Levels of disposable income– Available resources– Government incentives– Competition



• These days, in order to gain high rates of return, higher risk is involved

• Most of the untapped markets are in politically unstable, low income countries (BRIC, Africa, Southeast Asia)

• Entering these countries requires analysis and screening to see if there is a reason to go, what to expect and how to mitigate risks



• Professional sources– IMD World Competitiveness Yearbook– Economic Intelligence Unit

• Free Resources– Online Resource Centre– GlobalEDGE– World Economic Forum– World Bank



• Organizations– IMF– OECD– UNCTAD– WTO– CIA

• Problems with data– Out of date or unavailable information– Political manipulation– Definitional problems– Informal/Shadow economies– Conversion to a common currency



INITIAL SCREENING

ASSESS GENERAL MARKET OR SITE POTENTIAL

ASSESS GENERAL BUSINESS ENVIRONMENT

PRODUCT/SERVICE MARKET ASSESSMENT

PRODUCTION SITE ASSESSMENT

UNDERTAKE RISK ANALYSIS

SELECT MARKET OR SITE

Initial Screening

• First step is to eliminate countries that will not work by determining if there are basic levels of demand (ME) or required resources (E)

• Data collected from sources can provide guidance

Market Potential

• Develop indicators to assess the potential market – not just the size of the market but the potential for sales

• Market indicators:– GDP, GDP per capita, growth rate, trade stats– Market size and growth rate– Quality of demand - Ownership of cars, TVs,

telephones, computers, energy usage, internet usage etc.

Site Potential

• Companies that are intending to produce abroad need to see if there are appropriate levels of production factors at the appropriate cost– Access to raw materials, labour, finance– Access to energy, communications and transport– Quality and cost of resources– Country risk


Assess the General Business Environment

• Political and Legal Environment– Government regulation

• Restrictions• Taxes• Incentives

– Legal Regime • Employment law• Health and safety law• Environmental policy

– Bureaucracy


Economic and Financial Environment

• Economic and financial conditions will affect a firm’s profits from a given country– Inflation– Interest rates– Exchange rates– Credit availability– Financial stability– Rates of return

Socio-cultural Environment

• Cultural distance can make it difficult to operate the way you want – could lead to ethical issues. Cross-cultural problems are often the greatest barrier to gaining a competitive advantage operating in a different country:– Language– Religion– Culture/Customs – Demographic trends– Health/Education– Urbanisation– Labour force availability and skills– Wage levels/Working hours– Unionisation– Environmental concerns

Technological Environment

• A weak infrastructure can reduce or eliminate location advantages:– Science and technology infrastructure– Patent protection– Road network/Public transport– Telephony/Internet capacity– Air transport– Ports– Power supply and reliability

Product /Service Market Assessment

• Not all countries offer the “right” location to sell products/services – ME driver. The market characteristics must be assessed:– Size and growth rate of market– Major competitors– Prices, marketing, and promotions of competitors– Distribution networks– Marketing strategies


• Not all countries offer the “right” location to sell products/services – ME driver. The market characteristics must be assessed:– Marketing strategies– Production capacity– Cost structure– Entry– Substitutes– Power of buyers and sellers

• Even if from a competitive standpoint things look good, the country’s relative comparative advantage may be lower depending on:– Local standards and regulations– Value of imports and exports of the

product/service– Tariffs and other trade regulations– Local cultural factors


Production Site Assessment

• Entering a country to produce goods (Eff.) requires determining if the efficiencies sought are possible:– Start-up procedures/ ownership regulations– Availability, cost and quality of resources– Infrastructure– Financial system– Investment incentives

Country Risk

• The possibility of the business environment changing in such a way that reduces or eliminates a country’s relative comparative advantage

• Predictable vs. unpredictable risk• Cannot eliminate risk:

• Plan for it - Scenario planning• Hedge against it• Exit strategy

Country Risk

• Changes in political leadership/philosophy• Civil unrest• Corruption/organized crime• Weak leadership/governance• Reliability of the infrastructure• Supply chain disruption• Economic risks• Wars/terrorism/piracy

Country attractiveness grid

Factor Country A

Country B

Country C

Market potential

Size of market 4 3 3Growth rate 2 3 4

…….

Ease of doing business

Starting a business 3 3 4

Getting credit 3 2 3

………

Risk

Political risk 1 3 2

Supply chain disruption 2 3 2

………….

Documents

Analyzing Global Industries Trevor Hunter King’s University College