Venturing into the International Marketing Is a Good Recipe for Success - Research Paper Example

Part One. Critically evaluate the rationale used by companies for market screening prior to market entry. In addition to the criteria adopted by Colgate-Palmolive, Coca-Cola and other businesses compare and contrast two other criteria used by firms to screen international markets. Introduction. One of the most important decisions that a firm makes is whether to go international and the manner in which global operations will be managed. The decision to venture in an international market is a critical one because a firm is faced with completely new and unique challenges (Ball 2006). The mere fact that a firm has excelled in the domestic market and also operates in some other international market is “no guarantee that it will excel in a new battle ground” (Bradley 2005 p.88). In the international arena, you underestimate a much smaller competitor operating in your target market at your own peril. It is anyone’s game when it comes to the international market more so when there is an aggressive local competitor. A number of multinational giants have found the going rough after an aggressive assault by a local competitor. Wood, Watt and Farrell (1994) argue that at the heart of any decision to venture into any international market is the holy desire to increase profitability and also spread risk. According to Coyle (2000), a firm that has global operations is likely to be less affected by a downturn in one market. This enables it to buy time by holding on profitability from one market while it puts its house in order in the severely beaten market. In the same breathe, a firm dealing with physical goods can move slow moving goods from one market to another in an effort of cutting losses from a market that is on the slow lane. Barclays bank the UK banking giant is a perfect example of the added advantage of operating in the international market. The banking industry was given a big jolt as the recent credit crunch hit Europe. A number of banks resulted to bailout from the government. Barclays on the other hand resulted to an internal bailout from its other markets that were not badly hit by the meltdown. This is just one of the highlights of the advantaged of operating on the global scene. While going international has its unique advantages, it also has its unique challenges and drawbacks (Pagell &Halperin1994). Heavy initial investment is one of the major challenges that face firms that wish to go international. It is for this reason that a critical look at the international target market is crucial. Otherwise put screening of the international market is the first step in any international market involvement. The screening process is certainly not a walk in the park affair. It is a thorny and complex process which costs a company considerable amount of resources and may take even years to complete. So why do firms incur the extra costs associated with market screening? Well there are a number of reasons. Rationale for market screening prior to entry. Identify market potential. “It is no use investing in a market with little purchasing power unless of course you are in charitable ventures” (Hollensen 2007 p.101). In market potential, the screening process tries to understand the purchasing power of a target market. Hollensen (2009) notes that when identifying the potential of a target market, there are a number of factors that would be of interest to a firm. The income levels of the local population, spending patterns and the population. The population is of essence in any screening process since it is the masses which form the market. Thus a large population with a middle income would be more attractive than a small population with high levels of income especially if a firm is dealing with fast moving consumer goods (Gerstein 2001). For instance an American firm dealing in FMCG would rate Nigeria with a population of over 100 million people with middle income as a high potential market when compared to Botswana with a partly 10 million people with a substantially higher income level. Analyse legal and political environment. Hills (1987) points out that a market screening process is also crucial in determining the potential legal and political issues that a firm faces as it heads to the international market. Brassington & Pettitt (2006) further note that in some countries especially in Africa and Asia it is a business norm to grease the arms of the political elite if a firm wants to stand a chance of getting an operations license. It is through the screening process that a firm identifies these countries and lays strategies on how to meet the requirements of the host. It is imperative that a firm understands the legal environment of a target market since failure to do so may lead to disastrous gaffes. In some markets, local laws might require joint ownership as an entry requirement. In other markets, advertising is limited or not allowed at all (Gilligarn &Hirdi 1986). A firm therefore needs to understand these requirements to avoid unnecessary and potentially costly brushes with the law. To understand the intensity of competition in the target market. “The number of players in a target market is of utmost importance to a new entrant” (Bradley 2005, p.158). A firm seeking to go international therefore carries out a screening process to identify the number of competitors and also try and asses their ability to offer a credible challenge in the market place. In this case, the firm will try to understand the products they offer and also their financial power. This will help the firm to decide which competitors to face head on and which ones to avoid or better still position its products differently from the local market leader. Consumption patterns Ultimately it’s the consumers who determine the success of a firm in any new market. Failure to understand the consumption patterns of the target market could therefore be suicidal (Brassinton &Pettitt 2006). A good understanding of the consumption patterns will help a company decide whether to customize its products or sell standardized products. During the screening process, a company aims at identifying factors such as the level of brand loyalty, whether consumers tend to buy in bulk or in small quantities and if they are price sensitive or not. Culture A firm intending to go international tries to understand the culture of the target market because it ultimately shapes the consumption pattern. “A good screening process enables a firm to understand the culture of the target market and eventually try to tailor its products to the prevailing culture” (Wood, et al 1994, p.41-42). While screening the culture of the target market, a company pays close attention to the language of the target market and generally accepted means of doing business. General Motors learnt the importance of screening the culture of the target market and the possible mistakes in translation the hard way when it launched operations in the Spanish market. The American firm launched a new car called “Nova” only to realise much later that the word Nova actually means “can’t move” in Spanish (Gerstein 2001) Finally a firm also carries out a market screening to determine the availability of qualified labour at an affordable price. It also takes a close look at availability of resources and their cost. For example a beverage firm with the intention of investing in the Middle East market like Dubai would certainly be interested in finding out the availability of water and also a qualified pool of employees. . Other Criteria used by firms to screen international markets Market size Hills (1987) notes that one of the most used methods used by firms in screening international markets is the size of the market. “Of particular concern to these multinationals is the population of a country and purchasing power of the population” (Hills 1987 p.147). The firm will also pay close attention to market gaps or one that is not properly served. Vodafone the UK based telecommunication giant used this strategy to launch operations in Africa and particularly East Africa where mobile telephone technology was still non existent. The structure of the market. Another strategy used by firms in market screening is the structure of the potential market. A number of factors come into play when a firm uses this strategy to screen a new market. One of the major considerations here is the number of competitors including their size and financial muscle. The screening process also looks at the level of product differentiation in the market, ease of entry and exit, available market niche as well as the level of market concentration. Getting out of a market does not come easy especially when you take into account the initial investment. The government might halt such a move to avoid monopolistic practices especially when a firm wants to sell its assets to a preferred partner. This cropped up when Chevron wanted to exit the East African market. A comparison of the two methods. The importance that is placed to research is one thing that stands after carefully analyzing the two market screening methods. Either way research is inevitable if a correct market analysis is to be done. Both methods also highlight an element of future planning. In the process of screening the target market, a company focuses not only on the anticipated success but also on the exit strategy should their plans hit the wall. Finally the two methods pay close attention to the size and nature of the market which ultimately determines the success of any firm. Contrasting the two market screening methods. The structure of the market approach is more proactive than the market size approach. While the latter focuses more on the availability of market opportunities the former seeks to identify potential challenges and lays strategies on how to handle any future problems such as market exit strategy and how to deal with a potentially stubborn competitor. Part Two Compare and contrast Currency options and Forward currency contracts. Currency Option Currency option is a term used in the foreign exchange market and refers to an agreement where by the holder of a currency is able to exchange it for another at a given exchange rate before a specified date. However the holder of the currency is under no obligation to sell the currency especially when he feels that it would be to his disadvantage.(Hull 2008) Currency option is used by firms who deal with foreign currency to guard against frequent fluctuations and potential of loss. Here is an example of how currency option can be used to hedge against losses as a result of foreign exchange fluctuations. Let us assume that a UK based company provides some services to another one based in the US and charges $1 million to be paid in 30 days. Should the pound gain ground over the dollar, then the UK based company will lose money since it will receive fewer pounds when the $1 million is converted to pounds. However should the pound lose ground as compared to the dollar then the UK Company stands to benefit. However what is not in question is the fact that the company faces substantial foreign exchange risk. To guard against this the company can enter into a currency option where it enters into a contract with the debtor to pay the money at the current exchange rate within the 30 days. This helps the UK firm hedge against foreign exchange fluctuation (Madura 2006) Forward currency contracts. A forward currency contract is an arrangement whereby the exchange rate is fixed up two a given duration of time mostly for a maximum period of 24 months.(Clasing 1992) Just like currency option, forward currency contracts are used to hedge against exchange rate fluctuations. For example a UK company may owe £200,000 to a bank in the US. To ensure that it pays only this amount the future exchange rate notwithstanding, it can fix this amount by paying a deposit of 10%. This technique is mostly used by firms who buy foreign goods and would like to fix the price at the current exchange rate to avoid huge losses should the exchange rate not be in their favour. Airlines use this method to hedge against fluctuations of oil prices. A comparison of currency option and forward currency contracts Both methods are used in international business to hedge against foreign exchange risk. Consequently there is an element of risk whenever the two methods are put into use. The time period within which the two methods operate is usually stated in the contract. In the forward currency contract the time periods cannot exceed 24 months. There is no maximum period for the call option but the agreement must be fulfilled within a given duration of time. There is no formal market that trades these two types of financial instruments. They are both traded over the counter and as a result the rules are mostly set by the trading parties. Difference between currency option and forward currency contracts. According to Butler (1996), the major difference between these two hedging techniques is that currency options are mostly used to hedge against future incomes which are not certain while forward currency forwards are used to hedge against future income which is certain. The certain or uncertain future income is mostly in foreign currency. “In forward currency contract, there is always an obligation to receive or pay money in foreign currency at a stated future date”. However in currency option there is no obligation to buy or sell foreign currency at a specified date (Madura 2006, p.101) The benefits of using hedging techniques. There are a number of risks that face a firm that decides to do business in the international scene. “One of these risks is exchange rate fluctuations” (Chen 1998,p.14) Hedging helps a firm deal with potential loss of income by setting the exchange rate at which it will transact business. For example a manufacturer of a raw material such as barley may enter into a forward currency contract to supply a beer firm with the crucial product at an agreed exchange rate when the product is ready. This helps the producers of the product avoid huge losses should the local currency strengthen against the foreign one. By having a clear picture of the future payments and receipts, then a company is able to plan ahead in a more accurate manner rather than base its plans on a guess work and assumptions (Chen 1998). Due to the level of predictability which is made possible by hedging, a firm doing international business is able to keep track of its future expenses and this makes long term planning possible. Conclusion Going international is the only always a good bet if a firm is to increase profitability, diversify risk and gain the respect of a global player. Giants like Barclays bank, Coca-cola, Colgate Palmolive and others would not achieve the success they have today if they stuck to their home markets and failed to go international. While venturing into the international is a good recipe for success, it has also its pitfalls. Factors such as culture, a different climate, economic environment and a new set of laws always come into play. A firm seeking to go international therefore carries out market screening with the sole aim of weighing its chances of success in the new market. It seeks to better understand the new market which helps in laying strategies for success. Now, one of the major risks that face a firm which does business on the global scene is exchange rate fluctuations. To guard on this, global players use hedging to minimize this risk or do away with it all together. Two major methods used in hedging are currency option and forward currency contracts. While these hedging methods are not a sure bet to preventing financial loss in international business transactions, the go along way in minimizing potential loss in the international business arena. Reference: Ball, AD 2006, International business: the challenge of global competition, McGraw-Hill/Irwin, Columbus, OH. Butler, CK1996, Multinational finance, South-Western College Pub, Cincinnati, Ohio. Bradley, F 2005, International marketing strategy, Financial times/Prentice Hall, London Brassington F, Pettitt S, 2006 Principles of marketing, Cengage learning, Florence KY. Chen, Z 1998, Currency options and exchange rate economics, World scientific, London. Coyle, B 2000, Currency options, Lessons, Professional Publishing, Chicago, IL. Clasing, KH 1992, Currency options: hedging and trading strategies, Eska, Paris Hills, BH 1987, Contributions to the theory of market screening. 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Root, RF1994, Entry strategies for international markets, Levington books, New York. Wood, AP, Watt H, & Farrell, NP1994, International market selection by business service firms: key conceptual and methodological issues, Heriot-Watt University, Edinburgh. Read More