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PART ONE
THE INTERNATIONAL MARKETING ENVIRONMENT
AND APPROACHES TO OPPORTUNITY ANALYSIS
The essential elements of effective international marketing are the ability to interpret the business environment, recognise foreign market opportunities, and appreciate how the firm’s resources can best be used to match and develop patterns of market demand. Within the two chapters that make up this section of the book, we focus upon the major dimensions of the international environment and consider how market research and techniques of opportunity analysis can be used as a basis for developing a marketing strategy.
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2 THE INTERNATIONAL MARKETING ENVIRONMENT
Environmental analysis is a necessary element in the development of any marketing programme. For the international marketer, it is an activity which takes on an added importance both because of the large number of different countries in which the firm may operate, and because of the very great differences that can exist between the market environments even of neighbouring countries. Within this chapter, we focus upon four of the major dimensions of the international business environment — the economic, cultural, political and legal environments — and examine the ways in which they influence decisions on market entry and marketing strategy.
The Economic Environment
The economic environment influences demand in a number of ways and its potential effect upon an international marketing programme needs to be examined from two separate but interrelated viewpoints. At the macro level the marketer needs to consider people’s wants and needs, the country’s economic policy, its state of development and the economic outlook. At the micro level he needs to focus upon the firm’s ability to satisfy market demand and compete effectively with firms already in the market. It is, therefore, the economic environment that to a large extent defines the marketing opportunities for international operations and it is only by means of a detailed analysis of this aspect of the environment that the marketer is able to answer two fundamental questions: firstly, how big is the market, and secondly, what is the market like? It is the answers to these questions which then help to determine the firm’s market potentials and priorities, and subsequently the nature of the marketing task that is to be performed. We therefore begin this chapter by considering a number of the elements that make up the macro and micro economic environments, and then move on to discuss how they influence marketing strategy.
The Macroeconomic Environment
The starting point for any analysis of a market involves identifying the level and nature of economic activity. Because the economies of different nations can vary quite enormously (consider, for example, the implications of the differences between the United States and Somalia with populations of 230 millions and 4.5 millions, and per capita incomes of $14,000 and $350 respectively),* the international marketer needs to develop a clear idea of the economic situation and how it will influence the marketing mix. The most fundamental elements of such an analysis are the size and structure of the population, together with the level and distribution of income and wealth. However, having obtained this information and arrived at an initial measure of market attractiveness, care needs to be taken in its interpretation since the level of economic development can change significantly in a relatively short period. This is illustrated quite dramatically in the case of some of the Gulf States which, by virtue of their oil revenues over the past twenty years, have moved from being near the bottom of a league table of economic prosperity to a position very near the top. (In the mid 1980s, for example, the United Arab Emirates, Kuwait, and Saudi Arabia occupied positions 1, 2 and 8 respectively in the World Bank table of GNP per capita.)
Less dramatically, but perhaps equally significantly in the long term, the need to focus upon international market life cycles is illustrated by the ways in which the newly industrialised countries (NICs) such as Taiwan and Korea have leaped to prosperity over the past decade, and subsequently how some less developed nations are rapidly becoming markets which offer considerable potential. Any analysis needs therefore to take account not only of a country’s current position, but also of the ways in which the economy, and hence the market, is likely to develop in the foreseeable future.
The ways in which the stage of economic development reached influences patterns of consumption is reflected in Engel’s laws of consumption which state that poorer families will tend to spend a higher proportion of their incomes on food than more prosperous societies, and that rural populations will spend a larger percentage of their incomes on food than urban dwellers. These laws are, in turn, borne out by the Household Income and Expenditure Statistics produced by the International Labour Organisation in Geneva and have quite obvious and significant implications for market attractiveness.
Returning, however, to our earlier comment that the starting point for any economic analysis is the size and structure of the population, together with the level and distribution of income, the marketer should attempt to build up a market profile which includes information on the size of the current population, population trends, the distribution of the population, the gross national product, patterns of income distribution, and income per capita. Having got this information he can then begin the process of market evaluation and selection.
The Size and Structure of the Market
Although the size of a country’s current population is an important determinant of its potential, straightforward population data by itself provides only a limited and unidimensional view of the market. For a more detailed and useful picture, information is also needed on population trends and its distribution by age.
With regard to the first of these, population growth rates throughout the world currently vary enormously with countries such as Mexico, India and Brazil experiencing annual growth of 4 per cent or more, whilst the European nations, Japan, Canada and the United States average less than 1 per cent. These trends affect companies in a variety of ways. On the positive side, population growth leads to a certain buoyancy in the economy in the sense that new households increase the demand for household goods. At the same time, however, it is increasingly being recognised that high rates of population growth can stifle economic development by virtue of the constraints it places upon per capita income, and hence reduces a market’s attractiveness. It is for these reasons that many governments in the developing world are currently pursuing active birth control programmes. Nevertheless, even in those nations in which population growth rates are high, the market potential for manufacturing such products as medicines and certain foodstuffs may be considerable.
A further dimension which the marketer needs to take into account in his population analysis is its distribution by demographic variables such as age and social grouping. The significance of the social group is discussed at a later stage in this chapter; here we will concentrate upon changing age profiles.
It has long been recognised that age profiles throughout the western world in particular are changing in a dramatic and far-reaching way. Many of the highly industrialised nations in Western Europe have now reached a position in which birth rates are low and the average age of death has increased. By way of contrast, many of the developing nations are faced with a population explosion as rates of infant mortality decline. At the same time, however, life expectancy in many of these countries is still far below that of people in Western Europe with the result that a disproportionate part of the population is in the economically inactive 0-14 age group. These differences are reflected in Table 2.1.
The final factor to which the marketer should pay attention in considering the distribution of the population is its geographical concentration or dispersion. All other things being equal, there are obvious advantages in operating in markets which are geographically concentrated, since transportation and communication costs are minimised. Typically, the starting point for measuring the degree of concentration within a country is the number of people per square mile. In many countries, however, there are quite significant regional variations around the national average. In Egypt in 1984, for example, the approximate population density was listed as 97 persons per square mile. This compares with Asia’s 230 and Europe’s 258 persons per square mile. In practice, however, Egypt’s population is far more concentrated than that of most other nations since it lives almost exclusively in a narrow strip along the River Nile.
The significance of these concentration figures needs to be viewed, however, not just in terms of the implications for communication and transportation, but also for production since it may well be possible for regional markets to be supplied from a common production unit, possibly located in a neighbouring country.
Table 2.1: Age Structure of the Population in SelectedRegions (%)
| 0-14 | Age Group
15-64 | 65+ |
South-East Asia | 40 | 57 | 3 |
Africa | 42 | 54 | 4 |
Latin America | 41 | 56 | 3 |
Europe | 26 | 63 | 11 |
North America | 31 | 63 | 6 |
USSR | 31 | 64 | 5 |
Source: ‘Population Trends in Developing Countries’, Finance and Development, December 1969, p. 51.
The Level and Distribution of Income and Wealth
Although the size and structure of a market’s population is an important part of economic analysis, an equally important dimension is that of income levels throughout the country. The most commonly used basis for a comparison between countries is that of per capita income, since not only is it easily calculated and widely accepted, but it also provides a reasonably accurate indication of a market’s worth. Having said this, however, it needs to be remembered that, despite their value, per capita income figures do suffer from certain limitations. The most prominent of these stems from the way in which they are calculated. For a meaningful income comparison to be made, the per capita figures need to be expressed in a common currency — typically the United States dollar — and this is done by means of a simple exchange rate conversion. This figure is then used as the basis for comparison. The extent to which these figures reflect accurately the relative domestic purchasing power of the two countries can, however, be questioned, since the exchange rate used to arrive at the comparative figures may well vary significantly over a relatively short period as patterns of demand and supply on the foreign exchanges alter. This problem can, in turn, be exacerbated both by currency speculation and devaluation.
Other factors which tend to detract from the real value of per capita income comparisons include the way in which the sales of many products correlate only partially with per capita income. Many consumer goods, for example, have a far closer correlation with population figures, whilst sales of industrial products tend to be a reflection of overall national income or industrial structure.
Nevertheless, despite these problems, per capita income figures do represent a useful starting point for comparisons between markets, particularly for companies selling goods requiring high disposable incomes. An alternative measure which also provides a basis for comparison is that of gross national product. For certain types of good, and particularly those in the industrial sector, GNP has proved to be a more meaningful indication of market potential than per capita income and where this is the case, a straightforward ranking of countries by GNP is a more realistic measure of market value.
Recognising these problems of comparison, the United Nations International Comparison Project (ICP) was established in 1968. Conducted jointly by the United Nations Statistical Office and the University of Pennsylvania with the support of the World Bank and a number of other international, national and private institutions, the ICP has concentrated upon developing a more sophisticated method for measuring total expenditure, which can then be used to derive more reliable and directly comparable estimates of per capita income.
Other Elements of the Economic System
Having examined the size and valu...
