Deciding Which Markets to Enter

In deciding to go abroad, the company needs to define its marketing objectives and policies. What proportion of international to total sales will it seek? Most companies start small when they venture abroad. Some plan to stay small; others have bigger plans.

1. HOW MANY MARKETS TO ENTER

The company must decide how many countries to enter and how fast to expand. Typical entry strategies are the waterfall approach, gradually entering countries in sequence, and the sprinkler approach, entering many coun­tries simultaneously. Increasingly, firms—especially technology-intensive firms or online ventures—are born global and market to the entire world from the outset.14

Matsushita, BMW, General Electric, Benetton, and The Body Shop followed the waterfall approach. It allows firms to carefully plan expansion and is less likely to strain human and financial resources. When first-mover advantage is crucial and a high degree of competitive intensity prevails, the sprinkler approach is better. Microsoft sold more than 60 million licenses and upgrades of Windows 8 in the first 10 weeks after its October 26, 2012, global launch. Marketing spanned 42 countries with TV, print, and banner ads, outdoor posters, and branded entertainment. The main risk in the sprinkler approach is the substantial resources needed and the difficulty of planning entry strategies for many diverse markets.15

The company must also choose the countries to enter based on the product and on factors such as geography, income, population, and political climate. Competitive considerations come into play too. It may make sense to go into markets where competitors have already entered to force them to defend their market share as well as to learn from them how they are marketing in that environment.

A critical consideration without question is market growth. Getting a toehold in a fast-growing market can be a very attractive option even if that market is likely to soon be crowded with more competitors.16 KFC has entered scores of countries as a pioneer by franchising its retail concept and making its marketing culturally relevant.17

KFC KFC is the world’s largest fast-food chicken chain, serving more than 12 million customers at more than 4,600 restaurants in the United States and more than 18,000 restaurants in 120 countries and territories around the world. The company is world famous for its Original Recipe fried chicken—made with the same secret blend of 11 herbs and spices Colonel Harland Sanders perfected more than a half-century ago. In China, KFC is the largest, oldest, most popular, and fastest-growing quick-service restaurant chain, with more than 4,260 locations in 850 towns or cities, often enjoying healthy margins of 20 percent per store. The company has tailored its menu in China to local tastes with items such as the Dragon Twister, a wrap stuffed with chicken strips, Peking duck sauce, cucumbers, and scallions. KFC even has a Chinese mascot—a kid-friendly character named Chicky, which the company boasts has become “the Ronald McDonald of China.” Like any emerging market, China does pose challenges to KFC. Sales there took a stumble early in 2013 when state-owned Chinese media accused the company of using local suppliers that gave their chickens exces­sive antibiotics to stimulate faster growth. A social media firestorm followed, eventually causing KFC to apologize for not having tighter controls. Supply chain problems have posed a different challenge in Africa, KFC’s next growth target. Without enough domestic supply of chickens, the company has to import them, but that is illegal in Nigeria and Kenya. To overcome the supply problem in Nigeria, it added fish to the menu. By 2013, KFC had more than 1,000 restaurants in 17 countries in Africa. As it moved into more and more African markets, the company made sure to localize its menu—sell­ing Ugali, a type of porridge, in Kenya and jollof rice in Nigeria—and to showcase local culture on the walls and in the advertising.

KFC has become one of the world’s biggest global brands by adapting its products appropriately and overcoming any local market obstacles.

2. EVALUATING POTENTIAL MARKETS

However much nations and regions integrate their trading policies and standards, each market still has unique features. Readiness for different products and services and attractiveness as a market depend on the market’s demographic, economic, sociocultural, natural, technological, and political-legal environments.

How does a company choose among potential markets to enter? Many companies prefer to sell to neighboring countries because they understand them better and can control their entry costs more effectively. It’s not surpris­ing that the two largest U.S. export markets are Canada and Mexico or that Swedish companies first sold to their Scandinavian neighbors.

At other times, psychic proximity determines choices. Given more familiar language, laws, and culture, many U.S. firms prefer to sell in Canada, England, and Australia rather than in larger markets such as Germany and France. Companies should be careful, however, in choosing markets according to cultural distance. Besides overlooking potentially better markets, they may only superficially analyze real differences that put them at a disadvantage.18

It often makes sense to operate in fewer countries, with a deeper commitment and penetration in each. In gen­eral, a company prefers to enter countries that have high market attractiveness and low market risk and in which it possesses a competitive advantage. Digicel has a very unusual market expansion strategy, an interesting twist on those market-entry criteria.19

DIGICEL In its 11-year existence, Jamaica-based Digicel has conquered politically unstable developing coun­tries such as Papua New Guinea, Haiti, and Tonga with mobile telecommunication products and services appealing to poor and typically overlooked consumers. The company strives for 100 percent population coverage with its networks, bringing affordable mobile service to local and rural residents who have never had the opportunity for coverage before and whose fierce loyalty helps protect Digicel from aggressive government interventions. It operates in 32 markets in the Caribbean, South Pacific, and Central and South America, serving 13 million customers. To be locally relevant, Digicel sponsors local cricket, rugby and other high-profile sports teams in each of these areas. Well-known champion Olympic sprinter Usain Bolt is the chief Digicel Brand Ambassador for various advertising and promotions across the region. The company also runs a host of community-based initiatives in each market through the educational, cultural, and social development programs of its Digicel Foundation. The company’s marketing efforts in Fiji are instructive. Pitched in a fierce battle with incumbent Vodafone only two years after entry, Digicel Fiji even added a shade of light blue from the bottom of the Fiji national flag to its own red logo to reflect the company’s pride in its contributions to Fijian life and sport, as reflected in its campaign, “Fiji Matters to Us.”

3. SUCCEEDING IN DEVELOPING MARKETS

One of the sharpest distinctions in global marketing is between developed and developing or emerg­ing markets such as Brazil, Russia, India, China, and South Africa. These five countries have formed an association dubbed “BRICS” (for Brazil, Russia, India, China, and South Africa).20 Another developing market with much economic and market­ing significance is Indonesia. Some have begun grouping that country and South Africa with Columbia, Vietnam, Egypt, and Turkey, dubbing them CIVETS to raise their profile.21 These markets offer many opportunities but also many challenges.

The unmet needs of the developing world represent huge potential markets for food, clothing, shelter, consumer electronics, appliances, and many other goods. Many market leaders are relying on developing markets to fuel their growth. Nestle estimates about 1 billion consumers in emerging markets have increased their incomes enough to afford its products within the next decade. The world’s largest food company now gets about 40 percent of its revenue from emerging markets. Developing markets make up more than 50 percent of Unilever’s sales and 30 percent of Kraft’s total business, as well as more than 40 percent of its newly spun-off snack business, Mondelez.22

Developing markets account for about 82 percent of the world’s population, and 90 percent of future population growth is projected to occur there.23 Can marketers serve this huge population, which has much less purchasing power and lives in conditions ranging from mild deprivation to severe deficiency? Next we highlight some important developments in each of the BRICS coun­tries and Indonesia.

BRAZIL24 Resource-rich Brazil is the biggest economy in Latin America and the sixth largest in the world. According to a study by Goldman Sachs, it will likely move into fourth place by 2050, meaning it would economically be larger than countries like Germany, Japan, and the United Kingdom. The 2014 World Cup in soccer and the 2016 Summer Olympics in Rio de Janeiro will put the world’s spotlight on recent progress made by Brazil, though also highlighting some of the country’s unease in huge investments in athletic events as opposed to addressing pressing domestic concerns such as education and infrastructure.

Brazil is also the fifth-largest country globally in terms of digital users, with about 91 million people online, making digital strategies attractive. Social media are especially popular. Firms are increasingly using mobile mar­keting, with a strong local flavor in their marketing communications.

Marketers are finding innovative ways to sell products and services to Brazil’s poor and low-income residents. Nestle Brazil boosted sales of Bono cookies 40 percent after shrinking the package from 200 to 140 grams and low­ering the price. One Unilever Brasil marketing vice president noted:

There are common themes that resonate well with Brazilians—family life, happiness, optimism, and pride at being from Brazil. Brazilians are natural optimists, and notoriously upbeat, and the way brands engage with them must reflect this.

Brazil experienced some “go-go” growth years in the 1960s and 1970s, when it was the world’s second-fastest- growing large economy. As a result, it now boasts large and well-developed agricultural, mining, manufacturing, and service sectors.

Brazilian firms that have succeeded internationally include aircraft manufacturer Embraer, sandal maker Havaianas, and brewer and beverage producer AmBev, which merged with Interbrew to form InBev. Brazil also differs from other emerging markets in being a full-blown democracy, unlike Russia and China, and it has no seri­ous disputes with neighbors, unlike India.

A number of obstacles exist, however, that are popularly called custo Brasil (“the cost of Brazil”). The cost of transporting products eats up nearly 13 percent of Brazil’s GDP, five percentage points more than in the United States. Unloading a container is twice as expensive as in India and takes three times longer than in China. Strict and costly labor laws have inspired a massive underground economy that McKinsey estimated accounted for as much as 40 percent of Brazil’s gross domestic product, taking about half of all urban jobs. Crime and corruption are still problems.

RUSSIA25 The 1991 splintering of the Soviet Union transformed Russia’s isolated, centrally planned economy into a globally integrated, market-based economy. Russia is the largest exporter of natural gas, the second-largest exporter of oil, and the third-largest exporter of steel and primary aluminum. Reliance on commodities has its

downside, however. The country’s economy was hammered in the recent recession by plunging commodity prices and the credit crunch.

Russians make heavy use of social media, spending an average of 9.8 hours per visitor on a monthly basis, twice the world average, though Facebook has lagged behind local competitors. The company is engaging Russian devel­opers of apps, games, and similar tools to provide more local content.

Russia has a dwindling workforce and poor infrastructure. The Organization for Economic Cooperation & Development (OECD) cautions that economic reforms have stagnated and ranks Russia as one of the most cor­rupt countries in the world. Many feel the government of Vladimir Putin has been unpredictable and difficult to work with.

For these and other reasons, market entry can be daunting. To distribute in Russia, Cyclo Industries, a U.S. manufacturer of chemicals for the automotive industry, had to translate its labeling, determine how to competi­tively price its products, and develop specialized marketing plans. Logistical problems caused one of the company’s marketers to note, “The roads are just terrible and there’s no way to get from one part of Russia to another.” Although it took the company more than a year to even establish a presence there, within six months the Russian market was contributing 10 percent of Cyclo’s revenue.

INDIA26 India’s transformation over a generation has been staggering. Reforms in the early 1990s lowered trade barriers and liberalized capital markets, bringing booming investment and consumption. India boasts a lively democracy and a youthful population. The world’s second most populous nation with 1.21 billion people, it is also one of the youngest large economies, with a median age of 25. In fact, one-quarter of the entire world’s under-25 population lives in India.

A strong economy has been matched by progress in literacy and access to financial services and modern tech­nology. India has fully embraced mobile technology; mobile phone density is approximately 75 percent of the population, of whom around 15 percent use their mobile devices to go online. Enjoying some of the lowest prices anywhere, one-third of Indian mobile subscribers live in rural areas.

India’s ascent opens a larger market for U.S. and Western goods. About 16 million, or 3 percent, of Indian con­sumers are high-earning targets of youth lifestyle brands connoting status and affluence, like luxury cars and shiny motorbikes, followed by clothing, food, entertainment, consumer durables, and travel. Opportunities abound for firms of all types. Indians drank an average of only 14 eight-ounce bottles of Coke in 2012, compared with an aver­age of 241 bottles in Brazil and 745 bottles in Mexico, leading Coca-Cola to announce a $5 billion investment over 2012-2020.

As the seventh-largest country in size, however, India has important regional differences. Its 28 separate states each have their own policies and tax rules, 23 official languages, 1,500 dialects, and a multitude of faiths. Areas around Mumbai and Bangalore are richer and more highly literate, while poorer, less educated states lie in the east. Even the weather is significant to marketers. Cool winters in the north create dry skin conditions, in stark contrast to the humid climates of Mumbai and Chennai.

Some Indian firms—such as Mittal, Reliance Group, Tata, Wipro, Infosys, and Mahindra—have achieved international success. Reliance touches the life of one in 10 Indians every day, and its worldwide customer base numbers 100 million.

For all its opportunities, India struggles with poor infrastructure and public services—education, health, and water supply—and restrictive labor laws. The national government in New Delhi vows to spend $1 trillion on infrastructure over five years, although, as in many emerging markets, corruption remains a huge problem at vir­tually all levels of government. A complicated retail network has been slow to modernize, leading to distribution problems.

CHINA27 China’s 1.34 billion people have marketers scrambling to gain a foothold, and competition has heated up between domestic and international firms. Its 2001 entry into the World Trade Organization (WTO) eased China’s manufacturing and investment rules and modernized retail and logistics industries. Greater competition in pricing, products, and channels resulted, though some industries remained fiercely protected or off-limits to foreigners altogether.

Foreign businesses complain about subsidized competition, restricted access, conflicting regulations, opaque and seemingly arbitrary bureaucracy, and lack of protection for intellectual property; 90 percent of PC software is reportedly pirated in China. The Chinese government encourages partnerships with foreign companies, in part so that its firms can learn enough to become global powerhouses themselves.

Nevertheless, opportunities exist. Although China is Nestles ninth-biggest market, the company sells half what it does in Brazil, despite China’s having seven times the population. While it’s the largest auto market in the world, at 60 vehicles per 1,000 people, China lags in car ownership at half the world average. PepsiCo has big plans for its

food and beverage brands knowing that consumption of potato chips in China is around one small bag every two to four weeks, compared with 15 bags in the United States, and that the average Chinese buys a beverage 230 times per year while the average U.S. consumer buys 1,500.

Selling in China means going beyond the big cities to the second- and third-tier cities, as well as to the 700 mil­lion potential consumers in small communities in the rural interior. Chengdu and Chongqing are two second-tier economic powerhouses in western China and experiencing much growth. Rural consumers can be challenging; they have lower incomes (the income ratio between China’s coastal cities and rural interior is six to one), are less sophisticated, and often cling to local habits. China is also ethnically diverse—the banknote features eight lan­guages, including Arabic, Mongolian, and Tibetan.

China’s emerging urban middle class is active and discerning, demanding higher-quality products and variety. Although they number four times the U.S. population, Chinese consumers spend a fraction of what U.S. consum­ers do. China is now the world’s top consumer of luxury consumer goods, with many Chinese consumers view­ing these as trophies of success. Luxury cars are the fastest-growing auto segment thanks to the swelling ranks of Chinese millionaires. Burberry’s sales in China now almost match those in Europe as a whole.

Competition among foreign firms is fierce as they attempt to get the upper hand in the fast-growing market. Walmart contends with Carrefour, General Motors fights Volkswagen, and Nike battles Adidas. In competing with local firms, many Western companies benefit from their reputation of quality, safety, and dependability with Chinese consumers, who have seen numerous scandals from their domestic companies. At the same time, Western companies need to be locally relevant. Starbucks has a localized menu of beverages particularly tailored for Chinese consumers—including a unique “East meets West” blend—from which local stores can choose.

SOUTH AFRICA28 Although South Africa is a developed market, we include it here not only as an important market in its own right but also for its role as an access point to the African region; many international companies are using it as a launch pad for African expansion. The 2010 World Cup in soccer offered a chance to reexamine economic progress in South Africa and other African countries.

Africa has experienced much change in recent years. Although political turmoil in Egypt, Tunisia, and Libya during the “Arab Spring” is a reminder of the instability that has plagued the continent and logistical and in­frastructure problems prevail, improvements in many other areas such as health, education, and social services paint a rosier picture of the continent’s future, as do economic forecasts. McKinsey Global Institute estimates the number of African households with discretionary income—money available to spend on items other than food—is expected to increase by a robust 50 percent to 128 million people by 2020.

Additional McKinsey research shows that many African consumers seek high-quality products and are brand conscious, “belying the view that the continent is a backwater where companies can sell second-rate merchandise.” Unilever is finding success by tailoring products for African customers: affordable food, water-conserving washing powders, and grooming products to fit local tastes. Its best-selling Motions range of shampoos and conditioners were made especially for African hair and black skin.

Some firms have worked for years to develop their African business. General Motors now sells in more than 50 African countries and has manufacturing facilities in South Africa, Egypt, and Kenya. Like any other continent, Africa is highly heterogeneous, and some experts emphasize that it should be seen as 53 separate and often very different countries. The Boston Consulting Group has dubbed eight of Africa’s strongest economies the “African Lions”: Algeria, Botswana, Egypt, Libya, Mauritius, Morocco, South Africa, and Tunisia. Nestle is especially bullish on Kenya, Ethiopia, Mozambique, Angola, and the Democratic Republic of the Congo.

Although agriculture is the largest economic sector, telecommunications, energy, consumer products, and health care are experiencing the fastest growth. More than 650 million Africans had mobile phones by the end of 2011; more than 300 million of them are new subscribers since 2000. Mobile phones are used not just for talking but also as a platform to support daily living, playing a crucial role in health care and banking, for example, where extensive infrastructure does not exist. Two-thirds of adults used a mobile money service, with Vodafone and MTN leading the way. The Internet is playing an increasingly important marketing role in Africa, often accessed by mobile phones.

INDONESIA29 Indonesia’s reputation as a country historically struggling with natural disasters, terrorism, and economic uncertainty is quickly being replaced by a profile of political stability and economic growth. The fourth- largest country in the world and the largest Muslim country, given all its progress, Indonesia strikes many as ready to join the BRICS countries.

It has become the third-fastest-growing economy in the region—behind India and China—largely on the basis of its 240 million consumers. By 2030, forecasts expect the number of middle-class Indonesians—those making between $2 and $20 per day—to increase from 131 million to 244 million and those in the “consumer class”—who make more than $3,600 per year—to increase from 45 million to 135 million. Marketers have found Indonesian consumers to be very brand conscious, an important preference given their rising incomes.

An archipelago with more than 14,000 islands in a hot and humid climate, Indonesia does present challenges. Effective, efficient distribution is critical. Large importers have established distribution networks that allow them to reach beyond the one-third of the population living in the six or seven largest cities, but as in many developing countries, infrastructure can be lacking.

Recent progress is noteworthy, however. Indonesia is L’Oreal’s fastest-growing market in Asia-Pacific, leading the firm to build a plant there. IKEA has made a recent entry. With more than 20 percent of its Internet users hav­ing a Twitter account, Indonesia is the fifth-most active country on the microblogging site.

MARKETING STRATEGIES FOR DEVELOPING MARKETS Successfully entering developing markets requires a special set of skills and plans and an ability to do a number of things differently and well.30 Consider how these companies pioneered ways to serve “invisible” consumers in these markets:31

  • Grameenphone marketed cell phones to 35,000 villages in Bangladesh by hiring village women as agents who leased phone time to other villagers, one call at a time.
  • Colgate-Palmolive rolled into Indian villages with video vans that showed the benefits of toothbrushing.
  • Corporation GEO builds low-income housing in Mexico, featuring two-bedroom homes that are modular and expandable.

These marketers capitalized on the potential of developing markets by changing their conventional marketing practices. Selling in developing areas can’t be “business as usual.” Economic and cultural differences abound, a marketing infrastructure may barely exist, and local competition can be surprisingly stiff.32

Many companies are tapping into the growing middle class in developing markets. Boston Consulting Group estimates there will be nearly a billion middle-class Chinese and Indians by 20 20.33 Many will have aspirations that include the purchase of premium products and global brands.34

For example, when Unilever introduced TRESemme in Brazil, it secured the support of 40 big retailers, courted fashion bloggers, distributed 10 million free samples, and launched the company’s biggest-ever single-day online ad blitz, which eventually lured 1 million fans to the brand’s Brazilian Facebook page. In under a year, sales of TRESemme surpassed those of P&G shampoo stalwart Pantene in hypermarkets and drugstores, giving Unilever confidence to set its sights on India and Indonesia next.35

Because the needed marketing practices are more similar to those employed in developing markets, it is typically much easier to tap into the middle class in developing markets than to reach the 4 billion people at the “bottom of the pyramid.” Although they may collectively be worth $3 trillion, each individual low-income con­sumer may have very little to spend.

Satisfying the bottom of the pyramid also requires careful planning and execution. Conventional wisdom says a “low price, low margin, high volume” business model is the key to successfully appealing to lower-income mar­kets in developing markets. Although there are some good examples of such a strategy—Hindustan Unilever with Wheel detergent in India, for one—others have struggled. Procter & Gamble launched its Pur water-purification product in India, and although priced at only 10 cents a sachet, the product yielded a 50 percent margin. But after disappointing overall results, the company transitioned the brand to a philanthropic venture.36

Marketers are learning the nuances in marketing to a broader population in emerging markets, especially when cost reductions are difficult to realize because of the firm’s established supply chain and when production methods and distribution strategy and price premiums are hard to command because of consumer price sensitivity.

Getting the marketing equation right in developing markets can pay big dividends:

  • Smaller packaging and lower prices are often critical when income and space are limited. Unilever’s four-cent sachets of detergent and shampoo were a big hit in rural India, where 70 percent of the population still lives.37
  • The vast majority of consumers in emerging markets buy their products from tiny bodegas, stalls, kiosks, and mom-and-pop stores not much bigger than a closet, which Procter & Gamble calls “high-frequency stores.” In India, food is largely purchased from the 12 million neighborhood mom-and-pop outfits called kirana stores. These thrive by offering convenience, credit, and even home delivery, though modern retailing is beginning to make inroads.38
  • Nokia sent marketing, sales, and engineering staff from its entry-level phone group to spend a week in people’s homes in rural China, Thailand, and Kenya to observe how they used phones. By developing rock- bottom-priced phones with just the right functionality, Nokia has retained market-share leadership in some parts of Africa and Asia despite being surpassed by other brands in parts of the developed world.39

Digital strategies will be crucial in developing markets given the rapid penetration of smart phones as more than a means of communication. One research study showed that social media is six times more important for brands in developing markets such as Indonesia and Thailand than it is in Japan or the United Kingdom.

DEVELOPING AND DEVELOPED MARKETS Competition is also growing from companies based in developing markets. Wipro of India, Cemex of Mexico, HTC from Taiwan, and Petronas of Malaysia have emerged from developing markets to become strong multinationals selling in many countries. Often the key is to both develop a global business model and build a global brand that will effectively work in all the targeted markets.41

One strategy successfully employed by some companies from emerging markets is to identify neglected niches in larger markets.42 Mahindra has been selling U.S. farmers small tractors from its three U.S. assembly plants for more than 20 years. It has used its expertise in manufacturing small tractors to also expand into niche mar­kets for lawn care and golf course maintenance.

Another strategy for going global is to acquire one or more firms in developed markets. India’s Apollo Tyres acquired businesses in the Netherlands and South Africa. After Lenovo bought IBM’s PC business for $1.25 billion in 2005, many other Chinese firms began to look overseas for possible acquisitions, leading one pundit to declare that the well-known phrase “Made in China” would soon be replaced by “Owned by China.”43

On the other hand, many firms from developed markets are using lessons gleaned from developing mar­kets to better compete in their home or existing markets (recall the “bottom of the pyramid” discussion from Chapter 3). Product innovation has become a two-way street between developing and developed markets. The challenge is to think creatively about how marketing can fulfill the dreams of most of the world’s popula­tion for a better standard of living.44

Many companies are betting they can do that. To feed a projected world population of 9 billion by 2050, ana­lysts estimate that food production globally must increase by 60 percent, a challenge John Deere is addressing.45

JOHN DEERE John Deere’s new 8R line was the first tractor line designed to accommodate the needs of different farmers in 130 countries worldwide. The 8R is powerful but agile and fuel-efficient, best suited for larger farms. But it is highly customizable to suit the needs of growers in developing markets like Brazil and Russia as much as the developed markets of the United States or Germany. From March 2011 to March 2012, customers ordered more than 7,800 different configurations of the 8R tractor. Deere has nine fatories outside the United States in both developed and developing markets, including Germany, India, China, Mexico, and Brazil.

Regional economic integration—the creation of trading agreements between blocs of countrieshas intensified in recent years. This means companies are more likely to enter entire regions at the same time. Certain countries have formed free trade zones or economic communities—groups of nations organized to work toward common goals in the regulation of international trade.

Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.

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