Week 8 – Ch.

9
Country Market Analysis
Questions for this Week
• What are the opportunities and risks associated with
exporting?
• How can managers improve their firm’s export
performance?
• How do we identify which markets to enter, and when?
• What information sources and government programs
can help exporters?
• How can we model a typical method of finance and
payment in an international trade transaction?
• What strategies can we recommend to international
business to reduce the risks of default on payment by
international buyers?
 Benefits of exporting

Exporting provides opportunities for smaller

firms to benefit from international trade.
– Economies of scale, lowering its unit costs
– Can be profitable, opportunities available in
almost every industry and country
Small to medium firms tend to be reactive
exporters, exporting when:
– domestic markets become saturated or have
excess production capacity
– opportunities come to them
Australian exporters by destination
Exporting pitfalls

– Poor market analysis

– Poor understanding of competitive
conditions in the foreign market
– Failure to customise product offering to
needs of foreign customers
– Lack of effective distribution program
– Poorly executed promotional campaign
– Problems securing financing
Improving export performance
An international comparison
– Gain knowledge of relevant opportunities
available
– Identify the differences from the firm’s home
base: culture, language, distance, time, etc
– Identifying export opportunities is complex:
more than 200 countries, widely differing
cultures in the world of possible opportunities
 Improving export performance
Government information on opportunities
– Australia: Australian Trade Commission
(Austrade) is an agency within the
Department of Foreign Affairs and Trade
(DFAT) and helps to promote exports.
– Austrade also administers the Export Market
Development Grants (EMDG) scheme, which
reimburses export marketing expenses
– New Zealand: New Zealand Trade and
Enterprise is the Government’s national
economic development agency
 Improving export performance
Government information on opportunities
– United States: US Department of Commerce
has district offices all over the country.
– Japan: Japanese Ministry of International
Trade and Industry (MITI) and the sogo
shosha look for export opportunities
– Germany: trade associations, government
agencies, commercial banks gather
information, help small firms identify export
opportunities

Many international sources permit open access

to their data
Improving export performance
Government export promotion agencies
Improving export performance

Export management companies (EMCs)

– Export specialists, act as export marketing department
or international department for their client firms
– Can provide quick and deep expertise to novice
exporters. Various arrangements are possible:
 They start exporting operations for a firm, and later the firm will
take over operations after they are well established
 Offer start-up services but the EMC will have continuing
responsibility for selling the firm’s products.

– Note: the quality of EMCs varies, and ongoing reliance

on EMC means the company doesn't develop its own
exporting capabilities
 Improving export performance
Export strategy
– Steps to increase the probability of success:
 Hire an EMC or experienced export consultant to identify
opportunities and navigate export paperwork and regulations.
 Focus first on one or a just a few markets. Learn what is required
to succeed in those markets before moving to other markets
 Enter a foreign market on a small scale to reduce the costs of any
possible failure
 It takes time and managerial commitment to build export sales –
hire additional personnel to oversee this activity
 Build enduring relationships with local distributors and customers
 Hire local personnel to establish a company presence in the market
 Retain the option of local production
Basic entry decisions

Which foreign markets?

– An exporter needs to assess foreign markets
according to prospects of success
– Important variables include:
 the objectives of the firm
 the type of products it has to sell
 its size and resources available
 whether it has previous experience, or a
subsidiary, in the country in question
Basic entry decisions
Useful data sources
Basic entry decisions

Which foreign markets?

– Macroeconomic overview:
 First step: overview of broader national economic
indicators to gain an impression of:
• the type of economy in which the firm will
undertake business
• its economic potential
• its degree of risk

 A firm can then rank countries in terms of their

attractiveness and long-term profit potential
Basic entry decisions
12 pillars of competitiveness
(World Economic Forum)
Basic entry decisions

Gross fixed capital formation

– The total amount of newly added physical
capital invested in an economy in a given
year: factories, shops, office buildings, etc.
– Other things being equal, the greater the
capital investment in an economy, the
more favourable its future growth
prospects are likely to be
Basic entry decisions

CAGE framework for distance analysis

(Prof Pankaj Ghemawat, Harvard Business School)

– Cultural, Administrative, Geographic, Economic

– CAGE framework includes both country-level
and industry-level analysis
– Highlights the difference in ‘distance’ between
countries in terms of the above four components
Basic entry decisions
CAGE framework: countries
Basic entry decisions
CAGE framework: industries
Basic entry decisions
- Timing of entry
 Early: enter before other firms
 Late: after other firms are already established
– Early: first-mover advantages:
 can pre-empt rivals, capture demand by establishing a
strong brand name
 build sales volume in that country, learn how to reduce
costs, before later entrants
 can create switching costs, tie customers into your
products or services
– First-mover disadvantages:
 Pioneering costs, costs of being first, set-up costs, etc
 Liability of being 'foreign' is greater for early arrivals
 Regulations may change, and reduce the value of an
early entrant’s investments
Basic entry decisions
Scale of entry: strategic commitments
– Entering a new market on a smaller scale is
typically preferred, even by large firms
– This builds up scale slowly, allows a firm to
become familiar with the market while
managing costs and risks.
– Strategic commitment: any decision with
long-term impact, difficult to reverse
– Entering a foreign market is a major
strategic commitment for the entering firm
 Basic entry decisions

Strategic commitment pros and cons

– Strategic commitments influence the nature of
competition in a market:
 Positive: large investment makes it easier for the company to
attract customers and distributors (e.g. insurance agents)
 Negative: heavy commitment to one market, means less
resources to support expansion in other desirable markets
 Large strategic commitments are not simply good or bad, but
they do tend to change the competitive playing field
 It is important for a firm to think through the implications of
large-scale entry into a market and act accordingly
 Financing trade

Payment for international trade is difficult:

– firms have to trust someone they may never have

met, who lives in a different country, speaks a
different language, who abides by a different legal
system (or does not), and may be difficult to track
down if they default on the trade agreement

– international trade essentially requires the firm to

trust a stranger
Financing trade

Lack of trust: mechanisms and solutions

– Advance payment: payment prior to the exporter
shipping the products
– Open account: payment at some future date after
the products have been delivered
– A third party, trusted by both, e.g. a reputable
bank, can act as an intermediary, and either
mechanism can be agreed by both parties
Financing trade - example
Australia → France
Advance payment: preference of
the Australian exporter
Financing trade - example
Australia → France
Open account: preference of the
French importer
2. Importer pays after the goods are received

1. Exporter ships the goods

Financing trade - example
Australia → France
The use of a third party
 Financing trade –
typical documents
Letter of credit (L/C)
– Issued by a bank, for an importer: the bank will
pay a sum of money to the exporter, on
presentation of specified documents
Bill of lading
– Issued to the exporter by the carrier of the
merchandise.
– It confirms that the carrier has received the
merchandise described in the document
– It is also a transport contract, confirming that the
carrier will provide transport a certain charge
– See Figure 9.5 pg.417 in textbook
Financing trade

Bill of lading
(B/L)
 Summary: Country
Market Analysis
• There are opportunities and risks associated with
exporting
• Scale, timing and market characteristics are key
dimensions of a firm’s potential and actual export
performance
• Governments offer much assistance to local exporters
• The CAGE model is useful in identifying which markets
to enter and when to enter them
• Trust is a key issue in financing trade. There are
various methods of finance and payment to deal with
this in an international trade transaction
 Assignment 2
This week we are focused on comparing countries
for our exports, and have assumed that we have a
firm with established products, markets, skills, etc.

In Assignment 2 this is turned around – the country

is already chosen for you – so your task is now to
find suitable products or services, companies or
industries that would be suitable for exports to this
chosen country. In that sense you are using this
Country Market Analysis in reverse.
Case Study: Bindi Wines

Get together in groups, read the Case Study,

and prepare to answer the following questions:

• Looking back on Country Market Analysis,

find three lessons that we can learn from the
experience of Bindi Wines
• If your group could have given advice to
them before they started exporting, and you
could only mention one thing to them, what
would that one piece of strategic advice be?