Authors: Dermott Dowling @Creatovate & Kevin O’Reilly @Radar Insight
Five Factors to consider with your head, before following your heart into international markets.
International Business market choice is often based on ‘gut instinct’ decision making, retrofitted later with logic that backs up your initial assumptions. This can lead to costly mistakes and valuable scarce resource waste when wrong choices are made.
How do most businesses find themselves offshore? In one word: Dragged, and usually the result of a direct approach from either existing customers or a potential overseas trade partner. We believe one of the 3 keys to successful international business is use of deliberate, upfront rigorous strategic thinking, planning and risk analysis before deciding “Where to Go” first, second or third as you take your business offshore.
We know that any business growth journey starts with defining the challenge and mapping a journey before you set sail. That is why we are championing a new approach to driving profitable expansion into international markets. Following the 5 key factors outlined in this report have helped and will continue to help our clients use ‘more head and a little less heart’ initially in their market choice decision making.
This report outlines the data and decisions required to understand the five factors at play. We were able to build the Creatovate Market Opportunity Index© decision tool through our work with our clients, and wanted to share our learning with the business community.
Partnering with a consumer goods client, we undertook the challenge to help facilitate their Asian export strategy in terms of decision making “Where to go? First, Second, Third, etc” using a pure data approach, before we facilitated and encouraged the overlay of their own subjective lens and ‘gut instinct’. This mix of slow and fast thinking is vital to getting a balanced and aligned strategic choice on ‘Where to go?’ Our goal was to rank countries analysed based on their performance across 5 key factors (each broken into client specific indicators or markers. Using independent research data, extrapolated across attractiveness rating scales we were able to compare and contrast the opportunity presented by targeting China (huge population, low average wage, less international brands on shelf) to that of Singapore (geographically closer, smaller population, higher disposable income, free trade, etc).
This report will walk you through that thinking process, step by step. We hope you will see similarities to your own international business challenge and see opportunity to utilise or adapt the learning to your own context and International Business growth challenge.
Factor 1: Market Attractiveness
The most common starting ground for any business looking at which overseas country to sell their products and services is going to be the usual market research sourced through global data services providers like Euromonitor, Marketline, Nielsen, Canadean, etc. You could populate the indicators under Market Attractiveness with literally dozens of sub indicators but in the interests of clarity and not confusion we picked 5 key sub indicators to give us a sense of absolute size of market opportunity and attractiveness in terms of market growth. It has been noted before you are often better to enter a small but fast growing market as opposed to a large and static one.
I. Volume – what is the absolute volume of your business products/services sold in the country?
II. Value – what is the absolute value of the market in terms of retail sales for category?
III. $/Kg or $/L – this is an important measure for a consumer goods product especially for Australian consumer goods manufacturers. In our case our lenses were focus on Asia and it was important we identified markets that had high enough retail prices per Kg or L of product sold to justify a high cost of goods Australian made food so there is sufficient margin in the value chain for all participants.
IV. Consumption per capita – are we looking at a market with a ready and available appetite for your food or beverage or a market that is currently no/low consumption and will require education as to the products benefits from consumption?
V. CAGR or cumulative aggregate growth rates – in our case we took a CAGR average of the past 4 years market value growth rate to determine if there was a rising tide that would float all boats including new market entrants or a static or even worse in decline market opportunity.
Factor 2: Sociodemographics
Population and demographic information is vitally important in your decision making on which markets to focus on when considering international business. China might be a great market opportunity from a first glance at the absolute population and yet further probing and understanding of sub-indicator factors like the one child policy and an aging population vs. say India by comparison might suggest it is more attractive to the cruise line business than say children’s food products. In our case we were conscious to also look at ability to pay and buy premium imported foods in our markets under study. For this reason we included other sub indicators to give a more rounded view on the absolute numbers of mouths and pockets that can afford our clients products.
I. Population – absolute numbers are hard to ignore but feel free to use filters over the core consumer target age group for your business products or services.
II. PPP per capita – widely regarded as a better and fairer indicator or relative wealth by a nation than the more tradition GDP per capita this is again a fast indicator for overall wealth.
III. Disposable income per capita – we were fortunate to be working with a data set that included this level of detail which helps in the sense of what available funds do consumers in the country have to spend outside their daily necessities to live?
IV. Food expenditure per capita – a key indicator in our client project as they are selling food is the amount spent per household or able to be spent on weekly food purchases. This sub-indicator could be adapted to your own business category of products or services.
Factor 3: Open to trade
Our client first consideration was immediate opportunity to export/import their products into the region of study. As such a key factor for us was the local markets or countries openness and willingness to trade with the country of origin – in our case Australia. Our focus needed to search and discover data from international and domestic data sources on volumes of international trade and imports in the food category (open to trade), volumes of the category currently exported into the region and to what countries (follow the leader) and last but not least any visible or unforeseen barriers to entry. This factor became complex rather quickly requiring a mix of sub indicators that contributed to an overall factor score in terms of attractiveness.
I. Volume of Imports – MT, $/Kg and $m – this was the sub-indicator of the country openness and scale of trade both in absolute volume, value and $ per weight/volume measure.
II. Volume of Exports – sourcing data from the local industry association we were able to determine the absolute volume of the client’s category of products exported to each country in the region. This is a ready sub-indicator to open to Austrade in the sense open acceptance of imported goods from Australia in those countries.
III. Barriers to Entry – a mix of quantitative and qualitative judgements or indicators we utilise the apparent barriers like Tariffs, Quota restrictions, and some ‘behind the border’ barriers like Product registration requirements and estimated time to register or local labelling laws.
Factor 4: Dispersion
Working in the Fast Moving Consumer Packaged Goods industry where the majority of products sold are through retailers and increasing modern retailers like supermarkets, hypermarkets and convenience stores it was important we believed to include some country analysis and understanding on concentration of power of buyers (retailers), suppliers (local manufacturers) and penetration of private label products in that country. For this reason we used 3 key sub-indicators to get a sense of dispersion in the country which would suggest competition is less intense and more room for a new entrant vs. highly concentrated and difficult to penetrate the new market.
I. Concentration of Retailers – what is the combined market share of the top 5 retailers? In markets like Australia where we have a highly concentrated retail landscape with two retailers dominating 70% of available market share the trading terms and margin requirements with those retailers is understandably high relative to a highly dispersed retail market.
II. Private Label Penetration – if Private Label has penetrated the category and to a high % of total category share the correlating thinking is that there will be less willingness by customers to range new lines/brands/products in the category as they concentrate on incumbent market leaders and building their own exclusive or private label brands.
III. Concentration of Manufacturers – what is the combined market share of the top 5 local food manufacturers in the category you have entered? If that market share is high there will be higher profitability with those manufacturers and a willingness to go above and beyond to stop new entrants getting a food hold in their category.
Factor 5: Innovation Intensity
Factor number 5 we wanted to check was the relative level of innovation intensity in the country and category under examination. Whilst a higher level of innovation intensity would indicate consumer and customer willingness to trial new products and brands it might also suggest a higher level of competitive intensity and greater need for our client to continuously refresh their product offer both at home and off-shore. We selected three sub-indicators here to give us an overall sense and impression of which markets are open to new ideas, products, allow functional or nutritional health claims for foods and what % of total turnover in their country and category is from New Products launched in the past 3 years.
I. New Products launched in the past 3 years as a % of total value of sales in the category
II. Claims permissible – in your category space. Are the claims you can make on your products at home where they are successful allowed in the new country you are about to enter?
III. Health claims premium – if you are selling products that make beneficial health or functional claims how much of a price premium are similarly claiming products getting in the market under study?
Working through the above 5 factors and their 3-5 sub indicators across a mix of independent data sources enabled us and our clients to take a step back unbiased independent look at the region and rank the markets. We also developed a subjective scorecard that could be used to align key leaders in the client business around discussing which markets will be a focus for entry in the short, medium and longer term horizons so that preparation, planning and time critical steps could be taken across the board to manage a phased approach to international business growth. Heart is good and if the Head matches up with the heart or the slow thinking matches the fast thinking gut reaction you know you are onto a winner and ready to take that next step forward to answer our next question: “How to enter?” the new market and what market entry model to use? More on that front in our next post. We trust this critical thinking approach to the Where? Question will give you some data and knowledge to think about in your context and the ability to turn that learning into wisdom. Please do not hesitate to get in touch with us if you would like to do something similar or different relevant to your context and challenge as you create, innovate and grow your business internationally.
About the Authors:
Dermott Dowling is founding Director @Creatovate, Innovation & International Business consultancy. Creatovate help businesses create innovate and grow through innovation and spreading their wings outside their home base. Contact Dermott if you and your business needs help improving your innovation processes or expanding your business internationally.
Kevin O’Reilly launched Radar Insight after seeing too many products launch without the insight or clarity required to be successful. Contact Kevin to hear how consumer research & product evaluation can help tailor your product to your target market.