Country Evaluation and Selection



Country Evaluation and SelectionMittal SteelMittal Steel was formed consequent on the merger of LNM Holdings and ISPAT International, in 2004.In June 2006 it made history by creating the world's largest steel company. Mittal Steel and Arcelor merged and the combined group, headquartered in Luxembourg, was named Arcelor Mittal2. It had a net income of UD$ 9.4 Billion for 2008.The world’s eighth richest man, Lakshmi Niwas Mittal was born in Rajasthan, India in 1950. He began his career working in the family’s steel making business in India, and over the years garnered immense experience working in steel and related industries. Mittal founded the company Mittal Steel in 1976 and has been responsible for the development of its businesses ever since. It has operations in 14 countries.Mittal pioneered the development of integrated mini-mills and the use of Direct Reduced Iron or “DRI” as a scrap substitute for steel making and led the consolidation process of the global steel industry. Mittal Steel is the largest steel maker in the world.He set out to establish its international division, beginning with the buying of a run- down plant in Indonesia in 1976 and managing it for the next 14 years.Indonesia was chosen for its growth potential and the fact that there were fewer governmental and economic restrictions compared to India. The plant was inefficient and faced significant production issues, including reliable access to electricity. Mittal managed to secure a reliable source of energy to operate the plant.His Indonesian experience enabled him to identify the vulnerability of the industry asits dependence on an uncertain supply and means to rectify this drawback. He also realized that good-quality scrap, one of the raw material for making steel, could be both difficult to source and costly. He supplemented his supplies with a financially and technologically viable substitute, direct-reduced iron (DRI). His search for a supplier of DRI led him to the Caribbean, and his first of many big breaks came in 1989 with the acquisition of the Iron & Steel Company of Trinidad and Tobago, and renamed Caribbean Ispat.The new management raised production, broadened the product mix and customer base, improved processes and cuts costs. Caribbean Ispat made a profit in its first year. Over the following 15 years, steel production, using the integrated mini-mill process, trebles with steel shipments of 1.0 million tonnes in 2003.Mexico had embarked on a privatization program for its steel industry in the early 1990s. Mittal’s track record in Indonesia and his pioneering use of DRI technology cast a good impression on the Mexican authorities. A deal was thus struck and Mittal acquired Sibalsa, renaming it Ispat Mexicana in 1992.Built by the Mexican government at a cost of US$ 2.2 billion, the integrated mini-mill complex while modern, was operating at only 25% of capacity at the time of acquisition. Operating improvements achieved a dramatic turnaround. A sevenfold increase compared with the year before the company's acquisitionThe dramatic turnaround and generation of high-profit margins by Ispat Mexicana funded a series of acquisitions thereafter in Kazakhstan, USA, France, Romania, Algeria, Macedonia, Poland, Canada and investments in India and China.In 2005, Mittal Steel made its first move into China, by becoming the first foreign steel maker to have a production presence in China. It then buys 36.67% of Hunan Valin Steel Tube & Wire for cost of US$ 338 million, one of China's top ten steel makers with annual capacity of 8.5 million tons.Mittal has clearly demonstrated that the strategy of operating globally, which means having proximity to raw materials and growing markets, is highly lucrative.How do companies such as Caterpillar and Mittal evaluate and select countries to do business in? Do they leverage the opportunities provided by the environment or countries such as the world wars, the postwar reconstruction, or the much required roadways and infrastructure in a geographically spread out country with a dispersed population such as the United States? Are the opportunities created by the from bailout packages to cope with the downturn and recession necessitating heavy spending on infrastructure? Or are they drawing on their own internal capabilities and strengths to capitalize on opportunities that countries offer them?Learning ObjectivesWe need to learn from their successes, the following:How countries are analyzed in order to make an evaluation and selection based on opportunities?Toanalyzeanorganization’scompetitiveadvantageanddistinctive competencies that would allow it to leverage these opportunities.To shortlist, screen and prioritize countries in order to identify target markets.To make an assessment of the market potential and demand for an organization’s products and services in these target markets.Country AnalysisWe looked at how countries compete with each other to, amongst other things, improve the standard of living and quality of life of their citizens, grow economically, attract foreign investments and tourists, maintain political stability and build their own brand image. We analyzed the ‘competitive advantage of nations’ using Porter’s ‘National Diamond’ and ‘The Twelve Pillars’ as developed at the World Economic Forum in 2008. Reproduced below in Exhibit 15.1 is the overall Global Competitiveness Index (GCI). 3In the emerging economies, Chile, China, Czech Republic, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Poland, Russia, South Korea, Taiwan and Thailand appear to have a comparative competitive advantage over the ten Economies to Invest inThe Top ten Economies to Invest in, according to KPMG’s November, 2008 study4 (see Exhibit 15.2 below) - in the next five years has found that five of the ten are from Asia. These are China, India, Singapore, Hong Kong and Japan.China was ranked the world’s best place to invest in the next year and over the next five years. In Asia-Pacific, this was followed by India, Singapore, Hong Kong, Australia and Japan. Notably, India overtook the U.S as the 2nd best investment destination in five years’ time.Exhibit 15.1: Global Competitiveness Index3Overall Index13258803833176543210Exhibit 15.2: Top 10 Economies to Invest InRankNext YearIn Five Years1ChinaChina2United StatesIndia3IndiaUnited States4SingaporeSingapore5Hong KongHong Kong6AustraliaJapan7United KingdomUnited Kingdom8JapanAustralia9GermanyGermany10SwitzerlandSpainSource: KPMG, November 20084Corporate Tax RatesIt has also been found that a country’s Corporate Tax Rates are viewed as another important criterion.Exhibit 15.3: Corporate Tax Rates, Asia Pacific, 200841171043128929In a survey, conducted from September-October, 2008 and covering 260 MNCs in 12 economies globally, is KPMG’s first report4 on the influence of tax policies and demographics on international business locality decisions. The study also tracked the investment intentions of firms over the next five years.70% of respondents said the tax regime is an important factor in choosing where to locate their business. The survey found that half of all respondents indicated that the tax policy of a country (See Exhibit 15.3) is more important than an educated workforce in deciding where to locate their business operations.Macau, Hong Kong and Singapore certainly have advantageous corporate tax rates. The rest range from China at 25% and Philippines at 35%.GDP forecastsGDP forecasts are yet another good indicator in evaluating a country for the purposes of conducting business there.Exhibit 15.4: Prospects for the Global Economy6GDP FORECASTS1515745106680JapanUaAfricacoIndiaSouthiaBrazilMndRAChinaIndonesia ThldWexiussailSor00JapanUaAfricacoIndiaSouthiaBrazilMndRAChinaIndonesia ThldWexiussailSor108646087745376555006091555142240006087745257810006064885105410GDP 2008GDP 2009GDP 201000GDP 2008GDP 2009GDP 20101247140156210% age00% age20-2-4-6-8Source: Extracted from World Bank: Prospects for the Global Economy: Global Economic Prospects 20096 World Bank’s estimates of GDP forecasts for the year 2010 and shown above in Exhibit 15.4: Prospects for the Global Economy, China , India and Indonesia are forerunners with Thailand, Mexico , Brazil and South Africa close behind in showing promise.Number of Days required to start a businessOn the other hand another simple indicator would be the number of Days required to start a business in various countries as shown in Exhibit 15.5.While the figures appear very conducive for Australia (2), USA (5) and UK (18), the number of days required to start a business in figures for South Korea (22), Malaysia (30), Thailand (33), India & China at 35 are not unfavourable compared to that of 97 for Indonesia and 152 for Brazil.Exhibit 15.5: Days required to start a business6Days required to start a business1240155113665140120100806040200Polan Phillip Indon ColoMoroc Mexic TurkeRussi Hung h SouthThaila Malay South AustrPeruBrazil IndiaEgyptChina Israel ChileUSA UKd ines esia mbiacooyaary Repu Africablicnd sia Korea aliaDays required to start a business 72 31 46 97 44 152 35 12 27919 28 38 24 35 35 34 27 33 30 22251800140120100806040200Polan Phillip Indon ColoMoroc Mexic TurkeRussi Hung h SouthThaila Malay South AustrPeruBrazil IndiaEgyptChina Israel ChileUSA UKd ines esia mbiacooyaary Repu Africablicnd sia Korea aliaDays required to start a business 72 31 46 97 44 152 35 12 27919 28 38 24 35 35 34 27 33 30 222518160Foreign Direct Investment (FDI) Confidence Index5AT Kearney’s Foreign Direct Investment (FDI) Confidence Index5, 2007 as shown below in Exhibit 15.6, is a survey of senior executives from 1000 Global population of the largest companies in terms of revenues spread over 60 countries and 17 industry sectors. These companies accounted for more than 75% of FDI flows. The survey was conducted in August 2007 at the onset of the sub prime market crises.Exhibit 15.6: Foreign Direct Investment (FDI) Confidence Index, 200751143000119616China and India rank the highest. Other destinations in Asia and the Emerging markets are Hong Kong, Singapore, UAE and Russia, constituting six of the top ten.A Framework for Country Analysis and EvaluationDo we conclude that Chile, China, Czech Republic, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Poland, Russia, South Korea, Taiwan and Thailand are the most likely countries for businessmen wishing to enter or continue doing business in? What conclusions can we draw as to how to carry out a country analysis? Table15.7 summarizes these in a Framework for Country Analysis that consists of Contextual and Strategic and Policy factors.Exhibit 15.7: A Framework for Country AnalysisContextual FactorsStrategic & Policy FactorsPopulation & Natural ResourcesGNP, GDP Growth, Monetary & FiscalPoliciesGeography, Topography, ClimatePricesCulture (see Chapter 3)InflationLegal Framework (see Chapter 4)Unemployment, Literacy,Political Climate (see Chapter 4)Income DistributionState of Technological Preparedness(see Chapter 5)Exchange Rates, BOPEthics and Governance(see Chapter 7)Tariffs & QuotasInternational&RegionalIntegration(see Chapters 11 &12)Drawing from the two mini cases cited at the beginning of this, take a look at Exhibits15.9 and 15.10. These depict the location and names of the world’s top ten countries that are major iron ore producers and showing the presence of Arcelormittal2.Exhibit 15.9: Major Iron Ore Producers in the World1143000119638Exhibit 15.10: Arcelormittal’s2 Global Steel Production11430002666325699125220345Estimated iron ore production in million metric tons for 2006 according to U.S. Geological SurveyCountryProductionChina520Australia270Brazil250India150Russia105Ukraine73United States54South Africa40Canada3300Estimated iron ore production in million metric tons for 2006 according to U.S. Geological SurveyCountryProductionChina520Australia270Brazil250India150Russia105Ukraine73United States54South Africa40Canada33Source: Adapted from Corporate Brochure ‘Transforming Tomorrow’ respect of Caterpillar1, Exhibit 15.11 shows the geographical area (the top ten ranked by size) and population density. Caterpillar has presence in The Americas (US, Canada, Brazil , Mexico and Chile) , Europe ( Belgium, Netherlands, Germany, Spain, France, Ireland, Italy, Poland and Sweden), Asia ( China, India, Japan, Middle East, Indonesia, South Korea and Taiwan), Australia and Africa.4898135140282Exhibit 15.11: Caterpillar’s World Wide Presence119126013589000Source: Adapted from d_ statisticsSource: eveloped_and_Emerging_markets.This image has been released into the public domain by its author, Alex Covarrubias. This applies worldwide.In the case of Mittal, the sources of raw material and for Caterpillar, the geography and population density, and for both Investments in development of infrastructure, roads & highways, mining etc coupled with their own strengths or competitive advantage and distinctive competencies ( discussed below) allow them to make strategic choices in respect of global growth.These can also be viewed from the perspective of The opportunity matrix shown in Exhibit 15.12 below. Essentially an organization must view the level of attractiveness of the opportunity as being high and their own internal capability of ensuring a high probability of success (quadrant 1). Quadrant 2 and 3 offer some attractions and organizations should examine these to determine whether or not scope exists to improving the attractiveness and of the probability of success. Quadrant 4, on the otherhand represents opportunities that are too small or the organization’s ability to leverage the probability of success may be weak.Exhibit 15.12: The Opportunity MatrixProbability of Success26676354032251234001234HighLowHighAttractivenessLowAnalysis an organization’s competitive advantage and distinctive competenciesIn order to effectively convert opportunities offered by countries an organization needs to possess a competitive advantage and sets of distinctive competencies. These can be defined as clusters of extraordinary abilities or related ‘excellences’ that a firm has inherited, acquired or developed ; is demonstrated repeatedly and consistently in delivering value to its customer and; cannot be easily be imitated, or substituted. This quite different to comparative advantage which merely indicates an organization’s ability to produce goods or service more efficiently (cost wise) than its competitors or gain a marginal edge through efficient deployment of some of the factors of production.Areas for Obtaining Competitive AdvantageSome of the areas where organizations can seek out competitive advantage are listed below in Exhibit 15.13. this list is not exhaustive, but illustrative.Exhibit 15.13: The Areas for Obtaining Competitive Advantage1Organizational AdvantageOwnership StructureReputation and Public ImageCultureLeadership and Risk AppetiteStrategic capability in responding to Environmental ChangesManagerial Skills and CapabilitiesSizeFinancial StrengthOrganizational AgilityPast PerformanceSpeed in RespondingFlexibility & AdaptabilityEnvironmental ConcernCSR practicesCompetitive ResponseReputation in AlliancesLaw suits pending2Functional & Operational AdvantageMarketingCustomer BaseCustomer KnowledgeCustomer LoyaltyPast PerformanceProduct QualityBreadth & Depth of Product RangeResponse to Product Modification & AdaptationUnique Selling PropositionBrand EquityMarket ShareGeographical Spread & CoverageNew Product SkillsPricingMarketing Channels & NetworkMarketing CommunicationSales ForceService support & ReputationInnovation, Technology and R&DInnovative CulturePatents & Trade MarksNew Products DevelopedTechnology & Technical SkillAccess to Research Data and Institutions/UniversitiesAcademic AlliancesManufacturing & OperationsTechnology & Technical SkillEconomies of ScaleExperienceQualityFlexibilityProcess EfficiencyDelivery CapabilitySupply ChainRaw Material AdvantageJIT and other PracticesVendor Development , Relations and LoyaltySupplier sourcing FlexibilityEfficiency of Logistics and SupportEfficiency of Buying CentersFinanceNet WorthLiquidityCash FlowProfitability & ProfitsFinancial StabilityAccess to CapitalAbility to raise capital CompetitivelyHuman ResourcesEmployee-Management RelationsFlexibility and MobilityTurnover & RetentionPreferred EmployerLearning CultureAcademic Alliances3External Stakeholder AdvantageCustomer LoyaltyControl on Supply ChannelsControl on Distribution ChannelsPreferential Political & Legislative TreatmentBeneficial Tariff, non-tariff and Tax structuresLocation BenefitsGovernment Support and Respective Foreign Policy IssuesLocal Community SupportAlliances, Associations and CartelsThe need to have multiple layer/ sets of competitive advantageIt must be noted that a single source of competitive advantage may not be enough for an organization to successfully (and on a sustainable basis) leverage opportunities offered by the environment. Moreover, a single set of competitive advantage may be easily replicated by a competitor. Caterpillar promised that it would supply spare parts for its earth moving equipment within 48 hours anywhere in the world or it could had free of cost. It did not take much time for Komatsu to offer the same level of service. Hence organizations need to have multiple layer/ sets of competitive advantage to ensure their sustainability.In the case of Mittal, his managerial skills and capabilities to structure and successfully implement turn around strategies, past performance, access to capital, technology coupled with Local Government and Community Support gave them a multi layered competitive advantage.The TOWS Matrix113792032258000Exhibit 15.14: The TOWS Matrix10InternalExternalOrganizational StrengthsOrganizational WeaknessesStrategic OptionsEnvironmental OpportunitiesSO: Strengths can be used to capitalize or build upon existing or emerging opportunitiesWO: The strategies developed need to overcome organizational weaknesses if existing or emerging opportunitiesEnvironmental ThreatsST: Strengths in the Organization can be used to minimize existing or emerging threatsWT: The strategies pursued must minimize or overcome weaknesses and, as far as possible, cope with threatsAdapted form Weihrich, H (1982), ‘The TOWS Matrix: A Tool for situational Analysis’, Long Range Planning Vol.15, No. 2 pg. 60Mittal’s competitive advantages (stated above) or organizational strengths can be taken along with opportunities in the environment such as low cost raw material (for application of DRI technology), low cost labor, many foreign government’s embarking on a privatization program (of State Owned Enterprises) to create astrategic option or ‘SO’ strategy, whereby the organization’s strengths can be used to capitalize or build upon existing or emerging opportunities.Similarly ‘ST’ strategies denote strengths in the organization that can be used to minimize existing or emerging threats, such as Caterpillar’s financial strength was deployed to minimize the impact of its many labor unrest/strikes.‘WO’ strategies are those developed in order to overcome organizational weaknesses if existing or emerging opportunities. An example of this is McDonald’s. Traditionally, and in the rest of the world, its burgers are made from ‘beef’. While making a business entry into India, where the vast majority of the population hold the ‘cow’ as sacred, warranted a change in their product mix. Neither beef nor lamb meat is used in any of their products. Furthermore, some of their local products have a distinct Indian name and taste. This has proved to be successful in India.Coke and Pepsi have revamped their product (by introducing healthier substitutes to carbonated soft drinks and snack items) and promotion (adaptation of their advertising themes) mix. Thus their ‘WT’ strategies are such that they minimize or overcome weaknesses and, as far as possible, cope with the threats. Some of these being health consciousness level of people, accusations of pesticides contamination etc.Short listing, Screening and prioritizing countries in order to identify target markets.The Heritage Foundation, an US based policy think tank founded in 1973 publishes an index for economic freedom11 which has provided an analyzes of 183 countries across ten specific freedoms such as Business and Trade Freedom, Fiscal and Monetary Freedom, Financial and Investment Freedom.Brief explanations for each of the dimensions of ‘Economic Freedom’ are provided hereunder:Exhibit 15.15: Index of Economic Freedom, 200911Index of Economic Freedom 20091403350107315009080706050403020100Adapted from The Heritage Foundation- 2009 Index of Economic Freedom FreedomIt is a measure of the ease with which and entrepreneur can conceive, create, operate and close a business in a country. It measures how cumbersome some of its regulations, whether in the form of licensing or taxation etc. are.Trade FreedomIt is the degree to which Government’s restrict the freedom of trade in the forms of import and export of goods and services with taxes, tariffs, duties, quotas, bans and other regulatory barriers. It reflects the prices that consumers pay for importedgoods and the distortions created by production incentives for local manufacturers. The degree of protectionism when local producers lack competitive advantage. In short it is the degree to which businesses can interact freely as buyers and sellers in the international marketplace.Fiscal FreedomFiscal freedom for individuals and business organizations is the freedom to use and control their earned wealth for themselves. Fiscal burdens can be imposed by the government on economic activity to generate revenue for itself, via taxation and debt, which in turn has to be paid off through taxation. Hence this becomes an important ernment SizeRegarding issues of generating revenues and issues of expenditure (see fiscal freedom); the burden of excessive government becomes the main issue in economic freedom. “Public goods” is the term used to justify government expenditures, which are provided efficiently by the state rather than by the market. Through government action, there is also a justification for correcting market failures. But a government not being as disciplined as the market, further escalates inefficiency, bureaucracy, leading to even lowered productivity. Government expenditures compete with private ones and tend to interfere with market prices by over-stimulating demand and diverting resources through a crowding-out effect. In some cases, governments coerce goods and capital out of markets totally, escalating the interest rates and inflation.Monetary FreedomWhat free speech is to democracy, monetary freedom (reflected in a stable currency and market-determined prices), is to an economy.People living in freedom need a steady and reliable currency as a medium of exchange and as a store of value. One cannot create long-term value without monetary freedom.The monetary policy of a government is controlled by the value of a country’s currency. The monetary policy that can maintain stability can encourage people to rely on market prices for a foreseeable future leading to individuals enjoying a greater economic freedom towards investment, savings, and other longer-term plans. On the other hand inflation not only confiscates wealth like an invisible tax, but also distorts pricing, misallocates resources, raises the cost ofdoing business, and undermines a free society.Investment FreedomInflows and outflows of capital can be limited by restrictions on foreign investment. The returns are greatest in a free environment, and capital will flow to its best use where it is most needed.The freedom of the investor and the freedom of the people seeking capital feel restricted when the flow of capital is redirected. The more restrictions imposed on investment in a country, the lower becomes its level of entrepreneurial activity and economic growth.Financial FreedomMost of the countries provide some type of prudential supervision of banks and other financial services. Firstly, this ensures the safety and soundness of the financial system and secondly, it also ensures that financial services firms meetbasic fiduciary responsibilities.Property RightsAccumulating private property is the main motivating force in a market economy. Secure property rights give citizens the confidence to undertake commercialactivities, save their income, and make long-term plans because they know that their income and savings are safe from expropriation or theft. All this requires an effective and honest judicial system that is available to all without any discrimination.Freedom from CorruptionCorruption is dishonesty or decay in a system. It is a distortion in the system and failure of integrity by which individuals are able to gain personally at the expense of the country as a whole. Political corruption has been a sad part of human endeavors since long, and it manifests itself in many forms such as bribery, extortion, nepotism, cronyism, patronage, embezzlement, and (most commonly) graft in which the public officials steal or make profit illegitimately from public funds.Labor FreedomLabor freedom means that an individual can work as much as they want and wherever they want. Similarly, the choice of businesses to contract labor freely and to fire workers when they are no longer needed is a vital mechanism for increasing productivity and sustaining economic growth. Free and voluntary exchange is the core principle of any market. The labor market should be based on the principle of voluntary choice and free competition.Countries such as Peru, Poland, Colombia, Mexico, Turkey, Hungary, Czech Republic, South Africa, Israel, Chile, Thailand, Malaysia, South Korea, and Taiwan certainly figure better than the BRIC countries.While this may be true as far as the overall index goes - organizations need to look carefully and deeply at specifics with respect to each country.A country such as Indonesia, which ranks comparatively low on the index of economic freedom, including freedom from corruption, proved advantageous forMittal. It all began with his buying a run-down plant in Indonesia in 1976 and, Mittal managed it for the next 14 years. He received greater governmental support and faced fewer restrictions in Indonesia as compared to India. The plant was inefficient and faced significant production issues, including reliable access to electricity. Mittal managed to overcome these and operate the plant.Mittal’s Indonesian experience enabled him to identify the vulnerability of the industry as its dependence on an uncertain supply and means to rectify this drawback. He also realized that good-quality scrap, one of the raw material for making steel, could be both difficult to source and costly. He supplemented his supplies with a financially and technologically viable substitute, direct-reduced iron (DRI). His search for a supplier of DRI led him to the Caribbean, and his first of many big breaks came in 1989 with the acquisition of the Iron & Steel Company of Trinidad and Tobago, and renamed Caribbean Ispat.Making an assessment of the market potential and demand for an organization’s products and services in these target markets.For both new businesses and existing ones, a very important assessment is that of the ‘Market Potential’. Global Edge at Michigan State University12 has computed an index for market potential. Exhibit 15.16 A is an adapted version of this for emerging markets for 2008. In computing the overall index – consideration has been given to:1. Market Size- which has been given a 20% weightage and takes into account the size of the urban population13 and the consumption of electricity (International Energy Annual), 2. Market Growth Rate, given a 12% weightage takes into account GDP growth rate13 and the annual growth rate of primary energy use, 3. Market Intensity - having a weightage of 14% factors in GNI per capita estimates using purchasing power parity and private consumption as a percentage of GDP13. 4. Market Consumption Capacity, having a ten percent weightage which takes into account Percentage share of middle class in consumption/income13. 5. Commercial Infrastructure, with a weightage of 14% takes into account Telephone lines per 100habitants, mobile subscribers, number of personal computers, paved road density, internet users, percentage of households with TV. 6. Economic Freedom takes into account ‘The Economic Freedom Index’11 and ‘Political Freedom Index’ and has a ten percent weightage. 7. Market Receptivity, which has a 12 % weightage takes into account per capita imports from the US and trade as a percent of GDP13, and finally 8. Country Risk which takes into account Country Risk Rating (Country Risk Survey) and has a weightage of eight percent.Overall index for the top 25 countries and Market SizeExhibits15.16 A looks at the overall index for the top 25 countries and Exhibits15.16 B in respect of “Market Size’ for 20 of them. The highest scores are in respect of China, India, Russia and Brazil.In analyzing and judging market potential, this (Market Potential and Market Size) becomes an important consideration.Caterpillar1Caterpillar1 forecasts more than $ 750 Billion of infrastructure projects in India, over the next ten years. Hence it has invested in India and set up manufacturing facilities producing quarry and off highway construction trucks, backhoe and wheel loaders, engines power generator for both Indian and Global customers.In keeping with its goal to support manufacturing growth in China, Caterpillar, Inc. unveiled its new manufacturing operation in the Jiangsu province in East China, in May 2007. The Wuxi campus, home to Caterpillar (China) Machinery Components Co. Ltd, (CCMC) sits on 47 acres. It will manufacture a range of components to be used primarily in Caterpillar machines and to be sold to original equipment manufacturers (OEMs)."As demand for Caterpillar products continues to increase, the development of our operations in Wuxi will play an important role in supplying state-of- the-art, world- class components for the Caterpillar machines used by our customers and by discriminating OEMs," said Chris Schena, Caterpillar vice president with responsibility for the Motion & Power Control Division.Caterpillar core products manufactured in China include hydraulic excavators, track- type tractors, motor graders and paving products, large diesel engines used primarily for marine and power generation applications and generator sets for use in China and the Asia Pacific region. Caterpillar also manufactures components at several facilities in China1.Exhibit 15.16 A: Market Potential Index- 2008114300088988Exhibit 15.16 B: Market Potential Index- 2008MARKET POTENTIAL INDEX: TOP 25148145510541000120100806040200Exhibit 15.16 C: Market Potential Index- 2008MARKET SIZE: TOP 20141097010287000120100806040200Adapted from Market Potential Index for Emerging Markets – 2008,globalEDGE Created by IBC atMichigan State University Mittal2Arcelor Mittal2, hopes to start building a 12 million ton steel plant in the eastern Indian state of Orissa next year. The first phase of the project is likely to be commissioned by 2011-12.ArcelorMittal2 manufactures steel in Hunan Valin, China with an output of 11 million tons and has Investments in China of over 1.5 billion US dollars. It also has commercial offices in Beijing, Shanghai, Chengdu, Urumqi, Guangzhou, and Hong Kong and projects in Shanghai, Guangzhou, Tianjin and Wuhan.Consequent on the Mexican government’s privatization program, Sibalsa, an integrated mini-mill complex, while modern, was operating at only 25% of capacity. Post acquisition and renamed Ispat Mexican, after operating improvements achieved a dramatic turnaround. A sevenfold increase compared with the year prior to the company's acquisition.This dramatic turnaround and generation of high-profit margins by Ispat Mexicana funded a series of acquisitions- in Kazakhstan, USA, France, Romania, Algeria, Macedonia, Poland, Canada and investments in India and China. See Exhibit 15.10: Arcelormittal’s2 Global Steel Production.Markets of a high-end brand in low-income nationsThe potential of a market need not be judged only by market size as indicated by the numbers in respect of its urban population, but the presence of niche market segments.China has more billionaires than any country except the United States, as soaring stock and property prices helped boost wealth among the country's super-rich, according to researcher Rupert Hoogewerf15..The number of Chinese persons in the Chinese mainland worth $1 billion or more jumped to 130, from 101 last year, Hoogewerf said in his 2008 "Hurun Rich List," 15 which ranks the 800 wealthiest individuals in the Chinese mainland.The average wealth of those on the list doubled from a year earlier to $562 million.There are 24 Indians in the Forbes’16 list of world’s richest people. Forbes has said. that India no longer has maximum number of billionaires in Asia, ceding that title to China, which now has 28 richest people.Louis Vuitton17 in AsiaRated as one of the most valuable brands Louis Vuitton (LVMH) is an international French fashion house specializing in trunks, leather goods, ready-to-wear, shoes, watches, jewelry, accessories, sunglasses, and books. LVMH, a $13 billion group of companies with operations across the world--1,500 retail stores in about 60 countries--had conquered the luxury goods market successfully in Europe, the United States, and some parts of Asia. In the 1990s, LVMH decided to expand its operations in China and South Korea and in early 2000, made its entry into India. In 2004, Asia accounted for about 40% of the sales of LVMH.The expansion of Louis Vuitton into Asia and China and India in particular represents the marketing of a high-end brand into low-income nations, where select niche markets and pockets of buying power exist.ConclusionAs organizations we need to evaluate countries on some basis and make a selection of those that we wish to do business in a profitable manner.To this end we have studied a number of indexes, ratings, models, parameters and sub parameters under them. We have also seen it from the perspectives of a number of organizations that have successfully done business in emerging andother world markets.One can conclude that success for a business in a particular market is determined by a host of factors in the environment that offer opportunities and pose threats. It is incumbent on the organizations to leverage its own competitive advantage and distinctive capabilities in a manner that they can be skillfully and successfully leverage these to cash in on the opportunities and threats.Simplistic parameters such as GDP growth rate, market size and demand, freedom to conduct business, business infrastructure, level of technology, availability of skilled manpower and cheap finance, investment priorities etc are prone to reflect a country in positive light – for an organization to select it as one to do business with.Many internal weaknesses and threats at a country level- political instability, being in a state of war or turmoil, high levels of corruption, economic and financial crisis, and other shortages give rise to opportunities for organizations to respond to.Whatever the type of uncertainty or crisis be, there is always a need for food and commodities. Caterpillar and Komatsu, as well as Coke benefited from the World Wars, banks and financial institutions have been there to respond to countries in economic and financial crisis with substantial profits.Seizing opportunities in a favorable environment, and leveraging these with internal sources of advantage of the organization, is a relatively easier task.The major decision lies in the selection of countries, from a business perspective, is the ability to sense and read the signs of business opportunities from what would prima facie appear to be unfavorable or risky or non-existent and to respond to them with timing and speed.The age old story of two shoe company salesman visiting Africa for the first time, will serve as an example. One responds by informing his head office, that as people do not wear shoes, there is no market potential. The other declares, since no one wears shoes- the market has immense potential and asks for a shipload of shoes!It is this conversion and development of internal competitive advantages and distinct competencies and leverage them profitably in countries with both overt and covert opportunities and threats, in time that would reflect well on the score card..KEY TERMSBusiness Freedom Competitive Advantage Country Analysis Distinctive Competencies Economic Freedom FDI Confidence Index Financial FreedomFiscal FreedomFreedom fromCorruptionFunctional AdvantageGovernment SizeInvestment FreedomLabor FreedomMarket Potential IndexMarket SizeMonetary FreedomOperational AdvantageOpportunity MatrixOrganizational-AdvantageTOWS MatrixCHAPTER SUMMARYAt the beginning of this chapter we set out our learning objectives by asking some relevant questions: how countries are analyzed by organizations in order to make an evaluation and selection based on opportunities; how they analyze their own competitive advantage and distinctive competencies that would allow them to leverage these opportunities; how they shortlist; screen and prioritize countries in order to identify target markets and finally on what basis do they make an assessment of the market potential and demand for their products and services in these target markets.We started out by revisiting the ‘competitive advantage of nations’ using Porter’s ‘National Diamond’ and ‘The Twelve Pillars’ as developed at the World Economic Forum in 2008 and constituted the Global Competitiveness Index (GCI).The Top 10 Economies to invest in, according to KPMG’s November, study and found that in the next five years, five of the ten are from Asia. These were China, India, Singapore, Hong Kong and Japan.We also found that a country’s Corporate Tax Rates are viewed as another important criterion in the evaluation and selection of countries, together with GDP forecasts and Number of Days required to start a business.We then took a look at the AT Kearney’s Foreign Direct Investment (FDI) Confidence Index, 2007, which ranked China and India the highest. Other destinations in Asia and the Emerging markets were Hong Kong, Singapore, UAE and Russia, constituting six of the top ten.We then summarized these in a Framework for Country Analysis that consisted of Contextual and Strategic and Policy factors and related them to the two mini cases cited at the beginning of the chapter viz. Caterpillar and ArcelorMittal.We then studied the Opportunity Matrix, which viewed a country’s Attractiveness versus an organization’s Probability of Success. Thereafter we Analyzed an organization’s competitive advantage and distinctive competencies in terms of Organizational Advantage, Functional & Operational Advantage (being Marketing, Innovation, Technology and R&D, Manufacturing & Operations, Supply Chain, Finance and Human Resources) and, the External Stakeholder Advantage. This exercise culminated with the TOWS matrix which allowed us to view Strategic Options in relation to Environmental Opportunities and Threats.The process of Short listing, Screening and Prioritizing countries in order to identify target markets, we studied the ten dimensions of The Heritage Foundation- 2009 Index of Economic Freedom. We discovered, through examples that while this may be true as far as the overall index goes- organizations need to look carefully and deeply at specifics in respect of each country.Finally, in making an assessment of the market potential and demand for an organization’s products and services, we took a look at the Market Potential Index for Emerging Markets – 2008. In computing the overall index we found that consideration had been given to: 1. Market Size, 2. Market Growth Rate, 3. Market Intensity, 4. Market Consumption Capacity, 5. Commercial Infrastructure, 6. Economic Freedom, 7. Market Receptivity, and finally 8. Country Risk. We once again related them to the two mini cases cited at the beginning of the chapter viz. Caterpillar and ArcelorMittal. We also took into account a contra case of the expansion of Louis Vuitton into Asia and China and India in particular representing the marketing of a high-end brand into low-income nations, where select niche markets and pockets of buying power exist.114300013779500References:World Economic Forum, Global Competitiveness Report 2008-09KPMG, November 2008AT Kearney’s Foreign Direct Investment (FDI) Confidence Index, 2007WorldBank:ProspectsfortheGlobalEconomy:Global Economic Prospects 2009Maps by Google statistics, H (1982), ‘The TOWS Matrix: A Tool for situational Analysis’, Long Range Planning Vol.15, No. 2 pg. 60Heritage Foundation- 2009 Index of Economic Freedom Potential Index for Emerging Markets – 2008,globalEDGE Created byIBC at Michigan State University Bank: World Development Indicators 2009Kumar Nirmalya etal, 2009, India’s Global Power Houses: How they are taking on the World, Harvard Business School Publishing, 2009 List: ................
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