Unit 2 Flashcards
Market Segmentation
in an international context is comprised of two tasks: selecting the segments and developing them. Depending on the underlying strategic direction of the company, two different approaches can be taken here (Meffert, Burmann, & Becker, 2010):
Multinational (or multi-domestic) market segmentation
Multinational segmentation is a multi-stage process. The first step is to choose national markets that have potential for development. Afterwards, consumers are segmented. In some cases, transnational segments are created when similar target groups are identified in multiple countries. This approach emphasizes the differences between national markets. This strategy is ideal for highly differentiated products or products dictated by local preferences, e.g. confectionary.
Global Market Segmentation
is based on Levitt’s convergence theory and focuses on the similiarities between countries. This approach views the world as a homogeneous market and tries to identify worldwide target groups (e.g. teenagers with same behaviors and interests, middle-aged women with disposable income, etc.). This type of segmentation is used for global brand management, often for fashion brands (e.g. Hugo Boss, Prada), cigarettes manufacturers (e.g. Marlboro), or technology products (e.g. Apple iPhones), which aim to adopt a widely standardized marketing approach
Difference between multinational and global segmentation
Multinational: less complex, suited for companies that perceive greater value in differentiated products, polycentric, ethnocentric, targert markets similar to domestic
Global: more complex, geocentric/regiocentric , global brand strategy
The first step of multi-domestic (multination) is:
To exclude companies that do not meet the company’s requirements as per the market segmentation criteria
Market Segmentation criteria
Economic variables: Examples are per capita income of a population, the gross domestic product, or the level of consumption expenditure in a specific country.
Sociodemographic variables: Factors such as age distribution, birth rates, educational level, or gender ratio may yield further information about potential target groups in a specific country.
Political/legal variables: These variables give some indication of a country’s stability, investment security, and the legal feasibility of the planned undertaking. In addition to these variables, barriers to entry, tariffs, import bans, guidelines for advertising, etc. also need to be considered.
Geographic variables: In many industries, a country’s geographical characteristics, such as the quality of transportation routes, climate, or raw materials, have a direct impact on product design and logistic systems.
Technological variables: The stage of technological development such as the existence of broadband networks can be an important factor. A country’s level of technological infrastructure is also important for designing communication policies.
Cultural variables: These factors can include the level of individualism versus collectivism, power distance, and masculinity among others of Hofstede’s cultural dimensions (Hofstede, 1997).
Global market segmentation
is a one step approach of developing segments without choosing specific national markets beforehand. This means that consumers are directly segmented across national borders. Global market segmentation can be conducted worldwide or for specific regions, e.g. Europe. This type of segmentation is usually based on the classification of consumers according to lifestyle and behavior.
Global segmentation of mass markets is generally based on classifying consumers according to cross-national sociodemographic, psychographic, or behavioral characteristics. Social demographic information is often used to develop initial insights e.g. dividing consumers according to age, household size, income, etc.
Market Segmentation in the B2B Sector
Producers of industrial or consumer goods that offer standardized product ranges and that have comparatively large groups of customers can use an approach similar to customer segmentation. This is the case for Voith AG.
Producers of industrial or consumer goods that offer rather differentiated, specialized product ranges (e.g. specific technology) and are aware of only a few potential customers, can segment target groups across borders by means of concrete customer contacts.
Producers with less fixed customer relations do not have to segment at all; establishing customer relations on a 1:1 basis can result in a “follow the customer” strategy that does not require marketing strategies to fit the characteristics of multiple target groups.
Market Entry - How? and When?
Direct export Sales without intermediaries, usually through sole agencies, representative offices, and permanent establishments.
Indirect export Contract acquisition and distribution through intermediary third-party companies.
Licensing Licensor grants licensee the right to use intellectual property with the latter paying a fee that either depends on actual usage or a contractual basis.
Contract manufacturing Third parties produce a product or individual modules on a contractual basis.
Joint venture Founding of a jointly controlled company to which the partners contribute funds, expertise, and often already existing company shares. They can be classified as majority, equity, or minority joint ventures, depending on the allocation of capital shares, ownership, and supervisory rights.
Subsidiary Direct investment on the national market without any partners. There are different types of subsidiaries, ranging from distribution-only set-ups to independent R&D activities.
Considerations prior to market entry
Firstly, you should consider the advantages of differentiation and standardization as these advantages will support your strategic decisions.
Secondly, you should gather information about the resources and competences of your company; it is advisable that you only opt for strategies that match your profile of existing competences (Kotabe & Helsen, 2008).
Thirdly, you should evaluate the degree to which your company will be able to exercise control in the foreign country.
Finally, any evaluation of market entry type should be complemented by an evaluation of risk. Risk emerges when a decision made under uncertain circumstances cannot be revised without disadvantages or changed at the company’s discretion.
There are two typical cross-national timing strategies
1) the waterfall strategy, which involves gradual market entry, and 2) the sprinkler strategy, which involves simultaneous market entry.
When implementing the waterfall strategy, markets are entered successively, according to their level of attractiveness. A company will first strengthen its position in a strong market and only then enter the next one.
Implementing the sprinkler strategy means that the company enters all selected markets at once. The waterfall and sprinkler strategies can, of course, also be combined with one another.
Advantages and disadvantages of Waterfall Strategy
Advantages of the waterfall strategy are that less resources are required, which results in lower risk, the possibility to stop entering new markets, and the creation of “strategic bridgeheads.” Creating a strategic bridgehead is where establishing a presence in one foreign market enables or facilitates entry into the next foreign market.
Disadvantages of the waterfall strategy include the potential for competitors to introduce imitation products on markets not yet developed and the risk of making premature decisions about the progression of new market entries. A company might be successful in new markets even if it failed in a previous market; however, there is a risk with the waterfall strategy that past performance in specific markets will unduly (and perhaps unwisely) influence decisions about entering further markets.
Advantages and disadvantages of Sprinkler Strategy
include better prospects to enter markets before competitors, and better protection against the product becoming obsolete. By implementing this strategy, a company may even be able to establish barriers to entry for competitors. It is also possible that the company can balance risks between the different national markets. For products that have a short life cycle, high research and development costs may only be amortized through activity on all relevant markets simultaneously.
In such cases, there is essentially no alternative to the sprinkler strategy. Disadvantages of this strategy are the need for considerably higher financial and personnel resources and the higher level of coordination required.
There are two typical country-specific timing strategies to choose from:
1) the pioneer strategy, where the first international company on the foreign market is the pioneer, and 2) the follower strategy, where companies will wait for competitors to “test the waters” before they enter.
Advantages and disadvantages of pioneer strategy
Implementing the pioneer strategy means that the company is ahead of competitors when it comes to developing marketing expertise. The pioneer may even be able to establish barriers to entry for other competitors to ensure a larger market share. Disadvantages of this strategy are potentially higher costs associated with actually developing the foreign market. Competitors can enter this market at a later date at much lower costs, essentially as “free riders.” Additionally, the trajectory of market development may be uncertain, which entails another major risk.
