Printer Friendly

Identifying tomorrow's great markets today.

For years, large international companies have understood the strategic importance of the developing world as a source of raw materials and suppliers of cheap and efficient industrial labor. Today, a time when the U.S. and other industrial economies are mired in a period of extended sluggish growth, the developing world represents a different kind of opportunity for multinational companies - a source of growing and often untapped demand for a wide range of consumer goods and services, from breakfast cereals to automobiles, from fast food to life insurance.

For large industrial organizations, like IBM, Unilever, and Coca Cola, few developing-country markets are unfamiliar. Yet, even seasoned multinationals are now forced to confront markedly different competitive conditions in developing-country markets.

The changes have in large part been sparked by the phenomena of market liberalization and privatization, which, in the last five years, have swept through more than 50 developing countries in Southern Europe, Central/Eastern Europe, Latin America, and Asia/Pacific. Throughout these regions, economic policy priorities have been - and continue to be - fundamentally reformed, as countries compete to create the most hospitable conditions for increasingly scarce investment capital. As trade barriers tumble, price controls are withdrawn, and state companies are privatized, a whole new competitive environment has taken shape, with new players, new products, new consumers, new distribution and retailing channels, and rapidly changing consumer tastes.

Understanding the nature and implications of this structural reform/market liberalization phenomenon is critical for assessing medium- and long-term demand for specific products and services. To meet this need, The Futures Group has developed a practical analytical tool, called Structural Reform Analysis (SRA), to illuminate market implications of economic reform policies in developing-country markets. SRA is particularly useful as a means of identifying and prioritizing choices for market entry.

SRA is essentially a system for organizing and evaluating critical information on countries' economic policies and market structures. In contrast to conventional country risk assessment, which tends to concentrate on more short-term indicators, SRA focuses on underlying drivers of medium- and long-term market growth and development. Among the most important of these underlying drivers are the following:

* Trade liberalization, which encompasses tariff and non-tariff barriers to market entry and depicts general market openness and accessibility.

* Privatization, a very powerful indicator of a regime's commitment to structural change. Additionally, the process of transfer of state assets to private owners often ensures short-and medium-term fiscal stability.

* Foreign investment reform, like privatization, suggests basic changes in economic philosophy and, if grounded in credible legal and regulatory changes, can catalyze new long-term capital inflows.

* Real effective exchange rates, which are reliable indicators of currency competitiveness and, more generally, a country's level of integration with the global economy.

* Infrastructure investment, especially in developing country contexts, is critical for sustaining growth.

* Fiscal management, probably the most reliable indicator of long-term stability and growth potential. Without structurally sound tax and public finances, countries are vulnerable to regression. More than any other variable, effective fiscal management separates the committed from the noncommitted reformer.

Judgments about level of reform progress lie at the heart of SRA studies. Particularly when comparing two or more future market choices, it is useful to develop a quasi-quantitative evaluation system, which can take the form of a simple 0-10 index or even more basic high-medium-low schemes for grading a country's progress on selected reform indicators.

Alternatively, a benchmark system can be used, based on a country already proven to possess ideal demand for a specific product or service. For example, if a company already had a successful track record in Korea, it might want to benchmark future market candidates against reform characteristics that made Korea successful - i.e., export-oriented macroeconomic management, fiscal stability, incentives to boost savings, foreign investment promotion, infrastructure development, etc. Such an analysis might reveal that countries such as Mexico and Malaysia are following the Korea reform model and are likely to experience similar growth and market development over the next five to 10 years.

User-Specific Criteria

Choice of SRA evaluation criteria is user-specific. For example, a company wishing to evaluate potential new markets for a dollar-based life insurance product will be very concerned with indicators of financial market freedom, such as real interest rates, exchange controls, and regulations governing foreign-sourced financial service products. Such a company would be less interested in merchandise trade restrictions, for example. However, this and other seemingly tangential reform indicators, taken together, shed important light on the "big picture": where the country is going, how fast it will grow, and how its markets will develop.

SRA output can take many forms - tables, graphs, narrative, and forecasts. Minimally, it should provide meaningful measures of reform performance from which market- and strategically relevant implications can be drawn. Otherwise, the process of policy evaluation and analysis risks being sterile and academic. SRA practitioners should have a clear understanding of linkages between reform indicators and market implications.

One can combine SRA output with market indicators to develop multidimensional country images. The accompanying exhibit, developed from a recent Futures Group survey, depicts one such exercise. The position of each circle indicates the relative state of economic liberalization as of 1990-91 (horizontal axis) and the extent of reform progress registered in the 1980s vertical axis). The size of each circle indicates population size.

The exhibit suggests that Mexico is an attractive market opportunity. It is a relatively open economy. Moreover, its placement along the vertical axis indicates that its transformation is relatively recent. Thus, opportunities for privatization, acquisitions, and the like are probably higher than in Chile, for example, which embarked on the reform course more than 15 years ago.

Mexico's relatively large population suggests opportunities for (at least) providers of low-cost consumer goods. To depict current market affluence, it would be possible to substitute wealth indicators (e.g. per-capita gross product, urban adult income, average manufacturing wages, etc.). The structural reform indicators, as in the first case, would indicate future prospects for growth and development.

Gauging Risk and Reward

The Futures Group has effectively incorporated SRA in country scenario studies for large industrial clients seeking to gauge risk and reward potential in developing-country markets. A motor vehicle company with major assets in Brazil requested help understanding possible paths that the country might follow over the next five to seven years. Brazil's progress toward market liberalization was central to any market forecasting exercise. In response to the client's needs, four scenarios were developed, each one containing plausible and explicit structural reform assumptions. The structural reform scenarios then framed the macroeconomic projections which in turn drove econometrically derived vehicle forecasts. SRA provided an important framework for country and market analysis that the client could readily grasp and understand. Major capital allocations decisions were made in part on the basis of this analysis.

For another client, The Futures Group used structural reform scenarios to frame forecasts of beverage demand in six markets of varying size and reform orientation. Key component parts of the scenarios - such as real effective exchange rates, tax levels, tariffs, etc. - were analyzed to understand past market performance. For example, in most countries, unusually high demand for premium imported product coincided with periods of an overvalued exchange rate. Steeply falling tariffs stimulated imported product demand as well. To develop forecasts, assumptions contained in each scenario about future growth, inflation, and the exchange rate provided a basis for product demand projections by specific beverage category. The output of this SRA/scenario exercise was an important element in the client's decisions on investment in specific product brands in each of the six markets.

A Window Into the Future

Firms that can quickly identify emerging opportunities and mount effective campaigns to exploit them gain important competitive advantage. Nearly a decade ago, when Mexico was deeply mired in the debt crisis, Ford Motor Co. made a major commitment in a huge and costly export production facility. Today, that plant is among the most efficient and productive automotive plants anywhere in the world. Ford bet on Mexico's economic future - and an untested labor force - and won. Firms just now discovering Mexico's wonders will pay higher entry costs and find that competition for capital, skilled labor, and management talent is highly intense.

In addition, many global investment opportunities are once-in-a-lifetime deals in which early arrivals will gain an important edge. In many developing countries, there is only a handful of local companies large enough to make viable joint venture partners for multinationals wishing to get their feet wet in the local market. The most foresighted and aggressive international firms will have first shot in doing deals with the strongest and most capable local firms.

SRA is a powerful tool for "staying ahead of the pack" in identifying and pursuing emerging market opportunities. It is an infinitely flexible and adaptable process that produces highly useful results and often unexpected insights. SRA makes market evaluation exercises more thorough and rigorous. It forces corporate planners to think dynamically about future market change. In summary, it can help beat the path to the emerging markets of tomorrow.
COPYRIGHT 1993 Directors and Boards
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Kennedy, Peter J., Jr.
Publication:Directors & Boards
Date:Jan 1, 1993
Previous Article:Achieving global connectivity.
Next Article:'If we hesitate too long....' (Colgate-Palmolive Co.'s marketing tactics)

Related Articles
Designing corporate interiors for future needs.
How far is too far?
Anticipating what tomorrow may bring, and preparing for opportunities now.
ACA leadership development training: becoming the effective leaders of tomorrow.
Preparing tomorrow's workforce: as companies struggle to develop adequate levels of accounting, finance and audit professionals from a shrinking...
A disappointing perspective.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters