CHAPTER TWELVE COUNTRY EVALUATION AND SELECTION OBJECTIVES

CHAPTER TWELVE
COUNTRY EVALUATION AND SELECTION
OBJECTIVES
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To grasp company strategies for sequencing the penetration of countries
To see how scanning techniques can help managers both limit geographic
alternatives and consider otherwise overlooked areas
To discern the major opportunity and risk variables a company should consider when
deciding whether and where to expand abroad
To know the methods and problems when collecting and comparing international
information
To understand some simplifying tools for helping to decide where to operate
To consider how companies allocate emphasis among the countries where they
operate
To comprehend why location decisions do not necessarily compare different
countries’ possibilities
CHAPTER OVERVIEW
The country evaluation and selection process determines the geographical opportunities
firms choose to pursue. Chapter Twelve first discusses the challenges of marketing and
production site location. It goes on to carefully examine the process by describing the
choice and weighting of variables used for opportunity and risk analysis as well as the
inherent problems associated with data collection and analysis. The chapter then
introduces the use of grids and matrices for country comparison purposes, discusses
resource allocation possibilities, and concludes by noting the different factors considered
as part of start-up, acquisition, and expansion decisions.
CHAPTER OUTLINE
OPENING CASE: Carrefour: Crossroads at a Crossroads
[See Fig 12.1, Map 12.1]
This case explores the location, pattern, and reasons for Carrefour’s international
operations. Carrefour opened its first store in 1960 and is now the largest retailer in
Europe and Latin America and the second largest worldwide. In 2011, Carrefour derived
61 percent of its sales and 53 percent of its profits outside of France. Worldwide
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Carrefour has five different types of outlets: hypermarkets, supermarkets, hard discount
stores, cash-and-carry stores, and convenience stores. Country selection criteria include a
country’s economic evolution, sufficient size to justify additional store locations, and the
availability of a viable partner. Aside from financial resources, Carrefour brings to a
partnership expertise on store layout, clout in dealing with global suppliers, highly
efficient direct e-mail links with suppliers and the ability to export unique bargain items
from one country to another. Carrefour also considers whether a country or regional
location within a country can justify sufficient additional store expansion to gain
economies of scale in buying and distribution. Recently, Carrefour has used acquisition
as a way to capture additional scale economies. Carrefour depends primarily on locallyproduced goods but also engages in global purchasing when capable suppliers are found.
Whether Carrefour can ultimately succeed as a global competitor without a significant
presence in the United States and the United Kingdom remains to be seen.
Visit the corporate Web site at www.carrefour.com. The site has the latest press
releases and country-specific information and is of use to this case.
DOES GEOGRAPHY MATTER?
Don’t Fool with Mother Nature
Natural disasters have a huge impact on people and property every year, often hitting the
poorest nations of the world hardest. Companies should take the risk of natural disasters
and their potential impact into account when choosing locations for doing business. The
United Nations Development Programme has published a Disaster Risk Index that shows
the relative level of physical exposure to natural disaster hazards by country. Natural
disasters can also trigger outbreaks of disease, which should also be considered when
choosing locations for global operations.
POINT—COUNTERPOINT:
Should Companies Operate in and Send Employees to Violent Areas?
POINT: Where there’s risk, there are usually rewards. Companies need to take risks, as
they have in the past, to develop markets. Violence is only one of many risks and should
not be looked at in isolation. Risks from activities such as terrorism are the same whether
you are in London, Madrid, Caracas, or New York. All areas have their risks, and many
countries traditionally viewed as risky may actually be less risky than the United States or
England. Some industries, such as petroleum, have to operate in violent areas because
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that is where the resources are. MNEs should operate anywhere there are opportunities,
and develop plans to manage and react to risks as effectively as possible.
COUNTERPOINT: MNEs should not make investments in violent areas because it puts
MNE personnel at risk. MNEs are visible and therefore vulnerable to attack by antiglobalization groups, kidnappers, and groups opposed to foreigners, as well as others. It
is unethical to put employees in excessively dangerous situations. Employees who will
take dangerous assignments are usually either difficult to control, excessively naïve, or
addicted to the thrill of danger. Any country subject to extreme violence is not the kind
of country to do business in.
LOOKING TO THE FUTURE:
Will Prime Locations Change?
There are several important demographic shifts that are expected to occur over the next
several decades. Population growth in high income countries is expected to slow and
populations are actually expected to decline in countries such as Japan and Italy.
Meanwhile, population growth in low-income countries is expected to be robust. Since
there is a positive relationship between the changes in the size of the working-age
population and per capita GDP, the growth in per capita GDP should be higher in today’s
emerging economies than in today’s high-income countries. These changes could have
significant implications for the location of markets and the location of labor forces.
Another trend that could influence country selection is the propensity of innovative
people to converge on places that develop reputations for facilitating creativity and
innovation. Even with technologies that allow people to work from home or in virtual
office environments, face-to-face contact will continue to be important—especially
among the best and brightest.
CLOSING CASE: Burger King Beefs up Global Operations [See Map 12.2]
Burger King is the world’s largest flame-broiled fast food restaurant chain with 12,000
restaurants in all 50 states and it operates in 74 countries and territories. Even with all
this global expansion, it is still in less than 40 percent of the world’s countries providing
many opportunities. Burger King differentiates itself in two ways, the flame-broiled
cooking method and the flexibility it offers customers popularized by its “have it your
way” marketing theme. Expansion is normally done through franchising, but if a market
is sufficiently attractive and not ready for franchisees, they will enter with owned
operations. Some global expansion has not gone well, but when conditions changed they
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have reentered these markets, for example in Colombia. Like so many companies, they
have expanded into the BRICs and are evaluating if the Brazilian expansion model can
make them successful in Russia.
Questions
1.
By mid-2011, Burger King was not in any of the following five countries: France,
India, Nigeria, Pakistan, and South Africa. Compare these countries as possible
future locations for Burger King.
Students should provide general comparisons for these countries using the models
presented in this chapter, like the simplified grid, to compare countries for market
penetration (Table 12.2). External research to evaluate the countries can be done
online at sites such as www.doingbusiness.org, www.worldbank.org, and
www.nationmaster.com. In addition to general country comparisons, students should
consider Burger King’s specific criteria for entering a market: large populations of
young people, high consumption of beef, availability of capital to franchisees, safe
pro-business environment, growth in shopping centers, and availability of potential
franchisees. (LO: 1, Learning Outcome: To grasp company strategies for sequencing
the penetration of countries, AACSB: Dynamics of the Global Economy)
2.
When entering another country, discuss the advantages and disadvantages that an
international restaurant company, specifically Burger King, would have in
comparison with a local company in that market.
Large franchisee-based companies like Burger King have a very structured approach
when entering new markets. Burger King, through success and failure, refined the
criteria for entering and reentering markets to support success. They also have
resources that support growth. Many local firms do not have sufficient resources for
expansion to compete with large corporations. However, local firms can watch and
learn and apply the successful methods of foreign fast food companies. Local firms
can also modify their menus to support local tastes. Availability of suppliers is also a
factor if the market is not large enough to support multiple customers. (LO: 2,
Learning Outcome: To see how scanning techniques can help managers both limit
geographic alternatives and consider otherwise overlooked areas, AACSB:
Analytical Skills)
3.
A bit over 60 percent of Burger King’s restaurants and revenues
are in its Americas region (United States and Canada) and a bit
less than 40 percent elsewhere. Should this relationship change?
If so, why and how?
Burger King still sees growth in the U.S. market but recognizes it is a mature market
for fast food, particularly hamburgers. Burger King must maintain a strong presence
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in its primary markets but if it wants to grow significantly it must look globally. A
review of its primary rival McDonald’s gives some insight into expansion
opportunities. Burger King should continue to use the specific criteria to evaluate
markets to enter. Also, as conditions change in previously exited markets, they
should be reevaluated. The expansion of a growing middle class in many countries
provides an expanding opportunity for fast food. (LO: 3, Learning Outcome: To
discern the major opportunity and risk variables a company should consider when
deciding whether and where to expand abroad, AACSB: Dynamics of the Global
Economy)
4.
The case mentions that Burger King prefers to enter countries with large numbers of
youth and shopping centers. Why do you think these conditions would be
advantageous?
Burger King has studied its target markets and the characteristics of its most loyal
customers. Both the demographics of the youth consumer and the location
advantage of a closed environment of a shopping center encourage patrons of fast
food. Although there is not a lot of information in the case to respond to this
question, it is intuitively advantageous. Students can do research to see who the
most valued customers are of hamburger franchises to support their position. (LO: 5,
Learning Outcome: To understand some simplifying tools for helping to decide
where to operate, AACSB: Analytical Skills)
5.
How has Burger King’s headquarters location influenced its
international expansion? Has this location strengthened or
weakened its global competitive position?
Burger King’s Miami headquarters location influenced its
expansion strategy. Many consumers travel through this region
and are exposed to the company. Brand recognition and
acceptance made it easier to enter geographically local markets.
Early expansion strategy was based on employees’ familiarity with
markets and the Latin American and Caribbean group was ideal.
Although this expansion has increased the number of locations, the
revenue percentage is not large because many of these countries do
not have large populations. Burger King has also not expanded to
some markets that could be potentially more profitable like India,
Pakistan, Nigeria, Russia, and South Africa. (LO: 6, Learning
Outcome: To consider how companies allocate emphasis among
the countries where they operate, AACSB: Multicultural and
Diversity Understanding)
6.
Evaluate Burger King’s strategy of using the Brazilian experience
to guide its entries into Russia.
Burger King had a name recognition advantage in Brazil that it
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does not have in Russia. However, the five part strategy outlined
in the case should provide a good model for the Russian market.
The Russian market is extremely large and diverse but establishing
offices in Moscow is a good first step to develop commitment and
supply chain management. (LO: 4, Learning Outcome: To know
the methods and problems when collecting and comparing
international information, AACSB: Dynamics of the Global
Economy)
ADDITIONAL EXERCISES: Country Evaluation and Selection
Exercise 12.1. As the phenomenon of economic integration progresses, the process
of country selection takes on new dimensions. Ask students to compare and contrast
the opportunities and risks associated with establishing operations in the European
Union to those in the NAFTA region. Would such investments be primarily resourceor market-seeking? Be sure students explain and give examples to support their
ideas. (LO: 1, Learning Outcome: To grasp company strategies for sequencing the
penetration of companies, AACSB: Analytical Skills)
Exercise 12.2. Compare the costs and benefits of investing in an industrialized
economy to the costs and benefits of investing in a developing economy from the
standpoint of an MNE. Debate the idea that MNEs have a responsibility to work
toward developing global efficiency, i.e., that economic considerations should be
weighted more heavily than other factors in the country selection process. (LO: 2,
Learning Outcome: To see how scanning techniques can help managers both limit
geographic alternatives and consider otherwise overlooked areas, AACSB:
Multicultural and Diversity Understanding)
Exercise 12.3. During the 1970s, a number of MNEs such as Coca-Cola and IBM
made decisions to abandon operations in certain developing countries and not to
enter others because of government restrictions. Discuss the likelihood that MNEs
will face such decisions in the future, given the progress of the WTO and movements
toward economic integration in many parts of the world. Do you foresee other
factors that might cause more divestments in the future? (LO: 5, Learning Outcome:
To understand some simplifying tools for helping to decide where to operate,
AACSB: Dynamics of the Global Economy)
Exercise 12.4. Use the simplified grid to compare countries for market penetration
(Table 12.2) to compare South Africa, Ireland, and Argentina for a possible
investment. Encourage them to use outside data sources such as
www.doingbusiness.org, www.worldbank.org, and www.nationmaster.com to gather
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information and make meaningful comparisons. Which of these three countries
would be most suitable for investment? Why? (LO: 6, Learning Outcome: To
consider how companies allocate emphasis among the countries where they operate,
AACSB: Analytical Skills)
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