Global Market Segmentation: How firms assess and select markets

Global Market Segmentation: Here’s how firms screen and select country markets to enter.

Importance of Entering the ‘Right’ Market

There are over a couple of hundred countries and territories, but most firms do not compete in all those markets. Adding another country to a company’s portfolio requires additional investment and represents a new business risk.

It takes time to build up business in a country where the firm has not previously been represented. Profits may not be realized until much later on.

Consequently, companies need to perform a careful opportunity analysis before they decide which markets to enter.

This analysis is done through a screening and selection process, known as Global Market Segmentation.

“Global market segmentation is defined as the process of identifying specific segments (country groups or individual consumer groups) of potential customers with homogenous attributes who are likely to exhibit similar responses to a company’s marketing mix (Keegan and Green 2015)”.

So why is it important to Enter the ‘Right’ Market?

The decision which markets to enter can be a major determinant of success or failure; especially in the early stages of internationalization, and influences the nature of marketing programmes in the selected countries.

Ways of Assessing and Selecting Markets

Two Main Ways of Assessing and Selecting Markets:

1. Standalone Attractiveness

Evaluating the Markets based on Macro-and Micro-Indicators.

• Macro: Demographic and Geographic, Political, Economic, Socio-cultural
• Micro – Industry Structure

Market size (total and segment). Market growth (total and segments). Buying power of customers. Average industry margin. Competitive conditions (concentration, intensity). Market prohibitive barriers (tariff/non-tariff barriers, import restrictions). Government regulations (price controls, local content laws, etx). Infrastructure. Economic, political stability. Psychic distance. Market potential – actual consumption of a companies product or similar products. Ease of entry. Cost of entry. Profit potential.

2. Global Strategic Importance

Evaluating the Strategic Importance of Markets for the Company or Industry.

Globally strategic markets are current and future battlegrounds where global competitors engage with one another. Certain standalone unattractive markets might still be selected because they are judged to be globally strategic markets.

• Must-Win Markets: These are defined as crucial to global market leadership; markets that can determine the global winners among all competitors; markets that companies cannot afford to miss or neglect. Typically these markets show potential for major profits. These markets can subsidize competitive battles elsewhere in the world. In the past, the United States has been the largest single market for many industries, making it globally strategic to many firms. More recently China emerged as a country that many global firms consider to be a must-win market.

• Home Markets of Global Customers: Globally strategic markets can be the home countries of global customers. Having a presence close to a customer’s headquarters can give a global supplier an advantage. Many multinational corporations also have major sales in their home markets and consequently want global suppliers to understand their needs in those markets.

• Home Markets of Global Competitors: The home markets of global competitors are also globally strategic markets. This is where innovations are likely to first appear. Usually these markets are also lead markets.

  Counterparty Attack: Defending against a competitive attack in one country by counteracting in another country (Fuji and Kodak)

  Example: Kao, the Japanese packaged goods giant, opened an office in Cincinnati, to be close to headquarters of P&G.

• Lead Markets: Lead markets include major research and development sites and vary by industry. They are characterized by having demanding customers who push for quality and innovation. They may also be global or regional trend setters.

Strategic Considerations in Selecting Global Markets

Assessing Markets’ Economic Development

Strategic Decisions – Economic Development

While evaluating international markets one by one has its advantage, a company may also decide to only target developed markets in Europe, Japan, North America.

Alternatively it may decide to prefer emerging markets – such as the newly industrialized countries in Africa, Asia, and Latin America.

Each of these options presents its own challenges and opportunities.

Marketing Attractiveness by Economic Development:

• Targeting developed markets (in Europe, Japan, North America): Potential sources of major profits. High standalone attractiveness. Lead markets. Major markets of key competitors. Lower political risk. Tough competition. High operating costs. High Entry Barriers
• Targeting emerging markets (in Africa, Asia, and Latin America): Generally higher growth potential (because of higher population growth). Trend towards trade liberalization. New must win markets. Lower level of competition. Government incentives may be available for emerging markets. Higher political risk. Trade restrictions. Currency volatility. Crime and Corruption

(Gillespie and Hennesey 2016)

Classifying Economies by ‘Stages of Market Development’

• High-income counties
• Upper-middle-income countries
• Lower-middle-income countries
• Low-income countries

Related: BoP (Bottom of Pyramid) Markets

Steps in Global Market Segmentation

Various Steps in Global Market Segmentation

• Selecting the Relevant Segmentation Criteria
• Screening of Countries to narrow down the List
• Selecting the Target Countries
• Micro Segmentation: Develop Segments in each Selected Country

So, this process involves Segmenting the Global Market, Evaluating the Standalone Attractiveness of Each Market, Identifying Market Opportunities and Selecting one or several Markets as Target Markets.

Selecting the Relevant Segmentation Criteria

Here are the potential relevant Macro Segmentation Criteria.

Political Criteria

Political risk/stability (indicators are e.g. number of riots, political executions, bureaucratic delays, soldier civilian ratio); Market prohibitive conditions (tariff/non-tariff barriers, important restrictions), Political/legal barriers between the countries, Bribery, corruption; Government support programmes, Government regulations (import restrictions, local content laws, price control, labour restrictions), Tax controls/reliefs, Relationship between home and host country.

Economic Criteria

Economic stability, Economic development (national production: GNP, GDP, GDP per capita), Income and wealth (to determine people’s purchasing power) (income growth rate, personal or household disposable income, purchasing power parity (PPP); income distribution), Infrastructure: transportation, education, health care; Economic integration (free trade areas).

Demographic and Geographic Criteria

Total population, population growth rate, age distribution of the population, degree of population density, size of country in terms of geographic area,climatic conditions, topographical characteristics.

Socio-cultural Criteria

Values, belief systems, tastes; Religion, Language, Education, Trends , Rituals and routines, Classifying culture to formulate cultural differences and similarities, High and low context cultures, Hofstede’s culture dimensions, Market similarity/Psychic distance (from home base to foreign market).

Here are the potential relevant Micro Segmentation Criteria.

Industry structure: Market size, Market growth rate, Market potential, Availability of customer segment (segmentation variables: demographic, psychographic, geographic, etc.), Buying power of consumers, Level of competition, Ability to create competitive advantage, Ease of Market access/entry regulations, Average industry margin, Market similarity, Product/business model compatibility (to what extent is adaption of marketing mix required), Strategic importance of the market (first mover advantage, must win market.

Related: Understanding the External Environment (Macro and Micro Environment)

Segmentation Criteria (From General to Specific)

Geography, Language, Political factors, Demography, Economy, Industrial structure, Technology, Social organization, Religion, Education, Cultural Characteristics, Lifestyle, Personality, Attitudes and Tastes.

This is in the order of “High Degree of Measurability and Accessibility” to “Low Degree of Measurability and Accessibility” (Hollensen 2001).

Screening Countries

The basic idea of the Screening Process is to screen out all those countries that are less desirable.

The overwhelming number of market opportunities makes it necessary to break the screening process down into 2 steps because we cannot conduct extensive marketing research in every country of the world.

1. Preliminary Screening/Rough Screening
2. Fine-Grained Screening

Preliminary/Rough Screening

Each country is screened according to a number of ‘must have’ criteria (usually macro-indicators). Macroindicators describe the total market in terms of economic, social, geographic and political information.

A country has to meet some minimum standards, otherwise it will be excluded from the list right away. This step discriminates between countries that represent basic opportunities and those that offer little opportunities.

Example: Market size, market growth; Political risk (certain BERI number);No import/export restriction; Government spending as a percentage of GNP (e.g. 12 %).

Market Size/Growth as a Macro-Indicator

There are macro variables that reflect the potential market size/growth.

• Geographic Indicators (size of country in terms of geographic area, climatic conditions, topographical characteristics)
• Demographic Indicators (total population, population growth rate, age distribution of the population, degree of population density)
• Economic Indicators (total GNP, PCI, income growth rate, personal or household disposable income, income distribution, level of taxations, level of regulations)

Example: A company that sells products such as the microwave or the Refrigerator may decide to not consider any country with a disposable income per household of less than $10.000 a year. The rational for this criterion is that if the average household has less than $10.000 per year the potential market for a luxury item such as a micro wave will not be great.

Political Risk as a Macro-Indicator

Assess the host country’s political environment. Political risk tends to be more subjective than market growth and any company can be hurt by political risks.

• Ownership Risk: Risks to property and life
• Operating Risk: Risks related to the ongoing operations of a firm
• Transfer Risk: Occurs when companies want to transfer capital between countries

Official indexes (e.g. BERI)
Other Indicators such as Probability of nationalization, expropriation; Number of riots; Political executions; Bureaucratic delays; Soldier civilian ratio; Restriction of capital movement.

Fine Screening

Remaining countries are analysed more thoroughly based on macros and micros to identify a country’s market attractiveness and a company’s potential competitive strengths within the country market.

Market Attractiveness: Market size (total and segment); Market growth (total and segments); Buying power of customers; Average industry margin; Competitive conditions (concentration, intensity); Market prohibitive barriers (tariff/non-tariff barriers, import restrictions); Government regulations (price controls, local content laws, ect); Infrastructure; Economic, political stability; Psychic distance; Market potential (Actual consumption of a companies product or similar products (e.g. use of proxies), market size, growth rate); Ease of entry; Cost of entry; Profit potential.

Competitive Strength: Market share; Marketing ability and capacity (country-specific know how); Product for market demand; Price; Contribution margin; Image; Technology position; Product quality; Market support; Financial resources; Access to distribution channels.

The focus of the screening process switches from total market size to profitability. Beside macro-indicators, micro-indicators matter.

Market Size and Growth as a Micro-indicator

Macro-indicators of market size and market growth are general and crude. Micro-indicators of market size and growth may be more specific and indicate a perceived need for the product.

Example: A country such as Iran may have a population and income to suggest a large potential market for razors but the male consumers, many whom are Muslims and wear beards, may not feel the need for the razor product.

Micro-indicators usually indicate the actual consumption of a product or a similar products, therefore signalling a perceived need.

Example: The number of households with television indicates the potential market size for televisions if every household purchased a new television.

Similar products can be used as proxies if actual consumption statistics are not available for a certain product category.

Example: When Apple had to measure the potential market size and receptivity for its iPhones, it may have chosen the number of personal computers per person or cell phones usage as a proxy.

Selection of Country Markets

The result of the Rough and Fine Screening Process is that one gets a Long List of countries, which is then shortened by using a decision matrix.

The matrix approach can help to compare country markets along severable criteria.

To use the decision matrix, the firm must identify those criteria from their analysis that they consider most relevant in assessing the attractiveness of the market.

The criteria are then weighted and rated using an appropriate numeric scale.

Higher the rating in the decision matrix, better is the market. The market with the highest score would be the one to enter.

Micro-Segmentation

Once the main market(s) have been identified, firms then use standard techniques to segment customer markets within countries.

Firms can use traditional variables such as Demographic variables, Lifestyles, Consumer motivations, Geography, Psychographics.

The primary segmentation basis is geographic (by country); this secondary segmentation is within countries (by demographics, psychographics, ect.)

Related: More Global Marketing Strategies & Examples