by Johannes Holzhüter University of Groningen Faculty of Economics and Business MSc International Business & Management March 2009

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IMS for Exporting Companies

Investigating market potentials for Nordmilch’s brand Oldenburger in Africa

by

Johannes Holzhüter

University of Groningen

Faculty of Economics and Business

MSc International Business & Management

March 2009

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1. INTRODUCTION

1.1 The Process of Internationalization

A few decades ago, for many companies it was profitable enough to operate in the domestic market. But due to new market opportunities, fewer boundaries between countries, and more intense competition within countries almost every firm is confronted with both the will and the need to look for growth opportunities and to establish itself in the international market. This “process of increasing involvement in international operations” is called internationalization (Welch and Luostarien, 1998).

The process of internationalization is one of the most considerable trends in today’s business world because it spreads out throughout the whole world with nearly no limits. This assumption is supported by recent experiences which have proved that the process of internationalization is not restricted to certain markets, industry sectors or company sizes (Coveillo and Munro, 1997).

It is recognizable that the opportunity to achieve further growth and benefits in foreign countries through international expansions has become a necessity for companies when competition intensifies in the domestic market. If companies delay taking steps concerning the realization of internationalization, they risk being shut out of growing markets. This means that companies which think playing safe by staying in the home market do not only miss the opportunity to enter new markets, they also risk losing market share in their home country (Kotler & Armstrong, 2008).

Further reasons for companies to internationalize are the saturation of consumer demand in the home country, the willingness to realize economies of scale by increasing the number of goods sold and ambitions to improve the operational success by gaining a higher market share through international presence.

1.2 The growing importance of developing countries

In general, companies prefer to gain access to highly attractive markets which bear little risk and offer opportunities to realize a competitive advantage. But despite the fact that emerging markets are usually classified as high risk environments, it is inevitable to also take these countries into consideration when expanding international operations. According to Kotler and Keller (2006) the emerging or developing world represents a huge potential market for consumer goods (especially food) because of the unmet and accumulated needs of the population. Moreover, the rising rates of consumption as well as increasing per capita income have strengthened the buying power in developing markets. Many products which have been luxury goods for years can now be afforded by more and more people.

Thus, the emerging countries offer long-term growth possibilities that are no longer present in the saturated and highly competitive developed markets.

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countries with high growth potential. But statistical records expose that also countries in Africa are on a good way to develop (Rabobank, 2008).

But despite the immense sales potential, a lot of companies overlook opportunities in these countries. One reason for this is the lack of specialized frameworks which can be used to evaluate their potential. Many researchers have assessed the applicability of the existing methodsand their results are disappointing: They found out thatnearly no model is useful for an adequate country selection (Sakarya, 2006, Acs and Preston, 1997).

This study addresses the necessity for a systematic approach for the investigation of developing markets by combining the assessment of several influential factors determining country attractiveness. The model developed in this paper will help companies to identify the most promising target countries for exporting their goods. In this way, new sales potentials can be exploited successfully.

1.3 The importance to systematically evaluate foreign markets

Due to the increasing dependence on international or even global business and growth many researchers affirm that the identification and selection of non-domestic high potential markets has become one of the most critical decisions in international strategy. They support in unison the advice to determine target countries with highest care.

For example Douglas and Craig (1992), Kotler et al. (2006) as well as Andersen and Strandskov (1998) have identified the selection of attractive foreign markets for existing products to be the primary concern in a firm's internationalization process because this selection will be the first building block on which a firm's entire internationalization strategy will depend. Root (1994), Papadopoulos and Denis (1998) consider the IMS as the first and most important step in the export strategy, making it a crucial success factor for both smaller exporters as well as mature multinational firms.

Furthermore, Kumar (1993) and Cavusgil (1985) assume that the process of identifying the right market(s) for company products, evaluating their overall fit with the firm's existing portfolio, and assessing the sales potential in each selected market can be a major determinant of success or failure, especially in early stages of internationalization. Next, Papadopoulos and Denis (1998) account for the importance of the selection process because the geographic location of selected markets affects the firm’s ability to eventually co-ordinate its foreign operations.

The above presented results of researchers prove that the identification of the “right” target country is a crucial step which significantly influences success or failure in international operations. But this identification process is oftentimes very hard to conduct because different countries have divergent characteristics, opportunities, market potentials, and market sizes. These aspects influence the market attractiveness and have to be considered when analyzing each country. Therefore, it is important to ensure the availability of theoretical frameworks with which very diverse environments can be analyzed and evaluated. Managers who are confronted with the influential challenge of finding an interesting market to enter, yearn for a systematic approach to guide them through this important process.

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Consequently, this paper provides a synthesis of already available literature including an assessment of the viability and relevance of existing models, both methodologically and in terms of their applicability in practice.

With the help of this extensive research, influential factors which affect the country selection can be identified.

In this research, the application of the developed market selection model is exemplified on the basis of the German company Nordmilch AG which is one of the largest milk processors in Europe. This company has a strong international orientation with its international brand Oldenburger which is already sold in diverse markets. Currently, Nordmilch wants to expand its international activities by finding new market potentials and take advantage of new export sales opportunities in the African dairy product market. Therefore, it is an appropriate company for an exemplary application of the new IMS model.

Nordmilch’s expansion is promising since recent empirical research supports the attractiveness of opening up developing markets: Kotler and Keller (2006) found out that developing countries represent a high sales potential for food and thus for marketing dairy products because the people aspire to approximate their standard of living to the Western standard. Furthermore, increasing influence of media, increasing rates of consumption and higher income has led to a growing demand for dairy products in developing countries.

These observations have been proved statistically by the Rabobank (2007) which estimated the future demand for dairy products in several countries and calculated the average annual growth rates for each country. When comparing the European Union’s annual change of +0.5% to the growth rate in Africa of +3.5% it becomes obvious that African markets offer a much higher potential than the developed countries where the market is already saturated. Moreover, African countries as target markets for dairy product export are promising because Africa accounts for only 4.3% of the world’s milk production (Dairy report 2007). As a result of this low percentage, milk consumption exceeds milk production and the continent depends on exports of other countries. Currently, the annual milk deficit is covered by imports of about 5 million tons per year, trend upwards (Hemme, 2007) Due to increasing population numbers and improved equipment with refrigerators it can be expected that also prospectively the deficit will increase.

With the help of the model developed in this thesis, new growth opportunities for the Nordmilch AG in the African market should be investigated by determining the relative market attractiveness of several countries for the brand Oldenburger. The model developed in this thesis can be used as a framework by all companies which also seek to expand to foreign markets by exporting own standardized products.

1.4 Research Questions

In order to get an overview of existing models and to assess their usefulness in practice the most common frameworks will be investigated. Their advantages and disadvantages will be discovered to provide international marketers with the most suitable method for identifying countries with the highest export potentials. In order to get the desired results the following research question will be answered:

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On the basis of the response to the first research question, the theoretical results can be used in order to apply the most promising model in practice for the Nordmilch AG. By reason of the success of Oldenburger in Africa and due to the increasing importance of internationalization the purpose of this research is to explore opportunities for expansion in the African dairy market. Therefore, the African countries that offer the most promising export sales opportunities for Oldenburger will be selected.

This intention is reflected in the second research question:

Which countries within the African dairy product market offer the best export potentials for the brand Oldenburger?

In order to answer this question influential factors have to be identified which affect the market attractiveness and consequently have an impact on the country selection.

By answering the above presented research questions, this paper seeks to explore how FMCG firms undertake country selection. It aims at expanding knowledge for international marketing managers by developing a new framework concerning market selection which considers not only a detailed macro environmental analysis of the potential target markets but also an investigation of influential micro environmental factors.

1.5 Plan of the Study

In order to answer the research questions the paper comprises the following chapters:

In the second chapter – The Literature Review – motifs and reasons for international expansion as well as the IMS process itself are presented. Moreover, relevant methods for conducting an IMS are portrayed and advantages and disadvantages are revealed. Finally, gaps in the existing literature dealing with IMS are identified.

The models investigated in this chapter provide background knowledge, give an overview of already existing approaches and help to create an own IMS framework for companies seeking to expand internationally by exporting already existing products – like the Nordmilch AG. The third chapter – The Methodology – contains a description of the several steps of the selection procedure as well as the identification of relevant criteria which have to be considered when determining the most promising target countries.

The forth chapter – The Implementation – begins with a brief company profile of the Nordmilch AG. On the basis of this company the application of the model developed in this thesis will be exemplified.

By applying the new framework, the three most promising target markets for the Nordmilch AG to export their dairy products can be identified.

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2. LITERATURE REVIEW

2.1 Motifs and Reasons for International Expansion

There are several motifs and reasons which explain the increasing relevance of international expansion:

1. Competition within countries has intensified due to the reduction of state borders and

increased expansion of successful companies. As a result, for minor firms the new presence of local and global competitors poses the threat of being pushed out of the market if they renounce searching for new sales opportunities in new markets. Accordingly, the process of internationalization obtains a self-perpetuating character: The opening of the world trade facilitated overseas operations and thus it has become realizable for companies to sell products and services in foreign markets with huge potentials. In this way, local companies also became confronted with the pressure to reduce costs and to look beyond state borders in order to survive in a highly competitive environment.

Accordingly, more and more firms have to change their market orientation from domestic to an international or even global view.

The self-perpetuating process of internationalization is visualized in the following figure.

--- Insert Figure 1 about here ---

2. The saturation of consumer demand which could have been identified in recent years poses the threat of losing market share and confronts companies with the necessity to open up promising countries which still are in the growth stage of the life cycle. 3. A few years ago only huge companies were able to realize the expansion to foreign

markets. The intense capital needed, the complex process of going abroad and the risks associated with it were not manageable for smaller firms. But through the availability of modern information- and communication technology in combination with faster transportation and financial flows it has become possible for medium-sized companies to internationalize as well. Nowadays, many firms start expanding when they are still comparatively small and then gradually develop their international operations.

4. Moreover, internationalization helps companies to improve the operational success because profit advantages can be generated, market share can be maintained or even increased andinitial costs and risks can be spread (Jobber, 2007; Hoffman et al., 2005; Kotler, 2006).

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sell as many products as possible. Consequently, companies expanded their operations to foreign countries in order to increase sales.

As a result of these drivers, nowadays the DAX-30-companies generate more than 70% of their turnovers in foreign countries1. Moreover, the number of multinational companies in the 14 most highly developed nations tripled between the years 1969 and 2001 (Kotler and Bliemel, 2001). Furthermore, since 1969, the number of internationally acting companies has decupled from 7,000 to more than 70,000 (Kotler and Armstrong, 2008). These figures prove the relevance of internationalization in today’s business world.

2.2 The IMS Process

According to Brothers and Nakos (2005), if a firm decides to expand internationally, the first important step is to conduct an international market selection (IMS).

Therefore, in a first step possible international markets are identified and their relative attractiveness is determined by assessing their current and future situation in detail (Reid, 1981). On the basis of the results gained those foreign markets that are most attractive and offer the best opportunities for success can be selected.

Given the importance of this decision, it is astonishing that only limited attention has been paid to the specific requirements which global market selection and analysis has to fulfill- especially in case of exporting companies. Papadopoulos et al. (2002) confirmed that first models dealing with IMS research were developed in the 1960s and 1970s but in recent decades preoccupation with this topic declined. Brouthers and Nakos (2005) assert that this decline can not be traced back to the subject’s relevance; it is the consequence of the difficulty in empirically testing the models which were proposed to optimize IMS performance. Papadopoulos et al. (2002) and Douglas and Craig (1992) added that a further problem is represented by the difficulty to develop models that are generalizable to various industries. In general, empirical studies dealing with this important topic are scare because to date, international marketing literature has concentrated primary on the choice of entry mode while disregarding the country selection process itself (see e.g. Anderson and Gatignon, 1986; Agarwal and Ramaswami, 1992; Pan and Tse, 2000; Brouthers and Nakos, 2005). This improper focussing has been noted and criticized byAnderson and Gatignon (1986), Agarwal and Ramaswami (1992), and Pan and Tse (2000) Furthermore, Papadopoulos et al. (2002) pointed out, that the problem with the proposed models is that they have not been tested sufficiently, offer little or no evidence that they can in fact predict market attractiveness, and are too complex to apply in practice. Consequently, many firms renounce the option of applying a systematic approach and prefer to choose target markets arbitrarily. This approach can be fatal, since research proves that companies which applied a systematic model in the IMS process performed better in terms of number of markets served, new technology gained, and market share (Papadopoulos et al., 1988; Yip et al., 2000; Brouthers and Nakos, 2005; Cavusgil and Zou, 1994)). Moreover, errors resulting from operations in an unsystematically chosen country can be costly and may dampen the firm’s export enthusiasm (Welch et al., 1980).

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2.3 Traditional IMS Methods

In order to get an overview of the large range of existing models, it is useful to group them into specific categories:

When executing the IMS a company has two fundamentally different options: deciding on the basis of an unsystematic approach or applying a systematic model.

2.3.1 The Unsystematic Approach

If target countries are selected unsystematically companies decide intuitively or by using rules of thumbs. Therefore, typical of this approach is that none or limited research is conducted. The primary source of information usually is the experiential knowledge of the evaluator. Therefore, the final decision will be highly subjective.

2.3.1.1 Psychic Distance

When selecting new target markets unsystematically, in most cases the decision is made on the basis of “psychic distance”(Cicic et al., 1999; Kumar, 1993; Jobber 2007; Andersen and Buvik, 2002). The concept of psychic distance has been widely cited in the international business literature as a driver of unsystematic IMS (Andersen and Buvik, 2002). It is defined as “a firm’s degree of uncertainty about a foreign market resulting from cultural differences”. which signifies that the main criterion for market selection is cultural proximity (O’Grady and Lane, 1996; Kumar, 1993; Papadopolous et al., 1988). Consequently, factors such as differences in language, culture, political systems, level of education, or level of industrial development are taken into consideration. In general, companies prefer to enter those foreign countries which minimize the perceived socio-cultural distance to the home market (Johanson and Vahle, 1977; Andersen and Buvik, 2002; Kotler et al., 2006). Accordingly, many firms begin their overseas operation by selling their products to neighbouring countries since geographic proximity is likely to be attended by economic and especially cultural similarity. Therefore, more knowledge about the target country and greater ease in obtaining information is provided.

As a result, companies feel more comfortable with the language, laws, and local rules. Furthermore, it takes less time to enter these markets due to less extensive research and usually also less effort is required to develop successful business relationships.

All these factors reduce the risks of internationalization.

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stages of the internationalization process are more likely to start expanding by moving into neighboring countries which are similar to their home market and in this way involve less risk (Benito & Gripsrud, 1992; Douglas et al. 1982; Johanson & Vahlne, 1990; Papadopolous, 1987; Kruyt and Andriessen, 1987; Stottinger and Schlegelmilch, 1998; Papadopolous et al., 1988; Johansson, 1999; Nordstorm and Vahlne, 1977).

In contrast, larger companies oftentimes are already present in foreign markets and have gained international experience. In their situation, the criterion psychic distance is not as important as for smaller firms without international experience. For larger companies it is easier to gain access to relevant information about unknown countries since they are provided with a highly developed network. Consequently, these firms are confronted with fewer difficulties concerning new markets entries. They have a larger choice because they have the know-how and capabilities needed to enter very diverse countries.

In recent decades, it could have been observed that the growing international experience of companies, the developments in consulting services and improvements in information technology decreased the explanatory power of psychic distance (Sakarya, 2006). Furthermore, Benito and Gripsrud (1992) as well as Langhoff (1996) have investigated that the influence of psychic distance on market selection decision is reduced as companies become more internationally active.

Due to this decreasing relevance of the psychic distance approach it is important to improve the availability of suitable systematic models which are applicable with the capabilities of both smaller and larger firms.

2.3.1.2 Reasons for the Application

Several studies have concluded that in practice target markets are often chosen arbitrarily on the basis of the unsystematic approach described above (Cavusgil, 1985; Cavusgil & Godiwalla, 1982; Kobrin, 1979; Basek et al., 1980, Papadopoulos et al., 2002). Especially, in the early stages of internationalization, many researchers find it hard to resist the temptation of selecting target markets intuitively (Papadopoulos, 1988). It is astonishing that unsystematic approaches are applied much more frequently than systematic models since it has been found out that the latter guarantee a better operating performance in the foreign country (Yip, Biscarri, and Monti; 2000; Cavusgil and Zou, 1994). Reasons for the propensity of companies to focus on psychic distance and other unsystematic approaches are the following:

1. In recent years it has continuously been criticized that all of the existing systematic models have not been tested sufficiently, offer little or no evidence that they can in fact predict market attractiveness, and are too complex to apply in practice (Brouthers and Nakos, 2005; Papadopoulos and Dennis, 1988). These factors have decreased the evaluators’ willingness to apply them.

2. Especially medium-sized companies are confronted with a lack of international managerial experience, know-how and financial resources which are necessary to obtain relevant data about potential target markets (Brouthers and Nakos, 2005). 3. Due to limited experience of managers concerning exporting gathering relevant data is

difficult. Furthermore, they can not have recourse to practical experiences and established guidelines (Papadopoulos and Dennis, 1988).

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Moreover, there are some firm size-specific problems which complicate the application of systematic approaches. This means that SMEs are confronted with further problems which larger companies do not have to deal with. These include the following:

1. According to Kumar et al. (2002) and Papadopoulos et al. (2002) the systematic methodologies are considered as being too complex to use because oftentimes the resources and methodology with the corresponding concepts and instruments to formulate and implement such a systematic analysis successfully are not available for SMEs.

2. Extensive pre-screening processes may be disregarded by reason of the expenditures connected with the analysis, which may be regarded as not being cost effective (Rahman, 2003; Holton, 1970).

3. Oftentimes, SMEs are provided with poorly developed administrative policies and procedures which are not suitable for applying a systematic approach adequately (Brouthers and Nakos, 2005; Kumar, 2002).

These factors increase the propensity of SMEs to make opportunistic and more intuitive or ad hoc approaches and select foreign markets based on personal feelings rather than systematic strategic decisions. Kothari (1978) supports this assumption since he found out that 83% of the researched SMEs in his sample entered their first market without any research.

2.3.1.3 Conclusion and Criticism

To sum up, the concept of psychic distance is a very popular approach. Especially SMEs use it which oftentimes results in a decision for a country that is the firm’s immediate neighbor (Cicic et al., 1999; Papadopolous et al., 1988; Douglas et al., 1982; Johanson et al., 1990 Shenker and Zeira, 1992). A critical aspect is that the country selected from a very narrow range of potential countries does not necessarily have to be the best market for the firm's products. Furthermore, some researchers have criticized that the psychic distance phenomenon is too simplistic and therefore more often results in a failure (Andersen, 1993; Langhoff, 1996; Brewer, 2000; Rahman, 2001). Such a failure is especially fatal for SMEs because they are equipped with less capital and can be financially burdened more easily. Therefore, a failure has a much deeper impact on the overall financial situation of a smaller company than in case of a larger firm. Therefore, it is even more important for them to avoid failures, which can be achieved by disregarding psychic distance and concentrating on systematic approaches.

Concerning larger companies, the psychic distance approach should be avoided since the resources and know-how to apply more promising systematic approaches are available for them which means that the turnover could be increased.

Consequently, an adequate systematic approach would be absolutely helpful for both, minor and larger companies.

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empirically support the assumption that the more systematic a company selects the export target market the better the export performance will be.

Since experience has proved that the unsystematic approach is by far not as successful as the systematic approach it lies not in the focus of this research.

2.3.2 The Systematic Approach

The second approach is called systematic approach. It claims the usage of objective criteria which help to distinguish between foreign markets. By conducting a structured and formalized decision-making process that includes statistical methods the potential of each country is examined and finally the export markets are selected. In contrast to the unsystematic approach, extensive information research is necessary and typically, the source of information is secondary data.

2.3.2.1 Advantages

Since errors resulting from operations in an arbitrarily and unsystematically chosen country can be costly and may dampen the firm’s export enthusiasm it is advisable to apply a systematic approach with which these errors can be avoided. It has been found out that the costs for remedying a mistake which occurred through an inadequate evaluation of markets exceed those costs associated with a systematic evaluation which would have prevented the error (Rahman, 2003). Consequently, applying a systematic approach when selecting a foreign target country is an important step which companies cannot afford to disregard. It is an essential process which significantly influences a company’s success or failure of the international venture.

2.3.2.2 Procedure

According to Andersen and Buvik (2002) this approach consists of the following steps: In the first step, the problem is structured, formulated and isolated. “Isolation” means that the IMS problem is delimited from other issues, for example the decision of the entry mode choice. Next, the relevant selection criteria are identified. These are necessary to evaluate the potential markets’ overall attractiveness. Moreover, it is important to assign weights to the relevant criteria which reflect their importance to the firm’s objectives.

In a next step, a list which presents all investigated countries should be prepared.

After that, all alternatives noted in this list are assessed on each relevant criterion which has been identified in the second step. In this way, measured values reflecting the location attractiveness of each country can be computed, a ranking can be generated and with the help of this, the optimal decision can be made.

Despite the fact that the above described order of IMS is regarded as being most sensible, it is not unthinkable to modify the process. Previous research and methods of the systematic approach do not contain all stages that are mentioned by Andersen and Buvik (2002).

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2.3.2.3 The Qualitative Approaches

The qualitative approaches involve the rigorous, systematic and comprehensive collection and analysis of qualitative information about one or a handful of potential country markets (Papadopolous and Dennis, 1988). Papadopoulos and Denis (1988) argue that although these approaches are systematic, they are still open to distortion because of the potential biased opinions of those who gather information and because of the subjective judgment of the evaluator. Therefore, several authors found evidence that the outcomes of qualitative IMS methods can be largely inaccurate (for example: Papadopolous et al., 2002; Vogel, 1976;). Furthermore, these approaches are limited by considering only a small number of countries that are analyzed before the final selection is made (Papadopolous and Dennis, 1988). But a positive aspect is that since the potential target countries are few in number, a very detailed investigationof each is realizable - including both macro and micro environmental factors.

2.3.2.4 The Quantitative Approaches

In contrast, the quantitative approaches involve an extensive analysis of large amounts of secondary data about a large number of potential target countries (Papadopolous and Dennis, 1988 Papadopolous et al., 2002). Thus, it is possible for a company to evaluate and compare various markets beyond its immediate neighbours.

A disadvantage of these approaches is that they are relatively laborious to conduct because a large number of potential countries are investigated and a lot of information is needed.

The major advantages of quantitative approaches are that they are free of limited scope that characterizes the unsystematic approach as well as the systematic qualitative approach.

In order to better understand the variety of quantitative models applicable for IMS it is useful to classify the most common strategies systematically. In contrast to the qualitative approaches which are not based on particular methods, all quantitative approaches can be assigned to one of three major categories. These categories are the market grouping method, the market estimation method and the filter method and will be briefly described in the next paragraphs.

a) The market grouping or segmentation method Procedure

The market grouping or segmentation method classifies the potential countries on the basis of certain similarities (Papadopolous et al. 1988; Cavusgil et al., 2004; Backhaus et al., 2003). In the grouping method, relevant factors like the social, economic and political situation in each country are investigated and then countries which reveal similar characteristics are grouped together. The investigated factors differ from industry to industry – according to the prevailing requirements. After this classification, non-acceptable and acceptable country groups or clusters are identified. Those countries in the most acceptable cluster will be the first to expand into in the company’s internationalization process. Countries in other clusters will not be entered before all market potentials in the preceding group have been exhausted.

Advantages and Disadvantages

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and time for a further analysis of those is spared. If similarities are not taken into consideration, time is wasted for investigating countries that would already be out of the question if they had been grouped together with a similar, already investigated – and excluded – country.

Furthermore, due to the fact that all potential target countries are investigated and grouped, the risk of excluding a promising market in the first step is eliminated.

A disadvantage of this method is its complex implementation because all countries have to be analyzed and compared. This generates high costs and a lot of work.Another disadvantage is that the model exclusively focuses on general country indicators rather than on specific industry indicators - which are much more relevant to a company. This means that the grouping is based on factors which characterize the whole country whereas important trends influencing the particular industry in which the company operates are ignored. An example is that the industry or product-specific market size and market growth are not taken into account. These industry-specific developments can be completely contrary to the investigated country-specific developments. In this case, the results would be extremely distorted which would lead to wrong decisions. This point of criticism was strengthened by Kumar et al. (1993) who found out that country rankings within clusters differ dramatically on whether general or industry-specific indicators are used.

In summary, the grouping method does not consider the present and future industry-potential which is very important for the evaluation of the country attractiveness.

b) The market estimation method Procedure

In contrast to the grouping method which groups countries on the basis of similarities in country-specific indicators, the market estimation method distinguishes countries on the basis of their market potential and overall attractiveness (Papadopolous et al. 1988). The application of this method implies that one factor or multiple factors that influence the market attractiveness as well as the market potential are evaluated. On the basis of this evaluation the foreign markets are ranked.

According to Sakarya (2006) relevant factors which are investigated in order to assess the market potential are for example country size, growth, competition, and barriers.

The assessment process is conducted by allocating a certain number of points to each country. This number is determined by the degree to which certain favorable conditions are present in the respective environment. Accordingly, the highest score represents the overall highest attractiveness and is selected for entry.

Whereas the grouping method clusters countries on the basis of similarity, this method differentiates countries by order of preference.

The advantage of this method is that after having conducting it the company is provided with a clear ranking of the most attractive countries which can form the basis of the selection process.

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c) The filter or checklist method Procedure

The market estimation method requires that initially, all potential target countries are analyzed with regard to relevant factors that determine market attractiveness. In contrast, at the outset of the filter or checklist method not all determinants are considered in the selection process (Backhaus et al., 2003).

This method implies that in the first step, all criteria have to be classified on the basis of their relevance. Consequently, the selection process is divided into several steps and each criterion is allocated to one of these. Thus, the process can be considered as a multistage method to extract attractive markets. With every further step more and more countries are filtered out which do not match the threshold values of certain stages of the filter model. In the first filter step the most important criterion (called “must criterion” or “knock-out criterion”) is investigated. The knock-out criterion is a criterion that makes an entry to a foreign country impossible. Examples of knock-out criteria are legal aspects (for example if the sale is reserved exclusively for nationals), financial aspects (for example if the country’s currency is unconvertible) or unfavourable tax regimes. If any of these criteria applies to one of the potential target countries, this country has to be eliminated from the selection process immediately.

After having done this, the selection criteria are expanded from stage to stage. The goal is to eliminate uninteresting countries step by step and simultaneously investigate the advantageousness of individual countries.

In contrast to the market estimation method, the filter method does not result in a ranking, but in the generation of country clusters. These are not developed before the investigation process begins - like in case of the grouping method, they evolve automatically through the exclusion of foreign markets. Consequently, these clusters are not based on country similarities concerning their presence of certain characteristics; they are based on country similarities concerning their degree of attractiveness.

This means that the grouping method offers clusters which unite countries that have similar features, the market estimation method provides companies with an attractiveness ranking, and in the filter method process, clusters that unite countries with a similar degree of attractiveness are generated.

One advantage of this method is that it is easy to conduct. Due to the fact that initially, only few criteria are investigated, the process can be conducted quite fast and those countries absolutely out of the question are eliminated at the early stages. This ensures that no time and money is wasted on a further analysis of these uninteresting markets and the market research can be concentrated on a limited amount of countries. Moreover, the order of selection criteria as well as the level of the threshold values can be classified individually according to the company’s goals.

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no worth if a knock-out criterion is not fulfilled. Companies have to be aware of the must criterion’s power and accordingly, select it with care.

e) Conclusion and Criticism

In general, none of the quantitative methods is entirely satisfactory. The major limitations of the quantitative approach are the following:

• The selection process is usually too general because exclusively macroeconomic country-specific indicators are considered whereas micro criteria which influence the firm- or industry-specific environment are not regarded as being important to firms.

• Moreover, most of the models are too complex to apply in practice and are very costly due to the extensive investigation which has to be conducted for the huge number of potential target countries.

Literature exposes that these are the main reasons why especially small and medium-sized enterprises with limited resources do not use this approach (Kumar et al., 1993; Papadopoulos et al., 2002, Brouthers and Nakos, 2005).

Finally, the quantitative models entail the difficulty to identify the most relevant country- specific criteria which should be investigated as well as the difficulty to assign appropriate weights to them. These decisions will inevitably lead to an inclusion of subjective opinions.

2.4 Main points of criticism

Despite the fact that IMS models dealing with the selection of new target markets already exist none of them seems entirely satisfactory. Available models reveal profound weaknesses and experience has proved that none of them is adequate for determining the most promising target market. Therefore, the purpose of this research will be to develop a new framework which eliminates the most doubtful characteristics of the existing ones. There are three main points of criticism:

1. Applicability in practice

Empirical research demonstrates a considerable gap between the existing models and practice (Anderson and Strandskov, 1998; O’Farrell et al., 1998; Rahman, 2001). This means that none of these methods has succeeded in integrating the multi-criteria objectives of firms.

Furthermore, conducting them in practice is too costly and laborious due to the extensive information research needed.

2. Fulfilment of certain conditions concerning reliability and applicability

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3. Consideration of future market development

Furthermore, the existing models concentrate on the analysis of purely static factors. In this way, only the current situation in the target country is investigated, but in fact the attractiveness of a country is significantly determined by the market potential, the expected future situation. The emerging countries have growth rates of about 10% which means that these markets are very dynamic. Traditional models fail to include these fast changes and developments.

But in fact, a static analysis is absolutely futile in a country where rapid changes constantly invalidate old cognitions. Consequently, old no-growth models have no value when the aim is to evaluate emerging countries accurately.

In order to do justice to emerging countries and to enhance traditional analysis, factors which take a market’s future potential into account are integrated into the new model. An example for such a factor is annual consumption growth.

These additional criteria will complement the existing IMS models and offer a more realistic and useful framework for the evaluation of emerging countries. Thus, it includes a complete set of variables that capture both current country attractiveness and market potential.

2.5 The Three Stages of the IMS Process

Existing literature about the IMS process is quite consistent. According to a number of researchers, the process of broadly evaluating potential foreign markets can be sub-divided into the following three stages: the screening stage, the identification stage, and the selection stage (Cavusgil, 1985; Rice and Mahmoud, 1985; Kumar et al., 1993).

1. In the screening stage macro environmental indicators (for example: economic development, political stability, socio-cultural factors) are analyzed to eliminate countries that do not meet the primary demands of the firm. Thus, countries in which the company’s objectives can not be realized are excluded and candidates for the subsequent stage are identified. When reviewing the literature, it is notable that a number of criteria is generally regarded as being valid, such as political stability, level of economic development or market volume (Swoboda et al., 2007).

2. In the identification stage industry-specific or micro level criteria are investigated to assess each of the remaining country’s industry attractiveness and finally identify potential target countries. Most important among those criteria are market size and growth, level of competition, and entry barriers.

3. In the final selection stage, the investigated macro and micro criteria are taken into consideration in order to select the most attractive target markets.

The use of different indicators for various stages is consistent with the findings of past research (Cavusgil 1985).

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2.6 Macro and Micro Criteria

Macro criteria (investigated in the screening stage) are those factors relating to the general situation within the country as well as the overall country attractiveness whereas micro criteria contain those aspects characterizing the particularities of a firm or industry. Micro criteria allow a company to estimate the market potential reasonably because the industry-specific development, which has a deep impact on success or failure, is analyzed.

Examples of macro criteria are general facts about economic statistics, political environment, and legal, socio-cultural, and infrastructural factors:

o Economic: GNP, GDP, income development, economic stability, inflation, income

distribution, business cycles, unemployment, interest rate, disposable income, population development

o Political: government type and stability, political country risk, taxation policy

o Legal: conditions of foreign trade policy, political country risk, competition law, product

safety

o Entry conditions: possibilities for market entry, investment incentives, entry barriers ,

minimum size

In order to investigate the micro criteria data about very specific industry variables is needed. This is only available, in the best of circumstance, to some large firms. Analyzed factors include sales potential and overall industry attractiveness.

o Market capacity/volume: sales volume, customer behavior, relation to home/ other

markets

o Market environment: forms and intensity of competition, quantity of suppliers

o Distance: affinity to culture/ mentality/ language; market knowledge

Kumar et al. (1993) and Jobber (2007) support that these criteria -macro and micro- form the basis of the selection process.

The sensibleness of combining a macro-specific and a micro-specific analysis was also recognized by further researchers: Kramer (1964) and Deschampsneufs (1967) for example suggest multiple stages of assessment by considering both general and industry-specific indicators for market size. Finally, also Root (2004) separates market size into two components: product-specific (direct market size) and general macroeconomic (indirect market size). This classification can be traced back to the macro and micro analysis.

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3. METHODOLOGY

The proposed methodology is used for identifying potential foreign markets. When deciding to internationalize, companies first have to select promising countries which they could imagine to enter. In order to take this influential decision companies should apply the framework developed in this part because it captures the full range of influences which have an impact on market attractiveness. Limitations of older models like those described in previous chapters are reduced and in this way, the applicability in practice is assured.

Due to time and cost reasons the selection is made with the help of a three-stage selection process: the rough analysis, the fine analysis, and the selection. After a pre-selection of the countries with the help of the filter method a following detailed analysis is executed by applying the market estimation method. Thus, when analyzing the residual interesting countries a detailed analysis is made.

3.1 Rough Analysis

3.1.1 Advantages

Executing a rough selection first is very cost-effective because data acquisition costs can be reduced. In this initial process, the number of potential countries is decreased by eliminating absolutely unsuitable international markets which do not meet essential conditions. Concerning the remaining countries, further data will be gathered in order to analyze them in detail in the next stage of the selection process. As a consequence, international markets that are classified as environments with a low market potential and high risk of internationalization fall out of the focus and no time and money for a further analysis is wasted on them.

To sum up, in the rough selection, the large number of potential target markets is searched in order to filter out a smaller number of countries – representing the firm’s “best” opportunities, which are worth further analyzing.

3.1.2 The Depth of Relevant Selection Criteria in the Rough Analysis

When determining relevant criteria, the challenge is to identify those criteria that represent the most influential factors for current and, above all, for future attractiveness.

Recent findings of researchers concerned with the topic have proved that micro criteria oftentimes have a much deeper impact on sales potential than the macro environmental situation (Cavusgil, 1985; Connolly, 1987; Young et al., 1989; Ball and McCulloch, 1983; Papadopoulos et al., 1994; Daniels et al., 1998; Rahmna, 2001; Root, 2004). Therefore, it is almost inevitable to investigate both the level of (macro)economic development and the specific industry development for identifying attractive foreign markets. Consequently, information about the economic situation on the whole – comprising factors such as political, technological, socio-cultural, legal and environmental conditions - , as well as information about the market-specific development must be gathered. These criteria influence country attractiveness and must be taken into account in order to create a suitable own model for companies that seek to find new opportunities to export their existing products to new foreign markets.

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characteristics that make foreign markets attractive (Swoboda et al., 2007; Maharajh et al., 2005; Sakarya, 2007).

In order to alleviate this weakness and due to the attested relevance of the micro environment of a firm, an industry-specific analysis will be integrated into the rough selection of the new framework. This means that in the first stage of the model developed in this paper, the country attractiveness is evaluated by investigating some macro or country-specific criteria in combination with some micro level or firm-specific variables.

According to Nieschlag et al. taking all different macro and micro criteria into account is problematical and does not guide to the aim of finding high potential markets. Due to the fact that the number of existing influencing factors is gigantic, a model which would consider this multiplicity would be extremely complex. Moreover, since an incredibly extensive analysis would be required, such a detailed model would be impossible to apply in practice. Especially in the rough selection, when the number of potential target countries that have to be investigated is still very high, making a detailed analysis which considers all macro and micro environmental forces is neither possible nor necessary. As a result, it is crucial to identify the most fundamental factors, against which the alternative countries will be evaluated.

When determining the relevant selection factors, it is important to be aware of the fact that analyzing too many criteria is not reasonable since this could lead to an exclusion of promising countries. The more criteria are taken into consideration the more countries will fall out of the market segment because if more requirements are demanded fewer countries will be able to fulfil them. Therefore, it is important to maintain a certain degree of tolerance. In this way, more countries will come into question and the threat of eliminating an attractive market is avoided.

On the other hand, if too few segmentation criteria are investigated the full set of influences on country attractiveness will not be captured. This could result in a situation in which resources are being wasted on countries which turn out to be of little interest.

Consequently, the model developed should consider as many relevant factors as necessary, but as few as possible. In this way, more meaningful results are produced and simplicity and little cost is achieved.

3.1.3 Relevant Macro Environmental Criteria

For the investigation of macro environmental conditions, some generally accepted criteria that nearly every firm looks at to evaluate the market attractiveness are investigated. Among those is the real GDP growth as well as the total GDP (Kumar, 1993; Rahman, 2003). The GDP is defined as the total market value of all finished goods and services produced within a country in a given period of time – usually one year. It is an indicator for growth and the economic size of a country and therefore mirrors the general sales potential of all distributed goods

(Root 1987; Cavusgil 1985; Choffray and Lilien 1980).

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monetary flows are billed in Euro. Consequently, factors like the inflation rate and the stability of exchange rate do not have a very deep impact on operating success. But nevertheless, the criterion country risk is considered in the rough analysis because it is a very far-reaching influence which impacts the peoples’ buying power, the firmness of the market, sales potentials and other important circumstances.

Finally, the factor income per capita is generally interesting for the country evaluation and is therefore added to the rough analysis. Since the income is oftentimes associated with the buying power of the population, this criterion strongly influences the sales potential. With a higher income people can afford more and the sales potential increases.

3.1.4 Relevant Micro Environmental Criteria

When investigating the micro environmental environment research strongly focuses on market potential which is regarded as being more important than the market size at present and accordingly expectations about future demand are more important than current demand (Jobber, 2007). Some researchers even assume that market potential is the most significant criterion for the investigation of country attractiveness and for the final selection (for example Yoshida, 1987; Nieschlag et al., 2002 Rahman, 2003).

In order to analyze the future market potential, two factors have to be considered, namely

market growth and market size. Information about market size is necessary since it has been

discovered that a strong relationship between this factor and potential export performance exists (Aaby and Slater, 1989). Accordingly, against the background of information referring to market size, the market potential can be estimated.

The analysis of market future development is relevant when deciding which countries to enter because a declining or stagnating market is not attractive. Such a market may be in the saturation stage of the life cycle and therefore comes along with a very low sales potential for the foreign company. Contrarily, large and growing markets offer the greatest potential for exporting.

By integrating a market potential analysis, the model developed in this paper succeeds to capture the dynamics of emerging markets whereas traditional IMS assumes a static environment.

Moreover, it is very important to consider the quantity of the respective product imports in the target country because this number reflects both the openness of the country’s economic system as well as the consumers’ and country’s attitudes towards foreign goods. The openness of the economic system is defined as the extent to which the target country is involved in international trade.

Since the amount of younger and higher-income consumers with increasing demand for many types of products grows continuously in emerging countries, these markets become increasingly attractive.Therefore, it has become important to assess the receptiveness of these promising environments for externally produced goods in order to capture the potential new opportunities. According to Sakarya (2006), in traditional frameworks for IMS, the customers’ attitude towards foreign products of a specific industry as well as their attitude towards the product’s country of origin is not considered.

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With the help of this pre-selection – composed of the evaluation of the above-described most important factors – certain countries are eliminated whereas those countries which are left over reveal especial attractiveness.

3.1.5 The Weighting

Inspired by the quantitative methods, the model developed in this paper includes a weighting. This means that on the basis of managers’ judgement and experience and statistical records different weighs are assigned to the country- and industry-specific factors, reflecting their relevance for the fulfilment of the firm’s objectives.

In the evaluation process scores are allocated to the country’s “performance” with regard to each pre-selection criterion and these will then be multiplied by the weight assigned to the particular factor. In this way, the data can be transformed into an overall score which can finally form the basis for a ranking. Consequently, this country ranking also depends on the assigned weights and therefore on each factor’s degree of influence of country attractiveness. Ideally, the result shows a number of countries which are relatively high rated with regard to all relevant criteria.

3.1.6 Procedure

In order to obtain scores which reflect each country’s attractiveness with regard to each criterion, the procedure of Liander at al. (1967) is used. This includes several steps:

1. On the basis of statistical databases and other reliable sources, facts and figures about each country’s situation with regard to the above presented most important factors need to be gathered.

2. These figures can then be transformed into scores from zero to ten by proceeding as follows: First, the lowest figure is subtracted from the highest figure. Then the difference is divided by ten. In this way, ten intervals of the same size are generated, whereas the lower level of the first interval will be the lowest occurring value and the upper limit of the tenth interval will be the highest occurring value in the country selection. Therefore, it is assured that each figure can be assigned to one of the ten intervals and in this way transformed into a country score. This procedure has to be executed for each criterion.

3. The calculated scores for the country’s performance with regard to each criterion are multiplied by the corresponding weights, are added and finally, a total score will be obtained. After having executed this procedure for every country, the total scores can be compared.

The third step is reflected by this formula:

Total country value = XInc x WInc + XGDPg xWGDPg + XGDP x WGDP + XRisk x WRisk +

XGro x WGro + XSize x WSize + XImp x WImp

X: Selection Criterion

W: Weight

Inc: Income in €

GDPg: Real GDP growth in % GDP: GDP in billions

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Size: Market size

Imp: Respective product imports

3.2 Fine Analysis

After having conducted the rough analysis the country selection process continues with a more complex and cost-intensive part – the fine analysis. In this second step, the remaining foreign markets are scrutinized which leads to an exclusion of further unattractive countries whereas those with the highest potential for future success remain.

In this stage, further criteria concerning the political, economic as well as the socio-cultural environment are investigated in detail. As far as the analysis of the political situation is concerned, trade barriers play a major role because they significantly influence the operating success of exporting companies. The country risk is investigated in more detail in this stage by considering generally accepted criteria with which risk can be evaluated. These are inflation rate, stability of exchange rate and the country balance of debt. Furthermore, the geographic location is considered because it is directly connected to the resources available and to the next important factor which has to be investigated – the infrastructure. Especially if a country possesses an own harbor goods can be distributed very effectively which is a great advantage.

Data necessary for this detailed analysis can be gained by refering to external information sources like economic and political organizations, as for example customs authorities, credit institutions, chambers of commerce, embassies, the worldbank or the statistical office of the European communities (Eurostat)

During this fine analysis, the attractiveness of each potential target country can also be determined by considering the sales potential of specific product categories. If a firm has a broad portfolio it has the opportunity to investigate all countries with regard to each product group. Since different types of goods may have different sales potentials in diverse countries it has to be identified which countries are of special interest for the distribution of particular product groups.

A problem which might occur in this identification process is the small amount of data available. The information needed is not statistically documented since it is very specific. Therefore, allocating product categories to the best-fitting countries is only possible with the help of an international sales manager who is familiar with the target continent. Only personal experience and knowledge can be used in order to come to a reasonable conclusion.

The selection process visualized in the following figure. ---

Insert Figure 4 about here ---

The new IMS model was developed on the basis of already existing frameworks and criticism referring to their individual advantages and disadvantages. Accordingly, characteristics which turned out to be weaknesses could be removed and other characteristics which were regarded as sensible and helpful could be adopted. Therefore, the new model reveals significant improvements towards older methods.

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A next quality is that the new model is easy to comprehend and adopt because the selection criteria and weights can be chosen individually.

Finally, the framework succeeds to capture the full range of potential influences in a new environment because the importance of micro criteria is acknowledged and an investigation of the future potential is integrated.

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4. RESULTS AND ANALYSIS

4.1 The Nordmilch AG

The company Nordmilch was established in 1946. In 1999, the firm merged with the MZO (Oldenburg), Hansano (Isernhagen) and Bremerland (Stuhr) and a few years later it became the present company – the Nordmilch AG.

With 4.2 billion kilos of processed milk, nowadays Nordmilch is Germany’s largest dairy company and among the top ten in Europe. Its production range includes cheese, fresh and UHT products, milk powder and whey, butter and milk-based components and concentrates. Its high-quality milk products are exported to more than 80 countries. Approximately 2,800 employees, including 124 trainees, generate a group turnover of more than 2 billion euros. Nordmilch AG operates on the world’s markets, but is deeply rooted in the north of Germany. In total, the company is present in this region with nine production locations, three wholly-owned subsidiaries and a variety of equity holdings.

In 2006, Nordmilch opened up to the future with some pioneering decisions. The most important of these were the establishment of the Nordmilch AG, the opening of the Nordmilch Innovation Center in Zeven and the introduction of a new sales structure. At the same time, the product portfolio and the production structure were geared more closely to the markets. The goal of Nordmilch’s corporate strategy is profitable growth. To achieve this, the company successfully combines proven competence with new product ideas and optimised flexibility in production and in their markets.

With their quality products and the two brands Milram and Oldenburger, Nordmilch AG satisfies different customer requirements and constantly opens up new sales opportunities across Germany, across Europe, and across the world. In order to respond to the complex demands of the different markets with even greater flexibility and professionalism, Nordmilch AG’s distribution department is organized based on three relevant sales channels. With the divisions Food Retailing/Bulk Consumers, Industry and International, they have established the prerequisite for optimising the success of their operations in all markets and market segments they move forward.

• Food Retailing/Bulk Consumers: German food retailing is Nordmilch’s main market.

The biggest draw in this sector is the Milram brand. The main categories of this brand are flavoured curds, cheese, buttermilk drinks and whey drinks. Furthermore Nordmilch is market leader in flavoured curds and buttermilk drinks. The bulk consumers come from catering, the hotel business, the eating-out trade and social care institutions. In addition, Nordmilch successfully distributes private labels.

• Industry: The industrial customer business is growing. Nordmilch AG has further