Procedure and methods of target market selection and risk assessment on the example of SMA AG

Table of contents

List of abbreviations

List of figures

List of tables

1. Introduction

2. Target marketselection - a general strategic approach
2.1 Central criteria for the market selection
2.1.1 Market attractiveness
2.1.2 Marketrisks
2.1.3 Market entry barriers
2.2 Methods of target marketselection
2.2.1 Single-level-methods of target market selection
2.2.2 Multi-level-methods of target market selection

3. Procedure of target market selection by SMA AG
3.1 The company-facts and figures as of 2005
3.2 SMAs general domestic market standing in 2005
3.2.1 The company’s market position based on a SWOT analysis
3.2.2 Corporate and product readiness for targeted markets
3.3 General forecast of the industry sector globally
3.4 SMAs target market strategy and risk assessment going global
3.4.1 Determination of the company’s key success factors abroad
3.4.2 STEP competitive environment analysis for target markets
3.4.3 Strategy implementation by a tailor-made marketing mix
3.5 Critical evaluation of SMA’s international strategy as of today

4. Results and Conclusions

ITM - Checklist

Bibliography

List of abbreviations

illustration not visible in this excerpt

List of figures

Figure 1: Central methods ofmarketselection

Figure 2:. Development of German PV market

Figure 3: SWOTanalysis

Figure 4: USPofSMA

Figure 5: Development of global photovoltaic demand

Figure 6: Estimatedmedian household income of the US in 2008

Figure 7: Average household annual deposable income of deciles 5 in USA and China: 2008 - 2020

Figure 8: The budget of the U.S. Department of energy in context 1980 - 2010.

Figure 9: Outlook for real U.S. GDP growth

Figure 10: USA: Federal Funds Rate

Figure 11 : Marketing mix instruments

Figure 12: SMA’s product introductions

List of tables

Table 1: SMA financialsfrom 2003to 2005

Table 2: FY 2011 statistical table by appropriation (Dollars in thousands) 23

Table 3: SMA’s financialsfrom 2005to 2009

1. Introduction

Globalisation or going global at the moment echoes throughout the land. But very often it is used as flowery phrase: some use it to express their fear of a more and more internationalised and fast changing world, others use it to find excuses why they do not perform good any more. But the truth behind it is deeper as one could think. Let us have a look at the following quotation: “National champions are a phase-out model" (Neelie Kroes, European Commissioner for Competition). This phrase stands for itself. Large companies usually have to go international or they can not participate in worldwide emerging or developing markets and can not compete in the long term. If a company is a national niche player it does not have to go international compulsory but if it wants to grow more than it is possible at its home market it has to choose new target markets.

This assignment deals with this more and more important topic of going international and especially with the target market selection using the example of SMA Solar Technology AG (SMA) way of entering the United States solar market.

Problem Definition

This assignment deals with the complex problem of a target market selection. Where is the target market selection embedded in decision processes in a company, which methods of assessing target markets and finally select them can we apply? Are there any constraints while using them? What are situations where companies can use them? These questions will be answered in theory and demonstrated on the application SMA.

Objectives

An overview of actual methods of target market selection is given in the first part of the assignment. The procedure of a target market selection in practise is illustrated in the main part on the corporate SMA.

Methodology

The theoretical part of this assignment is mainly based on literature. The topic of target market selection for itself can not be found alone very often but is embedded in general marketing and strategy topics. The practical part is based on Internet sources, e.g. governmental sites, economical analysis services as well as open source information from SMA Solar.

2. Target market selection - a general strategic approach

As one looks at international acting companies it is obvious that most of them started their business in one country and entered later on other markets. But although markets are more international than ever before and there are more chances to benefit from, most of the companies who are engaged in these markets are unprepared and decide to enter international markets in a more accidentally way (Fuchs and Apfelthaler 2002, p. 126). Target market selections and market entries are too often led by coincidence and unconscious behaviour. However, there are still some systematic questions to be answered before deciding whether to enter a market or not.

Fuchs and Apfelthaler choose a systematic approach to answer the above question and criticise the approach which basically assumes that, if the product has enough potential to enter a new market, the company is fitting the market as well (2002, p. 127). Companies using this theory skip an internal analysis of the company itself - like a SWOT-Analysis (Strength, Weaknesses, Opportunities and Threats) - and only conduct a market analysis like e.g. a STEP-Analysis (Sociological, Technological, Economical and Political Change). Other companies do it the other way around and only use the market analysis and skip the internal one. The problem in both cases is that with skipping one analysis the decision to enter a market is already made what leads to a fading out of problems and risks of a new market environment as well as of the product. To select and to enter a new market in a systematic way Fuchs and Apfelthaler propose the following steps (2002, p. 130):

- Internal potential analysis,
- Product potential analysis,
- Market potential analysis,
- Market entry decision,
- Planning decision (Marketing Mix and Business Plan) and
- Market development.

As this assignment deals with target market selection we want to focus now on step three and have a closer look at the market potential analysis and the following market selection.

2.1 Central criteria for the market selection

In the given literature it becomes clear that there does not exist one perfect strategy to select a target market (Kutschker and Schmid 2005, p. 927). It is rather a process looking at central criteria and methods to find the right markets. A systematically approach is given by Fuchs and Apfelthaler (2002, p. 153). They first choose three steps to get a list of target markets by producing a list of all countries. They work through this first list and threw out each country with restrictions making this market out of the question. These are e.g. markets with very low income or a bad climate depending on what the company wants to sell. The next step is to use refined criteria e.g. market growth or volumes and push out countries with bad data. After step two the company has a list with countries having market potential which are called country portfolio. The last step is to make a specific selection by other criteria like financial resources the company needs to enter the market, necessary human resources and so on. After this step the company has a list of possible target markets. Kutschker and Schmid also mention this method and they call it a multi-level method of a market selection (2005, p. 936). They also propose a single-level method of a market selection. But before describing these two kinds of market selection methods we want to have a look at the three central criteria of market selection because these are used in the then following methods. Kutschker and Schmid use for their method three criteria (2005, p. 928-935): Target market attractiveness, target market risks and target market entry barriers.

2.1.1 Market attractiveness

Kutschker and Schmid mention that the market attractiveness describes in general the benefit potentials of a certain market (2005, p. 928). They categorise market attractiveness in different sub-criteria which are listed below:

- Market volume, growth and structure
- price structure,
- cost situation,
- procurement situation and
- infrastructure.

It is not possible to call a market attractive in general because each company has different demands and targets which determine whether the market is attractive or not.

Therefore it is necessary not only to use one criterion but to combine different ones to analyse the overall attractiveness in a multidimensional way (Kutschker and Schmid 2005, p. 929). After analysing the attractiveness a company has a first hint whether it could enter the market with a good return on its investment or not. But a good attractiveness alone does not mean a good opportunity at all because there are also risks which could jeopardise the market entry. Having said this, we want to have a short look at different risks at foreign markets.

2.1.2 Market risks

According to Kutschker and Schmid market risks describe possible uncertainties potentials which could affect the company’s investments. They mention two groups of possible risks which are called primary economical risks and secondary risks with economical consequences (2005, p. 905-906). Primary risks are e.g. currency risks, payment risks, inflation risks or transport risks. In addition to these Kutschker and Schmid call the secondary risks which are e.g. dispossession risks, transfer risks, security risks or fiscal risks. These are mentioned in different concepts which try to assess the risk of certain markets and create rankings of these markets (2005, p. 929) e.g. the Business-International-Country-Rankings or the Business Environment Risk Index (BERI). The BERI itself e.g. consists of different sub-indices which are the Operation Risk Index, Political Risk Index and the Repayment factor. Experts from different economical backgrounds assess criteria like political stability or economical growth from their point of view and rate these many sub-criteria with a grade. The average grades of each sub-index are summed up and build the Profit Opportunity Recommendation Index (POR). Kutschker and Schmid mention the BERI-example to make clear - as we already mentioned above - that such indices only give a first hint and can not present risks in general for all foreign countries (2005, p. 932). A market which is dangerous for one country can be a good one for the next company, depending on what you are trading.

Besides the BERI there are a lot more indices which can not all be mentioned here. The take away from this should be that all indices combine risk indicators and try to prognosticate more or less precise how this market could develop in the short, medium or long term to provide a first landmark. We will pick up some sub-topics later in the analysis for the United States (US) market in the practical example.

2.1.3 Market entry barriers

Kutschker and Schmid call the market entry barriers the third important criterion for the target market selection so we will have a look at them too (2005, p. 933). In general they define them as barriers which a company has to overcome if it wants to enter a certain market. In literature one can find different classifications of market entry barriers. We want to show two examples which can be used to classify them and then think about which we could use for our practical example.

Fuchs and Apfelthaler differentiate the barriers into economies of scale, product differentiation, capital needs, conversions costs and access to distribution channels (2002, p. 56-61). Hence economies of scale are a barrier if a company has to enter the market with a certain amount of produced goods to compete successfully. Product differentiation here means that a customer should recognise the product by its differences compared to similar products what means that the company has to spend a lot of money e.g. in advertisement or a better quality to make the own product different from the already existing ones on the market. If a market volume is limited, a company in a capital intensive environment could have problems to get enough money to enter new markets which could form a barrier. Conversion costs means that on the one hand the company could be confronted with own costs by converting a product into a new market e.g. by adapting it to the market and on the other hand the customer could have more costs by using this new product. The last mentioned distribution channels can be a barrier if a company has to spend a lot of effort to enter or to control these channels. In my opinion this differentiation from Fuchs and Apfelthaler is already specific and practical to handle because one can categorize the different barriers and thereafter develop a risk assessment. But let us have a look at another possibility to differentiate market entry barriers.

Kutschker and Schmid approach this topic in a more general way by differentiating the barriers into institutional barriers, behaviour-based barriers from the market and behaviour-based barriers from the company (2005, p. 933-935). At first glance this does not seem to be very handy in my opinion but they categorise these general so one can use them in a more practical way. Institutional barriers means here tariff and non-tariff barriers like toll, licence fees or other governmental regulations. The second mentioned kind of barrier is more related to behaviour in general and here specifically the behaviour of the competitor e.g. the pressure by competing companies, the access to distribution systems, another consumption behaviour or advantages concerning economies of scale of competitors. The last point means barriers which appear by a wrong behaviour of the own company e.g. by assessing the new market to strong or the barriers as insuperable. In this case problems are overestimated and a possible new market seems to be locked for the own company. In my opinion the second approach of Kutschker and Schmid is also a practical way of assessing entry barriers. One can find similarities in both approaches like e.g. the problem with the product differentiation which can be found in the market behaviour of the second approach or the access to distribution channels which can be found in both cases.

What a company should consider in both cases is the following: an assessment of different market entry barriers for themselves is not qualified to support a target market selection. A company always has to correlate the barriers to the company’s potential to overcome these barriers because a very strong company is under certain circumstances able to overcome these barriers and to enter the market successfully (Kutschker and Schmid 2005, p. 934).

Now that one could learn about the three central criteria of a target market selection we come back to the two methods of market selection mentioned in chapter 2.1: the single-level method and the multi-level method of target market selection.

2.2 Methods of target market selection

Kutschker and Schmid mention that the different methods can be divided in single-level methods and multi-level methods (2005, p. 936) as it is shown in figure 1.

illustration not visible in this excerpt

Figure 1: Central methods of market selection (Kutschker and Schmid 2005, p. 936)

As we can not mention all single-level methods we want to focus on the first three which are the checklist method, the aspect elimination and score evaluation method.

2.2.1 Single-level methods of target market selection

The checklist method tries to collect all relevant factors of the macro and micro environment in the target market which are relevant from the company’s perspective e.g. the political stability, inflation rates, attitudes or market growth and volumes (Kutschker and Schmid 2005, p. 937). Putting these factors in a table the analyst has to appraise if the factor offers good chances or e.g. a high risk by allocating points to each factor. In the end he can add the points together and can compare different countries. In my opinion this is a very qualitative method which requires an expert with good knowledge about foreign markets and a long experience in interpreting information from these markets. It is less adequate for people with low experience in interpreting foreign market data.

Aspect elimination means also selecting important market factors as we mentioned it in the checklist method. But here the factors are putted in an order and are completed in this order of importance (Kutschker and Schmid 2005, 938). That is to say if the political stability is the most important factor, all countries with low political stability will be eliminated in the first round and so on. In the end maybe no one or more countries stay in the list and can be entered. I personally think this method is for itself not very applicable because if the analyst weighted the factors in a wrong way an interesting market could be eliminated in the first rounds or one bad factor could be balanced by a later positive factor. So we can not recommend this method alone.

Score evaluation at first sight seems to be the same like the aspect elimination because the analyst has to identify important macro and micro economical factors but in this case the factors are weighted and they get certain points depending on what weight they have (ibid, p. 938). Here factors with many points can balance factors with low points. In the end the company chooses the country market with the most points. So if the political environment has a lot of points but only a low weight of 10% and the market competition has low points with a weight of 30% the company will probably not enter the market. Kutschker and Schmid do not criticize this method but we think that there is one weakness because the analyst first has to weigh the factors. So he has to choose which factor is important and which not. This involves the risk of being wrong and weighing the wrong factor too much.

Altogether we can state that each method for its own seems to be simple at first sight to handle but involves several risks like selecting wrong factors, bringing them in a wrong order or weighing them in an appropriate way. Fuchs and Apfelthaler also mention this problem and propose to keep in mind that the chosen factors have to be collectable, measurable and comparable to each other (2002, p. 158). This leads us to the conclusion that one method for its own is not adequate enough to assess the market entry risk in a final way. So maybe the combination of two or more methods could increase the probability to make the right target market selection. This will be shown in the next chapter.

2.2.2 Multi-level methods of target market selection

Kutschker and Schmid mention that there are a lot of multi-level or sequential methods of target market selection and one can not give the only one right recommendation which one to use (2005, p. 944). They therefore present one example of a three-stage method of target market selection which is divided in a pre-selection, an interim choice and a final choice.

In the pre-selection stage the company drops the countries which can not fit some basic considerations e.g. no market entries in non-democratic countries or no countries with French as the main language and so on (ibid, p. 944). This is in our opinion a very subjective consideration and could be connected very tight to the company’s philosophy to prevent arbitrarily choices.

The interim choice should include considerations concerning market attractiveness and market risks. Here the company should use the above mentioned single-level methods to reduce the list of possible country markets. Kutschker and Schmid recommend in this stage to combine the single-level methods and access additionally country rankings to make a further choice (2005, p. 945). Unfortunately they do not mention how to combine the different methods in a practical way. We think that there are three possibilities by making it:

- to use them one after another if one method alone leads to too many results,
- to use them parallel to each other to compare the results e.g. the best five country markets or
- to combine them by mixing them up e.g. by creating a checklist, bringing the factors in the order of their importance and load them with a certain weight.

In the last stage the company has to make the final choice if it enters a market or not. Therefore Kutschker and Schmid propose to refine the considerations about attractiveness and risk of the left countries and to have a look in more detail. Here the company should intensify its assessment by comprising primary data which it can buy from research institutes or by collecting them itself (2005, p. 945). In the end of this stage the left markets should be analysed concerning market entry barriers which have not been considered until the final choice stage. After this process the probably most qualified markets will stay in the list and can be entered by the company.

Concluding this theoretical part it is important to keep the following bullets in mind:

- target market selection is only one step in going international and embedded in a process including internal and product analysis as well as concrete entry decisions with then following marketing processes,
- the company has to consider central criteria for market entry decisions like market attractiveness, risks or entry barriers which can be comprised by different methods of target market selection and
- each method for its own is useless, there is not one best method and it requires a lot of experience and a deep analysis of many data to get a result.

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