Markets and Marketing
1. Competition: Don't underestimate the response of existing and potential competitors, domestic and foreign.
2. Price/demand cycle: Base case assumptions and sensitivity analyses should take long-term trends into account -- the success or failure of a project may depend on where the market is on the price/demand cycle.
3. Government intervention: Avoid relying on government subsidies or other market interventions.
4. Foreign currency exposure: Exchange rate fluctuations -- depreciation and appreciation -- can severely squeeze margins. Foreign currency exposure should be minimized for companies supplying only the domestic market.
5. Low cost and high quality: Being a low cost producer is important, but so too is product quality.
Appropriate technology: If new technology is to be used, the technical partner should be a leader in the field. Often, however, using well-established technology or second-hand equipment can gain competitive advantage.
6. Macro-economic variables: Always consider the impact of adverse macro-economic changes for the country and sector, particularly where the project country has experienced rapid political and economic changes.
7. New products/markets: Market forecasts should take into account that introducing new products usually takes more time and is more difficult than most companies anticipate.
8. Product differentiation (including brand name): A well-known brand name may result in better selling prices and may be vital for good returns, particularly where barriers to entry are perceived to be low. Market studies should help to assess the characteristics of market demand.
9. Also, beware of margin squeeze where the price drivers of the company's raw materials and its products are independent.
10. For projects in weak economies, be skeptical of assumed consumption increases.
11. Downstream capacity: The appraisal should assess the availability of downstream capacity when needed to process the projects output.
12. Transfer pricing: To mitigate the risks of transfer pricing, consider measures including a price monitoring system and legally binding agreements among sponsor, project company and any other subsidiaries.
The above lessons are based on 153 lessons from past IFC investments.
Last updated September 1998.
