McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 7: Strategies for Chapter 7: Strategies for

Competing in Foreign MarketsCompeting in Foreign Markets

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

““You have no choice but to You have no choice but to operate in a world shaped by operate in a world shaped by

globalization and the information globalization and the information revolution. There are two options: revolution. There are two options:

Adapt or die.”Adapt or die.”

Andrew S. GroveAndrew S. GroveCo-founder and Senior Advisor, Intel CorporationCo-founder and Senior Advisor, Intel Corporation

““Industries actually vary a Industries actually vary a great deal in the pressures great deal in the pressures

they put on a company to sell they put on a company to sell internationally.internationally.

Niraj Dawar and Tony FrostNiraj Dawar and Tony FrostProfessors, Richard Ivey School of BusinessProfessors, Richard Ivey School of Business

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Chapter Learning Objectives

1. Develop an understanding of why companies that have achieved competitive advantage in their domestic market may opt to enter foreign markets.

2. Learn how and why differing market conditions in different countries influence a company’s strategy for competing in foreign markets.

3. Gain familiarity with the major strategic options for entering and competing in foreign markets.

4. Understand the principal approaches used by multinational companies in building competitive advantage in foreign markets.

5. Gain an understanding of the unique characteristics of competing in emerging markets.

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Chapter Roadmap

Why Companies Expand into Foreign Markets

Factors that Shape Strategy Choices in Foreign Markets

The Concepts of Multicountry Competition and Global Competition

Strategy Options for Entering and Competing in Foreign Markets

The Quest for Competitive Advantage in Foreign Markets

Strategies to Compete in the Markets of Emerging Countries

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The Four Big Strategic Issuesin Competing Multinationally

Whether to customize a company’s offerings in each different country market to match preferences of local buyers or offer a mostly standardized product worldwide

Whether to employ essentially the samebasic competitive strategy in all countriesor modify the strategy country by country

Where to locate a company’s production facilities,distribution centers, and customer service operations to realize the greatest locational advantages

How to efficiently transfer a company’s resource strengths and capabilities from one country to another to secure competitive advantage

Why Do Companies Expandinto Foreign Markets?

Gain access tonew customers

Capitalizeon core

competencies

Achieve lowercosts and enhance competitiveness

Spreadbusiness risk across

widermarket base

Obtain access to valuable natural

resources

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International vs. Global Competition

International Competitor

GlobalCompetitor

Company operates in a select few foreign

countries, with modest ambitions to expand

further

Company markets products in 50 to 100 countries andis expanding operations into additional country

markets annually

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Factors Shaping Strategy Choices in Foreign Markets

Cross-country differences in cultural, demographic, and market conditions

Cross-country differences in cultural, demographic, and market conditions

Gaining competitive advantage basedon where activities are located

Gaining competitive advantage basedon where activities are located

Risks of adverse shifts incurrency exchange rates

Risks of adverse shifts incurrency exchange rates

Impact of host government policieson the local business climate

Impact of host government policieson the local business climate

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Cultures and lifestyles differ among countries

Differences in market demographicsand income levels

Variations in manufacturingand distribution costs

Fluctuating exchange rates

Differences in host governmenteconomic and political demands

Cross-Country Differences in Cultural, Demographic, and Market Conditions

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Consumer tastes and preferences

Consumer buying habits

Market size and growth potential

Distribution channels

Driving forces

Competitive pressures

How Markets Differ from Country to Country

One of the biggest concerns of companies competing in foreign markets is whether to customize their product offerings in each different country market to match the

tastes and preferences of local buyers or whether tooffer a mostly standardized product worldwide.

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Manufacturing costs vary from country to country based on

Wage ratesWorker productivityInflation ratesEnergy costsTax ratesGovernment regulations

Quality of business environment varies from country to country

Suppliers, trade associations, and makers of complementary products often find it advantageous to cluster their operations in the same general location

Different Countries HaveDifferent Locational Appeal

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Fluctuating Exchange Rates Affect a Company’s Competitiveness

Currency exchange rates are unpredictable Competitiveness of a company’s operations

partly depends on whether exchange ratechanges affect costs favorably or unfavorably

Competitive impact of fluctuating exchange rates Exporters always gain in competitiveness

when the currency of the country wheregoods are manufactured grows weaker

Exporters are disadvantaged whenthe currency of the country wheregoods are manufactured grows stronger

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Test Your Knowledge

Which one of the following statements concerning the effects of fluctuating exchange rates on companies competing in foreign markets is true?

A. Japan-based manufacturers exporting goods to the U.S. would be disadvantaged if the Japanese yen grows weaker in relation to the U.S. dollar.

B. Fluctuating foreign exchange rates greatly reduce the risks of competing in foreign markets—the big problem occurs when exchange rates are fixed at unreasonably low levels.

C. Domestic companies under pressure from lower-cost imports are benefited when their government’s currency grows weaker in relation to the currencies of the countries where the imported goods are being made.

D. Chinese exports to Europe would likely be grow in volume if the Chinese currency because much stronger relative to the euro.

E. If the exchange rate of U.S. dollars for euros changes from $1.25 per euro to $1.30 per euro, then it is correct to say that the U.S. dollar has grown stronger.

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Differences in HostGovernment Trade Policies

Local content requirements

Restrictions on exports

Regulations on prices of imports

Import tariffs or quotas

Other regulations

Technical standards

Product certification

Prior approval of capital spending projects

Withdrawal of funds from country

Ownership (minority or majority) by local citizens

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Multi-country

Competition

Global

Competition

Two Primary Patternsof International Competition

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Characteristics ofMulti-Country Competition

Market contest among rivals in onecountry not closely connected tomarket contests in other countries

Buyers in different countries areattracted to different product attributes

Sellers vary from country to country Industry conditions and competitive forces in

each national market differ in important respects

Rival firms battle for national championships –winning in one country does not necessarily signal the

ability to fare well in other countries!

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Competitive conditions across country markets are strongly linked Many of same rivals compete in

many of the same country markets A true international market exists

A firm’s competitive position in one country is affected by its position in other countries

Competitive advantage is based on a firm’s world-wide operations and overall global standing

Characteristics of Global Competition

Rival firms in globally competitiveindustries vie for worldwide leadership!

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Strategy Options for Competing in Foreign Markets

Exporting

Licensing

Franchising strategy

Strategic alliances orjoint ventures

Multi-country strategy

Global strategy

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Involve using domestic plants as a production base for exporting to foreign markets

Excellent initial strategy topursue international sales

AdvantagesConservative way to test international watersMinimizes both risk and capital requirementsMinimizes direct investments in foreign countries

An export strategy is vulnerable whenManufacturing costs in home country are higher

than in foreign countries where rivals have plantsHigh shipping costs are involvedAdverse fluctuations in currency exchange rates occur

Export Strategies

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Licensing Strategies

Licensing makes sense when a firm Has valuable technical know-how or a patented

product but does not have international capabilities to enter foreign markets

Desires to avoid risks of committing resources to markets which areUnfamiliar

Politically volatile

Economically unstable

Disadvantage Risk of providing valuable technical know-how

to foreign firms and losing some control over its use

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Franchising Strategies

Often is better suited to global expansion efforts of service and retailing enterprises

Advantages

Franchisee bears most of costs andrisks of establishing foreign locations

Franchisor has to expend only theresources to recruit, train, and support franchisees

Disadvantage

Maintaining cross-country quality control

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Achieving Global Competitivenessvia Cooperative Agreements

Cooperative agreements withforeign companies are a means to

Enter a foreign market or

Strengthen a firm’scompetitiveness in world markets

Purpose of alliances / joint ventures

Joint research efforts

Technology-sharing

Joint use of production or distribution facilities

Marketing / promoting one another’s products

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Strategic Appeal of Strategic Alliances

Gain better access to attractive country markets Capture economies of scale in production and/or

marketing Fill gaps in technical expertise or knowledge of local

markets Share distribution facilities and dealer networks Direct combined competitive energies toward

defeating mutual rivals Take advantage of partner’s local market

knowledge and working relationships withkey government officials in host country

Useful way to gain agreement onimportant technical standards

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Pitfalls of Strategic Alliances

Overcoming language and cultural barriers Dealing with diverse or conflicting operating

practices Time consuming for managers in

terms of communication,trust-building, and coordination costs

Mistrust when collaborating in competitively sensitive areas

Clash of egos and company cultures Dealing with conflicting objectives, strategies,

corporate values, and ethical standards Becoming too dependent on another firm for

essential expertise over the long-term

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Localized Multicountry Strategyor a Global Strategy?

Whether to vary a company’s competitive approach to fit specific market conditions and buyer preferences in each host county

or

Whether to employ essentially the same strategy in all countries

Strategic IssueStrategic Issue

Figure 7.1: A Company’s Strategic Options for Dealing withCross-Country Variations in Buyer Preferences and Market Conditions

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A company varies its product

offerings and basic competitive

strategy from country to country

in an effort to be responsive to

differing buyer preferences

and market conditions.

What Is a “Think-Local, Act-Local” Approach to Strategy Making?

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Characteristics of a “Think-Local,Act-Local” Approach to Strategy Making

Business approaches are deliberately crafted to Accommodate differing tastes and expectations

of buyers in each country Stake out the most attractive market positions

vis-à-vis local competitors

Local managers are given considerable strategy-making latitude

Plants produce different productsfor different local markets

Marketing and distribution are adaptedto fit local customs and cultures

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When Is a “Think-Local, Act-Local”Approach to Strategy Making Necessary?

Significant country-to-countrydifferences in customer preferencesand buying habits exist

Host governments enact regulations requiring products sold locally meet strict manufacturing specifications or performance standards

Trade restrictions of host governments areso diverse and complicated they preclude auniform, coordinated worldwide market approach

Drawbacks of a “Think-Local,Act-Local” Approach to Strategy Making

Poses problems of transferring

competencies across borders

Works against building a

unified competitive advantage

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A company employs the same

basic competitive approach in all

countries where it operates.

What Is a “Think-Global, Act-Global” Approach to Strategy Making?

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Characteristics of a “Think-Global,Act-Global” Approach to Strategy Making

Same products under the same brand names are sold everywhere

Same distribution channels are used in all countries Competition is based on the same capabilities

and marketing approaches worldwide Strategic moves are integrated and coordinated

worldwide Expansion occurs in most nations where

significant buyer demand exists Strategic emphasis is placed on

building a global brand name Opportunities to transfer ideas, new

products, and capabilities from onecountry to another are aggressively pursued

Figure 7.2: How a Localized or MulticountryStrategy Differs from a Global Strategy

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A company uses the same basic

competitive theme in each country but gives

local managers the latitude to

1.Incorporate whatever country-specific

variations in product attributes are needed to

best satisfy local buyers and

2.Make whatever adjustments in production,

distribution, and marketing are needed to

compete under local market conditions.

What Is a “Think-Global, Act-Local” Approach to Strategy Making?

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Test Your Knowledge

The stand-out characteristic of multicountry competition is

A. varying driving forces from country to country.

B. varying competitive pressures from country to country.

C. varying buyer requirements and expectations from country to country.

D. that there is so much cross-country variation in market conditions and in the companies contending for leadership that the market contest among rivals in one country is not closely connected to the market contests in other countries—as a consequence, there is no global or world market, just a collection of self-contained country markets.

E. varying degrees of product differentiation from country to country.

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For Discussion: Your Opinion

Assume you are in charge of developing the strategy for a multinational company selling products in several different countries around the world.

A. If your company’s product is personal computers, do you think it would make better strategic sense to employ a multicountry strategy or a global strategy? Why?

B. If your company’s product is dry soup mixes and canned soups, would a multicountry strategy seem to be more advisable than a global strategy? Why?

C. If your company’s product is washing machines, would it seem to make more sense to pursue a multicountry strategy or a global strategy? Why?

D. If your company’s product is basic work tools (hammers, screwdrivers, pliers, wrenches, saws), would a multicountry strategy or a global strategy seem to have more appeal? Why?

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The Quest for CompetitiveAdvantage in Foreign Markets

Three ways to gain competitive advantage

1. Locating activities among nationsin ways that lower costs or achievegreater product differentiation

2. Efficient/effective transfer of competitivelyvaluable competencies and capabilities fromcompany operations in one country to company operations in another country

3. Coordinating dispersed activities in ways a domestic-only competitor cannot

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Locating Activities to Build aGlobal Competitive Advantage

Two issues . . .

Whether to

Concentrate each activityin a few countries or

Disperse activities tomany different nations

Where to locate activities

Which country is best location for which activity?

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Activities should be concentrated when Costs of manufacturing or other value chain

activities are meaningfully lower in certain locations than in others

There are sizable scale economiesin performing the activity

There is a steep learning curve associatedwith performing an activity in a single location

Certain locations have

Superior resources

Allow better coordination of related activities or

Offer other valuable advantages

Concentrating Activities to Builda Global Competitive Advantage

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Dispersing Activities to Build aGlobal Competitive Advantage

Activities should be dispersed when

They need to beperformed close to buyers

Transportation costs, scale diseconomies, ortrade barriers make centralization expensive

Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed

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Transferring Valuable Competencies to Build a Global Competitive Advantage

Transferring competencies, capabilities, and resource strengths across borders contributes to Development of broader

competencies and capabilities

Achievement of dominating depthin some competitively valuable area

Dominating depth in a competitively valuable capability is a strong basis for sustainable competitive advantage over Other multinational or global competitors and

Small domestic competitors in host countries

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Coordinating Cross-Border Activities to Build a Global Competitive Advantage

Aligning activities located in differentcountries contributes to competitive advantage in several ways

Choose where and how to challenge rivals

Shift production from one location toanother to take advantage of most favorablecost or trade conditions or exchange rates

Use online systems to collectively come up with next-generation products

Achieve efficiencies by shifting workload to locations where personnel are underutilized

Enhance potential to build a global brand name by incorporating same differentiating attributes in products in all markets where a company competes

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Tailoring products for big, emerging markets often involves Making more than minor product changes and

Becoming more familiar with local cultures

Companies have to attract buyers withbargain prices as well as better products

Specially designed and/or speciallypackaged products may be needed toaccommodate local market circumstances

Management team must usually consistof a mix of expatriate and local managers

Characteristics of Competingin Emerging Foreign Markets

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Strategic Options: How to Competein Emerging Country Markets

Prepare to compete on the basis of low price

Be prepared to modify aspects ofthe company’s business model toaccommodate local circumstances

Try to change the local marketto better match the way thecompany does business elsewhere

Stay away from those emerging markets where it is impractical or uneconomicto modify the company’s businessmodel to accommodate local circumstances

Strategies for Local Companiesin Emerging Markets

Develop business models that exploit shortcomings

in local distribution networks or infrastructure.

Develop business models that exploit shortcomings

in local distribution networks or infrastructure.

Utilize keen understanding of local customer needs and

preferences to create customized products or services.

Utilize keen understanding of local customer needs and

preferences to create customized products or services.

Take advantage of low-cost labor and other

competitively important local workforce qualities.

Take advantage of low-cost labor and other

competitively important local workforce qualities.

Use economies of scope and scale to better

defend against expansion-minded multinationals.

Use economies of scope and scale to better

defend against expansion-minded multinationals.

Transfer company expertise to cross-border markets

and initiate actions to contend on a global level.

Transfer company expertise to cross-border markets

and initiate actions to contend on a global level.7-46