Management Strategic Chapter 7

7/28/2019 Management Strategic Chapter 7

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CHAPTER 7

STRATEGY FOR COMPETING IN FOREIGN

The spotlight will be on four strategic issues unique to competing multinationally:

1. Whether to customize a companys offerings in each different country market to matchpreferences of local buyers or offer a mostly standardized product worldwide

2. Whether to employ essentially the same basic competitive strategy in all countries ormodify the strategy country by country

3. Where to locate a companys production facilities, distribution centers, and customerservice operations to realize the greatest locational advantages

4. How to efficiently transfer a companys resource strengths and capabilities from onecountry to another to secure competitive advantage

WHY DO COMPANIES EXPAND INTO FOREIGN MARKETS?

1. To gain access new customers Expanding into foreign markets offers potential forincreased revenues, profits, and long-term growth and becomes an especially attractive

option when a companys home markets are mature.

2. To achieve lower costs and enhance the firmsMany companies are driven to sell inmore than one country because domestic sales volume is not large enough to fully capture

manufacturing economies of scale or learning/experience curve effects and thereby

substantially improve the firms cost competitiveness.

3. To capitalize on its core competencies A company may be able to leverage itscompetencies and capabilities into a position o competitive advantage in foreign markets

as well as just domestic markets.

4. To spread its business risk across a wider market base A company spreads businessrisk by operating in a number of different foreign countries rather than depending entirely

on operations in its domestic markets.


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The Different between Competing Internationally and Competing Globally

Typically, a company will start to compete internationally by entering just one or maybe a select

few foreign markets. Competing on a truly global scale comes later, after the company has

established operations on several continents and is racing against rivals for global market

leadership.

FACTOR THAT SHAPE STRATEGY CHOICES IN FOREIGN MARKET

There are four important factors that shape a companys strategic approach to competing in

foreign markets:

1. The degree to which there are important cross-country differences in cultural and marketcondition

2. Whether opportunities exist to again competitive advantage based on whether acompanys activities are located in some countries rather than in other

3. The risks of adverse shifts in currency exchange rates and4. The extent to which the policies of foreign governments lead to more favorable business

environments in some countries than in other countries.

CrossCountry Differences in Cultural, Demographic, and Market Conditions

Regardless of a companys motivation for expanding outside its domestic markets, the strategies

it uses to compete in foreign markets must be situation-driven. Cultural, demographic, and

market conditions vary significantly among the countries of the world.

Gaining Competitive Advantage Based on Where Activities Are Located

Differences in wage rates, worker productivity, inflation rates, energy costs, tax rates,

government regulations, and the like create sizable variations in manufacturing costs from

country to country. Plants in some countries have major manufacturing cost advantages because


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of lower input coats (especially labor), relaxed government regulations, the proximity of

suppliers, or unique natural resources.

The Risks of Adverse Exchange Rate Shifts

Fluctuating exchange rates pose significant risks to a companys competitiveness in foreign

markets. Exporters win when the currency of the country where goods are being manufactured

grows weaker, and they lose when the currency grows stronger. Domestic companies under

pressure from lower-cost imports are benefited when their governments currency grows weaker

in relation to the countries where the imported goods are being made.

The impact of Host Government Policies on the Local Business Climate

National governments enact all kinds of measures affecting business conditions and the operation

of foreign companies in their markets. They may set local content requirements on goods made

inside their borders by foreign-based companies, have rules and policies that protect local

companies from foreign competition, put restrictions on exports to ensure adequate local

supplies, regulate the prices of imported and locally produced goods, enact deliberately

burdensome procedures and requirements for imports of certain goods.

THE CONCEPTS OF MULTICOUNTRY COMPETITION AND GLOBAL

COMPETITION

At one extreme is multicountry competition, in which theres 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 localized and not closely connected to the market contests in other

countries.

The standout features of multicountry competition are that:

1. Buyers in different countries are attracted to different product attributes,2. Sellers vary from country to country, and3. Industry conditions and competitive forces in each national market differ in important

respects take the banking industry in Italy, Brazil, and Japan.


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At other extreme is global competition, in which prices and competitive conditions across

country markets are strongly linked and the term global or world market has true meaning. In a

globally competitive, industry, much the same group of rival companies competes in many

different countries, but especially so in country where sales volumes are large and where having

a competitive presence is strategically important to building a strong global position in the

industry.

STRATEGY OPTIONS FOR ENTERING AND COMPETING IN FOREIGN MARKETS

There are a host of generic strategic options for a company that decides to expand out-side its

domestic market and compete internationally or globally

1. Maintain a national (one-country) production base and export goods to foreign markets,using either company-owned or foreign-controlled forward distribution channels.

2. License foreign firm to use the companys technology or to produce and distribute thecompanys products.

3. Employ a franchising strategy.4. Use strategic alliances or joint ventures with foreign companies as the primary vehicle

for entering foreign markets and perhaps also use alliances as an ongoing strategic

arrangement aimed at maintaining or strengthening competitiveness.

5. Follow a multicountry strategy, varying the companys strategic approach (perhaps alittle, perhaps a lot) from country to country in response to differing local market and

competitive conditions and differing buyer tastes and presences.

6. Follow a global strategy, using essentially the same competitive strategy approach in allcountry markets where the company has a presence.

Export Strategies

1. Involve using domestic plants as a production base for exporting to foreign markets2. Excellent initial strategy to pursue international sales3. Advantages


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Conservative way to test international waters Minimizes both risk and capital requirements Minimizes direct investments in foreign countries

4. An export strategy is vulnerable when Manufacturing costs in home country are higher than in foreign countries where

rivals have plants

High shipping costs are involved Adverse fluctuations in currency exchange rates

Licensing Strategies

1. 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 are Unfamiliar Politically volatile Economically unstable

2. Disadvantage Risk of providing valuable technical know-how to foreign firms and losing some

control over its use

Franchising Strategies

1. Often is better suited to global expansion efforts of service and retailing enterprises2. Advantages

Franchisee bears most of costs and risks of establishing foreign locations

Franchisor has to expend only the resources to recruit, train, and supportfranchisees

3. Disadvantage Maintaining cross-country quality control


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Strategic Alliances and joint Ventures with Foreign Partners

Strategic alliances, joint ventures, and other cooperative agreements with foreign companies are

a favorite and potentially fruitful means for entering a foreign market or strengthening a firms

competitiveness in world markets.

The Risks of Strategic Alliances with Foreign Partners

Alliances and joint ventures with foreign partners have their pitfalls, however. Cross-border

allies typically have to overcome language and cultural barriers and figure out how to deal with

diverse (or perhaps conflicting) operating practices.

Strategic alliances are more effective in helping establish a beachhead of new opportunity in

world markets than in achieving and sustaining global leadership.

When a Cross-border Alliances May Be Unnecessary

Experienced multinational companies that market in 50 to 100 or more countries across the

world find less need or entering into cross-border alliances than do companies in the early stages

of globalizing their operations.

Choosing between a Localized Multicountry Strategy and a Global strategy

A localized or multicountry strategy is one where a company varies its product offering and

competitive approach from country to country in response to important cross-country variations

in buyer preferences and market conditions.

1. Thinklocal, actLocal Approach to Strategy-Making. Tailor the companys competitive approach and product offering to fit specific

market conditions

Delegate strategy making to local managers with firsthand knowledge of localconditions

2. Thinkglobal, actGlobal Approach to Strategy Making.


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Pursue the same basic competitive strategy theme (low-cost, differentiation, best-cost, or focused) in all country marketa global strategy

Offer the same products worldwide, with only very minor deviations from onecountry to another when local markets conditions so dictate

Utilize the same capabilities, distribution channels, and marketing approachesworldwide

3. Thinkglobal, ActLocal Approaches to Strategy Making Employ essentially the same basic competitive strategy theme (low-cost,

differentiation, best-cost, or focused) in all country market

Develop capability to customize product offerings and sell different countries(perhaps even under different brand names)

Give local managers the latitude to adapt the global approach as needed toaccommodate local buyer preferences and responsive to local market and

competitive conditions

A localize or multicountry strategy is one where company varies its product offering and

competitive to country in response to important cross-preferences in buyer preferences and

market conditions.

THE QUEST FOR COMPETITIVE ADVANTAGE IN FOREIGN MARKETS

Three ways to gain competitive advantage:

1. Locating activities among nations in ways that lower costs or achieve greater productdifferentiation

2.

Efficient/effective transfer of competitively valuable 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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Using Location to Build Competitive advantage

Location-based advantages range from access to low-cost labor to obtaining low corporate tax

rates in pro-business countries to improving innovation by locating activities in countries with

countries with unusually large pools of talented and skilled employees.

To use to build competitive advantage, a company must considers two issues:

1. Whether to concentrate each activity it performs in a few select countries or to disperseperformance of the activity to many nations, and

2. In which countries to locate particular activities.When to concentrate Activities in a Few Locations Companies tend to concentrate their

activities in a limited number of locations in the following circumstances:

When the coast of manufacturing or other activities are significantly When there are significant scale economies When there is a steep learning curve associated with performing an activity in a single

location

When certain locations have superior resources, allow better coordination of relatedactivities, or offer other valuable advantages

When to Disperse Activities Across Many Locations there are several instances when

dispersing activities is more advantageous than concentrating them. Buyer - related activities

such as distribution to dealers, sales and advertising, and aftersale serviceusually must take

place close to buyers.

Using Cross Border Transfers of Competencies and Capabilities to Build Competitive

Advantages

One of the best way for a company with valuable competencies and resource strength to grow

sales and profits is to use its considerable resource strength to enter additional country markets.

Transferring competencies, capabilities, and resource strength from country to country may also

contribute to the development of broader or deeper competencies and capabilities ideally

helping a company achieve dominating depth in some competitively valuable area.


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Using CrossBorder Coordinating to Build Competitive Advantages

International and global competitors are able to coordinate activities across different countries to

build competitive advantages. If firm learns how to assemble its product more efficiently at, say

its Brazilian plant, the accumulated expertise can be quickly communicated via the Internet to

assembly plants in other world locations.

STRATEGIES TO COMPETE IN THE MARKETS OF EMERGING COUNTRIES

Companies racing for global leadership have to consider competing in emerging markets like

China, India, Brazil, Indonesia, Thailand, Poland, Russia, and Mexico countries where the

business risks are considerable but where the opportunities for growth are huge, especially as

their economies develop and living standards climb toward levels in the industrialized world.

Strategy Option for emergingCountry Markets

The following are options for tailoring a companys strategy to fit the sometimes unusual or

challenging circumstances presented in emergingcountry markets:

Prepare to compete on the basis of low price consumers in emerging markets inemerging markets are often highly focused on price, which can give low-cost local

competitors the edge unless a company can find ways to attract buyers with bargain

prices as well as better product.

Be prepared to modify aspects of the companys business model or strategy toaccommodate local circumstances (but not so much that the company loses the advantage

of global scale and global branding) for instance, when Dell entered China, it

discovered that individuals and businesses were not accustomed to placing orders through

the internet. Try to change the local market to better match the way the company does business

elsewhere A multinational company often has enough market clout to drive major

changes in the way a local market operates.

Stay away from those emerging markets where it is impractical or uneconomic to modifythe companys business model to accommodate local circumstance The Home Depot


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expanded into Mexico in 2001 and China in 2006, but it has avoided entry into other

emerging countries because its value proposition of good quality, low prices, and

attentive customers service relies on:

1. Good highways and logistical system to minimize store inventory costs,2. Employee stock ownership to help motivate store personnel to provide good

customer service and,

3. High labor costs for housing construction and home repairs to encouragehomeowners to engage in do-it-yourself projects.

Defending against Global Giants: Strategies or Local Companies in Emerging Markets

If opportunity-seeking, resource-rich multinational companies are looking to enter emerging

markets. Studies of local companies in developing markets have disclosed five strategies that

have proved themselves in defending against globally competitive multinationals:

1. Develop business models that exploit shortcomings in local distribution networks orinfrastructure. In many instance, the extensive collection o resources possessed by

multinational is of little help in building a presence in emerging markets.

2. Utilize keen understanding of local customer needs and preferences to create customizedproduct or service. In many emerging markets, multinationals find it difficult to attract

the business o customers unable to pay global prices.

3. Take advantage of low-cost labor and other competitively important local workforcequalities. Local companies that lack the technological capabilities possessed by

multinational entrants to emerging markets may be able to rely on low-cost labor or

knowledge of the capabilities of the local labor force to offset any cost disadvantage.

4. Use acquisition and rapid growth strategies to better defend against expansion mindedmultinationals. With the growth potential o emerging markets such as China, India, and

Brazil obvious to the world, local companies must attempt to develop scale as quickly as

possible to defend against the stronger multinationals.

5. Transfer company expertise to cross-border markets and initiate actions to contend on aglobal level. When a company has resource strengths and capabilities suitable for


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competing in other country markets, launching initiatives to transfer its expertise to cross-

border markets becomes a viable strategic option.

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Management Strategic Chapter 7