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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
7-4
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.
7-5
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
7-6
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
7-7
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
7-8
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
7-9
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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
7-11
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
7-14
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.
7-15
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
7-16
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!
7-18
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
7-21
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
7-22
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
7-24
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
7-25
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
7-26
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
7-27
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?
7-28
7-29
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
7-30
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
7-31
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?
7-32
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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
7-34
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?
7-35
7-36
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?
7-38
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
7-39
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?
7-40
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
7-41
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
7-42
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
7-43
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
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