7 Competing Chapter Title in Foreign Markets 16e

7 Competing Chapter Title in Foreign Markets 16/e PPT Mc. Graw-Hill/Irwin Screen graphics created by: Jana F. Kuzmicki, Ph. D. Troy University-Florida Region Copyright © 2008 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

“You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or die. ” Andrew S. Grove 7 -2

Chapter Roadmap u u u Why Companies Expand into Foreign Markets Cross-Country Differences in Cultural, Demographic, and Market Conditions The Concepts of Multi-country Competition and Global Competition Strategy Options for Entering and Competing in Foreign Markets The Quest for Competitive Advantage in Foreign Markets u Profit Sanctuaries, Cross-Market Subsidization, and Global Strategic Offensives u Strategic Alliances and Joint Ventures with Foreign Partners u Strategies That Fit the Markets of Emerging Countries 7 -3

The Four Big Strategic Issues in Competing Multinationally u 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 u Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country u Where to locate a company’s production facilities, distribution centers, and customer service operations to realize the greatest locational advantages u How to efficiently transfer a company’s resource strengths and capabilities from one country to another to secure competitive advantage 7 -4

Why Do Companies Expand into Foreign Markets? Gain access to new customers Obtain access to valuable natural resources Achieve lower costs and enhance competitiveness Spread Capitalize business risk across on core wider competencies market base 7 -5

International vs. Global Competition International Competitor Company operates in a select few foreign countries, with modest ambitions to expand further Global Competitor Company markets products in 50 to 100 countries and is expanding operations into additional country markets annually 7 -6

Cross-Country Differences in Cultural, Demographic, and Market Conditions u Cultures and lifestyles differ among countries u Differences in market demographics and income levels u Variations in manufacturing and distribution costs u Fluctuating exchange rates u Differences in host government economic and political demands 7 -7

How Markets Differ from Country to Country u Consumer tastes and preferences u Consumer buying habits u Market size and growth potential u Distribution u Driving channels forces u Competitive pressures 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 to offer a mostly standardized product worldwide. 7 -8

Different Countries Have Different Locational Appeal u Manufacturing costs vary from country to country based on è Wage rates è Worker productivity è Inflation rates è Energy costs è Tax rates è Government regulations u Quality of business environment varies from country to country u Suppliers, trade associations, and makers of complementary products often find it advantageous to cluster their operations in the same general location 7 -9

Fluctuating Exchange Rates Affect a Company’s Competitiveness u Currency exchange rates are unpredictable è Competitiveness of a company’s operations partly depends on whether exchange rate changes affect costs favorably or unfavorably u Lessons of fluctuating exchange rates è Exporters always gain in competitiveness when the currency of the country where goods are manufactured grows weaker è Exporters are disadvantaged when the currency of the country where goods are manufactured grows stronger 7 -10

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 -11

Differences in Host Government Trade Policies u Local content requirements u Restrictions on exports u Regulations on prices of imports u Import u Other tariffs or quotas regulations è Technical è Product è Prior standards certification approval of capital spending projects è Withdrawal of funds from country è Ownership (minority or majority) by local citizens 7 -12

Two Primary Patterns of International Competition Multi-country Competition Global Competition 7 -13

Characteristics of Multi-Country Competition u Market contest among rivals in one country not closely connected to market contests in other countries u Buyers in different countries are attracted to different product attributes u Sellers vary from country to country u 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 -14

Characteristics of Global Competition u Competitive conditions across country markets are strongly linked è Many of same rivals compete in many of the same country markets è A true international market exists u. A firm’s competitive position in one country is affected by its position in other countries u Competitive advantage is based on a firm’s worldwide operations and overall global standing Rival firms in globally competitive industries vie for worldwide leadership! 7 -15

Strategy Options for Competing in Foreign Markets u Exporting u Licensing u Franchising strategy u Multi-country u Global strategy u Strategic alliances or joint ventures 7 -16

Export Strategies u Involve using domestic plants as a production base for exporting to foreign markets u Excellent initial strategy to pursue international sales u Advantages è Conservative way to test international waters è Minimizes both risk and capital requirements è Minimizes direct investments in foreign countries u An export strategy is vulnerable when è Manufacturing costs in home country are higher than in foreign countries where rivals have plants è High shipping costs are involved è Adverse fluctuations in currency exchange rates 7 -17

Licensing Strategies u Licensing makes sense when a firm è Has valuable technical know-how or a patented product but does not have international capabilities to enter foreign markets è Desires to avoid risks of committing resources to markets which are n Unfamiliar n Politically volatile n Economically unstable u Disadvantage è Risk of providing valuable technical know-how to foreign firms and losing some control over its use 7 -18

Franchising Strategies u Often is better suited to global expansion efforts of service and retailing enterprises u Advantages è Franchisee bears most of costs and risks of establishing foreign locations è Franchisor has to expend only the resources to recruit, train, and support franchisees u Disadvantage è Maintaining cross-country quality control 7 -19

Localized Multicountry Strategies or a Global Strategy? Strategic Issue u Whether to vary a company’s competitive approach to fit specific market conditions and buyer preferences in each host county OR u Whether to employ essentially the same strategy in all countries 7 -20

Fig. 7. 1: A Company’s Strategic Options for Dealing with Cross-Country Variations in Buyer Preferences and Market Conditions 7 -21

What Is a “Think-Local, Act-Local” Approach to Strategy Making? 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. 7 -22

Characteristics of a “Think-Local, Act-Local” Approach to Strategy Making u Business approaches are deliberately crafted to è Accommodate differing tastes and expectations of buyers in each country è Stake out the most attractive market positions vis-à-vis local competitors u Local managers are given considerable strategy-making latitude u Plants produce different products for different local markets u Marketing and distribution are adapted to fit local customs and cultures 7 -23

When Is a “Think-Local, Act-Local” Approach to Strategy Making Necessary? u Significant country-to-country differences in customer preferences and buying habits exist u Host governments enact regulations requiring products sold locally meet strict manufacturing specifications or performance standards u Trade restrictions of host governments are so diverse and complicated they preclude a uniform, coordinated worldwide market approach 7 -24

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 -25

What Is a “Think-Global, Act-Global” Approach to Strategy Making? A company employs the same basic competitive approach in all countries where it operates. 7 -26

Characteristics of a “Think-Global, Act-Global” Approach to Strategy Making u u u u 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 one country to another are aggressively pursued 7 -27

Fig. 7. 2: How a Localized or Multicountry Strategy Differs from a Global Strategy 7 -28

What Is a “Think-Global, Act-Local” Approach to Strategy Making? A company uses the same basic competitive theme in each country but allows local managers 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 7 -29

Test Your Knowledge The stand-out characteristic of multicountry competition is A. The 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. 7 -30

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 -31

The Quest for Competitive Advantage in Foreign Markets u Three ways to gain competitive advantage 1. Locating activities among nations in ways that lower costs or achieve greater product differentiation 2. Efficient/effective transfer of competitively valuable competencies and capabilities from company operations in one country to company operations in another country 3. Coordinating dispersed activities in ways a domestic-only competitor cannot 7 -32

Locating Activities to Build a Global Competitive Advantage u Two issues è Whether to n Concentrate each activity in a few countries or n Disperse activities to many different nations è Where n to locate activities Which country is best location for which activity? 7 -33

Concentrating Activities to Build a Global Competitive Advantage u Activities should be concentrated when è Costs of manufacturing or other value chain activities are meaningfully lower in certain locations than in others è There are sizable scale economies in performing the activity è There is a steep learning curve associated with performing an activity in a single location è Certain locations have n Superior resources n Allow better coordination of related activities or n Offer other valuable advantages 7 -34

Dispersing Activities to Build a Global Competitive Advantage u Activities è They should be dispersed when need to be performed close to buyers è Transportation costs, scale diseconomies, or trade barriers make centralization expensive è Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed 7 -35

Transferring Valuable Competencies to Build a Global Competitive Advantage u Transferring competencies, capabilities, and resource strengths across borders contributes to è Development of broader competencies and capabilities è Achievement of dominating depth in some competitively valuable area u Dominating depth in a competitively valuable capability is a strong basis for sustainable competitive advantage over è Other multinational or global competitors and è Small domestic competitors in host countries 7 -36

Coordinating Cross-Border Activities to Build a Global Competitive Advantage u Aligning activities located in different countries contributes to competitive advantage in several ways è Choose where and how to challenge rivals è Shift production from one location to another to take advantage of most favorable cost or trade conditions or exchange rates è Use online systems to collect ideas for new or improved products and to determine which products should be standardized or customized è Enhance brand reputation by incorporating same differentiating attributes in its products in all markets where it competes 7 -37

What Are Profit Sanctuaries? u Profit sanctuaries are country markets where a firm è Has a strong, protected market position and è Derives substantial profits u Generally, a firm’s most strategically crucial profit sanctuary is its home market Profit sanctuaries are a valuable competitive asset in global industries! 7 -38

Fig. 7. 3: Profit Sanctuary Potential of Domestic-Only, International, and Global Competitors 7 -39

Test Your Knowledge Profit sanctuaries are valuable competitive assets because A. they enable a company pursuing a “think global, act local” type of strategy to be more successful. B. a domestic competitor with multiple profit sanctuaries can wage and generally win a competitive offensive against a global competitor whose profits are scattered across many different countries. C. they provide the financial strength to support strategic offensives in selected country markets and can help fuel a company’s race for global market leadership. D. without having at least two profit sanctuaries a company is virtually precluded from competing globally. E. they enable a company pursuing a global strategy to compete on an equal footing with companies employing a multicountry strategy. 7 -40

What Is Cross-Market Subsidization? u Involves supporting competitive offensives in one market with resources/profits diverted from operations in other markets u Competitive power of cross-market subsidization results from a global firm’s ability to Draw upon its resources and profits in other country markets to mount an attack on single-market or onecountry rivals and è Try to lure away their customers with è Lower prices n Discount promotions n Heavy advertising n Other offensive tactics n 7 -41

For Discussion: Your Opinion Assume that you are a multinational soft-drink company with a large, well-protected profit sanctuary in your home country (and perhaps some smaller profit sanctuaries in other countries as well). Further assume that you are interested in entering an important new foreign market in which the leading soft drink competitors are all domestic companies. Do you think that a cross-market subsidization strategy based on under-pricing local competitors might be an appealing way to gain a market foothold? Why or why not? If you were one of the local competitors being attacked, what strategic moves might you make to defend your market position? 7 -42

Global Strategic Offensives Three Options u Attack a foreign rival’s profit sanctuaries è Approach places a rival on the defensive, forcing it to n Spend more on marketing/advertising Trim its prices n Boost product innovation efforts n Take actions raising its costs and eroding its profits n u Employ cross-market subsidization è u Attractive offensive strategy for companies competing in multiple country markets with multiple products Dump goods at cut-rate prices è Approach involves a company selling goods in foreign markets at prices Well below prices at which it sells in its home market or n Well below its full costs per unit n 7 -43

Achieving Global Competitiveness via Cooperation u Cooperative agreements with foreign companies are a means to è Enter a foreign market or è Strengthen a firm’s competitiveness in world markets u Purpose of alliances è Joint research efforts è Technology-sharing è Joint use of production or distribution facilities è Marketing / promoting one another’s products 7 -44

Strategic Appeal of Strategic Alliances u u u u Gain better access to attractive country markets from host country’s government to import and market products locally 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 with key government officials in host country Useful way to gain agreement on important technical standards 7 -45

Pitfalls of Strategic Alliances u Overcoming language and cultural barriers u Dealing with diverse or conflicting operating practices u Time consuming for managers in terms of communication, trust-building, and coordination costs u Mistrust when collaborating in competitively sensitive areas u Clash of egos and company cultures u Dealing with conflicting objectives, strategies, corporate values, and ethical standards u Becoming too dependent on another firm for essential expertise over the long-term 7 -46

Characteristics of Competing in Emerging Foreign Markets u Tailoring products for big, emerging markets often involves è Making more than minor product changes and è Becoming more familiar with local cultures u Companies have to attract buyers with bargain prices as well as better products u Specially designed and/or specially packaged products may be needed to accommodate local market circumstances u Management team must usually consist of a mix of expatriate and local managers 7 -47

Strategic Options: How to Compete in Emerging Country Markets u Prepare to compete on the basis of low price u Be prepared to modify aspects of the company’s business model to accommodate local circumstances u Try to change the local market to better match the way the company does business elsewhere u Stay away from those emerging markets where it is impractical or uneconomic to modify the company’s business model to accommodate local circumstances 7 -48

Fig. 7. 4: Strategy Options for Local Companies in Competing Against Global Challengers 7 -49

Strategic Options for Local Companies: Use Home-Field Advantages u Concentrate on advantages enjoyed in the home market u Cater to customers who prefer a local touch u Accept loss of customers attracted to global brands u Astutely exploit its local orientation based on è Familiarity è Expertise with local preferences in traditional products è Long-standing customer relationships u Cater to the local market in ways that pose difficulties for global rivals 7 -50

Strategic Options for Local Companies: Transfer Expertise to Cross-Border Markets u u When a local company trying to defend against a global challenger has resource strengths and capabilities suitable for competing in other country markets, then it should consider è Launching initiatives to transfer its expertise to cross-border markets è Becoming more of an international competitor Such a move to enter foreign markets can help è Build a bigger customer base (to offset any losses in its home market) è Grow sales and profits è Put in a stronger position to contend with global challengers in its home market 7 -51

Strategic Options for Local Companies: Dodging Rivals by Shifting to a New Business Model or Market Niche u When industry pressures to globalize are high, viable strategic options for a local company trying to defend against global challengers in its home market include è Shifting the business to a piece of the industry value chain where the firm’s expertise/resources provide a defendable position or maybe even a competitive advantage è Entering a joint venture with a globally competitive partner è Selling out to a global entrant into its home market 7 -52

Strategic Options for Local Companies: Contend on a Global Level u If a local company has resources and capabilities that it can transfer to operations in other countries, it can launch a strategy aimed at è Entering è Shifting markets of other countries as rapidly as possible to a more globalized strategy è Building brand recognition and a brand image that extends to more and more countries è Gradually establishing the resources and capabilities to go head-to-head against large global rivals 7 -53