Chapter 7 Strategies for Competing in Foreign Markets

Chapter 7: Strategies for Competing in Foreign Markets Mc. Graw-Hill/Irwin Copyright © 2010 by The Mc. Graw-Hill Companies, Inc. All rights

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 -2

Chapter Roadmap n Why Companies Expand into Foreign Markets n Factors that Shape Strategy Choices in Foreign Markets n The Concepts of Multicountry Competition and Global Competition n Strategy Options for Entering and Competing in Foreign Markets n The Quest for Competitive Advantage in Foreign Markets n Strategies to Compete in the Markets of Emerging Countries 7 -3

The Four Big Strategic Issues in Competing Multinationally n 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 n Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country n Where to locate a company’s production facilities, distribution centers, and customer service operations to realize the greatest locational advantages n 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

Factors Shaping Strategy Choices in Foreign Markets Cross-country differences in cultural, demographic, and market conditions Gaining competitive advantage based on where activities are located Risks of adverse shifts in currency exchange rates Impact of host government policies on the local business climate 7 -7

Cross-Country Differences in Cultural, Demographic, and Market Conditions n Cultures and lifestyles differ among countries n Differences in market demographics and income levels n Variations in manufacturing and distribution costs n Fluctuating exchange rates n Differences in host government economic and political demands 7 -8

How Markets Differ from Country to Country n Consumer tastes and preferences n Consumer buying habits n Market size and growth potential n Distribution channels n Driving forces n 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 -9

Different Countries Have Different Locational Appeal n Manufacturing costs vary from country to country based on v Wage rates v Worker productivity v Inflation rates v Energy costs v Tax rates v Government regulations n Quality of business environment varies from country to country n Suppliers, trade associations, and makers of complementary products often find it advantageous to cluster their operations in the same general location 7 -10

Fluctuating Exchange Rates Affect a Company’s Competitiveness n Currency exchange rates are unpredictable v Competitiveness of a company’s operations partly depends on whether exchange rate changes affect costs favorably or unfavorably n Competitive impact of fluctuating exchange rates v Exporters always gain in competitiveness when the currency of the country where goods are manufactured grows weaker v Exporters are disadvantaged when the currency of the country where goods are manufactured grows stronger 7 -11

Differences in Host Government Trade Policies n Local content requirements n Restrictions on exports n Regulations on prices of imports n Import tariffs or quotas n Other regulations v Technical standards v Product certification v Prior approval of capital spending projects v Withdrawal of funds from country v 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 n Market contest among rivals in one country not closely connected to market contests in other countries n Buyers in different countries are attracted to different product attributes n Sellers vary from country to country n 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 n Competitive conditions across country markets are strongly linked v Many of same rivals compete in many of the same country markets v A true international market exists n A firm’s competitive position in one country is affected by its position in other countries n Competitive advantage is based on a firm’s world-wide operations and overall global standing Rival firms in globally competitive industries vie for worldwide leadership! 7 -15

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

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

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

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

Achieving Global Competitiveness via Cooperative Agreements n Cooperative agreements with foreign companies are a means to v Enter a foreign market or v Strengthen a firm’s competitiveness in world markets n Purpose of alliances / joint ventures v Joint research efforts v Technology-sharing v Joint use of production or distribution facilities v Marketing / promoting one another’s products 7 -20

Strategic Appeal of Strategic Alliances n Gain better access to attractive country markets n Capture economies of scale in production and/or n n n 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 -21

Pitfalls of Strategic Alliances n Overcoming language and cultural barriers n Dealing with diverse or conflicting operating n n n 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 -22

Localized Multicountry Strategy or a Global Strategy? Strategic Issue n Whether to vary a company’s competitive approach to fit specific market conditions and buyer preferences in each host county or n Whether to employ essentially the same strategy in all countries 7 -23

Figure 7. 1: A Company’s Strategic Options for Dealing with Cross-Country Variations in Buyer Preferences and Market Conditions 7 -24

When Is a “Think-Local, Act-Local” Approach to Strategy Making Necessary? n Significant country-to-country differences in customer preferences and buying habits exist n Host governments enact regulations requiring products sold locally meet strict manufacturing specifications or performance standards n Trade restrictions of host governments are so diverse and complicated they preclude a uniform, coordinated worldwide market approach 7 -25

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 -26

Characteristics of a “Think-Global, Act-Global” Approach to Strategy Making n Same products under the same brand names are n n n 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

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

The Quest for Competitive Advantage in Foreign Markets n 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 -29

Locating Activities to Build a Global Competitive Advantage n Two issues. . . v Whether to « Concentrate each activity in a few countries or « Disperse activities to many different nations v Where to locate activities « Which country is best location for which activity? 7 -30

Concentrating Activities to Build a Global Competitive Advantage n Activities should be concentrated when v Costs of manufacturing or other value chain activities are meaningfully lower in certain locations than in others v There are sizable scale economies in performing the activity v There is a steep learning curve associated with performing an activity in a single location v Certain locations have « Superior resources « Allow better coordination of related activities or « Offer other valuable advantages 7 -31

Dispersing Activities to Build a Global Competitive Advantage n Activities should be dispersed when v They need to be performed close to buyers v Transportation costs, scale diseconomies, or trade barriers make centralization expensive v Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed 7 -32

Transferring Valuable Competencies to Build a Global Competitive Advantage n Transferring competencies, capabilities, and resource strengths across borders contributes to v Development of broader competencies and capabilities v Achievement of dominating depth in some competitively valuable area n Dominating depth in a competitively valuable capability is a strong basis for sustainable competitive advantage over v Other multinational or global competitors and v Small domestic competitors in host countries 7 -33

Coordinating Cross-Border Activities to Build a Global Competitive Advantage n Aligning activities located in different countries contributes to competitive advantage in several ways v Choose where and how to challenge rivals v Shift production from one location to another to take advantage of most favorable cost or trade conditions or exchange rates v Use online systems to collectively come up with next -generation products v Achieve efficiencies by shifting workload to locations where personnel are underutilized v Enhance potential to build a global brand name by incorporating same differentiating attributes in products in all markets where a company competes 7 -34

Characteristics of Competing in Emerging Foreign Markets n Tailoring products for big, emerging markets often involves v Making more than minor product changes and v Becoming more familiar with local cultures n Companies have to attract buyers with bargain prices as well as better products n Specially designed and/or specially packaged products may be needed to accommodate local market circumstances n Management team must usually consist of a mix of expatriate and local managers 7 -35

Strategic Options: How to Compete in Emerging Country Markets n Prepare to compete on the basis of low price n Be prepared to modify aspects of the company’s business model to accommodate local circumstances n Try to change the local market to better match the way the company does business elsewhere n Stay away from those emerging markets where it is impractical or uneconomic to modify the company’s business model to accommodate local circumstances 7 -36

Strategies for Local Companies in Emerging Markets 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. 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. Transfer company expertise to cross-border markets and initiate actions to contend on a global level. 7 -37