Chapter 8 Strategies for Competing in International Markets

Chapter 8 Strategies for Competing in International Markets Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 1 -1

Strategy Considerations Involving International Market Expansion § Is it necessary to expand internationally to achieve growth? § Does international expansion offer locationbased advantages? § How might resource strengths be transferred to operations in international markets? § Will business risk be reduced by competing in additional country markets? § Should the company modify its strategy country by country? § Are local allies needed to build competitive advantage in international markets? 8 -2

The Appeal of International Market Expansion § § Gain access to new customers Help achieve lower costs Capitalize on core competencies Spread business risk over a broader base 8 -3

Cross-Country Differences in Cultural, Demographic, and Market Conditions § Differences in cultures and lifestyles § Differences in market demographics § Variations in market growth from country to country § Country to country differences in manufacturing and distribution costs § Shifts in exchange rates § Differences in host government policies and trade regulations 8 -4

How Markets Demographics Differ from Country to Country § Consumer tastes and preferences § Consumer purchasing power § Consumer buying habits § Distribution channel emphasis § Demands for localized products § The strength of competitive rivalry 8 -5

Location-Based Cost Drivers § Manufacturing costs vary from country to country based on üWage rates üWorker productivity üGovernment regulations and industry subsidies üInflation rates üEnergy costs üTax rates 8 -6

The Effects of Shifting Exchange Rates § Exporters gain in competitiveness when the currency of the country in which the goods are manufactured is weak § Exporters are at a disadvantage when the currency of the country where goods are manufactured grows stronger 8 -7

Host Government Policies Affecting International Competition § Examples of host government policies affecting foreign-based companies include: ü Local content requirements ü Trade policies protecting domestic companies ü Deliberately burdensome customs requirements ü Restrictions on exports based upon national security concerns ü Tariffs and quotas ü Subsidies for domestic companies 8 -8

Strategy Options for Entering and Competing in Foreign Markets § General strategic options for expanding outside a company’s domestic market include: ü Exporting ü Licensing ü Franchising strategy ü Multi country strategy ü Global strategy ü Strategic alliances or joint ventures 8 -9

Export Strategies § Involves using domestic plants as a production base for exporting to foreign markets § Advantages ü Conservative way to test international waters ü Minimizes both risk and capital requirements 8 -10

Export Strategies § An export strategy is vulnerable when ü Manufacturing costs in home country are higher than in foreign countries where rivals have plants ü The cost of shipping the product to distant markets are relatively high ü Adverse fluctuations in currency exchange rates 8 -11

Licensing Strategies § Licensing makes sense when a firm üHas valuable technical know-how or a patented product but does not have neither the internal capabilities nor resources to enter foreign markets § Disadvantage üRisk of providing valuable technical know-how to foreign firms and thereby losing some control over its use 8 -12

International Franchising Strategies § Often is better suited to global expansion efforts of service and retailing enterprises § Advantages ü Franchisee bears most of the costs and risks of establishing foreign locations ü Franchisor has to expend only the resources to recruit, train, and support franchisees § Disadvantage ü Maintaining cross-country quality control 8 -13

Establishing International Operations § Choosing between localized multi country strategies or a global strategy üDeciding upon the degree to vary competitive approach country by country depends on cross-country differences in buyer preferences and market conditions 8 -14

Localized Multi country Strategies § Think local, act local -- A company varies its product offerings and basic competitive strategy from country to country § Used when ü Significant country-to-country differences exist in customer preferences, buying habits, distribution channels, or marketing methods or ü When host governments enact local content requirements or trade restrictions that preclude a uniform, coordinated worldwide market approach 8 -15

Global Strategies § A company employs the same basic competitive approach in all countries where it operates § Best suited to industries that are globally standardized in terms of customer preferences, buyer purchasing habits, distribution channels or marketing methods 8 -16

Global Strategies § Think global, act global— Strategic moves are integrated and coordinated worldwide, emphasis on building a global brand name § Think global, act local— Utilizes a common strategic approach (low-cost, differentiation, focus, best costs), but allowing some country-to-country customization to fit local market conditions 8 -17

International Strategic Alliances and Joint Ventures § Cooperative agreements with foreign-based companies are a means to üEnter a foreign market or üStrengthen competitiveness in world markets through joint research efforts, joint use of production or distribution facilities, or by gaining agreement on global technical standards 8 -18

Keys to Building Successful International Strategic Alliances and Collaborative Partnerships § Overcoming language and cultural barriers § Resolving differences in values, objectives, strategies, and operating practices § Developing trust, coordination, and effective communications between partners § Resolving interpersonal conflict among the two partners’ managers 8 -19

Using International Operations to Improve Overall Competitiveness § Expanding outside a company’s domestic market can improve overall competitiveness in three ways ü Concentrating processes and activities in advantageous locations ü Coordinating value chain activities across borders to improve competencies or lower costs ü Using profit sanctuaries and cross-market subsidization to wage a strategic offensive 8 -20

Using Location to Build Competitive Advantage § Multinational companies attempting to gain location-based competitive advantage should consider 1. Whether to concentrate activities in a few countries or disperse performance of each process to many countries 2. Which countries offer the best locational advantage for each activity 8 -21

When to Concentrate Internal Processes in a Few Locations § Concentrating activities and processes in a few countries makes sense when ü The cost of manufacturing or performing other activities is lower in a specific geographic location ü Significant scale economies can be achieved by concentrating particular activities ü There is a steep learning curve associated with performing an activity ü Certain locations have superior resources or allow better coordination of related activities 8 -22

Using Cross-Border Coordination to Build Competitive Advantage § Multinational and global companies are able to coordinate activities across borders to achieve competitive advantage by üTransferring knowledge and skills developed in one location to a location in another country üShifting production to locations having excess capacity or underutilized personnel üShift production between plants in different countries to take advantage of shifting exchange rates, energy costs, or changes in tariffs and quotas 8 -23

Using Profit Sanctuaries and Cross. Market Subsidization § Profit sanctuaries are protected markets that provide multinational companies with substantial profits ü A company’s domestic market is most likely its chief profit sanctuary § Cross-market subsidization involves using the profits provided by a multinational company’s profit sanctuary to wage a market offensive against a domestic-only competitor in its home market 8 -24