Chapter 7: Strategies for Competing in Foreign Markets

1. Chapter 7: Strategies for Competing in Foreign Markets Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

2. “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 Co-founder and Senior Advisor, Intel Corporation

3. “Industries actually vary a great deal in the pressures they put on a company to sell internationally. Niraj Dawar and Tony Frost Professors, Richard Ivey School of Business

4. Chapter Learning Objectives • Develop an understanding of why companies that have achieved competitive advantage in their domestic market may opt to enter foreign markets. • Learn how and why differing market conditions in different countries influence a company’s strategy for competing in foreign markets. • Gain familiarity with the major strategic options for entering and competing in foreign markets. • Understand the principal approaches used by multinational companies in building competitive advantage in foreign markets. • Gain an understanding of the unique characteristics of competing in emerging markets.

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

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 standardizedproduct 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 capabilitiesfrom one country to another to secure competitive advantage

7. Why Do Companies Expandinto Foreign Markets? Gain access to new customers Obtain access to valuable natural resources Achieve lowercosts and enhance competitiveness Spread business risk across widermarket base Capitalize on core competencies 7-7

8. International vs. Global Competition Company operates in a select few foreign countries, with modest ambitions to expand further International Competitor Company markets products in 50 to 100 countries andis expanding operations into additional country markets annually Global Competitor 7-8

9. Factors Shaping Strategy Choices in Foreign Markets Cross-country differences in cultural, demographic, and market conditions Gaining competitive advantage basedon where activities are located Risks of adverse shifts incurrency exchange rates Impact of host government policieson the local business climate 7-9

10. Cross-Country Differences in Cultural, Demographic, and Market Conditions • 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

11. How Markets Differ from Country to Country • Consumer tastes and preferences • Consumer buying habits • Market size and growth potential • Distribution channels • Driving forces • Competitive pressures One of the biggest concerns of companies competing in foreign markets is whether tocustomizetheir product offerings in each different country market to match the tastes and preferences of local buyers or whether tooffera mostly standardized product worldwide.

12. Different Countries HaveDifferent Locational Appeal • Manufacturing costs vary from country to country based on • Wage rates • Worker productivity • Inflation rates • Energy costs • Tax rates • Government 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

13. Fluctuating Exchange Rates Affect a Company’s Competitiveness • Currency exchange rates are unpredictable • Competitiveness of a company’s operationspartly depends on whether exchange ratechanges affect costs favorably or unfavorably • Competitive impact of fluctuating exchange rates • Exporters always gain in competitivenesswhen the currency of the country wheregoods are manufactured grows weaker • Exporters are disadvantaged whenthe currency of the country wheregoods are manufactured grows stronger

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.

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

16. Multi-country Competition Global Competition Two Primary Patternsof International Competition

17. 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 ineach 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!

18. Characteristics of Global Competition • Competitive conditions across country markets are strongly linked • Many of same rivals compete inmany 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 Rival firms in globally competitiveindustries vie for worldwide leadership!

19. Strategy Options for Competing in Foreign Markets • Exporting • Licensing • Franchising strategy • Strategic alliances orjoint ventures • Multi-country strategy • Global strategy

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

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 are • Unfamiliar • Politically volatile • Economically unstable • Disadvantage • Risk of providing valuable technical know-how to foreign firms and losing some control over its use

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

23. 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

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 marketknowledge and working relationships withkey government officials in host country • Useful way to gain agreement onimportant technical standards

25. Pitfalls of Strategic Alliances • Overcoming language and cultural barriers • Dealing with diverse or conflicting operating practices • Time consuming for managers interms 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

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 Issue

27. Figure 7.1: A Company’s Strategic Options for Dealing withCross-Country Variations in Buyer Preferences and Market Conditions 7-27

28. What Is a “Think-Local, Act-Local” Approach to Strategy Making? A company varies its product offerings and basic competitive strategy from country to countryin an effort to be responsive todiffering buyer preferencesand market conditions. 7-28

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

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

31. Drawbacks of a “Think-Local,Act-Local” Approach to Strategy Making Poses problems of transferring competencies across borders Works against building aunified competitive advantage 7-31

32. 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. 7-32

33. 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 capabilitiesand marketing approaches worldwide • Strategic moves are integrated and coordinated worldwide • Expansion occurs in most nations wheresignificant buyer demand exists • Strategic emphasis is placed onbuilding a global brand name • Opportunities to transfer ideas, newproducts, and capabilities from onecountry to another are aggressively pursued

34. Figure 7.2: How a Localized or MulticountryStrategy Differs from a Global Strategy 7-34

35. What Is a “Think-Global, Act-Local” Approach to Strategy Making? A company uses the same basiccompetitive theme in each country but gives local managers the latitude to • Incorporate whatever country-specific variations in product attributes are needed to best satisfy local buyers and • Make whatever adjustments in production, distribution, and marketing are needed to compete under local market conditions. 7-35

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.

37. 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?

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

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?

40. Concentrating Activities to Builda Global Competitive Advantage • 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

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

42. Transferring Valuable Competencies to Build a Global Competitive Advantage • Transferring competencies, capabilities, and resource strengths across borders contributes to • Development of broadercompetencies 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

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

44. Characteristics of Competingin Emerging Foreign Markets • 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

45. 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

46. Strategies for Local Companiesin Emerging Markets Develop business models that exploit shortcomingsin 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 othercompetitively important local workforce qualities. Use economies of scope and scale to betterdefend against expansion-minded multinationals. Transfer company expertise to cross-border marketsand initiate actions to contend on a global level. 7-46