Because buyer tastes for a particular product or service sometimes differ substantially

CHAPTER 7 Strategies for Competing in International Markets

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This chapter focuses on strategy options for expanding beyond domestic boundaries and competing

in the markets of either a few or a great many countries.

Learning Objectives

This chapter will help you understand:

The primary reasons companies choose to compete in international markets.

How and why differing market conditions across countries influence a company’s strategy choices in international markets.

The differences among the five primary modes of entry into foreign markets.

The three main strategic approaches for competing internationally.

How companies can to use international operations to improve overall competitiveness.

The unique characteristics of competing in developing-country markets.

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In the process of exploring these options, we introduce such concepts as the Porter diamond of national competitive advantage; and discuss the specific market circumstances that support the adoption of multidomestic, transnational, and global strategies. The chapter also includes sections on cross-country differences in cultural, demographic, and market conditions; strategy options for entering foreign markets; the importance of locating value chain operations in the most advantageous countries; and the special circumstances of competing in developing markets such as those in China, India, Brazil, Russia, and eastern Europe.

Why Companies Decide to Enter Foreign Markets

To gain access to new customers

To achieve lower costs through economies of scale, experience, and increased purchasing power

To gain access to low-cost inputs of production

To further exploit its core competencies

To gain access to resources and capabilities located in foreign markets

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A company may opt to expand outside its domestic market for any of five major reasons.

Why Competing Across National Borders Makes Strategy Making More Complex

1. Different countries with different home-country advantages in different industries.

2. Location-based value chain advantages for certain countries

3. Differences in government policies, tax rates, and economic conditions

4. Currency exchange rate risks

5. Differences in buyer tastes and preferences for products and services

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Crafting a strategy to compete in one or more countries of the world is inherently more complex for five reasons. Differing market conditions across countries influence a company’s strategy choices in international markets.

FIGURE 7.1 The Diamond of National Advantage

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Source: Adapted from Michael E. Porter, “The Competitive Advantage of Nations,” Harvard Business Review, March-April 1990, pp. 73-93.

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Figure 7.1 summarizes the four major factors in a framework developed by Michael Porter and known as the Diamond of National Competitive Advantage.

The Diamond Framework

The Diamond Framework can be used to:

Predict from which countries foreign entrants are most likely to come.

Decide which foreign markets to enter first.

Choose the best country location for different value chain activities.

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Where industries are more likely to develop competitive strength depends on a set of factors that describe the nature of each country’s business environment and vary from country to country. Because strong industries are made up of strong firms, the strategies of firms that expand internationally are usually grounded in one or more these factors. Thus, the diamond framework is an aid to deciding where to locate different value chain activities most beneficially.

Opportunities for Location-Based Advantages

Lower wage rates

Higher worker productivity

Lower energy costs

Fewer environmental regulations

Lower tax rates

Lower inflation rates

Proximity to suppliers and technologically related industries

Proximity to customers

Lower distribution costs

Available or unique natural resources

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Increasingly, companies are locating different value chain activities in different parts of the world to exploit location-based advantages that vary from country to country. Differences in wage rates, worker productivity, energy costs, etc., create sizable variations in manufacturing costs from country to country.

The Impact of Government Policies and Economic Conditions in Host Countries

Positives

Tax incentives

Low tax rates

Low-cost loans

Site location and development

Worker training

Negatives

Environmental regulations

Subsidies and loans to domestic competitors

Import restrictions

Tariffs and quotas

Local-content requirements

Regulatory approvals

Profit repatriation limits

Minority ownership limits

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Cross-country variations in government policies and economic conditions affect both the opportunities available to a foreign entrant and the risks of operating within the host country.

Political risks stem from instability or weaknesses in national governments and hostility to foreign business. Economic risks stem from the stability of a country’s monetary system, economic and regulatory policies, and the lack of property rights protections.

The Risks of Adverse Exchange Rate Shifts

Effects of exchange rate shifts:

Exporters experience a rising demand for their goods whenever their currency grows weaker relative to the importing country’s currency.

Exporters experience a falling demand for their goods whenever their currency grows stronger relative to the importing country’s currency.

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Fluctuating exchange rates pose significant economic risks to a firm’s competitiveness in foreign markets.

Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger relative to the currency of the importing country.

Domestic companies facing competitive pressure from lower-cost imports benefit when their government’s currency grows weaker in relation to the currencies of the countries where the lower-cost imports are being made.

Thinking Strategically

What effects has the adoption of the euro had on the ability of European Union (EU) countries and firms to respond to changes in intra-national economic and trade conditions, given that they now share a common currency?

What should an EU firm do to respond to an adverse currency exchange rate shift in a non-EU country?

How will exiting the EU affect the United Kingdom’s ability to compete in world markets?

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Instructors may want to discuss the current and collateral effects of tariffs on international trade relationships between and among EU members and other major trading countries (e.g., the United States and China.)

Cross-Country Differences in Demographic, Cultural, and Market Conditions

Key Strategic Considerations

Whether to customize offerings in each country market to match the tastes and the preferences of local buyers

Whether to pursue a strategy of offering a mostly standardized product worldwide

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Buyer tastes for a particular product or service sometimes differ substantially from country to country. While making products that are closely matched to local tastes makes them more appealing to local buyers, customizing a company’s products country by country may raise production and distribution costs. The tension between the market pressures to localize a company’s product offerings country by country and the competitive pressures to lower costs is one of the big strategic issues that participants in foreign markets have to resolve.

Primary Modes of Entry into Foreign Markets

Maintain a home country production base and export goods to foreign markets.

License foreign firms to produce and distribute the firm’s products abroad.

Employ a franchising strategy in foreign markets.

Establish a subsidiary in a foreign market via acquisition or internal development.

Rely on strategic alliances or joint ventures with foreign companies.

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Once a company decides to expand beyond its domestic borders, it must consider the question of how to enter foreign markets. There are five primary modes of entry. The modes vary considerably regarding the level of investment required and the associated risks—but higher levels of investment and risk generally provide the firm with the benefits of greater ownership and control.

Export Strategies

Advantages

Low capital requirements

Economies of scale in utilizing existing production capacity

No distribution risk

No direct investment risk

Disadvantages

Maintaining relative cost advantage of home-based production

Transportation and shipping costs

Exchange rates risks

Tariffs and import duties

Loss of channel control

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Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial strategy for pursuing international sales. It is a conservative way to test the international waters. Unless an exporter can keep its production and shipping costs competitive with rivals’ costs, secure adequate local distribution and marketing support of its products, and effectively hedge against unfavorable changes in currency exchange rates, its success will be limited.

Licensing and Franchising Strategies

Advantages

Low resource requirements

Income from royalties and franchising fees

Rapid expansion into many markets

Disadvantages

Maintaining control of proprietary know-how

Loss of operational and quality control

Adapting to local market tastes and expectations

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Using a licensing strategy as a mode of entry makes sense when a firm with valuable technical know-how, an appealing brand, or a unique patented product has neither the internal organizational capability nor the resources to enter foreign markets. While licensing works well for manufacturers and owners of proprietary technology, franchising is often better suited to the international expansion efforts of service and retailing enterprises.

Foreign Subsidiary Strategies

Advantages

High level of control

Quick large-scale market entry

Avoids entry barriers

Access to acquired firm’s skills

Disadvantages

Costs of acquisition

Complexity of acquisition process

Integration of the firms’ structures, cultures, operations, and personnel

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Companies that want to participate directly in the performance of all essential value chain activities typically establish a wholly owned subsidiary, either by acquiring a local company or by establishing its own new operating organization from the ground up.