Using an internal startup strategy to enter the market of a new foreign country

CHAPTER 7 Strategies for Competing in International Markets

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 five major strategic options for entering foreign markets

The three main strategic approaches for competing internationally

How companies are able to use international operations to improve overall competitiveness

The unique characteristics of competing in developing-country markets

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Why companies decide to enter foreign markets

To further exploit core competencies

To gain access to lower-cost inputs of production

To gain access to new customers and meet current customer needs

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

To gain access to resources and capabilities located in foreign markets

WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS

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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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FIGURE 7.1 The Diamond of National Advantage

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THE DIAMOND FRAMEWORK

Answers important questions about competing on an international basis by:

Predicting where new foreign entrants are likely to come from and their strengths

Highlighting foreign market opportunities where rivals are weakest

Identifying the location-based advantages of conducting certain value chain activities of the firm in a particular country

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REASONS FOR LOCATING VALUE CHAIN ACTIVITIES ADVANTAGEOUSLY

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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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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Core Concepts (1 of 6)

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, the lack of property rights protections.

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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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STRATEGIC MANAGEMENT PRINCIPLE (1 of 6)

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.

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STRATEGIC MANAGEMENT PRINCIPLE (2 of 6)

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.

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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 conditions given that they now share a common currency?

What should a EU firm do to respond to a 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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CROSS-COUNTRY DIFFERENCES IN DEMOGRAPHIC, CULTURAL, AND MARKET CONDITIONS

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

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

Key Strategic Considerations

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STRATEGIC OPTIONS FOR ENTERING AND COMPETING IN INTERNATIONAL 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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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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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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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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Core Concept (2 of 6)

A greenfield venture is a subsidiary business that is established by setting up the entire operation from the ground up.

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USING A GREENFIELD STATEGY FOR DEVELOPING A FOREIGN SUBSIDIARY

A greenfield strategy is appealing when:

Creating an internal startup is cheaper than making an acquisition

Adding new production capacity will not adversely impact the supply-demand balance in the local market

A startup subsidiary has the ability to gain good distribution access

A startup subsidiary will have the size, cost structure, and resource strengths to compete head-to-head against local rivals

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PURSUING A GREENFIELD STRATEGY

Advantages

High level of control over venture

“Learning by doing” in the local market

Direct transfer of the firm’s technology, skills, business practices, and culture

Disadvantages

Capital costs of initial development

Risks of loss due to political instability or lack of legal protection of ownership

Slowest form of entry due to extended time required to construct facility

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BENEFITS OF ALLIANCE AND JOINT VENTURE STRATEGIES

Gaining partner’s knowledge of local market conditions

Achieving economies of scale through joint operations

Gaining technical expertise and local market knowledge

Sharing distribution facilities and dealer networks, and mutually strengthening each partner’s access to buyers

Directing competitive energies more toward mutual rivals and less toward one another

Establishing working relationships with key officials in the host-country government

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Strategic Management Principle (3 of 6)

Collaborative strategies involving alliances or joint ventures with foreign partners are a popular way for companies to edge their way into the markets of foreign countries.

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Strategic Management Principle (4 of 6)

Cross-border alliances enable a growth-minded firm to widen its geographic coverage and strengthen its competitiveness in foreign markets; at the same time, they offer flexibility and allow a firm to retain some degree of autonomy and operating control.

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Walgreens Boots Alliance, Inc.: Entering Foreign Markets via Alliance Followed by Merger

Did industry consolidation provoke Walgreens to make its strategic international acquisition?

What strategic advantages does the alliance between Walgreens and Alliance Boots bring to both partners?

What internal problems could the merger create for Walgreens as it strives to integrate and adjust to the risks of entry into international markets?

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THE RISKS OF STRATEGIC ALLIANCES WITH FOREIGN PARTNERS

Outdated knowledge and expertise of local partners

Cultural and language barriers

Costs of establishing the working arrangement

Conflicting objectives and strategies or deep differences of opinion about joint control

Differences in corporate values and ethical standards

Loss of legal protection of proprietary technology or competitive advantage

Overdependence on foreign partners for essential expertise and competitive capabilities

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INTERNATIONAL STRATEGY: THE THREE MAIN APPROACHES

Multidomestic Strategy

Global Strategy

Transnational Strategy

Competing Internationally

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Core Concepts (3 of 6)

An international strategy is a strategy for competing in two or more countries simultaneously.

A multidomestic strategy is one in which a firm varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions. It is a think-local, act-local type of international strategy, facilitated by decision making decentralized to the local level.

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Core Concepts (4 of 6)

A global strategy is one in which a firm employs the same basic competitive approach in all countries where it operates, sells much the same products everywhere, strives to build global brands, and coordinates its actions worldwide with strong headquarters control. It represents a think-global, act-global approach.

A transnational strategy is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies.

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FIGURE 7.2 Three Approaches for Competing Internationally

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INTERNATIONAL OPERATIONS AND THE QUEST FOR COMPETITIVE ADVANTAGE

Use international location to lower cost or differentiate product

Share resources and capabilities

Gain cross-border coordination benefits

Build Competitive Advantage in International Markets

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TABLE 7.1 Advantages and Disadvantages of a Multidomestic Strategy

Multidomestic (think local, act local)

Advantages Disadvantages

Can meet the specific needs of each market more precisely Hinders resource and capability sharing or cross-market transfers

Can respond more swiftly to localized changes in demand Has higher production and distribution costs

Can target reactions to the moves of local rivals Is not conductive to a worldwide competitive advantage

Can respond more quickly to local opportunities and threats

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TABLE 7.1 Advantages and Disadvantages of a Global Strategy

Global (think global, act global)

Advantages Disadvantages

Has lower costs due to scale and scope economies Cannot address local needs precisely

Can lead to greater efficiencies due to the ability to transfer best practices across markets Is less responsive to changes in local market conditions

Increases innovation from knowledge sharing and capability transfer Involves higher transportation costs and tariffs

Offers the benefit of a global brand and reputation Has higher coordination and integration costs

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TABLE 7.1 Advantages and Disadvantages of Transnational Strategy

Transnational (think global, act local)

Advantages Disadvantages

Offers the benefits of both local responsiveness and global integration Is more complex and harder to implement

Enables the transfer and sharing of resources and capabilities across borders Entails conflicting goals, which may be difficult to reconcile and require trade-offs

Provides the benefits of flexible coordination Involves more costly and time-consuming implementation

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Four Seasons Hotels: Local Character, Global Service

Why has Four Seasons Hotels been so successful in expanding its hospitality operations into a broad diversity of countries?

How should local hotel competitors respond to Four Seasons Hotels’ continued expansion into their markets?

Why has the global economic slowdown not dampened demand for the Four Seasons luxury hotel offerings?

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USING LOCATION TO BUILD COMPETITIVE ADVANTAGE

To pursue a strategy of offering a mostly standardized product worldwide

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

Key Location Issues

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Strategic Management Principle (5 of 6)

Companies that compete internationally can pursue competitive advantage in world markets by locating their value chain activities in whatever nations prove most advantageous.

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WHEN TO CONCENTRATE ACTIVITIES IN A FEW LOCATIONS

The costs of manufacturing or other activities are significantly lower in some geographic locations than in others.

There are significant scale economies in production or distribution.

There are sizable learning and experience benefits associated with performing an activity in a single location.

Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages.

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WHEN TO DISPERSE ACTIVITIES ACROSS MANY LOCATIONS

Buyer-related activities can be conducted at a distance.

There are high transportation costs.

There are diseconomies of large size.

Trade barriers make a central location too expensive.

Dispersing activities reduces exchange rate risks.

Dispersion helps prevent supply interruptions.

Dispersion helps avoid adverse political developments.

Dispersion allows for location-based technology and production cost competitive advantages.

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SHARING AND TRANSFERRING RESOURCES AND CAPABILITIES TO BUILD COMPETITIVE ADVANTAGE

Building a resource-based competitive advantage requires:

Using powerful brand names to extend a differentiation-based competitive advantage beyond the home market

Coordinating activities for sharing and transferring resources and production capabilities across different countries’ domains to develop market dominating depth in key competencies

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Core Concepts (5 of 6)

Profit sanctuaries are country markets that provide a firm with substantial profits because of a strong or protected market position.

Cross-market subsidization—supporting competitive offensives in one market with resources and profits diverted from operations in another market—can be a powerful competitive weapon.

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PROFIT SANCTUARY POTENTIAL OF DOMESTIC-ONLY AND INTERNATIONAL COMPETITORS

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PROFIT SANCTUARY POTENTIAL OF GLOBAL COMPETITORS

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DUMPING AS A STRATEGY

Dumping

Selling goods in foreign markets at prices that are either below normal home market prices or below the full costs per unit

Dumping is NOT a fair-trade practice.

Governments can be expected to retaliate against such practices by foreign competitors.

The World Trade Organization (WTO) actively polices dumping to discourage such practices.

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USING PROFIT SANCTUARIES TO DEFEND AGAINST INTERNATIONAL RIVALS

International Firm A

International Firm B

Profit Sanctuary

Firm A moves against Firm B in Country B

Firm B counters with a response in Country C

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Core Concept (6 of 6)

When the same companies compete against one another in multiple geographic markets, the threat of cross-border counterattacks may be enough to deter aggressive competitive moves and encourage mutual restraint among international rivals.

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STRATEGY OPTIONS FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIES

Prepare to compete on the basis of low price.

Prepare to modify the firm’s business model or strategy to accommodate local circumstances.

Try to change the local market to better match the way the firm does business elsewhere.

Stay away from developing markets where it is impractical or uneconomical to modify the company’s business model to accommodate local circumstances.

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DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES

Develop a business model that exploits shortcomings in local distribution networks or infrastructure.

Utilize knowledge of local customer needs and preferences to create customized products or services.

Take advantage of aspects of the local workforce with which large multinational firms may be unfamiliar.

Use acquisition and rapid-growth strategies to defend against expansion-minded internationals.

Transfer company expertise to cross-border markets and initiate actions to contend on an international level.

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Strategic Management Principle (6 of 6)

Profitability in developing markets rarely comes quickly or easily—new entrants have to adapt their business models to local conditions and be patient in earning a profit.

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How Ctrip Successfully Defended Against International Rivals to Become China’s Largest Online Travel Agency

What were the key elements of Ctrip’s business model that allowed it to successfully fend off the entry of major international rivals in its market?

What changes in Ctrip’s external competitive environment will eventually threaten its continued success?

How could the Diamond of National Competitive Advantage be useful to Ctrip in predicting the future of the travel industry in China?

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Appendix 1 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 further exploit core competencies

To gain access to resources and capabilities located in foreign markets

To spread business risk across a wider market base

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Appendix 2 Figure 7.1 The Diamond of National Advantage

The four factors that influence each other and a company's home-country advantage are:

Demand conditions: home-market size and growth rate; buyers' tastes

First strategy, structure, and rivalry: different styles of management and organization; degree of local rivalry

Factor conditions: availability and relative prices of inputs (e.g. labor, materials)

Related and supporting industries: proximity of suppliers, end users, and complementary industries

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Appendix 3 Cross-Country Differences in Demographic, Cultural, and Market Conditions

Two key strategic considerations

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

To pursue a strategy of offering a mostly standardized product worldwide

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Appendix 4 Figure 7.2 Three Approaches for Competing Internationally

A grid is shown. The vertical axis, Benefits from Global Integration and Standardization, is labeled “high” at the top and “low” at the bottom. The horizontal axis, Need for Local Responsiveness, is labeled “low” on the left side and “high” on the right. Three strategies are charted on the graph:

Global strategy: think global, act global. High benefits; low need for local responsiveness.

Transnational strategy: think global – act local. Mid-high benefits; mid-high need for local responsiveness.

Multidomestic strategy: think local – act local. Low benefits; high need for local responsiveness.

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Appendix 5 International Operations and the Quest for Competitive Advantage

Three ways to build competitive advantage in international markets are:

Use international location to lower cost or differentiate product

Share resources and capabilities

Gain cross-border coordination benefits

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Appendix 6 Using Location to Build Competitive Advantage

Two key location issues are:

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

To pursue a strategy of offering a mostly standardized product worldwide

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Appendix 7 Profit Sanctuary Potential of Domestic-Only and International Competitors

A domestic-only company only reaches out to the home market, and thus only has one profit sanctuary. An international company, on the other hand, reaches out to the home market, as well as several other countries. This means the company usually has a profit sanctuary in its home market, but may also have other sanctuaries in other countries where it has a strong position and market share.

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Appendix 8 Profit Sanctuary Potential of Global Competitors

A globally competitive company generally has a profit sanctuary in its home market and frequently has several other profit sanctuaries in those countries where it is a market leader and enjoys a strong competitive position.

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Appendix 9 Using Profit Sanctuaries to Defend Against International Rivals

Firm A moves against Firm B in Country B, where Firm B has a presence. Firm B then counters by a response in Country C, where Firm A has a presence.

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