When is a think-local, act-local approach to strategy making appropriate?

McGraw-Hill/Irwin

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 7: Strategies for Competing in Foreign Markets

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.

Troy University

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McGraw-Hill/Irwin

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

“You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or die.”

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McGraw-Hill/Irwin

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

“Industries actually vary a great deal in the pressures they put on a company to sell internationally.

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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.

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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

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The Four Big Strategic Issues

in Competing Multinationally

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

Whether to employ essentially the same

basic competitive strategy in all countries

or 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 capabilities from one country to another to secure competitive advantage

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Why Do Companies Expand

into Foreign Markets?

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International vs. Global Competition

International

Competitor

Global

Competitor

Company operates in a select few foreign countries, with modest ambitions to expand further

Company markets products in 50 to 100 countries and

is expanding operations into additional country markets annually

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Factors Shaping Strategy

Choices in Foreign Markets

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Cultures and lifestyles differ among countries

Differences in market demographics

and income levels

Variations in manufacturing

and distribution costs

Fluctuating exchange rates

Differences in host government

economic and political demands

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

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Consumer tastes and preferences

Consumer buying habits

Market size and growth potential

Distribution channels

Driving forces

Competitive pressures

How Markets Differ from

Country to Country

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.

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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

Different Countries Have

Different Locational Appeal

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Fluctuating Exchange Rates Affect

a Company’s Competitiveness

Currency exchange rates are unpredictable

Competitiveness of a company’s operations

partly depends on whether exchange rate

changes affect costs favorably or unfavorably

Competitive impact of fluctuating exchange rates

Exporters always gain in competitiveness

when the currency of the country where

goods are manufactured grows weaker

Exporters are disadvantaged when

the currency of the country where

goods are manufactured grows stronger

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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 grow in volume if the Chinese currency becomes 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.

Answer: C

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Differences in Host

Government 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

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Two Primary Patterns

of International Competition

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Characteristics of

Multi-Country Competition

Market contest among rivals in one

country not closely connected to

market contests in other countries

Buyers in different countries are

attracted to different product attributes

Sellers vary from country to country

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!

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Competitive conditions across country markets are strongly linked

Many of same rivals compete in

many 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

Characteristics of Global Competition

Rival firms in globally competitive

industries vie for worldwide leadership!

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Strategy Options for

Competing in Foreign Markets

Exporting

Licensing

Franchising strategy

Strategic alliances or

joint ventures

Multi-country strategy

Global strategy

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Involve using domestic plants as a production base for exporting to foreign markets

Excellent initial strategy to

pursue 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 higher

than in foreign countries where rivals have plants

High shipping costs are involved

Adverse fluctuations in currency exchange rates occur

Export Strategies

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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

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Franchising Strategies

Often is better suited to global expansion efforts of service and retailing enterprises

Advantages

Franchisee bears most of costs and

risks of establishing foreign locations

Franchisor has to expend only the

resources to recruit, train, and support franchisees

Disadvantage

Maintaining cross-country quality control

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Achieving Global Competitiveness

via Cooperative Agreements

Cooperative agreements with

foreign companies are a means to

Enter a foreign market or

Strengthen a firm’s

competitiveness 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

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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 market

knowledge and working relationships with

key government officials in host country

Useful way to gain agreement on

important technical standards

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Pitfalls of Strategic Alliances

Overcoming language and cultural barriers

Dealing with diverse or conflicting operating 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

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Localized Multicountry Strategy

or 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

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Figure 7.1: A Company’s Strategic Options for Dealing with

Cross-Country Variations in Buyer Preferences and Market Conditions

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A company varies its product offerings and basic competitive strategy from country to country

in an effort to be responsive to

differing buyer preferences

and market conditions.

What Is a “Think-Local, Act-Local” Approach to Strategy Making?

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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 products

for different local markets

Marketing and distribution are adapted

to fit local customs and cultures

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When Is a “Think-Local, Act-Local”

Approach to Strategy Making Necessary?

Significant country-to-country

differences in customer preferences

and buying habits exist

Host governments enact regulations requiring products sold locally meet strict manufacturing specifications or performance standards

Trade restrictions of host governments are

so diverse and complicated they preclude a

uniform, coordinated worldwide market approach

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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

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A company employs the same basic competitive approach in all countries where it operates.

What Is a “Think-Global, Act-Global” Approach to Strategy Making?

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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 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

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Figure 7.2: How a Localized or Multicountry

Strategy Differs from a Global Strategy

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A company uses the same basic

competitive 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.

What Is a “Think-Global, Act-Local” Approach to Strategy Making?

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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.

Answer: D

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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?

Global strategy.

Multicountry strategy.

Multicountry strategy.

Global strategy.

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The Quest for Competitive

Advantage in Foreign Markets

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

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Locating Activities to Build a

Global Competitive Advantage

Two issues . . .

Whether to

Concentrate each activity

in a few countries or

Disperse activities to

many different nations

Where to locate activities

Which country is best

location for which activity?

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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 economies

in performing the activity

There is a steep learning curve 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

Concentrating Activities to Build

a Global Competitive Advantage

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Dispersing Activities to Build a

Global Competitive Advantage

Activities should be dispersed when

They need to be

performed close to buyers

Transportation costs, scale diseconomies, or

trade barriers make centralization expensive

Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed

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Transferring Valuable Competencies to Build a Global Competitive Advantage

Transferring competencies, capabilities, and resource strengths across borders contributes to

Development of broader

competencies and capabilities

Achievement of dominating depth

in 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

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Coordinating Cross-Border Activities to Build a Global Competitive Advantage

Aligning activities located in different

countries contributes to competitive advantage in several ways

Choose where and how to challenge rivals

Shift production from one location to

another to take advantage of most favorable

cost 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

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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 with

bargain prices as well as better products

Specially designed and/or specially

packaged products may be needed to

accommodate local market circumstances

Management team must usually consist

of a mix of expatriate and local managers

Characteristics of Competing

in Emerging Foreign Markets

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Strategic Options: How to Compete

in Emerging Country Markets

Prepare to compete on the basis of low price

Be prepared to modify aspects of

the company’s business model to

accommodate local circumstances

Try to change the local market

to better match the way the

company does business elsewhere

Stay away from those emerging markets where it is impractical or uneconomic

to modify the company’s business

model to accommodate local circumstances

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Strategies for Local Companies

in Emerging Markets

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Answer: C

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Answer: D

Global strategy.

Multicountry strategy.

Multicountry strategy.

Global strategy.

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