Chapter 7: Strategies for Competing in Foreign Markets

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Chapter 7 Strategies for Competing in
Foreign Markets
Screen graphics created by Jana F. Kuzmicki,
Ph.D. Troy University
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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
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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
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The Four Big Strategic Issuesin Competing
Multinationally

• Whether to customize a companys offerings in
  each different country market to match
  preferences of local buyers or offer a mostly
  standardized product worldwide
• Whether to employ essentially the samebasic
  competitive strategy in all countriesor modify
  the strategy country by country
• Where to locate a companys production
  facilities,distribution centers, and customer
  service operations to realize the greatest
  locational advantages
• How to efficiently transfer a companys resource
  strengths and capabilities from one country to
  another to secure competitive advantage

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Why Do Companies Expandinto Foreign Markets?
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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
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Factors Shaping Strategy Choices in Foreign
Markets
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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

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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 to
customize their product offerings in each
different country market to match the tastes and
preferences of local buyers or whether tooffer a
mostly standardized product worldwide.
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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

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Fluctuating Exchange Rates Affect a
Companys Competitiveness

• Currency exchange rates are unpredictable
• Competitiveness of a companys 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

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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

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Two Primary Patternsof International
Competition
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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!
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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 firms competitive position in one country is
  affected by its position in other countries
• Competitive advantage is based on a firms
  world-wide operations and overall global standing

Rival firms in globally competitiveindustries
vie for worldwide leadership!
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Strategy Options for Competing in Foreign
Markets

• Exporting
• Licensing
• Franchising strategy
• Strategic alliances orjoint ventures
• Multi-country strategy
• Global strategy

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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

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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 andrisks of
  establishing foreign locations
• Franchisor has to expend only theresources to
  recruit, train, and support franchisees
• Disadvantage
• Maintaining cross-country quality control

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Achieving Global Competitivenessvia
Cooperative Agreements

• Cooperative agreements withforeign companies are
  a means to
• Enter a foreign market or
• Strengthen a firmscompetitiveness in world
  markets
• Purpose of alliances / joint ventures
• Joint research efforts
• Technology-sharing
• Joint use of production or distribution
  facilities
• Marketing / promoting one anothers 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 partners local
  marketknowledge and working relationships
  withkey government officials in host country
• Useful way to gain agreement onimportant
  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 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

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Localized Multicountry Strategyor a Global
Strategy?

• Whether to vary a companys 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 Companys Strategic Options
for Dealing withCross-Country Variations in
Buyer Preferences and Market Conditions
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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.
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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 productsfor different
  local markets
• Marketing and distribution are adaptedto fit
  local customs and cultures

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When Is a Think-Local, Act-LocalApproach
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

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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 aunified competitive
advantage
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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.
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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 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

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Figure 7.2 How a Localized or
MulticountryStrategy Differs from a Global
Strategy
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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.

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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

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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?

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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

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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

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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 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

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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

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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

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Strategic Options How to Competein
Emerging Country Markets

• Prepare to compete on the basis of low price
• Be prepared to modify aspects ofthe companys
  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 companys
  businessmodel to accommodate local circumstances

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Strategies for Local Companiesin Emerging
Markets
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Chapter 8 Diversification Strategies for
Managing aGroup of Businesses
Screen graphics created by Jana F. Kuzmicki,
Ph.D. Troy University
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Diversification and Corporate Strategy

• A company is diversified when it is in two or
  more lines of business that operate in diverse
  market environments
• Strategy-making in a diversifiedcompany is a
  bigger pictureexercise than crafting a
  strategyfor a single line-of-business
• A diversified company needs amulti-industry,
  multi-business strategy
• A strategic action plan must be developedfor
  several different businesses competingin diverse
  industry environments

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When Should a Firm Diversify?

• It is faced with diminishing growthprospects in
  present business
• It has opportunities to expand intoindustries
  whose technologies andproducts complement its
  present business
• It can leverage existing competencies and
  capabilities by expanding into businesses where
  these resource strengths are key success factors
• It can reduce costs by diversifying into closely
  related businesses
• It has a powerful brand name it can transfer to
  products of other businesses to increase sales
  and profits of these businesses

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Why Diversify?

• To build shareholder value!
• Diversification is capable of buildingshareholder
  value if it passes three tests
• Industry Attractiveness Test The industry
  being entered presents good long-term profit
  opportunities
• Cost of Entry Test Cost of entering is not so
  high as to spoil the ability to earn attractive
  profits
• Better-Off Test A companys different
  businesses should perform better together than as
  stand-alone enterprises, such that company As
  diversification into business B produces a 1 1
  3 effect for shareholders

1 1 3
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Four Main Tasks inCrafting Corporate
Strategy

• Pick new industries to enterand decide on means
  of entry
• Initiate actions to boost combinedperformance of
  businesses
• Pursue opportunities to leverage cross-business
  value chain relationships and strategic fits into
  competitive advantage
• Establish investment priorities, steering
  resources into most attractive business units

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Strategies for EnteringNew Businesses
8-47
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Related vs. Unrelated Diversification

• Related Diversification
• Involves diversifying into businesses whose value
  chains possess competitively valuable strategic
  fits with value chain(s) of firms present
  business(es)

• Unrelated Diversification
• Involves diversifying into businesses with no
  competitively valuable value chain match-ups or
  strategic fits with firms present business(es)

8-48
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Core Concept Strategic Fit

• Exists whenever one or more activities in the
  value chains of different businesses are
  sufficiently similar to present opportunities for
  
• Transferring competitively valuableexpertise or
  technological know-howfrom one business to
  another
• Combining performance of commonvalue chain
  activities to achieve lower costs
• Exploiting use of a well-known brand name
• Cross-business collaboration to create
  competitively valuable resource strengths and
  capabilities

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Types of Strategic Fits

• Cross-business strategic fits can exist anywhere
  along the value chain
• RD and technology activities
• Supply chain activities
• Manufacturing activities
• Distribution activities
• Sales and marketing activities
• Managerial and administrative support activities

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Related Diversificationand Competitive
Advantage

• Competitive advantage can result from related
  diversification when a company captures
  cross-business opportunities to
• Transfer expertise/capabilities/technologyfrom
  one business to another
• Reduce costs by combiningrelated activities of
  differentbusinesses into a single operation
• Transfer use of firms brand name reputation
  from one business to another
• Create valuable competitive capabilities via
  cross-business collaboration in performing
  related value chain activities

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Core Concept Economies of Scope

• Stem from cross-business opportunities to reduce
  costs
• Arise when costs can be cutby operating two or
  more businessesunder same corporate umbrella
• Cost saving opportunities can stem from
  strategic fits anywhere along the value chains
  of differentbusinesses

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Figure 8.4 Identifying a Diversified
Companys Strategy
8-53
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How to Evaluate aDiversified Companys
Strategy

• Step 1 Assess long-term attractiveness of each
  industry firm is in
• Step 2 Assess competitive strength of firms
  business units
• Step 3 Check competitive advantage potential of
  cross-business strategic fits among business
  units
• Step 4 Check whether firms resources fit
  requirements of present businesses
• Step 5 Rank performance prospects of businesses
  and determine priority for resource allocation
• Step 6 Craft new strategic moves to improve
  overall company performance

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Figure 8.5 A Nine-Cell Industry
Attractiveness-Competitive Strength Matrix
8-55
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Strategies to Broaden aDiversified Companys
Business Base

• Conditions making thisapproach attractive
• Slow grow in current businesses
• Vulnerability to seasonal orrecessionary
  influences or to threatsfrom emerging new
  technologies
• Potential to transfer resources and capabilities
  to other related businesses
• Rapidly-changing conditions in one or more core
  industries alter buyer requirements
• Complement and strengthen market position of one
  or more current businesses

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Retrenchment Strategies

• Objective
• Reduce scope of diversification to smaller number
  of core businesses
• Strategic options involve divesting businesses
  that
• Are losing money
• Have little growth potential
• Have little strategic fitwith core businesses
• Are too small to contributemeaningfully to
  earnings

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Options for Accomplishing Divestiture

• Sell it
• Involves finding a company which views the
  business as a good deal and good fit
• Spin it off as independent company
• Involves deciding whether or not to retain
  partial ownership
• Liquidation
• Involves closing down operationsand selling
  remaining assets
• A last resort because no buyer can be found

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Strategies to Restructure a Companys
Business Lineup

• Objective
• Make radical changes in mixof businesses in
  portfolio via both
• Divestitures and
• New acquisitions
• to put a whole new face on the companys
  business makeup

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Multinational Diversification Strategies

• Distinguishing characteristics
• Diversity of businesses and
• Diversity of national markets
• Presents a big strategy-making challenge
• Strategies must be conceived and executedfor
  each business, with as manymultinational
  variations as appropriate
• Cross-business and cross-country collaboration
  opportunities must be pursued and managed