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Chapter 7

Competing in

Foreign

Markets

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Chapter Roadmap• Why Companies Expand into Foreign Markets

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

• The Concepts of Multi-country Competition and Global Competition

• Strategy Options for Entering and Competing in Foreign Markets

• The Quest for Competitive Advantage in Foreign Markets

• Profit Sanctuaries, Cross-Market Subsidization, and Global Strategic Offensives

• Strategic Alliances and Joint Ventures with Foreign Partners

• Strategies That Fit the Markets of Emerging Countries

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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 standardized product 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 operationsto 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 Expandinto Foreign Markets?

Gain access tonew customers

Capitalizeon core

competencies

Achieve lowercosts and enhance competitiveness

Spreadbusiness risk across

widermarket base

Obtain access to valuable natural

resources

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International vs. Global Competition

International Competitor

GlobalCompetitor

Company operates in a select few foreign

countries, with modest ambitions to expand

further

Company markets products in 50 to 100 countries andis expanding operations into additional country

markets annually

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• 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

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 pressuresOne 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.

How Markets Differ from Country to Country

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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 HaveDifferent Locational Appeal

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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

• Lessons 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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Foreign Exchange terms

• The US dollar is devalued against the Euro:– Exchange rate goes from $1:1Euro to $1.60 to 1Euro– US dollar at the moment is WEAKER than the Euro

• The Chinese yuan is UNDERVALUED vis US $– Before 2005, the yuan was PEGGED to the US $:

8.28yuan to $1– In 2005, the yuan was “FLOATED”, against a basket

of currencies and devalued by 2% (8.11yuan: $1)– The yuan is now STRONGER vis the US $– Some say it is still undervalued by as much as 30%,

therefore should be around 6 yuan to $1.

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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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Multi-country

Competition

Global

Competition

Two Primary Patternsof International Competition

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Characteristics ofMulti-Country Competition

• Market contest among rivals in one country not closely connected to market contests in other countries

• Buyers in different countries areattracted to different product attributes

• Sellers vary from country to country• Industry conditions and competitive forces in

each national market differ in important respects

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Characteristics ofMulti-Country Competition

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 acrosscountry 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

Rival firms in globally competitiveindustries vie for worldwide leadership!

Characteristics of Global Competition

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Strategy Options for Competing in Foreign Markets

• Exporting

• Licensing

• Franchising strategy

• Multi-country strategy

• Global strategy

• Strategic alliances or joint ventures

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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

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 effortsof 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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Localized Multicountry Strategiesor a Global Strategy?

• Vary a company’s competitive approach to fit specific market conditions and buyer preferences in each host county

OR

• Employ essentially the same strategy in all countries

Strategic Issue

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Fig. 7.1

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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 country in

an effort to be responsive to differing

buyer preferences and 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 considerablestrategy-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-Local”Approach to Strategy Making Necessary?

• Significant country-to-country differences incustomer 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 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 a

unified 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 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 onecountry to another are aggressively pursued

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Fig. 7.2: How a Localized or Multicountry Strategy 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 basic

competitive theme in each country but

allows local managers latitude to . . .

1. Incorporate whatever country-specific

variations in product attributes are needed to

best satisfy local buyers and

2. 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 nations in ways that lower costs or achieve greater 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 activity in afew countries or

• Disperse activities to manydifferent 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 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

Concentrating Activities to Builda Global Competitive Advantage

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Dispersing Activities to Build aGlobal Competitive Advantage

• Activities should be dispersed when

– They need to be performed 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 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 favorablecost or trade conditions or exchange rates

– Use online systems to collect ideas for newor improved products and to determine whichproducts should be standardized or customized

– Enhance brand reputation by incorporatingsame differentiating attributes in itsproducts in all markets where it competes

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What Are Profit Sanctuaries?

• Profit sanctuaries are countrymarkets where a firm

– Has a strong, protected marketposition and

– Derives substantial profits

• Generally, a firm’s most strategicallycrucial profit sanctuary is its home market

Profit sanctuaries are a valuablecompetitive asset in global industries!

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Fig. 7.3: Profit Sanctuary Potential of Domestic-Only,International, and Global Competitors

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• Involves supporting competitive offensives in one market with resources/profits diverted from operations in other markets

• Competitive power of cross-market subsidization results from a global firm’s ability to– Draw upon its resources and profits in other country

markets to mount an attack on single-market or one-country rivals and

– Try to lure away their customers with • Lower prices• Discount promotions• Heavy advertising• Other offensive tactics

What Is Cross-Market Subsidization?

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Global Strategic Offensives

• Attack a foreign rival’s profit sanctuaries

– Approach places a rival on the defensive, forcing it to

• Spend more on marketing/advertising

• Trim its prices

• Boost product innovation efforts

• Take actions raising its costs and eroding its profits

• Employ cross-market subsidization

– Attractive offensive strategy for companies competing in multiple country markets with multiple products

• Dump goods at cut-rate prices

– Approach involves a company selling goods in foreign markets at prices

• Well below prices at which it sells in its home market or

• Well below its full costs per unit

Three Options

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Achieving GlobalCompetitiveness via Cooperation

• Cooperative agreements with foreign companies are a means to

– Enter a foreign market or

– Strengthen a firm’s competitivenessin world markets

• Purpose of alliances

– 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 from host country’s government to import and market products locally

• 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 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 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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• 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 will usually consistof a mix of expatriate and local managers

Characteristics of Competingin 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 ofthe company’s business model toaccommodate 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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Fig. 7.4: Strategy Options for Local Companiesin Competing Against Global Challengers

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Strategic Options for Local Companies:Use Home-Field Advantages

• Concentrate on advantages enjoyed in the home market

• Cater to customers who prefer a local touch

• Accept loss of customers attracted to global brands

• Astutely exploit its local orientation based on

– Familiarity with local preferences

– Expertise in traditional products

– Long-standing customer relationships

• Cater to the local market in ways thatpose difficulties for global rivals

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Strategic Options for Local Companies:Transfer Expertise to Cross-Border

Markets• When a local company trying to defend against a global challenger

has resource strengths and capabilities suitable for competing in other country markets, then it should consider

– Launching initiatives to transfer its expertise tocross-border markets

– Becoming more of an international competitor

• Such a move to enter foreign markets can help

– Build a bigger customer base (to offset any losses in its home market)

– Grow sales and profits

– Put in a stronger position to contend with global challengers in its home market

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Strategic Options for Local Companies: Dodging Rivals

by Shifting to a New Business Model or Market Niche

• When industry pressures to globalize are high, viable strategic options for a local company trying to defend against global challengers in its home market include

– Shifting the business to a piece of the industryvalue chain where the firm’s expertise/resourcesprovide a defendable position or maybe even a competitive advantage

– Entering a joint venture with a globally competitive partner

– Selling out to a global entrant into its home market

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• If a local company has resources and capabilities that it can transfer to operations in other countries, it can launch a strategy aimed at

– Entering markets of other countries as rapidly as possible

– Shifting to a more globalized strategy

– Building brand recognition and a brand image that extends to more and more countries

– Gradually establishing the resources and capabilities to go head-to-head against large global rivals

Strategic Options for Local Companies:Contend on a Global Level