Chapter 7: Strategies for Chapter 7: Strategies for

Competing in Foreign MarketsCompeting in Foreign Markets

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

““You have no choice but to You have no choice but to operate in a world shaped by operate in a world shaped by

globalization and the information globalization and the information revolution. There are two options: revolution. There are two options:

Adapt or die.”Adapt or die.”

Andrew S. GroveAndrew S. GroveCo-founder and Senior Advisor, Intel CorporationCo-founder and Senior Advisor, Intel Corporation

““Industries actually vary a Industries actually vary a great deal in the pressures great deal in the pressures

they put on a company to sell they put on a company to sell internationally.internationally.

Niraj Dawar and Tony FrostNiraj Dawar and Tony FrostProfessors, Richard Ivey School of BusinessProfessors, Richard Ivey School of Business

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 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

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

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

Factors Shaping Strategy Choices in Foreign Markets

Cross-country differences in cultural, demographic, and market conditions

Cross-country differences in cultural, demographic, and market conditions

Gaining competitive advantage basedon where activities are located

Gaining competitive advantage basedon where activities are located

Risks of adverse shifts incurrency exchange rates

Risks of adverse shifts incurrency exchange rates

Impact of host government policieson the local business climate

Impact of host government policieson the local business climate

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

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 tooffer a mostly standardized product worldwide.

Manufacturing costs vary from country to country based on

Wage ratesWorker productivityInflation ratesEnergy costsTax ratesGovernment 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

Fluctuating Exchange Rates Affect a Company’s Competitiveness

Currency exchange rates are unpredictable Competitiveness of a company’s operations

partly depends on whether exchange ratechanges affect costs favorably or unfavorably

Competitive impact of fluctuating exchange rates Exporters always gain in competitiveness

when the currency of the country wheregoods are manufactured grows weaker

Exporters are disadvantaged whenthe currency of the country wheregoods are manufactured grows stronger

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

Multi-country

Competition

Global

Competition

Two Primary Patternsof International Competition

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 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!

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 competitiveindustries vie for worldwide leadership!

Strategy Options for Competing in Foreign Markets

Exporting

Licensing

Franchising strategy

Strategic alliances orjoint ventures

Multi-country strategy

Global strategy

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

Excellent initial strategy topursue international sales

AdvantagesConservative way to test international watersMinimizes both risk and capital requirementsMinimizes direct investments in foreign countries

An export strategy is vulnerable whenManufacturing costs in home country are higher

than in foreign countries where rivals have plantsHigh shipping costs are involvedAdverse fluctuations in currency exchange rates occur

Export Strategies

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 areUnfamiliarPolitically volatileEconomically unstable

Disadvantage Risk of providing valuable technical know-how

to foreign firms and losing some control over its use

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

Achieving Global Competitivenessvia Cooperative Agreements

Cooperative agreements withforeign companies are a means to

Enter a foreign market or

Strengthen a firm’scompetitiveness 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

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 withkey government officials in host country

Useful way to gain agreement onimportant technical standards

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

Localized Multicountry Strategyor 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 IssueStrategic Issue

Figure 7.1: A Company’s Strategic Options for Dealing withCross-Country Variations in Buyer Preferences and Market Conditions

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?

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

When Is a “Think-Local, Act-Local”Approach 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

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

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?

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

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

A company uses the same basic

competitive theme in each country but gives

local managers the 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.

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

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

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?

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

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

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

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 to

another 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

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

Characteristics of Competingin Emerging Foreign Markets

Strategic Options: How to Competein 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 marketto better match the way thecompany does business elsewhere

Stay away from those emerging markets where it is impractical or uneconomicto modify the company’s businessmodel to accommodate local circumstances

Strategies for Local Companiesin Emerging Markets

Develop business models that exploit shortcomings

in local distribution networks or infrastructure.

Develop business models that exploit shortcomings

in local distribution networks or infrastructure.

Utilize keen understanding of local customer needs and

preferences to create customized products or services.

Utilize keen understanding of local customer needs and

preferences to create customized products or services.

Take advantage of low-cost labor and other

competitively important local workforce qualities.

Take advantage of low-cost labor and other

competitively important local workforce qualities.

Use economies of scope and scale to better

defend against expansion-minded multinationals.

Use economies of scope and scale to better

defend against expansion-minded multinationals.

Transfer company expertise to cross-border markets

and initiate actions to contend on a global level.

Transfer company expertise to cross-border markets

and initiate actions to contend on a global level.

Chapter 8: Diversification: Chapter 8: Diversification: Strategies for Managing aStrategies for Managing a

Group of BusinessesGroup of Businesses

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

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 a

multi-industry, multi-business strategy

A strategic action plan must be developedfor several different businesses competingin diverse industry environments

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

When Should a Firm Diversify?

Why Diversify?

To build shareholder value!

Diversification is capable of buildingshareholder value if it passes three tests:

1. Industry Attractiveness Test — The industry being entered presents good long-term profit opportunities

2. Cost of Entry Test — Cost of entering is not so high as to spoil the ability to earn attractive profits

3. Better-Off Test — A company’s different businesses should perform better together than as stand-alone enterprises, such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders

1 + 1 = 3

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

Strategies for EnteringNew Businesses

Acquire existing company

Internal start-up

Joint ventures/strategic partnerships

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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 firm’s present business(es)

Unrelated Diversification

Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firm’s present business(es)

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Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for Transferring competitively valuable

expertise 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 nameCross-business collaboration to create

competitively valuable resource strengths and capabilities

Core Concept: Strategic Fit

Cross-business strategic fits can exist anywhere along the value chain

R&D and technology activities

Supply chain activities

Manufacturing activities

Distribution activities

Sales and marketing activities

Managerial and administrative support activities

Types of Strategic Fits

Related Diversificationand Competitive Advantage

Competitive advantage can result from related diversification when a company captures cross-business opportunities toTransfer expertise/capabilities/technology

from one business to anotherReduce costs by combining

related activities of differentbusinesses into a single operation

Transfer use of firm’s brand name reputation from one business to another

Create valuable competitive capabilities via cross-business collaboration in performing related value chain activities

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

Figure 8.4: Identifying a Diversified Company’s Strategy

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How to Evaluate aDiversified Company’s Strategy

Step 1: Assess long-term attractiveness of each industry firm is in

Step 2: Assess competitive strength of firm’s business units

Step 3: Check competitive advantage potential of cross-business strategic fits among business units

Step 4: Check whether firm’s 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

Figure 8.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix

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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

Strategies to Broaden aDiversified Company’s Business Base

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

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

Strategies to Restructure a Company’s 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 company’s business makeup

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