Transcript Slide 1

7
Competing
Chapter Title in
Foreign Markets
16/e PPT
McGraw-Hill/Irwin
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
Copyright © 2008 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.”
Andrew S. Grove
7-2
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
7-3
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
7-4
Why Do Companies Expand
into Foreign Markets?
Gain access to
new customers
Obtain access to
valuable natural
resources
Achieve lower
costs and enhance
competitiveness
Spread
Capitalize
business risk across
on core
wider
competencies
market base
7-5
International vs. Global Competition
International
Competitor
Company operates in a
select few foreign
countries, with modest
ambitions to expand
further
Global
Competitor
Company markets products
in 50 to 100 countries and
is expanding operations
into additional country
markets annually
7-6
Cross-Country Differences in Cultural,
Demographic, and Market Conditions
 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
7-7
How Markets Differ from
Country to Country
 Consumer
tastes and preferences
 Consumer
buying habits
 Market
size and growth potential
 Distribution
 Driving
channels
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 to offer a mostly standardized product worldwide.
7-8
Different Countries Have
Different 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
7-9
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
 Lessons
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
7-10
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 be grow in volume if the
Chinese currency because 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.
7-11
Differences in Host
Government Trade Policies
 Local
content requirements
 Restrictions
on exports
 Regulations
on prices of imports
 Import
 Other
tariffs or quotas
regulations

Technical standards

Product certification

Prior approval of capital spending projects

Withdrawal of funds from country

Ownership (minority or majority) by local citizens
7-12
Two Primary Patterns
of International Competition
Multi-country
Competition
Global
Competition
7-13
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!
7-14
Characteristics of Global Competition
 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 worldwide operations and overall global standing
Rival firms in globally competitive
industries vie for worldwide leadership!
7-15
Strategy Options for
Competing in Foreign Markets
 Exporting
 Licensing
 Franchising
strategy
 Multi-country
 Global
strategy
strategy
 Strategic
alliances or joint ventures
7-16
Export Strategies
 Involve
using domestic plants as a production
base for exporting to foreign markets
 Excellent initial strategy to pursue international
sales
 Advantages



 An
Conservative way to test international waters
Minimizes both risk and capital requirements
Minimizes direct investments in foreign countries
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
7-17
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
7-18
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
7-19
Localized Multicountry Strategies
or a Global Strategy?
Strategic Issue
to vary a company’s competitive
approach to fit specific market conditions and
buyer preferences in each host county
 Whether
OR
 Whether
to employ essentially the same strategy
in all countries
7-20
Fig. 7.1: A Company’s Strategic Options for Dealing with
Cross-Country Variations in Buyer Preferences and Market Conditions
7-21
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.
7-22
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
7-23
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
7-24
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
7-25
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.
7-26
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
7-27
Fig. 7.2: How a Localized or Multicountry Strategy Differs from a Global Strategy
7-28
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
7-29
Test Your Knowledge
The stand-out characteristic of multicountry competition
is
A. The 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.
7-30
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?
7-31
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
7-32
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?
7-33
Concentrating Activities to Build
a 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 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
7-34
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
7-35
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
7-36
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 collect ideas for new
or improved products and to determine which
products should be standardized or customized
 Enhance brand reputation by incorporating
same differentiating attributes in its
products in all markets where it competes
7-37
What Are Profit Sanctuaries?
 Profit
sanctuaries are country
markets where a firm

Has a strong, protected market
position and

Derives substantial profits
 Generally,
a firm’s most strategically
crucial profit sanctuary is its home market
Profit sanctuaries are a valuable
competitive asset in global industries!
7-38
Fig. 7.3: Profit Sanctuary Potential of Domestic-Only,
International, and Global Competitors
7-39
Test Your Knowledge
Profit sanctuaries are valuable competitive assets because
A. they enable a company pursuing a “think global, act local” type
of strategy to be more successful.
B. a domestic competitor with multiple profit sanctuaries can wage
and generally win a competitive offensive against a global
competitor whose profits are scattered across many different
countries.
C. they provide the financial strength to support strategic
offensives in selected country markets and can help fuel a
company’s race for global market leadership.
D. without having at least two profit sanctuaries a company is
virtually precluded from competing globally.
E. they enable a company pursuing a global strategy to compete
on an equal footing with companies employing a multicountry
strategy.
7-40
What Is Cross-Market Subsidization?
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 onecountry rivals and
Try to lure away their customers with




Lower prices
Discount promotions
Heavy advertising
Other offensive tactics
7-41
For Discussion: Your Opinion
Assume that you are a multinational soft-drink company with a
large, well-protected profit sanctuary in your home country
(and perhaps some smaller profit sanctuaries in other
countries as well). Further assume that you are interested in
entering an important new foreign market in which the leading
soft drink competitors are all domestic companies. Do you
think that a cross-market subsidization strategy based on
under-pricing local competitors might be an appealing way to
gain a market foothold? Why or why not? If you were one of
the local competitors being attacked, what strategic moves
might you make to defend your market position?
7-42
Global Strategic Offensives
Three Options

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
7-43
Achieving Global
Competitiveness via Cooperation
 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 research efforts

Technology-sharing

Joint use of production or distribution facilities

Marketing / promoting one another’s products
7-44
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 with
key government officials in host country
 Useful way to gain agreement on
important technical standards
7-45
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
7-46
Characteristics of Competing
in 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 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
7-47
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
7-48
Fig. 7.4: Strategy Options for Local Companies
in Competing Against Global Challengers
7-49
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 that
pose difficulties for global rivals
7-50
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 to
cross-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
7-51
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 industry
value chain where the firm’s expertise/resources
provide 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
7-52
Strategic Options for Local Companies:
Contend on a Global Level
 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
7-53