CHAPTER 7 STRATEGY FOR COMPETING IN FOREIGN

The spotlight will be on four strategic issues unique to competing multinationally: 1. Whether to customize a companys offerings in each different country market to match preferences of local buyers or offer a mostly standardized product worldwide 2. Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country 3. Where to locate a companys production facilities, distribution centers, and customer service operations to realize the greatest locational advantages 4. How to efficiently transfer a companys resource strengths and capabilities from one country to another to secure competitive advantage

WHY DO COMPANIES EXPAND INTO FOREIGN MARKETS? 1. To gain access new customers Expanding into foreign markets offers potential for increased revenues, profits, and long-term growth and becomes an especially attractive option when a companys home markets are mature. 2. To achieve lower costs and enhance the firms Many companies are driven to sell in more than one country because domestic sales volume is not large enough to fully capture manufacturing economies of scale or learning/experience curve effects and thereby substantially improve the firms cost competitiveness. 3. To capitalize on its core competencies A company may be able to leverage its competencies and capabilities into a position o competitive advantage in foreign markets as well as just domestic markets. 4. To spread its business risk across a wider market base A company spreads business risk by operating in a number of different foreign countries rather than depending entirely on operations in its domestic markets.

The Different between Competing Internationally and Competing Globally Typically, a company will start to compete internationally by entering just one or maybe a select few foreign markets. Competing on a truly global scale comes later, after the company has established operations on several continents and is racing against rivals for global market leadership.

FACTOR THAT SHAPE STRATEGY CHOICES IN FOREIGN MARKET There are four important factors that shape a companys strategic approach to competing in foreign markets: 1. The degree to which there are important cross-country differences in cultural and market condition 2. Whether opportunities exist to again competitive advantage based on whether a companys activities are located in some countries rather than in other 3. The risks of adverse shifts in currency exchange rates and 4. The extent to which the policies of foreign governments lead to more favorable business environments in some countries than in other countries.

Cross Country Differences in Cultural, Demographic, and Market Conditions Regardless of a companys motivation for expanding outside its domestic markets, the strategies it uses to compete in foreign markets must be situation-driven. Cultural, demographic, and market conditions vary significantly among the countries of the world. Gaining Competitive Advantage Based on Where Activities Are Located Differences in wage rates, worker productivity, inflation rates, energy costs, tax rates, government regulations, and the like create sizable variations in manufacturing costs from country to country. Plants in some countries have major manufacturing cost advantages because

of lower input coats (especially labor), relaxed government regulations, the proximity of suppliers, or unique natural resources. The Risks of Adverse Exchange Rate Shifts Fluctuating exchange rates pose significant risks to a companys competitiveness in foreign markets. Exporters win when the currency of the country where goods are being manufactured grows weaker, and they lose when the currency grows stronger. Domestic companies under pressure from lower-cost imports are benefited when their governments currency grows weaker in relation to the countries where the imported goods are being made. The impact of Host Government Policies on the Local Business Climate National governments enact all kinds of measures affecting business conditions and the operation of foreign companies in their markets. They may set local content requirements on goods made inside their borders by foreign-based companies, have rules and policies that protect local companies from foreign competition, put restrictions on exports to ensure adequate local supplies, regulate the prices of imported and locally produced goods, enact deliberately burdensome procedures and requirements for imports of certain goods.

THE

CONCEPTS

OF

MULTICOUNTRY

COMPETITION

AND

GLOBAL

COMPETITION At one extreme is multicountry competition, in which theres 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 localized and not closely connected to the market contests in other countries. The standout features of multicountry competition are that: 1. Buyers in different countries are attracted to different product attributes, 2. Sellers vary from country to country, and 3. Industry conditions and competitive forces in each national market differ in important respects take the banking industry in Italy, Brazil, and Japan.

At other extreme is global competition, in which prices and competitive conditions across country markets are strongly linked and the term global or world market has true meaning. In a globally competitive, industry, much the same group of rival companies competes in many different countries, but especially so in country where sales volumes are large and where having a competitive presence is strategically important to building a strong global position in the industry.

STRATEGY OPTIONS FOR ENTERING AND COMPETING IN FOREIGN MARKETS There are a host of generic strategic options for a company that decides to expand out-side its domestic market and compete internationally or globally 1. Maintain a national (one-country) production base and export goods to foreign markets, using either company-owned or foreign-controlled forward distribution channels. 2. License foreign firm to use the companys technology or to produce and distribute the companys products. 3. Employ a franchising strategy. 4. Use strategic alliances or joint ventures with foreign companies as the primary vehicle for entering foreign markets and perhaps also use alliances as an ongoing strategic arrangement aimed at maintaining or strengthening competitiveness. 5. Follow a multicountry strategy, varying the companys strategic approach (perhaps a little, perhaps a lot) from country to country in response to differing local market and competitive conditions and differing buyer tastes and presences. 6. Follow a global strategy, using essentially the same competitive strategy approach in all country markets where the company has a presence.

Export Strategies 1. Involve using domestic plants as a production base for exporting to foreign markets 2. Excellent initial strategy to pursue international sales 3. Advantages

 Conservative way to test international waters Minimizes both risk and capital requirements Minimizes direct investments in foreign countries 4. 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

Licensing Strategies 1. 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 2. Disadvantage Risk of providing valuable technical know-how to foreign firms and losing some control over its use Franchising Strategies 1. Often is better suited to global expansion efforts of service and retailing enterprises 2. 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 3. Disadvantage Maintaining cross-country quality control Unfamiliar Politically volatile Economically unstable

Strategic Alliances and joint Ventures with Foreign Partners Strategic alliances, joint ventures, and other cooperative agreements with foreign companies are a favorite and potentially fruitful means for entering a foreign market or strengthening a firms competitiveness in world markets. The Risks of Strategic Alliances with Foreign Partners Alliances and joint ventures with foreign partners have their pitfalls, however. Cross-border allies typically have to overcome language and cultural barriers and figure out how to deal with diverse (or perhaps conflicting) operating practices. Strategic alliances are more effective in helping establish a beachhead of new opportunity in world markets than in achieving and sustaining global leadership. When a Cross-border Alliances May Be Unnecessary Experienced multinational companies that market in 50 to 100 or more countries across the world find less need or entering into cross-border alliances than do companies in the early stages of globalizing their operations.

Choosing between a Localized Multicountry Strategy and a Global strategy A localized or multicountry strategy is one where a company varies its product offering and competitive approach from country to country in response to important cross-country variations in buyer preferences and market conditions. 1. Think local, act Local Approach to Strategy-Making. Tailor the companys competitive approach and product offering to fit specific market conditions Delegate strategy making to local managers with firsthand knowledge of local conditions 2. Think global, act Global Approach to Strategy Making.

 Pursue the same basic competitive strategy theme (low-cost, differentiation, bestcost, or focused) in all country market a global strategy Offer the same products worldwide, with only very minor deviations from one country to another when local markets conditions so dictate Utilize the same capabilities, distribution channels, and marketing approaches worldwide 3. Think global, Act Local Approaches to Strategy Making Employ essentially the same basic competitive strategy theme (low-cost, differentiation, best-cost, or focused) in all country market Develop capability to customize product offerings and sell different countries (perhaps even under different brand names) Give local managers the latitude to adapt the global approach as needed to accommodate local buyer preferences and responsive to local market and competitive conditions A localize or multicountry strategy is one where company varies its product offering and competitive to country in response to important cross-preferences in buyer preferences and market conditions.

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

Using Location to Build Competitive advantage Location-based advantages range from access to low-cost labor to obtaining low corporate tax rates in pro-business countries to improving innovation by locating activities in countries with countries with unusually large pools of talented and skilled employees. To use to build competitive advantage, a company must considers two issues: 1. Whether to concentrate each activity it performs in a few select countries or to disperse performance of the activity to many nations, and 2. In which countries to locate particular activities. When to concentrate Activities in a Few Locations Companies tend to concentrate their activities in a limited number of locations in the following circumstances: When the coast of manufacturing or other activities are significantly When there are significant scale economies When there is a steep learning curve associated with performing an activity in a single location When certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages When to Disperse Activities Across Many Locations there are several instances when dispersing activities is more advantageous than concentrating them. Buyer - related activities such as distribution to dealers, sales and advertising, and after sale service usually must take place close to buyers. Using Cross Border Transfers of Competencies and Capabilities to Build Competitive Advantages One of the best way for a company with valuable competencies and resource strength to grow sales and profits is to use its considerable resource strength to enter additional country markets. Transferring competencies, capabilities, and resource strength from country to country may also contribute to the development of broader or deeper competencies and capabilities ideally helping a company achieve dominating depth in some competitively valuable area.

Using Cross Border Coordinating to Build Competitive Advantages International and global competitors are able to coordinate activities across different countries to build competitive advantages. If firm learns how to assemble its product more efficiently at, say its Brazilian plant, the accumulated expertise can be quickly communicated via the Internet to assembly plants in other world locations.

STRATEGIES TO COMPETE IN THE MARKETS OF EMERGING COUNTRIES Companies racing for global leadership have to consider competing in emerging markets like China, India, Brazil, Indonesia, Thailand, Poland, Russia, and Mexico countries where the business risks are considerable but where the opportunities for growth are huge, especially as their economies develop and living standards climb toward levels in the industrialized world. Strategy Option for emerging Country Markets The following are options for tailoring a companys strategy to fit the sometimes unusual or challenging circumstances presented in emerging country markets: Prepare to compete on the basis of low price consumers in emerging markets in emerging markets are often highly focused on price, which can give low-cost local competitors the edge unless a company can find ways to attract buyers with bargain prices as well as better product. Be prepared to modify aspects of the companys business model or strategy to accommodate local circumstances (but not so much that the company loses the advantage of global scale and global branding) for instance, when Dell entered China, it discovered that individuals and businesses were not accustomed to placing orders through the internet. Try to change the local market to better match the way the company does business elsewhere A multinational company often has enough market clout to drive major changes in the way a local market operates. Stay away from those emerging markets where it is impractical or uneconomic to modify the companys business model to accommodate local circumstance The Home Depot

expanded into Mexico in 2001 and China in 2006, but it has avoided entry into other emerging countries because its value proposition of good quality, low prices, and attentive customers service relies on: 1. Good highways and logistical system to minimize store inventory costs, 2. Employee stock ownership to help motivate store personnel to provide good customer service and, 3. High labor costs for housing construction and home repairs to encourage homeowners to engage in do-it-yourself projects.

Defending against Global Giants: Strategies or Local Companies in Emerging Markets If opportunity-seeking, resource-rich multinational companies are looking to enter emerging markets. Studies of local companies in developing markets have disclosed five strategies that have proved themselves in defending against globally competitive multinationals: 1. Develop business models that exploit shortcomings in local distribution networks or infrastructure. In many instance, the extensive collection o resources possessed by multinational is of little help in building a presence in emerging markets. 2. Utilize keen understanding of local customer needs and preferences to create customized product or service. In many emerging markets, multinationals find it difficult to attract the business o customers unable to pay global prices. 3. Take advantage of low-cost labor and other competitively important local workforce qualities. Local companies that lack the technological capabilities possessed by multinational entrants to emerging markets may be able to rely on low-cost labor or knowledge of the capabilities of the local labor force to offset any cost disadvantage. 4. Use acquisition and rapid growth strategies to better defend against expansion minded multinationals. With the growth potential o emerging markets such as China, India, and Brazil obvious to the world, local companies must attempt to develop scale as quickly as possible to defend against the stronger multinationals. 5. Transfer company expertise to cross-border markets and initiate actions to contend on a global level. When a company has resource strengths and capabilities suitable for

competing in other country markets, launching initiatives to transfer its expertise to crossborder markets becomes a viable strategic option.