Chapter 7: Strategies for

Competing in Foreign Markets

McGrawHill/Irwin Copyright2010byTheMcGrawHillCompanies,Inc.Allrightsreserved.
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
 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
Chapter Learning Objectives
1. Develop an understanding of why companies that
have achieved competitive advantage in their
domestic market may opt to enter foreign markets.
2. Learn how and why differing market conditions in
different countries influence a companys strategy
for competing in foreign markets.
3. Gain familiarity with the major strategic options for
entering and competing in foreign markets.
4. Understand the principal approaches used by
multinational companies in building competitive
advantage in foreign markets.
5. Gain an understanding of the unique characteristics
of competing in emerging markets.
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 Chapter Roadmap
Why Companies Expand into Foreign Markets
Factors that Shape Strategy Choices in Foreign
Markets
The Concepts of Multicountry Competition and
Global Competition
Strategy Options for Entering and Competing in
Foreign Markets
The Quest for Competitive Advantage in Foreign
Markets
Strategies to Compete in the Markets of
Emerging Countries
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The Four Big Strategic Issues
in 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 same
basic competitive strategy in all countries
or 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 Expand
into Foreign Markets?

Gain access to Obtain access to

new customers valuable natural
resources
Achieve lower
costs and enhance
competitiveness
Spread
Capitalize business risk across
on core wider
competencies market base
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International vs. Global Competition

Company operates in a
select few foreign
International
countries, with modest
Competitor
ambitions to expand
further

Company markets products

in 50 to 100 countries and
Global
is expanding operations
Competitor
into additional country
markets annually
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 Factors Shaping Strategy
Choices in Foreign Markets

Cross-country differences in cultural,

demographic, and market conditions

Gaining competitive advantage based

on where activities are located

Risks of adverse shifts in

currency exchange rates

Impact
Impact of
of host
host government
government policies
policies
on
on the
the local
local business
business climate
climate
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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
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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 to
offer a mostly standardized product worldwide.
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 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

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Fluctuating Exchange Rates Affect
a Companys Competitiveness
Currency exchange rates are unpredictable
Competitiveness of a companys operations
partly depends on whether exchange rate
changes affect costs favorably or unfavorably
Competitive impact 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

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 Two Primary Patterns
of International Competition

Multi-country
Competition

Global Competition

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 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!
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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 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 competitive
industries vie for worldwide leadership!
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 Figure 1.1
Nine strategic windows

1-19
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 Strategy Options for
Competing in Foreign Markets
Exporting

Licensing

Franchising strategy

Strategic alliances or
joint ventures

Multi-country strategy

Global strategy
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 Modes of entry

Exporting Contractual Joint Acquisition Greenfield

Agreeme Venture Investm
nt ent
Risk Low Low Moderate High High

Return Low Low Moderate High High

Control Moderate Low Moderate High High

Integration Negligible Negligible Low Moderate High

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Types of entry modes

Export

Intermediate

Hierarchical

9-22
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9-23
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9-24
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 Export Strategies
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 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 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

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Achieving Global Competitiveness
via Cooperative Agreements
Cooperative agreements with
foreign companies are a means to
Enter a foreign market or
Strengthen a firms
competitiveness 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 market
knowledge and working relationships with
key government officials in host country
Useful way to gain agreement on
important 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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Localized Multicountry Strategy
or a Global Strategy?

Strategic Issue

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

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 Figure 7.1: A Companys Strategic Options for Dealing with
Cross-Country Variations in Buyer Preferences and Market Conditions

7-32
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--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
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 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
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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 one
country to another are aggressively pursued
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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 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.
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 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
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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?
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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
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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

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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 favorable
cost 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 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
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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 of
the companys 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 companys business
model to accommodate local circumstances
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 Strategies for Local Companies
in Emerging Markets
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.

Take advantage of low-cost labor and other

competitively important local workforce qualities.

Use
Use economies
economies ofof scope
scope and
and scale
scale to
to better
better
defend
defend against
against expansion-minded
expansion-minded multinationals.
multinationals.

Transfer
Transfer company
company expertise
expertise to
to cross-border
cross-border markets
markets
and
and initiate
initiate actions
actions to
to contend
contend on
on aa global
global level.
level.
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