Chapter 7: Strategies for Competing in International Markets Learning Objectives
Chapter 7: Strategies for Competing in International Markets
Learning Objectives
After reading this chapter, you should be able to:
Identify the primary reasons companies choose to compete in international markets.
Understand how and why differing market conditions across countries influence a company’s strategy choices in international markets.
Identify the differences among the five primary modes of entry into foreign markets.
Identify the three main strategic approaches for competing internationally.
Explain how companies can use international operations to improve overall competitiveness.
Identify the unique characteristics of competing in developing-country markets.
Why Companies Decide to Enter Foreign Markets
Primary Reasons:
To gain access to new customers.
To achieve lower costs through economies of scale, experience, and increased purchasing power.
To gain access to low-cost inputs of production.
To further exploit its core competencies.
To gain access to resources and capabilities located in foreign markets.
Why Competing Across National Borders Makes Strategy Making More Complex
Challenges include:
Different countries with different home-country advantages in different industries.
Location-based value chain advantages for certain countries.
Differences in government policies, tax rates, and economic conditions.
Currency exchange rate risks.
Differences in buyer tastes and preferences for products and services.
The Diamond Framework
Usage of the Diamond Framework:
To predict from which countries foreign entrants are most likely to come.
To decide which foreign markets to enter first.
To choose the best country location for different value chain activities.
Opportunities for Location-Based Advantages
Factors to consider:
Lower wage rates.
Higher worker productivity.
Lower energy costs.
Fewer environmental regulations.
Lower tax rates.
Lower inflation rates.
Proximity to suppliers and technologically related industries.
Proximity to customers.
Lower distribution costs.
Available or unique natural resources.
The Impact of Government Policies and Economic Conditions in Host Countries
Positive Aspects:
Tax incentives.
Low tax rates.
Low-cost loans.
Site location and development.
Worker training.
Negative Aspects:
Environmental regulations.
Subsidies and loans to domestic competitors.
Import restrictions.
Tariffs and quotas.
Local-content requirements.
Regulatory approvals.
Profit repatriation limits.
Minority ownership limits.
Political and Economic Risk in Host Countries
Political Risks:
Instability of host government.
Revolution against dictatorial government leaders.
Legislation or regulations on foreign-owned businesses.
Potential for election of corrupt or tyrannical leaders.
Nationalization or expropriation of foreign-owned assets.
Internal political unrest, terrorism, and corruption.
Economic Risks:
Instability of a host’s economy and monetary system.
Inflation rate increases due to uncontrolled deficit spending or risky bank lending practices.
Piracy and lack of protection for intellectual property.
Fluctuations in the value of different currencies.
The Risks of Adverse Exchange Rate Shifts
Risks associated with exchange rate shifts:
Predictability Issues: Shifts are hard to predict due to various factors and uncertainties regarding when and how much these will change.
Market Uncertainty: Creates uncertainty about which countries represent low-cost manufacturing locations and which rivals have the upper hand in the marketplace.
Effects on Exporters:
Exporters experience a rising demand for their goods whenever their currency grows weaker compared to the importing country's currency.
Exporters experience a falling demand for their goods whenever their currency grows stronger compared to the importing country's currency.
Thinking Strategically
Strategic Considerations for the EU:
What effects has the adoption of the euro had on the ability of European Union (EU) countries and firms to respond to changes in intra-national economic and trade conditions, given that they now share a common currency?
What should an EU firm do to respond to an adverse currency exchange rate shift in a non-EU country?
How will exiting the EU affect the United Kingdom's ability to compete in world markets?
Cross-Country Differences in Demographic, Cultural, and Market Conditions
Key Strategic Considerations:
Whether to customize offerings in each country market to match the tastes and preferences of local buyers.
Whether to pursue a strategy of offering a mostly standardized product worldwide.
Primary Modes of Entry into Foreign Markets
Five Primary Modes:
Maintain a home country production base and export goods to foreign markets.
License foreign firms to produce and distribute the firm’s products abroad.
Employ a franchising strategy in foreign markets.
Establish a subsidiary in a foreign market via acquisition or internal development.
Rely on strategic alliances or joint ventures with foreign companies.
Export Strategies
Advantages:
Low capital requirements.
Economies of scale in utilizing existing production capacity.
No distribution risk.
No direct investment risk.
Disadvantages:
Maintaining relative cost advantage of home-based production.
Transportation and shipping costs.
Exchange rate risks.
Tariffs and import duties.
Loss of channel control.
Licensing and Franchising Strategies
Advantages:
Low resource requirements.
Income from royalties and franchising fees.
Rapid expansion into many markets.
Disadvantages:
Maintaining control of proprietary know-how.
Loss of operational and quality control.
Adapting to local market tastes and expectations.
Foreign Subsidiary Strategies
Advantages:
High level of control.
Quick large-scale market entry.
Avoids entry barriers.
Access to acquired firm’s skills.
Disadvantages:
Costs of acquisition.
Complexity of acquisition process.
Integration of the firms’ structures, cultures, operations, and personnel.
Using a Greenfield Strategy for Developing a Foreign Subsidiary
Conditions Favorable for Greenfield Strategy:
Creating an internal startup is cheaper than making an acquisition.
Adding new production capacity will not adversely impact the supply-demand balance in the local market.
A startup subsidiary has the ability to gain good distribution access.
A startup subsidiary will have the size, cost structure, and resource strengths to compete head-to-head against local rivals.
Pursuing a Greenfield Strategy
Advantages:
High level of control over venture.
“Learning by doing” in the local market.
Direct transfer of the firm’s technology, skills, business practices, and culture.
Disadvantages:
Capital costs of initial development.
Risks of loss due to political instability or lack of legal protection of ownership.
Slowest form of entry due to the extended time required to construct facility.
Benefits of Alliance and Joint Venture Strategies
Benefits include:
Gaining partner’s knowledge of local market conditions.
Achieving economies of scale through joint operations.
Gaining technical expertise and local market knowledge.
Sharing distribution facilities and dealer networks and mutually strengthening each partner’s access to buyers.
Directing competitive energies more toward mutual rivals and less toward one another.
Establishing working relationships with key officials in the host country government.
The Risks of Strategic Alliances with Foreign Partners
Risks include:
Outdated knowledge and expertise of local partners.
Cultural and language barriers.
Costs of establishing the working arrangement.
Conflicting objectives and strategies or deep differences of opinion about joint control.
Differences in corporate values and ethical standards.
Loss of legal protection of proprietary technology or competitive advantage.
Overdependence on foreign partners for essential expertise and competitive capabilities.
International Strategy: The Three Main Approaches
Strategic Approaches:
Multidomestic Strategy
Global Strategy
Transnational Strategy
FIGURE 7.2: Three Approaches for Competing Internationally
Global Strategy:
Think Global - Act Global
Transnational Strategy:
Think Global - Act Local
Multidomestic Strategy:
Think Local - Act Local
Advantages and Disadvantages of a Multidomestic Strategy
Advantages:
Can meet the specific needs of each market more precisely.
Can respond more swiftly to localized changes in demand.
Can target reactions to the moves of local rivals.
Can respond more quickly to local opportunities and threats.
Disadvantages:
Hinders resource and capability sharing or cross-market transfers.
Higher production and distribution costs.
Is not conducive to a worldwide competitive advantage.
Advantages and Disadvantages of a Global Strategy
Advantages:
Has lower costs due to scale and scope economies.
Can lead to greater efficiencies due to the ability to transfer best practices across markets.
Increases innovation from knowledge sharing and capability transfer.
Offers the benefit of a global brand and reputation.
Disadvantages:
Cannot address local needs precisely.
Is less responsive to changes in local market conditions.
Involves higher transportation costs and tariffs.
Has higher coordination and integration costs.
Advantages and Disadvantages of a Transnational Strategy
Advantages:
Offers the benefits of both local responsiveness and global integration.
Enables the transfer and sharing of resources and capabilities across borders.
Provides the benefits of flexible coordination.
Disadvantages:
Is more complex and harder to implement.
Entails conflicting goals, which may be difficult to reconcile and require trade-offs.
Involves more costly and time-consuming implementation.
Illustration Capsule 7.2: Four Seasons Hotels: Local Character, Global Service
Key Questions:
Why has Four Seasons Hotels been so successful in expanding its hospitality operations into a broad diversity of countries?
How should local hotel competitors respond to Four Seasons Hotels’ continued expansion into their markets?
Why has the global economic slowdown not dampened demand for the Four Seasons luxury hotel offerings?
International Operations and the Quest for Competitive Advantage
Three Main Approaches to Building Competitive Advantage in International Markets:
Use international location to lower costs or differentiate product.
Share resources and capabilities across country borders.
Gain cross-border resource coordination opportunities unavailable to domestic rivals.
Using Location to Build Competitive Advantage
Key Location Issues:
To customize offerings in each country market to match tastes and preferences of local buyers.
To pursue a strategy of offering a mostly standardized product worldwide.
When to Concentrate Activities in a Few Locations
When concentration makes sense:
Costs of manufacturing or other activities are significantly lower in some geographic locations than in others.
There are significant scale economies in production or distribution.
There are sizable learning and experience benefits associated with performing an activity in a single location.
Certain locations have superior resources or allow better coordination of related activities.
When to Disperse Activities across Many Locations
When dispersion is suitable:
Buyer-related activities can be conducted at a distance.
High transportation costs.
Diseconomies of large size.
Trade barriers make a central location too expensive.
Dispersing activities reduces exchange rate risks.
Dispersion helps prevent supply interruptions and avoids adverse political developments.
Sharing and Transferring Resources and Capabilities across Borders to Build Competitive Advantage
Building advantage requires:
Using powerful brand names to extend a differentiation-based advantage beyond the home market.
Coordinating activities for sharing and transferring resources and production capabilities across different countries’ domains.
Cross-Border Strategic Moves
Offensive strategic options:
Based on international competitor’s strong or protected market position in more than one country.
Defensive Strategic Moves:
Involving multiple markets, counteracting moves made by competitors in another.
Dumping as a Strategy
Definition of Dumping:
Selling goods in foreign markets at prices that are either below normal home market prices or below the full costs per unit.
Implications of Dumping:
Governments can be expected to retaliate against such practices by foreign competitors.
The World Trade Organization (WTO) actively polices dumping to discourage such practices.
Defending Against International Rivals
Strategies include:
Firm A moves against Firm B in Country B.
Firm B counters with a response in Country C.
Strategies for Competing in Developing-Country Markets
Recommended Strategies:
Prepare to compete based on low price.
Modify the firm’s business model or strategy to accommodate local circumstances.
Change the local market to better match the firm’s operations elsewhere.
Avoid markets where modification is impractical or uneconomical.
Defending against Global Giants: Strategies for Local Companies in Developing Countries
Strategies include:
Developing a business model that exploits shortcomings in local distribution networks or infrastructure.
Utilizing knowledge of local customer needs to create customized products.
Leveraging aspects of the local workforce that large multinational firms may be unfamiliar with.
Using acquisition and rapid-growth strategies to defend against larger firms.
Illustration Capsule 7.3: WeChat’s Strategy for Defending against International Social Media Giants in China
Key Questions:
What were the key elements of WeChat’s business model that allowed it to fend off major international rivals?
What changes in WeChat’s external competitive environment could threaten its success?
How could the Diamond of National Competitive Advantage be useful for WeChat in forecasting its future success in China?
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