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146Chapter 7 Strategies for Competing Internationally or Globally 146

Strategy: Core Concepts and Analytical Approaches

An e-book published by McGraw-Hill Education

Arthur A. Thompson, The University of Alabama 6th Edition, 2020-2021

146

chapter 7 Strategies for Competing Internationally or Globally

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, retired Chairman and CEO, Intel Corporation

You do not choose to become global. The market chooses for you; it forces your hand. —Alain Gomez, Former CEO, Thomson, S.A.

[I]ndustries 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

Any company that aspires to industry leadership in the 21st century must think in terms of global, not domestic, market leadership. The world economy is globalizing at an accelerating pace as ambitious, growth-minded companies race to build stronger competitive positions in the markets of more and more countries, as companies gain greater access to foreign markets, as country exports and imports increase, and as rapidly growing Internet accessibility and usage erodes the relevance of geographic distance.

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 marketing its products or services in many different geographic regions of the world. Thus, there is a meaningful distinction between the competitive scope of a company that operates in a few foreign countries (and whose strategy is to enter only a few more country markets) and a company with production and/or sales operations in 50 to 100 countries (and whose strategy is to expand rapidly into additional country markets). The former is most accurately termed an international competitor while the latter qualifies as a global competitor.

This chapter focuses on strategy options for expanding beyond domestic boundaries and competing internationally in a few countries or globally in a great many countries across the world. The spotlight is on four strategic issues unique to competing across national borders:

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1. Whether to customize the company’s offerings in each different country market to match local buyers’ tastes and preferences or to offer a mostly standardized product everywhere it operates.

2. Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country to better match local market and competitive conditions.

3. Where to locate the company’s production facilities, distribution centers, and customer service operations to realize the greatest location-related advantages.

4. When and how to efficiently transfer some of the company’s competitively powerful resources and capabilities from certain countries to other countries; such cross-border redeployment of competitively potent resources/capabilities is useful for spearheading the company’s strategic offensives to enter new country markets and more effectively battle local rivals for sales and market share.

In the process of exploring these issues, we introduce such core concepts as multicountry competition, global competition, and profit sanctuaries. The chapter includes sections on why competing across national borders makes strategy-making more complex; the principal strategy options for competing internationally or globally; the importance of locating value chain activities in the most advantageous countries; the strategic value of profit sanctuaries; and the initiation of global strategic offensives.

Why Companies Decide to Enter Foreign Markets

Companies opt to sell their products/services or to locate operations in some or many countries for any of four major reasons:

1. To gain access to new customers. Expanding into the markets of countries around the world becomes an imperative when a company encounters dwindling growth opportunities in its home market or if a company aspires to be among the world leaders in its industry.

2. To achieve lower costs and thereby become more cost competitive. Many companies are driven to seek out foreign buyers for their products and services because they cannot achieve a big enough sales volume domestically to fully capture manufacturing economies of scale or learning-curve effects. The relatively small size of country markets in Europe explains why companies like Michelin, BMW, and Nestlé long ago began selling their products all across Europe and then moved into markets in North America and Latin America. Many manufacturers have located production facilities in foreign countries to take advantage of lower costs for labor and other production-related activities and/or to avoid the payment of tariffs/duties on goods exported to countries with relatively high tariffs/duties on imported goods and/or to mitigate the risks of adverse shifts in currency exchange rates. International expansion can also increase a company’s bargaining power with suppliers because of its increased volume of purchases. Companies in industries based on natural resources often find it necessary to have operations in foreign countries since natural resource supplies (oil, natural gas, minerals, and rubber) are located in many parts of the world and can be accessed most cost effectively at the source.

3. To further exploit competitively valuable resources and capabilities. A company with valuable competitive assets can extend what may be a market-leading position in one or two countries into a position of global market leadership. Walmart is capitalizing on its considerable resources and capabilities in discount retailing to expand its operations in 27 countries outside the United States, including Mexico, China, Japan, Chile, Great Britain, Brazil, Argentina, and parts of both Africa and Central America.

4. To spread business risk across a wider market area. A company distributes its business risk by operating in many countries rather than depending entirely on operations in a few countries. Thus, when a company with operations across much of the world approaches market saturation in certain countries or

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encounters economic downturns or adverse competitive conditions in certain countries, its performance may be bolstered by buoyant sales elsewhere. In general, a company’s business risk is lower when it has a diverse collection of revenue streams coming from many countries rather than being dependent on revenues generated in one or just a few countries,

In addition, the major suppliers of companies expanding internationally often also do so in order to meet their customers’ needs abroad and retain their position as a key supply chain partner. For example, when motor vehicle companies have opened new plants in foreign locations, several big automotive parts suppliers have frequently opened new facilities nearby to permit timely delivery of their parts and components to the plant. Newell- Rubbermaid, one of Walmart’s biggest suppliers of household products, has followed Walmart into foreign markets.

Why Competing Across National Borders Causes Strategy Making to Be More Complex

Crafting a strategy to compete in one or more countries or regions of the world is inherently more complex for four reasons: (1) the presence of important cross-country differences in buyer tastes, market sizes, and growth potential; (2) sizable cross-country differences in wage rates, worker productivity, inflation rates, energy supplies and costs, tax rates, and other factors that impact the pros and cons of locating company facilities in one country versus another; (3) differing governmental policies and regulations that make the business climate more favorable in some countries than in others; and (4) the risks of adverse shifts in currency exchange rates.

Cross-Country Differences in Buyer Tastes, Market Sizes, and Growth Potential Buyer tastes for a particular product or service sometimes differ substantially from country to country. In France, consumers prefer top-loading washing machines, whereas in most other European countries consumers prefer front-loading machines. Soups that appeal to Swedish consumers are not popular in Malaysia. Italian coffee drinkers prefer espressos, but in North America many coffee drinkers prefer milder-roasted coffees. Northern Europeans want large refrigerators because they tend to shop once a week in supermarkets; southern Europeans are satisfied with small refrigerators because they shop daily. In parts of Asia, refrigerators are a status symbol and may be placed in the living room, leading to preferences for stylish designs and colors—in India, bright blue and red are popular colors. In other Asian countries, household space is constrained and many refrigerators are only four feet high so the top can be used for storage. In Hong Kong and Japan, the preference is for compact appliances, but in Taiwan large appliances are more popular. Consequently, companies operating in a global marketplace must wrestle with whether and how much to customize their offerings in each different country market to match local buyers’ tastes and preferences or whether to pursue a strategy of offering a mostly standardized product worldwide. While making products that are closely matched to local tastes makes them more appealing to local buyers, customizing a company’s products country by country may raise production and distribution costs due to the greater variety of designs and components, shorter production runs, and the complications of added inventory handling and distribution logistics. Greater standardization of a global company’s product offering, on the other hand, can lead to scale economies and learning-curve effects, thus reducing production costs per unit and perhaps contributing to the achievement of a low-cost advantage.

CORE CONCEPT The tension between the market pressures to localize a company’s product offerings country by country and the competitive pressures to lower costs by offering mostly standardized products in all countries where a company competes is one of the big strategic issues that companies operating in few or many country markets must address.

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Understandably, differing population sizes, income levels, and other demographic factors give rise to considerable differences in market size and growth rates from country to country. In emerging markets like India, China, Brazil, and Malaysia, the potential for long-term growth in buyer demand for motor vehicles, PCs and tablets, smartphones, steel, big-screen TVs, credit cards, and electric energy is higher than in the more mature economies of Great Britain, Canada, and Japan. Owing to widely differing population demographics and income levels, there is a far bigger market for luxury automobiles and high-fashion apparel in the United States and Western Europe than in Argentina, India, Mexico, and Thailand. Cultural influences can also affect consumer demand for a product. For instance, in China, many parents are reluctant to purchase PCs even when they can afford them because of concerns that their children will be distracted from their schoolwork by surfing the Internet, playing video games, and streaming music, movies, and TV shows.

Similarly, there are country-to-country differences in distribution channels, competitive conditions, and other market-related factors that impact a company’s strategy choices. In India, there are efficient well-developed national channels for distributing trucks, scooters, farm equipment, groceries, personal care items, and other packaged products to the country’s three million retailers; however, in China, distribution is primarily local and there is a limited national network for distributing most products. The marketplace for certain products/services is intensely competitive in some countries and only moderately contested in others. Industry driving forces may be one thing in Spain, quite another in Canada, and different yet again in Turkey, Argentina, and South Korea. Sometimes, product designs suitable in one country are inappropriate in another because of differing local customs and standards. For example, in the United States, electrical devices run on 110-volt electrical systems, but in some European countries the standard is a 240-volt electric system, necessitating the use of different electrical designs, components, and cord plugs.

The managerial challenge at companies with international or global operations is how best to tailor a company’s strategy to take all these cross-country differences into account.

Cross-Country Differences in Operating Costs and Profitability Differences in wage rates, worker productivity, energy costs, environmental regulations, tax rates, inflation rates, tariffs/import duties, and the like from country to country are often so big that a company’s operating costs and profitability are significantly impacted by where its production, distribution, and customer-service activities are located. Wage rates, in particular, vary enormously from country to country. For example, in 2016, hourly compensation for manufacturing workers averaged less than $2.00 in India (2017), $2.06 in the Philippines, $3.60 in China, $3.91 in Mexico, $7.98 in Brazil, $8.60 in Hungary, $9.82 in Taiwan, $10.96 in Portugal, $15.70 in Greece, $22.98 in South Korea, $26.46 in Japan, $30.08 in Canada, $37.72 in France, $39.03 in the United States, $43.18 in Germany, and $48.62 in Norway.1 Not surprisingly, the big cross-country differences in wages rates have turned low-wage countries like China, India, Pakistan, Cambodia, Vietnam, Mexico, Brazil, Guatemala, Honduras, the Philippines, and several countries in Africa and Eastern Europe into production havens for goods that can be manufactured or assembled by a relatively unskilled labor force. Indeed, China has emerged as the manufacturing capital of the world—virtually all of the world’s major manufacturing companies now have facilities in China. A manufacturer can also gain cost advantages by locating its manufacturing and assembly plants in countries with less costly government regulations, low taxes, low energy costs, and cheaper access to essential natural resources.

Clearly, companies that locate production facilities in low-cost countries (or that source their products from contract manufacturers in these countries) have a production-cost advantage over rivals with plants in countries where costs are higher. In such cases, the low-cost countries become principal production sites, with most of the output being exported to markets in other parts of the world. Likewise, concerns about short delivery times and low shipping costs make some countries better locations than others for establishing distribution centers. Many U.S. companies locate customer call centers in such lower wage countries as Ireland and India, where English is spoken and well-educated workers are readily available.

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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. It matters whether these measures create a favorable or unfavorable business climate. Governments of countries anxious to spur economic growth, create more jobs, and raise living standards for their citizens (Ireland is a good example) usually make a special effort to create a business climate that outsiders will view favorably. They may provide such incentives as reduced taxes, low-cost loans, site location and site development assistance, and government-sponsored training for workers to both foreign and domestic companies to construct or expand production and distribution facilities. When new business issues or developments arise, “pro-business” governments make a practice of seeking advice and counsel from business leaders. When tougher business regulations are deemed appropriate, they endeavor to make the transition to more costly and stringent regulations somewhat business friendly rather than adversarial.

On the other hand, governments sometimes enact policies that, from a business perspective, make locating facilities within a country’s borders less attractive. For example, the nature of a company’s operations may make it particularly costly to achieve compliance with a country’s environmental regulations. The governments of emerging or developing countries often create uneven playing fields that give domestic companies an advantage— they may enact policies to discourage foreign imports or provide subsidies and low-interest loans to domestic companies to enable them to better compete against foreign companies or enact burdensome procedures and requirements for imported goods to pass customs inspection (to make it harder for imported goods to compete against the products of local businesses), and impose tariffs or quotas on the imports of certain goods (also to help protect local businesses from foreign competition).2 For example, in early 2019, the cheapest Tesla Model 3 (produced at Tesla’s factory in California) had a base price of about $36,500 in the United States but this same Model 3 in Europe carried a price tag of $60,900 due principally to Europe’s value-added tax (VAT) and import duties on U.S.-made vehicles. Foreign governments sometimes also specify that a certain percentage of the parts and components used in manufacturing a product in their country be obtained from local suppliers, require prior approval of a foreign company’s capital spending projects, limit withdrawal of funds from the country, and require minority (sometimes majority) ownership of foreign company operations by local companies or investors. There are times when a government may place restrictions on exports to ensure adequate local supplies and regulate the prices of imported and locally produced goods. Governments controlled by newly elected left- leaning or socialist politicians often impose very high taxes on large corporations to fund new government programs that benefit low-income families and the disadvantaged. Such governmental actions make a country’s business climate unattractive, and in some cases, may be sufficiently onerous to discourage a company from locating production or distribution facilities in that country or maybe even selling its products in that country.

A country’s business climate is also a function of the political and economic risks associated with operating within its borders. Political risks have to do with the instability of weak governments, growing possibilities that a country’s citizenry will revolt against dictatorial government leaders, the likelihood that current or future governmental leaders will pursue legislation or regulations that are onerous or burdensome to businesses, and the potential for future elections to produce government leaders who are corrupt or hostile to companies from certain foreign countries operating within their borders. For example, if socialist politicians gain control of a country’s government, there’s a political risk that a company’s assets will be nationalized and its operations taken over by the government. Economic risks have to do with the stability of a country’s economy and monetary system— whether inflation rates might skyrocket, whether risky bank lending practices could lead to large numbers of bank failures and economic disruptions, or whether out-of-control government spending could spur a meltdown of the country’s credit rating, cause interest rates on government debt to escalate, and cause prolonged economic distress. In some countries, the threat of piracy and lack of protection for a company’s intellectual property pose substantial economic risks.

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The Risks of Adverse Exchange Rate Shifts When companies produce and market their products and services in many different countries, they are subject to the impacts of sometimes favorable and sometimes unfavorable changes in currency exchange rates. The rates of exchange between different currencies can vary by as much as 20 to 40 percent annually, with the changes occurring sometimes gradually and sometimes swiftly. Sizable shifts in exchange rates pose significant risks for two reasons:

1. They are very hard to predict because of the variety of factors involved and the uncertainties surrounding when and by how much the various factors affecting exchange rates will change.

2. They shuffle the cards of which countries—either temporarily or long term— represent the low-cost manufacturing location and which rivals have a temporary or longer-term cost-based competitive advantage because of the countries where their production operations are located.

To illustrate the economic and competitive risks associated with fluctuating exchange rates, consider the case of a U.S. company that has located manufacturing facilities in Brazil (where the currency is reals—pronounced ray- alls) and that exports most of its Brazilian-made goods to markets in the European Union (where the currency is euros). To keep the numbers simple, assume that the exchange rate is 4 Brazilian reals for 1 euro and that the product being made in Brazil has a manufacturing cost of 4 Brazilian reals (or 1 euro). Now suppose the exchange rate shifts from 4 reals per euro to 5 reals per euro (meaning that the real has declined in value and the euro is stronger). Making the product in Brazil is now more cost competitive because a Brazilian good costing 4 reals to produce has fallen to only 0.8 euros at the new exchange rate (4 reals divided by 5 reals per euro = 0.8 euros). This clearly puts a producer of the Brazilian-made good in a better position to compete against the European makers of the same good. On the other hand, should the value of the Brazilian real grow stronger in relation to the euro—resulting in an exchange rate of 3 reals to 1 euro—the same Brazilian-made good formerly costing 4 reals (or 1 euro) to produce now has a cost of 1.33 euros (4 reals divided by 3 reals per euro = 1.33), putting a producer of the Brazilian-made good in a weaker competitive position vis-à-vis European producers. Plainly, the attraction of manufacturing a good in Brazil and selling it in Europe is far greater when the euro is strong (an exchange rate of 1 euro for 5 Brazilian reals) than when the euro is weak and exchanges for only 3 Brazilian reals.

But there is one more piece to the story. When the exchange rate changes from 4 reals per euro to 5 reals per euro, not only is the cost competitiveness of the Brazilian manufacturer stronger relative to European manufacturers of the same item, but the Brazilian-made good that formerly cost 1 euro and now costs only 0.8 euros can also be sold to consumers in the European Union for a lower euro price than before. In other words, the combination of a stronger euro and a weaker real acts to lower the price of Brazilian-made goods in all the countries that are members of the European Union, which is likely to spur sales of the Brazilian-made good in Europe and boost Brazilian exports to Europe. Conversely, should the exchange rate shift from 4 reals per euro to 3 reals per euro—which makes a Brazilian manufacturer less cost competitive with rival European manufacturers—the Brazilian-made good that formerly cost 1 euro and now costs 1.33 euros will sell for a higher price in euros than before, which will weaken the demand of European consumers for Brazilian- made goods and reduce Brazilian exports to Europe. Thus, the exporters of Brazilian-made goods are likely to experience (1) rising demand for their goods in Europe whenever the Brazilian real grows weaker relative to the euro and (2) falling demand for their goods in Europe whenever the real grows stronger relative to the euro. Consequently, from the standpoint of a company with Brazilian manufacturing plants, a weaker Brazilian real is a favorable exchange rate shift and a stronger Brazilian real is an unfavorable exchange rate shift.

CORE CONCEPT Companies that export goods to foreign countries always gain in competitiveness when the currency of the country in which the goods are manufactured grows weaker relative to the currencies of countries to which the goods are being exported. A company is disadvantaged when the currency of the country where its goods are being manufactured grows stronger relative to the currencies of countries to which it is exporting its goods.

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It follows from the previous discussion that shifting exchange rates have a big impact on domestic manufacturers’ ability to compete with foreign rivals. For example, U.S.-based manufacturers locked in a fierce competitive battle with low-cost foreign imports benefit from a weaker U.S. dollar for the following reasons:

n Declines in the value of the U.S. dollar against foreign currencies raise the U.S. dollar costs of goods manufactured by foreign rivals at plants located in the countries whose currencies have grown stronger relative to the U.S. dollar. A weaker dollar acts to reduce or eliminate whatever cost advantage foreign manufacturers may have had over U.S. manufacturers (and helps protect the manufacturing jobs of U.S. workers).

n A weaker dollar makes foreign-made goods more expensive in dollar terms to U.S. consumers—this curtails U.S. buyer demand for foreign-made goods, stimulates greater demand on the part of U.S. consumers for U.S.-made goods, and reduces U.S. imports of foreign-made goods.

n A weaker U.S. dollar enables the U.S.-made goods to be sold at lower prices to consumers in those countries whose currencies have grown stronger relative to the U.S. dollar—such lower prices boost foreign buyer demand for the now relatively cheaper U.S.-made goods, thereby stimulating exports of U.S.-made goods to foreign countries and perhaps creating more jobs in U.S.-based manufacturing plants.

n A weaker dollar increases the dollar value of profits a company earns in those foreign country markets where the local currency is stronger relative to the dollar. For example, if a U.S.-based manufacturer earns a profit of €10 million on its sales in Europe, those €10 million convert to a larger number of U.S. dollars when the dollar grows weaker against the euro.

A weaker U.S. dollar is therefore an economically favorable exchange rate shift for manufacturing plants based in the United States. A decline in the value of the U.S. dollar strengthens the cost competitiveness of U.S.- based manufacturing plants and boosts foreign buyers’ demand for U.S.-made goods. When the value of the U.S. dollar is expected to remain weak for some time to come, foreign companies have an incentive to build manufacturing facilities in the United States to make goods for U.S. consumers rather than export the same goods to the United States from foreign plants where production costs in dollar terms have been driven up by the decline in the value of the dollar.

Conversely, a stronger U.S. dollar is an unfavorable exchange rate shift for U.S.-based manufacturing plants because it makes such plants less cost-competitive with foreign plants and weakens foreign demand for U.S.-made goods. A strong dollar also weakens the incentive of foreign companies to locate manufacturing facilities in the United States to make goods for U.S. consumers. The same reasoning applies to companies who have plants in countries in the European Union where euros are the local currency. A weak euro versus other currencies enhances the cost competitiveness of companies manufacturing goods in Europe vis-à-vis foreign rivals with plants in countries whose currencies have grown stronger relative to the euro; a strong euro versus other currencies weakens the cost-competitiveness of companies with plants in the European Union.

CORE CONCEPT Domestic companies facing competitive pressure from lowercost foreign rivals benefit when their government’s currency grows weaker in relation to the currencies of the countries where the lowercost foreign rivals have their manufacturing plants.

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The Concepts of Multicountry Competition and Global Competition

Important differences exist in the patterns of international competition from industry to industry.3 At one extreme is multicountry competition, in which there’s 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 to that country 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 Poland, Mexico, and Australia as an example—the requirements and expectations of banking customers vary among the three countries, the lead banking competitors in Poland differ from those in Mexico or Australia, and the competitive battle going on among the leading banks in Poland is unrelated to the rivalry taking place in Mexico or Australia. Thus, with multicountry competition, rival firms compete for national championships and winning in one country does not necessarily signal the ability to fare well in other countries. In multicountry competition, the power of a company’s resources, capabilities, and strategy in one country may have limited impact on its competitiveness in other countries where it operates. Moreover, any competitive advantage a company secures in one country is largely confined to that country; the spillover effects to other countries are minimal. Industries characterized by multicountry competition include radio and TV broadcasting, consumer banking, metals fabrication, baking, and retailing.

At the 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 countries where sales volumes are large and where having a competitive presence is strategically important to building a strong global position in the industry. Thus, a company’s competitive position in one country both affects and is affected by its position in other countries. In global competition, a firm’s overall competitive advantage grows out of its entire worldwide operations; the competitive advantage it creates at its home base is supplemented by advantages growing out of its operations in other countries (having plants in low-wage countries, being able to transfer competitively valuable expertise from country to country, having the capability to serve customers who also have multinational operations, and having brand name recognition in many parts of the world). Rival firms in globally competitive industries vie for worldwide leadership. Global competition exists in motor vehicles, television sets, tires, cell phones, personal computers, copiers, watches, bicycles, and commercial aircraft.

It is also important to recognize that an industry can be in transition from multicountry competition to global competition. In a number of today’s industries—beer and major home appliances are prime examples—leading domestic competitors have begun expanding into more and more foreign markets, often acquiring local or regional brands, integrating them into their operations, and expanding their distribution to more countries. As some industry members start to build global brands and a global presence, other industry members find themselves pressured to follow the same strategic path. As the industry consolidates to fewer players, such that many of the same companies find themselves in head-to-head competition in more and more country markets,

CORE CONCEPT Multicountry competition exists when competition in one national market is not closely connected to competition in another national market. There is no global or world market, just a collection of selfcontained country markets.

CORE CONCEPT Global competition exists when competitive conditions across national markets are linked strongly enough to form a true international market and when leading competitors compete head to head in many different countries.

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global competition begins to replace multicountry competition. Global competition can also replace multicountry competition when consumer tastes and/or uses of a product converge across the world—as has been occurring in the market for smart phones and LED lighting. Less diversity of tastes and preferences enables companies to create global brands and sell essentially the same products in different countries. But even in industries where cross-country consumer tastes remain fairly diverse, global competition can emerge if companies are able to use cost-effective “custom mass production” methods at one or more large-scale plants to economically produce different product versions and thus accommodate the different tastes of people in different countries.

In addition to taking the obvious cultural and political differences between countries into account, a company must shape its strategic approach to competing in foreign markets according to whether its industry is characterized by multicountry competition, global competition, or a transition from one to the other.

Strategy Options for Establishing a Competitive Presence in Foreign Markets

There are five strategic ways a company can establish a competitive presence in foreign markets:

1. Maintain a national (one-country) production base and export goods to foreign markets.

2. License foreign firms to use the company’s technology or to produce and distribute the company’s products.

3. Employ a franchising strategy in foreign markets.

4. Rely upon acquisitions or internal startup ventures to gain entry into foreign markets.

5. Rely on strategic alliances or joint ventures with foreign companies as the primary vehicle for entering foreign markets.

The following sections discuss these five strategy options in more detail.

Export Strategies Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial strategy for pursuing international sales. It is a conservative way to explore competing in markets of foreign countries. The amount of capital needed to begin exporting is often minimal; existing production capacity may well be sufficient to make goods for export. With an export strategy, a manufacturer can limit its involvement in foreign markets by contracting with foreign wholesalers experienced in importing to handle the entire distribution and marketing function in their countries or regions of the world. If it is more advantageous to maintain control over these functions, however, a manufacturer can establish its own distribution and sales organizations in some or all of the target foreign markets. Either way, a home-based production and export strategy helps the firm minimize its direct investments in foreign countries. Such strategies are commonly favored by Chinese, Korean, and Italian companies—products are designed and manufactured at home and then distributed through local channels in the importing countries. The primary functions performed abroad relate chiefly to establishing a network of distributors and perhaps conducting sales promotion and brand-awareness activities.

Whether an export strategy can be pursued successfully over the long run hinges on the relative cost competitiveness of a company’s home-country production base. In some industries, firms gain additional scale economies and learning-curve benefits from centralizing production in one or several giant plants whose output capability exceeds buyer demand in any one country market; obviously, a company must export to capture such economies. However, an export strategy is vulnerable when (1) manufacturing costs in the home country are substantially higher than in foreign countries where rivals have plants, (2) the costs of shipping the product to distant foreign

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markets are relatively high, (3) adverse shifts occur in currency exchange rates, and (4) importing countries impose tariffs or erect other trade barriers. Unless an exporter can both keep its production and shipping costs competitive with rivals, secure adequate local distribution and marketing support of its products, and effectively hedge against unfavorable changes in currency exchange rates, its success will be limited.

Licensing Strategies Licensing makes sense when a firm with valuable technical know-how or a unique patented product has neither the internal organizational capability nor the resources to enter foreign markets. Licensing also has the advantage of avoiding the risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky. By licensing the technology or the production rights to foreign-based firms, a company can generate income from royalties while shifting the costs and risks of entering foreign markets to the licensee. The big disadvantage of licensing is the risk of providing valuable technological know-how to foreign companies and thereby losing some degree of control over its use; monitoring licensees and safeguarding the company’s proprietary know-how can prove difficult in some circumstances. But if the royalty potential is considerable and the companies to whom licenses are granted are trustworthy and reputable, then licensing can be an attractive option. Many software and pharmaceutical companies use licensing strategies to participate in foreign markets.

Franchising Strategies While licensing works well for manufacturers and owners of proprietary technology, franchising is often better suited to the international expansion efforts of service and retailing enterprises. McDonald’s, Yum! Brands (the parent of Pizza Hut, KFC, and Taco Bell), Subway, Jani-King International (the world’s largest commercial cleaning franchisor), Roto-Rooter, 7-Eleven, Intercontinental Hotels and Resorts, Marriott, and Hilton Hotels have all used franchising to build a presence in foreign markets. Franchising has much the same advantages as licensing. The franchisee bears most of the costs and risks of establishing foreign locations; a franchisor has to expend only the resources to recruit, train, support, and monitor franchisees. The big problem a franchisor faces is maintaining quality control; foreign franchisees do not always exhibit strong commitment to consistency and standardization, especially when the local culture does not stress the same kinds of quality concerns. Another problem that can arise is whether to allow foreign franchisees to make modifications in the franchisor’s product offering to better satisfy the tastes and preferences of consumers in the countries where they operate. Should KFC allow its 23,000 international franchised locations to use substitute spices in the company’s chicken recipes? Should McDonald’s give franchisees in each nation some leeway in what products they put on their menus? Or should the same menu offerings be rigorously and unvaryingly required of all franchisees worldwide?

Acquisition and Internal Startup Strategies Very often companies electing to compete internationally or globally prefer to have direct control over all aspects of operating in a foreign market. Companies that want to direct performance of all essential value chain activities typically establish a wholly owned subsidiary, either by acquiring a local company or by establishing its own new operating organization from the ground up. A subsidiary business that is established internally from scratch is called an internal startup or a greenfield venture.

Acquiring a local business is the quicker of the two options, and it may be the least risky and most cost- efficient means of hurdling such entry barriers as gaining access to local distribution channels, building supplier relationships, and establishing working relationships with key government officials and other constituencies. Buying an ongoing operation allows the acquirer to move directly to the task of transferring resources and personnel to the newly acquired business, integrating and redirecting the activities of the acquired business into its own operation, putting its own strategy and valuable capabilities into place, and initiating efforts to build a competitively strong market position.4

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The first issue an acquisition-minded firm must consider is whether to pay a premium price for a successful local company or to buy a struggling competitor at a bargain price and refurbish its operations. If the buying firm has little knowledge of the local market but ample capital, it is often better off purchasing a capable, strongly positioned firm—unless the acquisition price is prohibitive. However, when the acquirer sees promising ways to transform a weak firm into a strong one and has the resources and managerial know-how to do it, a struggling company can be the better long-term investment.

Entering a new foreign country via internal startup makes sense when a company already operates in a number of countries, has experience in getting new subsidiaries up and running and overseeing their operations, and has a sufficiently large resource/capability pool to rapidly equip a new subsidiary with the personnel and capabilities it needs to compete successfully and profitably. Four other conditions make an internal startup strategy appealing:

1. When creating a new subsidiary is cheaper than making an acquisition.

2. When adding new production capacity will not adversely impact the supply–demand balance in the local market.

3. When a new subsidiary has the resources and capability to gain good distribution access (perhaps because of the company’s recognized brand name).

4. When a new subsidiary can quickly be infused with the resources and capabilities needed to achieve the cost structure and competitive strength to battle local rivals head to head.

Collaborative Strategies—Alliances and Joint Ventures with Foreign Partners Entering into alliances, joint ventures, and other cooperative agreements with foreign companies are a favorite and fruitful strategic means for entering a foreign market.5 A company can benefit immensely from a foreign partner’s familiarity with local government regulations, its knowledge of local buying habits and product preferences, its distribution channel capabilities, and so on.6 Both Japanese and American companies are actively forming alliances with European companies to better compete in the 27-nation European Union and to capitalize on emerging opportunities in the countries of Eastern Europe. Many U.S. and European companies are allying with Asian companies in their efforts to enter markets in China, India, Thailand, Indonesia, and other Asian countries; alliances and joint ventures with Latin American enterprises are common as well.

A second big appeal of cross-border alliances is to capture economies of scale in production and/or marketing— cost reduction can be the difference-maker in enabling a company to be cost competitive in foreign markets. By joining forces in producing components, assembling models, and marketing their products, collaborating companies can realize cost savings not achievable with their own small volumes. A third reason to employ a collaborative strategy is to share distribution facilities and dealer networks, thus mutually strengthening each partner’s access to buyers. A fourth potential benefit of a collaborative strategy is the learning, expertise, and added capability that comes from performing joint research, sharing technological know-how, studying one another’s manufacturing methods, and understanding how to tailor sales and marketing approaches to fit local cultures and traditions. Indeed, one of the win-win benefits of an alliance is to learn from alliance partners and implant the knowledge and know-how of these partners in a company’s own personnel. A fifth benefit is that cross-border allies can direct their competitive energies more toward mutual rivals and less toward one another; working together collaboratively may help them close the gap on leading companies. And, finally, alliances can be a particularly useful way for companies across the world to gain agreement on important

Collaborative strategies involving alliances and/or joint ventures with foreign partners are a popular way for companies to edge their way into the markets of foreign countries.

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technical standards—cross-border alliances have been used to arrive at standards for assorted computer devices, Internet-related technologies, ultra-high definition televisions, and forthcoming 5G wireless communication systems.

Many companies believe that cross-border alliances and partnerships are a better strategic means of gaining the preceding benefits (as compared to acquiring or merging with foreign-based companies to gain much the same benefits) because they allow a company to preserve its independence (which is not the case with a merger), retain veto power over how the alliance operates, and avoid using perhaps scarce financial resources to fund acquisitions. Furthermore, an alliance offers the flexibility to readily disengage once its purpose has been served or if the benefits prove elusive, whereas an acquisition is a more permanent sort of arrangement (although the acquired company can, of course, be divested).7

The Risks of Strategic Collaborations. Alliances and joint ventures with foreign partners have their pitfalls, however. Sometimes local partners’ knowledge and expertise turns out to be less valuable than expected.8 Cross- border allies typically must overcome language and cultural barriers and figure out how to deal with diverse or incompatible operating practices. The communication, trust-building, and coordination costs are high in terms of management time.9 It takes many meetings of many people working in good faith over a period of time to iron out what is to be shared, what is to remain proprietary, and how the collaborative arrangements will work. Often, partners soon discover they have different, sometimes conflicting, objectives for their collaborative efforts and/ or deep differences of opinion about how to proceed and/or important differences in corporate values and ethical standards. Tensions can build up, working relationships cool, and the hoped-for benefits never materialize.10 It is not unusual for there to be little rapport or personal chemistry among some of the key people on whom success or failure of the collaborative efforts depends. And even if allies are able to develop good working relationships, they can still have trouble reaching mutually agreeable ways to collaborate in competitively sensitive areas or to launch new initiatives fast enough to stay abreast of changing technology or shifting market conditions.

Even if an alliance proves to be a win-win proposition for its members, a company must guard against becoming overly dependent on foreign partners for essential expertise and competitive capabilities. Companies aiming for global market leadership usually need to develop competitively valuable resources and capabilities that are internally controlled to be masters of their destiny. Frequently, experienced multinational companies operating in 50 or more countries across the world find less need for entering into cross-border alliances than do companies in the early stages of globalizing their operations.11 Companies with global operations make it a point to develop senior managers who understand how “the system” works in different countries, plus they can avail themselves of local managerial talent and know-how by simply hiring experienced local managers and thereby detouring the hazards of collaborative alliances with local companies. One of the lessons about cross-border partnerships is that they are more effective in helping a company establish a beachhead of new opportunity in world markets than they are in enabling a company to achieve and sustain global market leadership.

Crossborder alliances enable a growthminded company to widen its geographic coverage and strengthen its competitiveness in foreign markets, while at the same time offering flexibility and giving a company some leeway in pursuing its own strategy and retaining some degree of operating control.

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Competing in Foreign Markets: The Three Competitive Strategy Approaches

The issue of whether and how to vary the company’s competitive approach to fit specific market conditions and buyer preferences in each host country or whether to employ essentially the same competitive strategy approach in all countries is perhaps the foremost strategic issue companies must address when they operate in the markets of multiple countries.12 Figure 7.1 shows the three strategy approaches a company can take to resolve this issue.

Multicountry Strategies—A “Think Local, Act Local” Approach The bigger the differences in buyer tastes, cultural traditions, and market conditions in different countries, the stronger the case for a “think local, act local” approach to strategy making that involves customizing a company’s product offerings and perhaps its basic competitive strategy to fit the specific buyer needs and tastes and market conditions in each country where it competes. In such instances, employing a set of multicountry or localized strategies calls for deliberately tailoring the company’s product offering in each country to be relevant and appealing to local buyers and undertaking whatever country-specific strategic initiatives and market maneuvers are needed to compete effectively against local rivals and produce good business results. In effect, localized strategies aim at growing a company’s international sales and market share by addressing country-specific buyer needs and expectations and by employing customized strategic approaches and actions to combat local rivals and build local competitive advantage. A think local, act local approach to crafting strategy also becomes a good, if not necessary, strategic option when host governments enact regulations requiring that products sold locally meet strict manufacturing specifications or performance standards and when the trade restrictions of host governments are so diverse and complicated that they preclude a uniform, coordinated worldwide competitive approach.

A think local, act local approach typically requires delegating considerable strategy-making latitude to local managers who have firsthand knowledge of local market and competitive conditions. Localized strategies often entail having plants produce different product versions for different local markets and selling these different versions under different brand names (to signal the presence of different product attributes and avoid the potential for buyer confusion associated with using the same brand name for different product versions). Local managers have responsibility for matching marketing, advertising, sales promotion campaigns, and distribution channel emphasis to fit local customs and cultures. They determine how best to respond to the fresh strategic initiatives and market maneuvers of local rivals, and they decide which newly emerging local market opportunities to pursue.

CORE CONCEPT Multicountry or localized strategies involve tailoring a company’s product offering and competitive approach country by country to match differing buyer preferences, market conditions, and competitive circumstances.

The bigger the competitive strategy variations from country to country, the more an international competitor’s overall strategy becomes a collection of localized country strategies.

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Figure 7.1 The Three Strategic Options for Competing Internationally

Multicountry Strategies — A “Think Local,

Act Local” Approach

Global Strategies— A “Think Global, Act

Global” Approach

Hybrid “Think Global, Act Local” Strategy Approaches

Employ localized strategies—one for each country market where the company competes—and delegate lead responsibility for crafting strategy to local managers. • Tailor the company’s product offering in each country to

local buyers’ tastes and expectations. • Adopt country-specific strategic initiatives and

market maneuvers to pursue emerging local market opportunities, compete effectively against local rivals, and build a local competitive advantage.

• Match marketing, advertising, sales promotion campaigns, and distribution channel emphasis to fit local customs, cultures, and market conditions.

Employ same strategy worldwide and coordinate strategic actions from central headquarters. • Pursue the same basic competitive strategy theme

(low-cost, differentiation, best-cost, or focused) in all country markets—a global strategy.

• Offer the same products worldwide, with only minor deviations from one country to another should local market conditions dictate.

• Build a global brand name • Emphasize the same distribution channels and

marketing approaches worldwide. • Stress cross-country sharing of competitively valuable

resources and capabilities and be quick to transfer them to newly entered countries

• Strive to build a global competitive advantage over other rivals that compete globally.

Employ a combination global-local strategy orchestrated partly by headquarters and partly by local managers.

• Pursue essentially the same basic competitive strategy theme (low-cost, differentiation, best-cost, or focused) in all country markets.

• Give local managers the latitude to adapt the global competitive strategy as may be required to accommodate local buyer preferences, be responsive to local market conditions, and compete effectively against local rivals.

• Allow local managers the latitude to incorporate minor country-specific variations in product attributes to better satisfy local buyers but try to sell these slightly different product versions under the same brand name unless the versions are quite dissimilar.

• Strive to build a brand name that has cross-border appeal to the extent possible.

• Counter the actions of global rivals with global responses and the actions of important local rivals with localized responses.

A number of companies employ a think local, act local approach to strategy making. Castrol, a specialist in oil lubricants, produces more than 3,000 formulas of lubricants to meet the requirements of different climates, vehicle types and uses, and equipment applications that characterize different country markets. In the food products industry, it is common for companies to vary the ingredients in their products and sell the localized versions under local brand names to cater to country-specific tastes and eating preferences. Government requirements

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for gasoline additives that help reduce carbon monoxide, smog, and other emissions are almost never the same from country to country, requiring oil refineries to use localized strategies in supplying gasoline with the required additives to service stations in different countries. Motor vehicle manufacturers routinely produce smaller, differently-styled, and more fuel-efficient vehicles for European markets where roads are narrower and gasoline prices are two to three times higher than in the North American market (where many consumers prefer larger vehicles); the models they manufacture for the Asian market are different yet again—and local managers tailor the sales and marketing of these vehicles to local cultures, buyer tastes, and market conditions as well.

However, think local, act local strategies have three important drawbacks:

n Customizing a company’s products country by country may raise production and distribution costs due to the greater variety of designs and components, the added time and expense associated with shifting production over to each product version, and the complications of added inventory handling and distribution logistics.

n A collection of localized multicountry strategies is not conducive to building a single worldwide competitive advantage. When a company’s competitive approach and product offering varies from country to country, the nature and size of any resulting competitive edge also tends to vary (and in some—maybe many—countries, a company will fail to achieve any meaningful competitive edge over local rivals). At the most, localized multicountry strategies are capable of producing a group of local competitive advantages of varying types and degrees of strength.

n Localized strategies handicap a company in using its existing complement of resources, capabilities, and product offerings to speed entry and competitive success in additional country markets. Because a multicountry competitor’s various localized strategies are each structured around resources, capabilities, and product offerings that are specific to competing in a particular country, its overall resource/capability pool tends to be diverse but shallow with regard to any one specific resource or capability. In entering new country markets, a company often finds its current pool of fragmented resources, capabilities, and variety of product offerings does not match up well—in quantity or quality—with those needed to support execution of still different customized product offerings and strategies for the target countries it wants to enter. In such cases, the company has to retool certain resources and capabilities, build others from scratch, and design/produce new versions of its products.

Global Strategies—A “Think Global, Act Global” Approach While multicountry or localized strategies are best suited for industries where multicountry competition dominates and a fairly high degree of local responsiveness is competitively imperative, global strategies are best suited for globally competitive industries. A global strategy is one in which the key strategy elements are fundamentally the same in all countries—a company sells much the same products under the same brand names everywhere, uses much the same distribution channels in all countries, and uses the same set of resources/capabilities to power its strategy in all the countries where it competes. Although the company’s strategy or product offering is sometimes slightly adapted to fit circumstances in a few host countries, the company’s fundamental competitive approach (low-cost, differentiation, best-cost, or focused) remains intact worldwide and local managers stick close to the global strategy.

The use of highly similar, if not identical, cross-border strategies in every country enables a company to (1) build global brands (2) refine and strengthen the competitively valuable resources and capabilities that underpin its global strategy, (3) grow the numbers of company personnel with experience and know-how in implementing

CORE CONCEPT A global strategy is one where a company employs the same basic competitive approach in all countries where it operates, sells much the same products everywhere, strives to build global brands, and coordinates its actions worldwide with strong headquarters control. It represents a thinkglobal, actglobal approach.

Chapter 7 • Strategies for Competing Internationally or Globally 161

the strategy and conducting operations in foreign markets, and (4) tightly integrate and coordinate the company’s strategic moves worldwide. Strategic initiatives to enter more countries nearly always entail transferring sufficient supplies of these resources and capabilities (including experienced company personnel with competitively important know-how) to the targeted countries to help power successful market entry. Typically, companies employing a global strategy expand into most if not all nations where there is significant buyer demand.

Whenever country-to-country differences are small enough to be accommodated within the framework of a global strategy, a global strategy is preferable to localized strategies for several important reasons. A globally standardized product offering better enables a company to capture scale economies in manufacturing and a company to focus on establishing a global brand image and reputation, one linked to the same product attributes in all countries. A global strategy and product offering simplifies company efforts to build a deep pool of competitively potent resources and capabilities suitable for entering and competing successfully in the markets of countries across the world; as these resources are refined and strengthened, the potential emerges to secure a sustainable low-cost or differentiation-based competitive advantage over other rivals racing for world market leadership. Well-managed companies pursuing a global strategy are in a uniquely strong position to transfer newly developed product enhancements, best practices in performing value chain activities, and new production technologies from location to location and to make all of the company’s operating units worldwide aware of recent successes, failures, and new ideas for strategic and operational improvements.13 Figure 7.2 highlights the basic differences between a localized or multicountry strategy and a global strategy.

Hybrid “Think Global, Act Local” Strategy Approaches Often, a company can be more effective in accommodating cross-country variations in buyer tastes, local customs, and market conditions with a hybrid or combination “think global, act local” competitive strategy approach. This middle-ground strategy entails using the same basic competitive theme (low-cost, differentiation, best-cost, or focused) in each country but allowing local managers ample latitude to (1) incorporate minor country-specific variations in product attributes to address local buyers’ needs and expectations more precisely, and (2) make whatever adjustments in production, distribution, and marketing strategies are needed to create a good match with local market conditions and compete more successfully against local rivals. Slightly different product versions sold under the same brand name may suffice to satisfy local tastes, and it may be feasible to accommodate these versions rather economically in the course of designing and manufacturing the company’s product offerings.14 Complete standardization of product offerings and other strategy elements is not necessary, especially when some aspects of localization can be accommodated easily and when it is more competitively effective to adapt an otherwise global approach to better fit local needs and conditions. Even if local product versions in a few countries are different enough to merit use of local brands, the benefits of striving to build and strengthen a mostly global brand name elsewhere are unlikely to be impaired by very much.

Many Multinational Companies Employ Strategies That Are as Close to Global as Circumstances Permit Many, if not most, multinational companies lean toward strategies with as many global elements as buyer needs/preferences and market circumstances permit. But some degree of localization is common. McDonald’s, KFC, and Starbucks have discovered ways to customize their menu offerings in various countries without compromising costs, product quality, and operating effectiveness. Whirlpool has been globalizing its low-cost leadership strategy in home appliances for more than 20 years, striving to standardize parts and components and move toward worldwide designs for as many of its appliance products as possible. But Whirlpool has found it necessary to continue producing different versions of refrigerators, washing machines, and cooking appliances for consumers in various countries because local buyers’ needs and tastes in these countries have not converged sufficiently to permit complete global standardization. Microsoft adapts its software to accommodate cross- country differences in languages, spelling, and punctuation, but otherwise its approach to competing is very similar. Video game developers localize their product offerings by designing games for specific cultures (like football for North America and soccer for Europe and South America) and also for different devices (computers, game players, and assorted handheld devices)—the relative use of various game-playing devices differs greatly

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across countries. Multinational producers of motor oils and lubricants necessarily have hundreds or thousands of product versions to accommodate different motor vehicle and machine requirements and widely varying climatic conditions across the world, but many of the remaining strategy elements they employ are global in nature.

Figure 7.2 How a Multicountry or Localized Strategy Differs from a Global Strategy

Country A Country B Country C

Country D Country E

Country A Country B

Country C Country D Country E

• Customize the company’s competitive approach as needed to fit market and business circumstances in each host country—strong responsiveness to local conditions.

• Sell different product versions in different countries under different brand names—adapt product attributes to fit buyer tastes and preferences country by country.

• Either design manufacturing plants to cost- effectively produce many different product versions or else scatter plants across many host countries, each making product versions for local markets.

• Use local suppliers when local governments have local content requirements.

• Adapt marketing and distribution to the prevailing local customs, culture, and market circumstances.

• Develop resources and capabilities appropriate to each country’s localized strategy. Cross- border transfer of resources is limited because of strategy variability.

• Give country managers fairly wide strategy- making latitude and autonomy over local operations.

• Strive to gain local competitive advantages (the nature of any such competitive advantages that are achieved will tend to vary from country-to- country).

• Pursue the same basic competitive strategy worldwide (low-cost, differentiation, best-cost, focused low-cost, focused differentiation)— minimal responsiveness to local conditions.

• Sell the same products under the same brand name worldwide. Concentrate on building global brands as opposed to strengthening local/ regional brands sold in local/regional markets.

• Locate plants on the basis of maximum locational advantage, usually in countries where production costs are lowest but plants may be scattered if shipping costs are high or other locational advantages dominate.

• Use the best suppliers from anywhere in the world.

• Coordinate marketing and distribution worldwide; make minor adaptations to local countries where needed.

• Compete on the basis of the same competencies and resource capabilities worldwide. Stress rapid cross-country transfers of new capabilities, products, and best practices.

• Coordinate major strategic decisions worldwide. Give local managers leeway to make minor adjustments to the global strategy.

• Strive to achieve the same type of competitive advantage over rivals in every country where the company competes.

Localized Multicountry

Strategy

Global Strategy

Strategies are nearly identical

everywhere

Strategies vary according to

local conditions

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Building Cross-Border Competitive Advantage

An international or global competitor can strive to gain competitive advantage (or counteract disadvantages) in two important ways.15 One, it can locate certain facilities and value chain activities in particular countries to lower costs or achieve greater product differentiation. Two, it can build competitive advantage vis-à-vis rivals by doing a better job than they do of sharing and transferring competitively valuable resources and capabilities across the borders of the countries in which it competes.

Using Location to Build Competitive Advantage To use location to build cross-border competitive advantage, a company must consider 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.16 The classic reason for locating an activity in a particular country is low cost.17

When to Concentrate Activities in a Few Locations It is advantageous for a company to concentrate its activities in a limited number of locations when:

n The costs of manufacturing or other activities are significantly lower in some geographic locations than in others. For example, much of the world’s athletic footwear is manufactured in Asia because of low labor costs; much of the production of PC circuit boards is located in Taiwan because of low costs and the high technical skills of the Taiwanese labor force.

n Significant scale economies exist in production or distribution. The presence of significant economies of scale in components production or final assembly means a company can gain major cost savings from operating a few large plants (with output volumes big enough to fully capture scale economies) as opposed to a host of small plants scattered across the world. Likewise, a company may be able to reduce its distribution costs by using large-scale regional distribution centers serving multiple countries (or maybe customers within a “large” radius) as opposed to having smaller distribution centers serving a single country (or customers within a “small” radius).

n Sizable learning and experience benefits are associated with performing an activity. In some industries, a manufacturer can lower unit costs, boost quality, or master a new technology more quickly by concentrating production in a few locations. The greater the cumulative volume of production at a plant, the faster the buildup of learning and experience of the plant’s workforce, thereby enabling quicker capture of the productivity gains associated with greater learning and experience in performing a value chain activity.

n Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages. A research unit or a sophisticated production facility may be situated in a particular nation because of its pool of technically-trained personnel. Samsung became a leader in memory chip technology by establishing a major R&D facility in Silicon Valley and transferring the know-how it gained back to its operations in South Korea. When just-in-time inventory practices yield big cost savings and/or when an assembly firm has long-term partnering arrangements with its key suppliers, parts manufacturing plants may be clustered around final assembly plants. A customer-service center or sales office may be opened in a particular country to help cultivate strong relationships with important customers located nearby.

Companies that compete internationally or globally can pursue competitive advantages in world markets by locating their value chain activities in whatever nations prove most advantageous.

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When to Disperse Activities Across Many Locations In some instances, dispersing activities is more advantageous than concentrating them. Such buyer-related activities as distribution, face-to-face selling, certain sales promotion and advertising activities, and after-sales service usually must take place close to buyers. This means physically locating the capability to perform such activities in every country or region where a firm has many buyers or important large-volume customers. For example, firms that make mining and oil- drilling equipment typically have service operations in many international locations to enable quick spare parts delivery, speedy equipment repair, and hands-on technical assistance. Most multinational companies distribute their products from multiple geographic locations, both to shorten delivery times to customers and economize on shipping costs. Large public accounting firms have numerous international offices to service the foreign operations of their multinational corporate clients.

Dispersing performance of an activity to many locations is also competitively advantageous when small- scale performance of an activity is cheaper than performing the activity at a central location. All major motor vehicle companies operate multiple assembly plants rather than a single giant assembly plant; very few global companies would accept the penalty of long delivery times and high shipping costs associated with using a single giant distribution center for shipping orders to customers worldwide. The presence of high import tariffs in many countries can make it expensive to perform production and distribution activities outside these countries; rather, it may prove cheaper to disperse performance of all activities from production forward to end users to each of the high-tariff countries rather than incur the costs of their respective high import tariffs. In addition, dispersing activities to multiple foreign locations helps hedge against the risks of fluctuating exchange rates, supply interruptions (due to strikes or transportation delays), and adverse political developments. Such risks are usually greater when activities are concentrated in one or just a few locations.

Even though multinational and global firms have strong reasons to disperse buyer-related activities to many international locations, such activities as materials procurement, parts manufacture, finished goods assembly, technology research, and new product development can frequently be decoupled from buyer locations and performed wherever advantage lies. Components can be made in Mexico; technology research done in Frankfurt; new products developed and tested in Phoenix; and assembly plants located in Spain, Brazil, Malaysia, or South Carolina. Capital can be raised in whatever country it is available on the best terms.

Cross-Border Sharing and Transfer of Resources and Capabilities to Build Competitive Advantage When a company has competitively valuable resources and capabilities, it often makes sense to leverage them further by expanding internationally and initiating a long-term strategic offensive to enter a number of country markets. If its resources and capabilities prove potent in competing in newly entered country markets, then not only does the company grow sales and profits but it extends its competitiveness and potential for competitive advantage over a broader geographic domain, perhaps in time enabling the company to contend for global market leadership. As an international or global company develops a market presence in many countries, it should stay alert for opportunities to transfer some of its competitively powerful resources and capabilities from countries where it has established competitively strong market positions to countries where it is competitively weaker. Such infusions can be the extra boost subsidiaries with comparatively weaker competitive strength need to battle local rivals on even terms, or better still, to begin to outcompete them.

Another way to enhance a company’s competitiveness internationally is to quickly transfer important new technological know-how, recently-developed core competencies, newly-implemented best practices, and ways to improve/strengthen certain capabilities from its operations in one country to its operations in other countries. For instance, if a company discovers ways to assemble a product faster and more cost effectively at one plant, then that know-how can be transferred to its assembly plants in other countries. If a company’s North American operations develop a core competence in speeding next-generation products to market more quickly, it can communicate these methods to company operations elsewhere via Internet conferencing or by transferring some of its North

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American personnel with the requisite expertise to its operations in other parts of the world. Whirlpool, the leading global manufacturer of home appliances with 70 manufacturing and technology research centers around the world and sales in nearly every country, uses an online global information technology platform to quickly and effectively transfer key product innovations and improved production techniques both across national borders and across its various appliance brands. Disney has been enormously adept at transferring its considerable expertise in all aspects of its theme park operations in the United States to its recently established Disney parks in Tokyo, Hong Kong, Shanghai, and Paris. Disney’s cross-border transfers of its competitively potent resources and capabilities in theme park design and operation, together with the universal appeal of the Disney name in family entertainment products, have enabled it to achieve a global differentiation-based competitive advantage in theme parks and family entertainment. Walmart is expanding its international operations with a strategy that involves transferring its consider able resource capabilities in distribution and discount retailing to its retail units in 27 foreign countries. Televisa, Mexico’s largest media company, used its expertise in Spanish culture and linguistics to become the world’s most prolific producer of Spanish-language soap operas.

Companies like Rolex, Tiffany, Burberry, and Gucci have used their powerful brand names to extend their differentiation-based competitive capabilities into country markets far beyond their home-country origins.18 In each of these cases, the company’s luxury brand name represents a valuable competitive asset that can readily be shared by all of its international stores, enabling them to attract buyers and gain a higher degree of market penetration over a wider geographic area than would otherwise be possible.

Cross-border sharing of powerful brand names or important technological know-how and/or the transfer of personnel with competitively valuable expertise from operations in one country to another country is a cost- efficient and competitively effective way of leveraging existing resources and capabilities into competitive success in a growing number of geographic markets. The cost of sharing or transferring already developed resources and capabilities across country borders is low in comparison to the time and considerable expense it takes for a country subsidiary to build matching resources and capabilities solely on its own initiative. Moreover, deployment of the company’s valuable resources and capabilities across many countries spreads the fixed development costs over a greater volume of unit sales, thus contributing to low unit costs and a potential cost- based competitive advantage in recently entered geographic markets. Even if the shared/transferred resources or capabilities have to be adapted to local market conditions, this can usually be done at low additional cost.

Furthermore, deploying a competitively valuable resource or capability to a growing number of geographic markets contributes to the development of even greater resource depth and expert capability, especially if company managers attend to the task of finetuning, updating, and enhancing its valuable resources and capabilities. Resource/capability transfers, coupled with diligent internal efforts to refine and enhance competitively powerful resources and capabilities, are a company’s two best approaches to achieving dominating depth in one or more competitively valuable areas.19 Dominating depth in a competitively valuable resource, capability, or value chain activity is a strong basis for sustainable competitive advantage over rivals.

However, cross-border resource-sharing or transfers of competencies and capabilities are not a guaranteed recipe for being competitively successful in every market entered. Sometimes a popular or well-regarded brand in one country turns out to have little competitive clout against local brands in other countries. A particular capability that is valuable in one country may have lesser value in another (if local rivals have substitute capabilities that are even more potent or if buyers in some countries respond less favorably to a company’s product offerings, merchandising, advertising, and so on).

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Profit Sanctuaries and Global Strategic Offensives

Profit sanctuaries are country markets (or geographic regions) in which a company derives substantial profits because of its strong or protected market position. In most cases, a company’s biggest and most strategically crucial profit sanctuary is its home market, but international and global companies may also enjoy profit sanctuary status in other nations where they have a strong competitive position, big sales volume, and attractive profit margins. Companies that compete globally are likely to have more profit sanctuaries than companies that compete in just a few country markets; a domestic-only competitor, of course, can have only one profit sanctuary.

Nike, which markets its products in about 200 countries, has two major geographic profit sanctuaries: North America (where it earned $3.6 billion in operating profits in fiscal 2018) and Greater China (where it reported $1.8 billion in operating earnings in 2018). The biggest profit sanctuary for McDonald’s is the United States, which generated 45.5 percent of the company’s 2018 operating profits. Starbucks’ two biggest geographic profit sanctuaries in fiscal 2018 were the United States and China.

Offensive Attacks on Global Rivals While international or global competitors can fashion a strategic offensive based on any of the nine offensive strategy options discussed in Chapter 6, there are two additional offensive strategies particularly suited for companies competing internationally or globally:20

1. Attack a rival’s profit sanctuaries. Launching an offensive in a country market where a key rival earns a big percentage of its profits can put the rival on the defensive, forcing it to spend more on marketing/ advertising, trim its prices, boost product innovation efforts, or otherwise undertake actions that raise its costs and reduce its profit margins. Such offensives are particularly attractive when the attacker (1) has competitively valuable resources and capabilities that it can divert from other countries to help power its offensive attack and (2) can draw upon the financial strength of profit sanctuaries in other locations to help subsidize its razor-thin margins or even losses in the country market where the rival is being attacked. Supporting an offensive with resources, capabilities, and profits in other market locations is called cross-market subsidization . While attacking a rival’s profit sanctuary violates the principle of attacking competitor weaknesses instead of competitor strengths, such an attack can nonetheless prove useful when it poses a serious threat to a rival’s business and forces it to devote added time and attention to defending a market that is important to its competitive well-being and overall profitability. To the extent that a major rival’s profits can be significantly eroded in an important profit sanctuary, its financial resources may be sufficiently weakened to enable the attacker to gain the upper hand and build market momentum in several geographic markets, not just in the market where the offensive is being waged. The bigger the potential for such outcomes, the greater the appeal of attacking a rival’s profit sanctuary.

2. Dump goods at cut-rate prices in the markets of rivals. A company is said to be dumping when it sells its goods in certain countries at prices that are (1) well below the prices at which it normally sells elsewhere or (2) well below its full costs per unit. Generally, dumping occurs because a company has

CORE CONCEPT Companies with large, protected profit sanctuaries have an advantage in competing against companies that don’t have a protected sanctuary. Companies with multiple profit sanctuaries have an edge in competing head to head against rivals with only a single sanctuary.

CORE CONCEPT Cross market subsidization entails supporting competitive offensives in one market with resources, capabilities, and profits diverted from operations in another market. Such competitive tactics can be a powerful weapon against a rival with only one profit sanctuary or limited resources and capabilities.

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excess production capacity and is anxious to keep this capacity running rather than suffer the cost penalty associated with idle capacity. Companies that decide to dump goods at deep discounts usually keep their selling prices high enough to cover variable costs per unit, thereby limiting their losses on each unit to some percentage of fixed costs per unit. Dumping can be an appealing offensive strategy in either of two instances. One is when dumping drives down the going price so far in the targeted country that local rivals are quickly put in dire financial straits (perhaps even forced into bankruptcy or driven out of business). For dumping to pay off in this instance, however, the dumping company needs to have deep enough financial pockets to cover any losses from its own sales at below-market prices, and the targeted rivals need to be financially weak to begin with so the onset of dumping at below-market prices quickly punishes their financial performance by a significant amount. The second instance in which dumping becomes an attractive strategy is when a company with unused production capacity discovers it is cheaper to keep producing (as long as the selling prices cover average variable costs per unit) than to incur the cost burdens associated with idle plant capacity. By keeping its plants operating at or near capacity, not only may a dumping company be able to cover variable costs and earn a contribution to fixed costs, it may also be able to use its below-market prices to draw price-sensitive customers away from rivals, then attentively court these new customers and retain their business when prices later begin a gradual rise back to normal market levels. Thus, dumping may prove useful as a way of entering the market of a particular country and establishing a customer base. However, dumping strategies run a high risk of host government retaliation on behalf of the adversely affected domestic companies. Most all governments can be expected to retaliate against dumping by imposing special tariffs or duties on goods being imported from the countries of the guilty companies. Indeed, as the trade among nations has mushroomed over the past ten years, most governments have joined the World Trade Organization (WTO), which promotes fair trade practices among nations and actively polices dumping. The WTO allows member governments to impose tariffs or duties on the imports of companies that have engaged in dumping wherever there is material injury to domestic competitors. Companies found guilty of dumping frequently come under pressure from their own government to cease dumping, especially if the imposition of higher tariffs or duties adversely affect innocent companies based in the same country or if the advent of special tariffs raises the specter of a trade war.

Key Points

Companies opt to compete in the world marketplace to gain access to new customers, achieve lower costs, and thereby become more cost competitive, to better leverage their competitively valuable resources and capabilities, and to spread their business risk across a wider market area. Four strategic issues are unique to competing across national boundaries:

1. Whether to customize the company’s offerings in each different country market to match local buyers’ tastes and preferences or to 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 to create a better fit with local market and competitive conditions.

3. Where to locate the company’s production facilities, distribution centers, and customer service operations to realize the greatest location-related advantages.

CORE CONCEPT A company is said to be engaging in dumping when it sells its goods in certain countries at prices that are either well below the prices at which it normally sells elsewhere or else well below its full costs per unit.

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4. When and how to efficiently transfer some of the company’s competitively powerful resources and capabilities from countries where it has a strong market position (1) to countries where it is competitively weak and (2) to countries it is preparing to enter—such transfers help company subsidiaries in these countries more effectively battle local rivals for sales and market share.

Multicountry competition refers to situations where competition in one national market is largely independent of competition in another national market—there is no “international market,” just a collection of self-contained country (or maybe regional) markets. Global competition exists when competitive conditions across national markets are linked strongly enough to form a true world market and when leading competitors compete head- to-head in many different countries.

There are five strategic ways for a company to establish a competitive presence in the markets of other countries: (1) maintaining a national (one-country) production base and exporting goods to foreign markets, (2) licensing foreign firms to use the company’s technology or produce and distribute the company’s products, (3) employing a franchising strategy, (4) using acquisitions or internal startup to enter new foreign markets, and (5) using strategic alliances or other collaborative partnerships to enter a foreign market or strengthen a firm’s competitiveness.

A company has three strategic options for tailoring its international competitive approach and product offering: (1) localized multicountry strategies based on a “think local, act local” approach, (2) global strategies based on a “think global, act global” approach, and (3) hybrid or combination “think global, act local” strategy approaches. A “think local, act local” approach is appropriate for industries where multicountry competition dominates. A localized multicountry approach calls for a company to vary its product offering and competitive approach from country to country to accommodate differing buyer preferences and market conditions. A “think global, act global” approach works best in markets that are globally competitive or beginning to globalize, whereas a global strategy-making approach involves employing the same basic competitive strategy (low-cost, differentiation, best-cost, focused) in all country markets and marketing essentially the same products under the same brand names in all countries where the company operates. A “think global, act local” approach can be used when it is feasible for a company to employ essentially the same basic competitive strategy in all markets, but still customize its product offering and some aspects of its operations to fit local market circumstances.

There are two important ways for a firm competing internationally or globally to pursue competitive advantage or enhance an already existing competitive advantage: (1) it can locate certain facilities and value chain activities in countries that enable it to lower costs or achieve greater product differentiation and (2) it can strengthen its competitiveness vis-à-vis rivals by being more nimble in efficiently and effectively transferring competitively valuable competencies and capabilities from one country to another.

Two types of offensive strategies are particularly suitable for companies operating internationally or globally: (1) attack a rival’s profit sanctuaries and (2) dump goods at cut-rate prices in the markets of important rivals.