Strategic Management week 5 Discussion

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chapter 7 Strategies for Competing Internationally or Globally

Arthur A. Thompson The University of Alabama

An e-book published and distributed by McGraw Hill Education

Sixth Edition of Strategy: Core Concepts and Analytical Approaches (2020-2021). Arthur A. Thompson, The University of Alabama. Published and distributed by McGraw Hill Education. Image of globe comprised of puzzle pieces with several pieces dislodged and scattered below the globe. Chapter 5 The Five Generic Competitive Strategy Options: Which One to Employ

“You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or die.”

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Andrew S. Grove former Chairman and CEO, Intel Corporation

“You do not choose to become global. The market chooses for you; it forces your hand.”

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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.”

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Niraj Dawar and Tony Frost Professors, Richard Ivey School of Business

Learning Objectives

Learn why companies decide to enter foreign markets.

Understand why competing across national borders makes strategy-making more complex.

Learn the difference between multi-country competition and global competition.

Gain command of the strategic options for establishing a competitive presence in foreign markets.

Become familiar with the three main strategic approaches to competing internationally.

Learn how multinational competitors can use their international operations to improve their competitiveness.

Learn about profit sanctuaries and global strategic offensives.

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Chapter 7 Roadmap

Why Companies Decide to Enter Foreign Markets

Why Competing across National Borders Makes Strategy-Making More Complex

The Concepts of Multicountry Competition and Global Competition

Strategy Options for Entering and Competing in International and Global Markets

The Quest for Competitive Advantage in Global Markets

Profit Sanctuaries and Global Strategic Offensives

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Whether to customize the firm’s offerings in different country markets to match local buyer preferences or offer mostly standardized products worldwide

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

Where to locate facilities, distribution centers, and service operations to realize the greatest locational advantages

When and how to efficiently transfer some of a firm’s competitively powerful resources and capabilities from its operations in some countries to its operations in one or more other countries in order to better spearhead the company’s strategic offensives to enter new country markets and to more effectively battle local rivals for sales and market share

Strategic Issues Unique to Competing across National Borders

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Competing Across National Borders

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Strategic Issues Unique To Competing Across National Borders

Whether to customize the firm’s offerings in each country market or to offer a mostly standardized product worldwide

Whether to employ the same basic competitive strategy in all countries or modify the strategy

country by country

Where to locate the firm’s operations

to realize the greatest location-related advantages.

When and how to transfer some of a firm’s competitively powerful resources and capabilities from its operations in some countries to its operations in one or more other countries in order to compete more effectively against local rivals

A firm that competes in relatively few foreign countries is an international or multinational competitor

A global competitor has operations on several continents, is actively marketing its products or services in many different parts of the world, and is pursuing a strategy of expanding into additional countries

Typically, a firm will start to compete internationally by entering one or two foreign markets and then expand gradually or perhaps rapidly into the markets of other countries over time.

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International Competitors versus Global Competitors—What’s the Difference?

Why Companies Decide to Enter Foreign Markets

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To gain access to new customers

To achieve lower costs and thereby become more cost competitiveness

To further exploit competitively valuable resources and capabilities

To spread business risk across a wider market base

To meet their customers’ needs abroad and retain their position as a key supply chain partner.

The presence of important cross-country differences in buyer tastes, market sizes, and growth potential

The existence of sizable cross-country differences in wages, worker productivity, inflation rates, energy costs, taxes, and other factors that impact a firm’s costs and profit prospects

Differing cross-country governmental policies and regulations that make the business climate more favorable in some countries than others

The need to consider ways to mitigate the risks of adverse shifts in currency exchange rates

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

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Cross-Country Differences in Buyer Tastes, Market Sizes, and Growth Potential

Many cross-country factors affect an international or global competitor’s strategic decisions:

Country-to-country differences in population sizes, income levels, and other demographic factors that help drive market size and rates of growth in market demand

Country-to-country differences in buyer tastes

Country-to-country differences in distribution channels, competitive conditions, and other market-related factors

Perhaps the biggest market-related issue:

Whether and how much to customize offerings to match local buyers’ tastes and preferences in each different country market OR

Whether to pursue a strategy of offering a mostly standardized product worldwide

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Core Concept

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

The managerial challenge in operating internationally or globally is tailoring a firm’s strategy to take a variety of country-to-country differences into account.

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Cross-Country Differences in Operating Costs and Profitability

Country-to-country differences are often so large that a firm’s operating costs and profitability are significantly impacted by local factors such as:

Wage rates • Worker productivity

Inflation rates • Energy costs

Tax rates • Government regulations

Cost advantages are gained by locating operations in countries with:

Low wage rates • Less costly government regulations

Low taxes • Low energy costs

Cheaper access to natural resources

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The Impact of Host Government Policies on the Local Business Climate

Host government policies and attitudes of toward business create a favorable or unfavorable business climate for local firms and foreign firms.

“Pro-business” governments

Provide incentives for expansion-minded firms (lower tax rates, site location and site development assistance, government-sponsored worker training, seek the advice and counsel of business leaders)

Make the transition to more costly and stringent regulations business-friendly rather than adversarial

“Anti-business” governments

Tend to enact costly regulations and procedures, institute burdensome taxes, impose tariffs and/or quotas on imports, create uneven playing field that favors domestic companies, and pursue various other policies that make the local business climate less attractive to foreign firms

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Political Risks

Instability of weak governments

Civil unrest and revolt

Passage of anti-business legislation or regulations

Systemic corruption in governmental and business operations

Suspicion of foreign firms operating within their borders

Loss of assets to nationalization by socialist politicians

Economic Risks

Instability of the national economy and monetary system—inflation rates, deficit-spending, and economic distress

Threat of piracy

Lack of intellectual property protection

The Impact of Host Government Policies on the Local Business Climate (continued)

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The Risks of Adverse Exchange-Rate Shifts

Sizable shifts in currency exchange rates pose significant risks for two reasons:

They are very hard to predict because of the variety of factors involved and the uncertainties surrounding when and by how much these factors will change

Shifting exchange rates affect 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

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Core Concept

Firms that export goods to foreign countries always gain in competitiveness when the currency of the producing country grows weaker relative to the currencies of countries to which the goods are exported.

A firm is competitively disadvantaged when the currency of country where its products are produced grows stronger relative to the currencies of countries to which its goods are exported and marketed.

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Consider the case of a firm with manufacturing facilities in Brazil (where the currency is reals—pronounced ray-alls) that exports its Brazilian-made goods to European Union markets (where the currency is euros).

Assume that the current exchange rate is 4 Brazilian reals for 1 euro and that the product made in Brazil has a manufacturing cost of 4 Brazilian reals (or 1 euro).

Now suppose that the exchange rate shifts from 4 reals per euro to 5 reals per euro (meaning that the real has declined in value and that the euro is stronger).

The Brazilian-made product is now more cost-competitive because a Brazilian-made good costing 4 reals has fallen to only 0.8 euros at the new exchange rate (4 reals divided by 5 reals per euro = 0.8 euros). The producer of the Brazilian-made good is better positioned to compete against European makers of the same good.

On the other hand, if the value of the real grows 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) now has a cost of 1.33 euros (4 reals divided by 3 reals per euro = 1.33), This puts a producer of the Brazilian-made good in a weaker competitive position versus European producers of the same good.

Clearly, manufacturing in Brazil to sell in Europe is more attractive when the euro is strong (a rate of 1 euro for 5 reals) than when weak and 1 euro exchanges for 3 reals.

Example: Who Gains and Who Loses When Currency Exchange Rates Shift?

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When the exchange rate changes from 4 reals per euro to 5 reals per euro:

The Brazilian-made good that formerly cost 1 euro and now costs only 0.8 euros can be sold to European Union consumers 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 the European Union. This spurs sales of Brazilian goods and boost exports of Brazilian goods to Europe

Conversely, an exchange rate shift from 4 reals to 3 reals per euro makes a Brazilian manufacturer less cost competitive with European manufacturers of the same item—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, weakens European consumer demand for Brazilian-made goods and reduces Brazilian exports to Europe.

Brazilian exporters 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 Brazilian real grows stronger relative to the euro.

Example: Who Gains and Loses When Currency Exchange Rates Shift? (continued)

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The Impact of Exchange Rates on Domestic Competitors Competing with Foreign Rivals

Weaker dollar policies best serve U.S. manufacturers affected by low-cost foreign imports by:

Raising the dollar-costs of foreign goods produced in countries whose currencies have grown stronger relative to the dollar

Making foreign goods more expensive to U.S. consumers—curtailing demand for those goods and stimulating demand for U.S. goods

Allowing U.S. goods to be sold at lower prices to consumers in countries with strong currencies—thereby stimulating exports to meet foreign demand for U.S. goods and creating U.S.-based jobs

Increasing the dollar value of profits a firm earns in foreign markets where local currencies are now stronger relative to the dollar

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Core Concept

Domestic companies facing competitive pressure from lower-cost foreign rivals benefit when their country’s currency grows weaker in relation to currencies of countries where lower-cost foreign rivals have their manufacturing plants.

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Questions for Company Co-Managers

When your simulation company is facing an unfavorable exchange rate change that negatively affects profitability in one or more geographic regions, should you and your co-managers:

Consider raising price or adjusting marketing efforts to reduce/eliminate the negative impact on earnings?

Consider temporarily curtailing sales and marketing efforts in the negatively affected regions and boosting sales efforts in regions where profits are favorably impacted by the exchange rate shifts?

Do nothing, absorb whatever adverse financial impact occurs, and suffer the consequences of lower earnings?

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When your simulation firm experiences a favorable exchange rate change that positively affects profitability in one or more geographic regions, should you and your co-managers:

Consider lowering price or boosting marketing efforts to increase sales and further exploit the positive impact on earnings in those regions where the exchange rate shifts are favorable?

Consider temporarily boosting sales efforts in regions where profits are favorably impacted by the exchange rate shifts and curtailing sales and marketing efforts in regions with unfavorable exchange rate impacts?

Do nothing and enjoy the benefits of whatever temporary boost to earnings occurs?

Questions for Company Co-Managers (continued)

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Global competition

There Are Two Importantly Different Patterns of Competition in World Markets

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Multi-country competition

Core Concepts

Multicountry competition exists when competition in one national market is not closely connected to competition in any other national market. There is no global or world market, only a collection of self-contained country markets.

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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Traits of Multicountry Competition

The country’s market is localized to that country and not closely connected to the market contest in other countries

Buyers in different countries are attracted to different product attributes

The numbers and identities of rival sellers vary from country to country

Industry conditions and competitive forces in each national market differ in important respects

Rival firms battle for national championships and winning in one country does not necessarily signal the ability to fare well in other countries!

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Traits of Global Competition

Prices and competitive conditions across country markets are strongly linked

Leading competitors compete head-to-head in many of the same country markets

A firm’s competitive position in one country both affects and is affected by its position in other countries

A true global or world market exists

Competitive advantage is based on a firm’s world-wide operations and global standing

Rival firms in globally competitive industries vie for global leadership (world championships)!

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

License foreign firms to use the firm’s technology or to produce and distribute the firm’s products in foreign markets

Employ a franchising strategy in foreign markets

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

Rely on strategic alliances or joint ventures with foreign firms as the primary vehicle for entering foreign country markets

Strategy Options for Establishing a Competitive Presence in Foreign Markets

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Export Strategies

Using domestic plant capacity to produce goods for export to foreign markets is a good initial strategy to pursue international sales

Advantages

Is a conservative way to test the risks of international markets

Increases the utilization of existing capital investment in production facilities

Minimizes direct investments in foreign countries

An export strategy is vulnerable when:

Home country manufacturing costs are higher than the manufacturing costs that rivals incur in the countries where they have plants

Product shipping costs to distant markets are high

Adverse shifts can occur quickly in currency exchange rates

Importing countries impose tariffs or erect other trade barriers to protect local firms against competition from foreign-made goods

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Licensing Strategies

Licensing makes sense when a firm

Has valuable technical know-how or a unique patented product but lacks the organizational capability or resources to enter foreign markets

Desires to avoid risks of committing resources to markets that are unfamiliar, politically volatile, and/or economically unstable.

Can earn considerable royalties from licensees who are trustworthy and reputable

Disadvantage

Licensing firm risks providing valuable technical know-how to foreign firms and losing control over its use—monitoring the actions of foreign licensees and safeguarding the company’s proprietary know-how is not always as easy as it might seem

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Franchising Strategies

Well suited to the global expansion efforts of service and retailing enterprises

Advantages

Franchisee bears in-country costs and risks of establishing foreign locations

Franchisor has to expend only the resources to attract, recruit, train, support, and monitor franchisees

Disadvantage

Maintaining quality control when franchisees in certain locations are not strongly committed to consistency and standardization

Issue: To allow localization or not

Should franchisees be allowed to make modifications in the franchisor’s product offering to better satisfy the tastes and expectations of local buyers?

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Acquisition Strategies

Acquiring a local business to compete internationally or globally:

Is quicker than creating a new subsidiary and having to build a new operating organization from the ground up

Is 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 relationships with government officials and other constituencies

Allows acquirer to move directly to the tasks of transferring resources and personnel, integrating and redirecting the acquired firm into its own operations, putting its own strategy in place, and building a stronger market position

The big issue an acquisition-minded firm must consider is whether to pay a premium price to buy a successful local firm or to buy a struggling competitor at a bargain price (and then spend monies to boost its competitiveness).

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Internal Startup Strategies

Creating an internal startup (greenfield venture) to build a new business subsidiary from scratch makes sense when a firm:

Has foreign market operating experience in rapidly getting new foreign subsidiaries up and running and overseeing their operations

Can create the subsidiary for less cost than making an acquisition.

Can add the subsidiary’s production capacity to the local market without adversely impacting the supply–demand balance in that market.

Can provide the subsidiary with the resources and capabilities needed to achieve the cost structure and competitive strength to battle local rivals head to head.

Can create a subsidiary with the resources and capability to gain good distribution access (in part, perhaps, because of the firm’s recognized brand name).

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Collaborative Strategies—Alliances and Joint Ventures with Foreign Partners

Advantages of a Collaborative Strategy:

Enables a firm to benefit from a foreign partner’s familiarity with local government regulations, knowledge of the buying habits and product preferences of local consumers, distribution channel relationships, etc.

Facilitates capture of economies of scale in production and/or marketing—cost reduction can be the difference that allows a firm to be cost-competitive

Enables joint sharing of distribution facilities and dealer networks which mutually strengthen each partner’s access to buyers

Facilitates learning and competence-building from performing joint research, sharing know-how, studying partner’s manufacturing methods, and understanding how to tailor sales and marketing approaches to fit local cultures and traditions

Directs partners’ competitive energies more toward mutual rivals and less toward one another; working together collaboratively both close the gap on leading companies

Encourages partners in reaching agreement on important technical standards

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Strategic Insight

Collaborative strategies involving alliances and/or joint ventures with foreign partners are a popular way for companies to gain entry into the markets of foreign countries (and, once it establishes a strong enough market foothold, to discontinue its participation in the alliance/joint venture and operate on its own).

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Strategic Insight

Cross-border alliances enable a growth-minded 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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Strategic Benefits of Cross-Border Alliances and Partnerships

Alliances and partnerships allow a company:

To preserve its independence (which is not the case with a merger)

To retain veto power over how the alliance operates

To avoid using scarce financial resources to fund acquisitions

To retain the flexibility to readily disengage once the purpose of the alliance or partnership has been served or if its benefits prove elusive and avoid the cost of an acquisition’s divestiture

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Knowledge and expertise of local partners may prove less valuable than expected

Communication, trust-building, and coordination costs are high in terms of managerial time

The potential for discord to emerge among cross-border allies

Language and cultural barriers

Diverse or conflicting operating practices

Conflicting objectives and strategies, differences of opinion about how to proceed, and/or differences in corporate values and ethical standards

Trouble working together or reaching mutually agreeable ways to proceed

It is risky to become overly dependent on another firm for essential expertise and competitive abilities over the long-term

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The Risks of a Collaborative Strategy

Strategic Issue:

Whether to vary a firm’s strategy and competitive approach to fit specific market conditions and buyer preferences in each host country OR

Whether to employ essentially the same strategy in all countries where the firm competes

Employ any one of three competitive strategy approaches to resolve this issue:

A localized multi-country strategy—a “think local, act local” approach

A global strategy—a “think global, act global” approach

A hybrid strategy—a “think global, act local” approach

Competing in Foreign Markets: The Three Competitive Strategy Approaches

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Core Concept

Multicountry or localized strategies involve tailoring a company’s product offering and competitive approach to match differing buyer preferences, market conditions, and competitive circumstances in each country where it choses to compete.

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Strategic Insight

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: Option 1--Multicountry Strategies

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FIGURE 7.1 The Three Strategic Options for Competing Internationally: Option 2--Global Strategies (Continued)

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FIGURE 7.1 The Three Strategic Options for Competing Internationally: Option 3--Hybrid Strategies (Continued)

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Multicountry Strategies— A “Think Local, Act Local” Approach

A “Think Local, Act Local” approach is well-suited to situations where:

There are significant country-to-country differences in

Customer preferences, buying habits, and the product features required to be relevant and appealing to local buyers

Competitive circumstances (what it takes to compete effectively against rivals)

Distribution channels and marketing methods

Host governments enact regulations requiring products sold locally must be manufactured locally, meet strict manufacturing specifications or performance standards

Trade restrictions of host governments are so diverse and complicated they preclude a uniform, coordinated worldwide market approach

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The Pros and Cons of a “Think-Local, Act-Local” Approach to Strategy-Making

Advantages

Accommodates the differing tastes and expectations of buyers in each country to gain the most attractive market positions vis-à-vis local rivals

Grows global sales and market share by making product offerings more relevant and appealing to local buyers

Disadvantages

May raise production and distribution costs due to the greater variety of designs and components, shorter production runs, and the costs and complications of added inventory handling and distribution logistics

Is not conducive to building a single worldwide competitive advantage

Handicaps a firm in using its resources, competencies, and capabilities to speed entry into additional country markets because the assets required in one country may differ from those needed in another country

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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 think-global, act-global approach.

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Global Strategies— A “Think-Global, Act-Global” Approach

Best suited for globally competitive industries where the firm’s competitive approach can be fundamentally the same in all countries; such a high degree of similarity in cross-border strategy:

Promotes building a global brand name, since a firm can sell its brand name products everywhere (with minor local adaptations when “necessary”)

Facilitates building and strengthening a collection of competitively valuable resources and capabilities to underpin its global strategy

Facilitates quick, smooth cross-border transfer of ideas, new products, and competitively valuable resources and capabilities

Allows it to compete using the same capabilities, marketing, and distribution channels approaches worldwide

Grows the numbers of personnel with experience and know-how in implementing the strategy and conducting operations in foreign markets

Enables tightly integrating and coordinating strategic moves worldwide.

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Reasons to Use a Global Strategy When Market Conditions Permit

A globally standardized product offering:

Enables capture of scale economies in manufacturing

Allows a company to focus on establishing a global brand image and reputation linked to the same product attributes in all countries

Facilitates concentrated effort on building a competitively powerful collection of resources and capabilities to secure a sustainable low-cost or differentiation-based competitive advantage over both local and global rivals

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

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FIGURE 7.2 How a Multicountry or Localized Strategy Differs from a Global Strategy (continued)

Localized Multicountry Strategy

Global Strategy

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 resources and capabilities worldwide. Stress rapid cross-country transfers of new capabilities, products, and best practices.

Coordinate major strategic decisions worldwide. Expect local managers to stick close to the global strategy.

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

A middle-ground approach

Entails utilizing the same basic competitive theme (low-cost, differentiation, best-cost, or focused) in each country but allowing local managers leeway to:

Incorporate minor country-specific variations in product attributes to better satisfy local buyers

Make adjustments in production, distribution, and marketing strategy elements to be responsive to local market conditions and to compete more successfully against local rivals

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Hybrid “Think Global, Act Local” Strategy Approaches

Is your company pursuing a global strategy or a strategy that is localized by geographic region?

Which of the following best characterizes your strategy?

Think local, act local

Think global, act global

Think global, act local

Have you studied rival companies enough to know which of these three strategy options they are pursuing—most especially your closest rivals?

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Questions for Simulation Company Co-Managers

Building Cross-Border Competitive Advantage

Ways to gain competitive advantage (or counteract disadvantages):

Locate facilities and value chain activities in particular countries to lower costs or achieve greater product differentiation

Do a better job than rivals of efficiently and effectively transferring competitively valuable resources and capabilities across the borders of the countries in which it competes

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Strategic Insight

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

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Using Location to Build Competitive Advantage

To use location to build competitive advantage, a firm must consider:

Whether it is more advantageous to concentrate each activity it performs in a few select countries or to disperse performance of the activity to many nations

In which countries to locate particular activities to boost the company’s competitiveness vis-à-vis rivals and facilitate achieving competitive advantage

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When to Concentrate Activities in a Few Locations

Activities should be concentrated when:

The costs of manufacturing or other value chain activities are significantly lower in one location than in others

Significant scale economies in production or distribution are associated with a particular location

Sizable learning and experience benefits accrue from performing an activity at a particular location

A certain location has superior resources, allows better coordination of related activities, or offers other valuable advantages

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When to Disperse Activities Across Many Locations

Activities should be dispersed when

They need to be performed close to buyers

High transportation costs, scale diseconomies, or trade barriers make it too expensive to operate from a central location

It is strategically advantageous to disperse activities to hedge against exchange rate risks, supply interruptions due to weather, strikes or logistical delays, and adverse political developments

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Cross-Border Sharing and Transfer of Resources and Capabilities to Build Competitive Advantage

When a firm has succeeded in building a collection of competitively valuable resources and capabilities, it can:

Use its competitively potent resources and capabilities to spearhead a strategic offensive to enter additional country markets or to compete more effectively against local rivals

Pursue cross-border transfer of powerful brands, superior technology, core competencies, competitive capabilities, and key personnel to strengthen its global market position and boost its competitiveness vis-à-vis rivals in one or more countries

Use its dominating strength in a competitively valuable capability, resource, or value chain activity as a basis for winning a sustainable competitive advantage over rivals lacking such resources and capabilities

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The Concept of Profit Sanctuaries

Profit sanctuaries are country markets (or geographic regions) where a firm earns substantial profits because of its strong or protected market position

In most cases, a firm’s biggest and most strategically crucial profit sanctuary is its home market, but international and global firms may also enjoy profit sanctuary status in other nations where they have a strong competitive position, big sales volume, and attractive profit margins

Firms competing globally often have more profit sanctuaries than firms that compete in only a few country markets

A domestic-only competitor has only one profit sanctuary

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Core Concept

Firms with large, protected profit sanctuaries have an advantage in competing against firms that don’t have a protected sanctuary.

Firms with multiple profit sanctuaries have an edge in competing head to head against firms with a single sanctuary.

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A firm with multiple profit sanctuaries is well positioned to attack an close rival when:

It has more or bigger profit sanctuaries than the rival it is attacking

It has competitively valuable resources and capabilities that it can divert from other countries to help power its offensive attack

The financial strength of its profit sanctuaries in other locations helps subsidize its razor-thin margins or even losses in the market where the rival is being attacked—such tactics are called cross-market subsidization.

Profit Sanctuaries Are a Valuable Competitive Asset in Attacking Rivals

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Core Concept

Cross market subsidization entails supporting competitive offensives in one market with resources and profits diverted from operations in another market.

Such a competitive tactic can be a powerful weapon against a rival with only one profit sanctuary or limited resources and capabilities.

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Global Strategic Offensives: Option 1 for Attacking an Important Rival

Attack a rival’s largest profit sanctuaries to force the rival to take expensive defensive actions that raise its costs or reduce its profit margins

While attacking a rival’s profit sanctuary violates the principle of attacking competitor weaknesses instead of competitor strengths, such an attack can 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.

When a rival’s profits are significantly eroded in its chief profit sanctuary, attacker can gain the upper hand and build market momentum in other markets, not only in the market where the offensive is being waged.

The bigger the potential payoff for such outcomes, the greater the appeal of attacking an important rival’s biggest profit sanctuary.

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Global Strategic Offensives: Option 2 for Attacking One or More Rivals

Dump goods at cut-rate prices in the markets of rivals

Involves selling goods in other countries at prices that are either (1) well below the prices at which it normally sells elsewhere or (2) well below its full costs per unit

Has appeal in two instances:

When it drives down the price so far in the targeted country that local rivals are quickly put in dire financial straits

When a firm with unused production capacity finds that it is cheaper to keep producing (as long as the selling prices cover average variable costs per unit) than to incur the costs associated with idle plant capacity

Problem: Dumping strategies run a high risk of host government retaliation through the World Trade Organization on behalf of the adversely affected domestic firms

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Core Concept

A firm 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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Questions for Company Co-Managers

Should you make an effort to analyze which geographic regions/product segments your closest rivals are earning their biggest profits?

Then should you deliberately launch an offensive attack on one or more of these rivals in those geographic regions/product segments where they have big profit sanctuaries?

Is such an attack even more advisable if two or more of your close rivals’ profit sanctuaries happen to be in the same region or product segment and if your profit sanctuaries are elsewhere?

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FIGURE 7.1 The Three Strategic Options for Competing Internationally: Multicountry Strategies, Alternate Text

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Multicountry strategies, a think local, act local approach:

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.

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FIGURE 7.1 The Three Strategic Options for Competing Internationally: Global Strategies, Alternate Text

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Global strategies, a think global, act global approach.

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.

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FIGURE 7.1 The Three Strategic Options for Competing Internationally: Hybrid Approaches, Alternate Text

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Hybrid, think global and act local strategy approaches.

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.

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FIGURE 7.2 How a Multicountry or Localized Strategy Differs from a Global Strategy, Alternate Text

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The graphic shows localized multicountry strategy in 5 countries. Each strategy varies, according to the local conditions.

The graphic also shows how a global strategy with locations in 5 countries, keep identical strategies no matter the country.

Strategic Management week 5 Discussion

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