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CHAPTER 7

STRATEGIES FOR COMPETING IN INTERNATIONAL MARKETS

(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

THIS CHAPTER WILL HELP YOU UNDERSTAND:

LO 1 The primary reasons companies choose to compete in international markets.

LO 2 How and why differing market conditions across countries influence a company’s strategy choices in international markets.

LO 3 The five major strategic options for entering foreign markets.

LO 4 The three main strategic approaches for competing internationally.

LO 5 How companies are able to use international operations to improve overall competitiveness.

LO 6 The unique characteristics of competing in developing-country markets.

7–2

To further exploit core competencies

To spread business risk across a wider market base

To gain access to new customers

To achieve lower costs through economies of scale, experience, and increased purchasing power

To gain access to resources and capabilities located in foreign markets

WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS

7–3

WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY-MAKING MORE COMPLEX

7–4

Different countries have different home-country advantages in different industries

Location-based value chain advantages for certain countries

Differences in government policies, tax rates, and economic conditions

Currency exchange rate risks

Differences in buyer tastes and preferences for products and services

The Diamond of National Advantage

FIGURE 7.1

7–5

THE DIAMOND FRAMEWORK

Answers important questions about competing on an international basis by:

Predicting where new foreign entrants are likely to come from and their strengths.

Highlighting foreign market opportunities where rivals are weakest.

Identifying the location-based advantages of conducting certain value chain activities of the firm in a particular country.

7–6

Lower wage rates

Higher worker productivity

Lower energy costs

Fewer environmental regulations

Lower tax rates

Lower inflation rates

Proximity to suppliers and technologically related industries

Proximity to customers

Lower distribution costs

Available\unique natural resources

REASONS FOR LOCATING VALUE CHAIN ACTIVITIES ADVANTAGEOUSLY

7–7

Positives

Tax incentives

Low tax rates

Low-cost loans

Site location and development

Worker training

Negatives

Environmental regulations

Subsidies and loans to domestic competitors

Import restrictions

Tariffs and quotas

Local-content requirements

Regulatory approvals

Profit repatriation limits

Minority ownership limits

THE IMPACT OF GOVERNMENT POLICIES AND ECONOMIC CONDITIONS IN HOST COUNTRIES

7–8

Political risks stem from instability or weaknesses in national governments and hostility to foreign business.

Economic risks stem from the stability of a country’s monetary system, economic and regulatory policies, the lack of property rights protections.

7–9

CORE CONCEPT

THE RISKS OF ADVERSE EXCHANGE RATE SHIFTS

Effects of Exchange Rate Shifts:

Exporters experience a rising demand for their goods whenever their currency grows weaker relative to the importing country’s currency.

Exporters experience a falling demand for their goods whenever their currency grows stronger relative to the importing country’s currency.

7–10

Fluctuating exchange rates pose significant economic risks to a firm’s competitiveness in foreign markets.

Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger relative to the currency of the importing country.

7–11

STRATEGIC MANAGEMENT PRINCIPLE

Domestic companies facing competitive pressure from lower-cost imports benefit when their government’s currency grows weaker in relation to the currencies of the countries where the lower-cost imports are being made.

7–12

STRATEGIC MANAGEMENT PRINCIPLE

What effects has the adoption of the euro had on the ability of European Union (EU) countries (and firms) to respond changes in intra-national economic conditions in other EU countries given that they now share a common currency?

What should a EU firm do to respond to a adverse currency exchange rate shift in a non-EU country?

7–13

THINKING STRATEGICALLY

CROSS-COUNTRY DIFFERENCES IN DEMOGRAPHIC, CULTURAL, AND MARKET CONDITIONS

To pursue a strategy of offering a mostly standardized product worldwide.

To customize offerings in each country market to match the tastes and preferences of local buyers

Key Strategic Considerations

7–14

STRATEGIC OPTIONS FOR ENTERING AND COMPETING IN INTERNATIONAL MARKETS

Maintain a home country production base and export goods to foreign markets.

License foreign firms to produce and distribute the firm’s products abroad.

Employ a franchising strategy in foreign markets.

Establish a subsidiary in a foreign market via acquisition or internal development.

Rely on strategic alliances or joint ventures with foreign companies.

7–15

Advantages

Low capital requirements

Economies of scale in utilizing existing production capacity

No distribution risk

No direct investment risk

Disadvantages

Maintaining relative cost advantage of home-based production

Transportation and shipping costs

Exchange rates risks

Tariffs\import duties

Loss of channel control

EXPORT STRATEGIES

7–16

Advantages

Low resource requirements

Income from royalties and franchising fees

Rapid expansion into many markets

Disadvantages

Maintaining control of proprietary know-how

Loss of operational and quality control

Adapting to local market tastes and expectations

LICENSING AND FRANCHISING STRATEGIES

7–17

FOREIGN SUBSIDIARY STRATEGIES

7–18

Advantages

High level of control

Quick large-scale market entry

Avoids entry barriers

Access to acquired firm’s skills

Disadvantages

Costs of acquisition

Complexity of acquisition process

Integration of the firms’ structures, cultures, operations and personnel

A greenfield venture is a subsidiary business that is established by setting up the entire operation from the ground up.

7–19

CORE CONCEPT

FOREIGN SUBSIDIARY STRATEGIES

A greenfield strategy is appealing when:

Creating an internal startup is cheaper than making an acquisition.

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

A startup subsidiary has the ability to gain good distribution access.

A startup subsidiary will have the size, cost structure, and resource strengths to compete head-to-head against local rivals.

7–20

GREENFIELD STRATEGIES

7–21

Advantages

High level of control over venture

“Learning by doing” in the local market

Direct transfer of the firm’s technology, skills, business practices, and culture

Disadvantages

Capital costs of initial development

Risks of loss due to political instability or lack of legal protection of ownership

Slowest form of entry due to extended time required to construct facility

BENEFITS OF ALLIANCE AND JOINT VENTURE STRATEGIES

Gaining partner’s knowledge of local market conditions

Achieving economies of scale through joint operations

Gaining technical expertise and local market knowledge

Sharing distribution facilities and dealer networks, and mutually strengthening each partner’s access to buyers.

Directing competitive energies more toward mutual rivals and less toward one another

Establishing working relationships with key officials in the host-country government

7–22

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

7–23

STRATEGIC MANAGEMENT PRINCIPLE

Cross-border alliances enable a growth-minded firm to widen its geographic coverage and strengthen its competitiveness in foreign markets; at the same time, they offer flexibility and allow a firm to retain some degree of autonomy and operating control.

7–24

STRATEGIC MANAGEMENT PRINCIPLE

THE RISKS OF STRATEGIC ALLIANCES WITH FOREIGN PARTNERS

Outdated knowledge and expertise of local partners

Cultural and language barriers

Costs of establishing the working arrangement

Conflicting objectives and strategies and/or deep differences of opinion about joint control

Differences in corporate values and ethical standards.

Loss of legal protection of proprietary technology or competitive advantage

Overdependence on foreign partners for essential expertise and competitive capabilities.

7–25

7–26

What are the risks that Sloazyme faces in partnering with much larger firms (e.g., Unilever) on collaborative research projects?

Why did Sloazyme form an alliance with Sephora, a firm in the same product market?

Which one of Solazyme’s alliances presents the most potential risk? Which alliance could yield the greatest benefit?

Solazyme’s Cross-Border Alliances with Unilever, Sephora, Qantas, and Roquette

ILLUSTRATION CAPSULE 7.1

INTERNATIONAL STRATEGY: THE THREE MAIN APPROACHES

7–27

Multidomestic Strategy

Global Strategy

Transnational Strategy

Competing Internationally

An international strategy is a strategy for competing in two or more countries simultaneously.

A multidomestic strategy is one in which a firm varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions. It is a think-local, act-local type of international strategy, facilitated by decision making decentralized to the local level.

7–28

CORE CONCEPTS

A global strategy is one in which a firm 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.

A transnational strategy is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies.

7–29

CORE CONCEPTS

Three Approaches for Competing Internationally

FIGURE 7.2

7–30

7–31

7–32

7–33

INTERNATIONAL OPERATIONS AND THE QUEST FOR COMPETITIVE ADVANTAGE

7–34

Use international location to lower cost or differentiate product

Share resources and capabilities

Gain cross-border coordination benefits

Build Competitive Advantage in International Markets

USING LOCATION TO BUILD COMPETITIVE ADVANTAGE

To pursue a strategy of offering a mostly standardized product worldwide.

To customize offerings in each country market to match tastes and preferences of local buyers

Key Location Issues

7–35

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

7–36

STRATEGIC MANAGEMENT PRINCIPLE

WHEN TO CONCENTRATE ACTIVITIES IN A FEW LOCATIONS

The costs of manufacturing or other activities are significantly lower in some geographic locations than in others.

There are significant scale economies in production or distribution.

There are sizable learning and experience benefits associated with performing an activity in a single location.

Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages.

7–37

WHEN TO DISPERSE ACTIVITIES ACROSS MANY LOCATIONS

Buyer-related activities can be conducted at a distance.

There are high transportation costs.

There are diseconomies of large size.

Trade barriers make a central location too expensive.

Dispersing activities reduces exchange rate risks.

Dispersion helps prevent supply interruptions.

Dispersion helps avoid adverse political developments.

Dispersion allows for location-based technology and production cost competitive advantages.

7–38

SHARING AND TRANSFERRING RESOURCES AND CAPABILITIES TO BUILD COMPETITIVE ADVANTAGE

Build a Resource-Based Competitive Advantage By:

Using powerful brand names to extend a differentiation-based competitive advantage beyond the home market.

Coordinating activities for sharing and transferring resources and production capabilities across different countries’ domains to develop market dominating depth in key competencies.

7–39

Profit sanctuaries are country markets that provide a firm with substantial profits because of a strong or protected market position.

Cross-market subsidization—supporting competitive offensives in one market with resources and profits diverted from operations in another market—can be a powerful competitive weapon.

7–40

CORE CONCEPTS

PROFIT SANCTUARY POTENTIAL OF DOMESTIC-ONLY AND INTERNATIONAL COMPETITORS

7–41

PROFIT SANCTUARY POTENTIAL OF GLOBAL COMPETITORS

7–42

DUMPING AS A STRATEGY

Dumping

Selling goods in foreign markets at prices that are either below normal home market prices or below the full costs per unit.

Dumping is NOT a fair-trade practice

Governments can be expected to retaliate against such practices by foreign competitors.

The World Trade Organization (WTO) actively polices dumping to discourage such practices.

7–43

USING PROFIT SANCTUARIES TO DEFEND AGAINST INTERNATIONAL RIVALS

International Firm A

International Firm B

Firm A moves against Firm B in Country B

Profit Sanctuary

Firm B counters with a response in Country C

7–44

When the same companies compete against one another in multiple geographic markets, the threat of cross-border counterattacks may be enough to deter aggressive competitive moves and encourage mutual restraint among international rivals.

7–45

CORE CONCEPT

STRATEGY OPTIONS FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIES

Prepare to compete on the basis of low price.

Prepare to modify the firm’s business model or strategy to accommodate local circumstances.

Try to change the local market to better match the way the firm does business elsewhere.

Stay away from developing markets where it is impractical or uneconomical to modify the company’s business model to accommodate local circumstances.

7–46

DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES

Develop a business model that exploits shortcomings in local distribution networks or infrastructure.

Utilize knowledge of local customer needs and preferences to create customized products or services.

Take advantage of aspects of the local workforce with which large multinational firms may be unfamiliar.

Use acquisition and rapid-growth strategies to defend against expansion-minded internationals.

Transfer company expertise to cross-border markets and initiate actions to contend on an international level.

7–47

7–48

Why has Four Seasons Hotels been so successful in expanding its hospitality operations into a broad diversity of countries?

How should local hotel competitors to respond to Four Seasons Hotels continued expansion into their markets?

Why has the global economic slowdown not dampened demand for the Four Seasons’ luxury hotel offerings?

Four Seasons Hotels: Local Character, Global Service

ILLUSTRATION CAPSULE 7.2

Profitability in developing markets rarely comes quickly or easily—new entrants have to adapt their business models to local conditions and be patient in earning a profit.

7–49

STRATEGIC MANAGEMENT PRINCIPLE

7–50

What were the key elements of Ctrip’s business model that allowed it to successfully fend off the entry of international rivals in its market?

What changes in Ctrip’s external competitive environment will eventually threaten its continued success?

How could the Diamond of National Competitive Advantage be useful to Ctrip in predicting the future of the travel industry in China?

How Ctrip Successfully Defended against International Rivals to Become China’s Largest Online Travel Agency

ILLUSTRATION CAPSULE 7.3