Weekly Reflection
COURTMCLARKE777
ipptchap007.pptx
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LO1 Develop an understanding of the primary reasons companies choose to compete in international markets.
LO2 Learn why and how differing market conditions across countries influence a company’s strategy choices in international markets.
LO3 Gain familiarity with the five general modes of entry into foreign markets.
LO4 Learn the three main options for tailoring a company’s international strategy to cross-country differences in market conditions and buyer preferences.
LO5 Understand how multinational companies are able to use international operations to improve overall competitiveness.
LO6 Gain an understanding of the unique characteristics of competing in developing-country markets.
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Why Companies Expand Into International Markets
To gain access to new customers.
To achieve lower costs and enhance the firm’s competitiveness.
To further exploit its core competencies.
To gain access to resources and capabilities located in foreign markets.
To spread its business risk across a wider market base.
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Factors That Shape Strategy Choices in International markets
The degree to which there are important cross-country differences in demographic, cultural, market conditions.
Whether opportunities exist to gain a location-based advantage based on wage rates, worker productivity, inflation rates, energy costs, tax rates, and other factors that impact cost structure.
The risks of adverse shifts in currency exchange rates.
The extent to which governmental policies affect the local business climate.
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Cross-Country Differences in Demographic, Cultural, and Market Conditions
Adjustments to local buyer tastes
Raise manufacturing and distribution costs.
Reduce scale economies and increase learning curve effects.
Differences in market growth potential
Reflect wide variances in the demographics, income levels, and cultural attitudes in emerging markets.
Can result from a lack of infrastructure, reliable distribution systems, and closed retail networks.
Differences in the intensity of local competition
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How Markets Demographics Differ from Country to Country
Distribution channel emphasis
Demands for localized products
Strength of local competitive rivalry
Demographic Differences
Consumer tastes and preferences
Consumer purchasing power
Consumer buying habits
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How Markets Demographics Differ from Country to Country
Consumer tastes and preferences
Consumer purchasing power
Consumer buying habits
Distribution channel emphasis
Demands for localized products
The strength of local competitive rivalry
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Opportunities for Location-Based Cost Advantages
Location-Based Cost Advantages
Environmental regulations
Tax rates
Inflation rates
Wage rates
Worker productivity
Energy costs
Access to resources
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Opportunities for Location-Based Cost Advantages
A firm’s costs and profitability are impacted by the location of its activities due to:
Wage rates
Worker productivity
Energy costs
Environmental regulations
Tax rates
Inflation rates
Access to resources
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The Risks of Adverse Exchange Rate Shifts
An exporter gains in competitiveness when the currency of the country in which the exported goods are manufactured is weak relative to the currency of the country to which the exporter will export the goods.
An exporter is at a disadvantage when the currency of the country where exported goods are manufactured grows stronger relative to the country to which the exporter will export the goods.
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The Impact of Government Policies on the Business Climate in Host Countries
Host government policies that create a business climate favorable to foreign firms agreeing to construct or expand production and distribution facilities in the host country include:
Reduced taxes
Low-cost loans
Site-development assistance
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The Impact of Host Government Policies on the Business Climate (cont’d)
Negative impact of host government policies
Limits on repatriation of local funds
Local ownership or partner requirements
Subsidies for domestic companies
Environmental regulations
Customs requirements, tariffs and quotas
Locally produced content requirements
Require prior approval of capital spending projects
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The Impact of Host Government Policies on the Business Climate (cont’d)
Host government policies negatively affecting foreign-based firms include:
Environmental regulations
Customs requirements, tariffs and quotas
Local content requirements
Requiring prior approval of capital spending projects
Limits on repatriation of local funds
Local ownership or partner requirements
Subsidies for domestic companies
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Political risks stem from instability or weak-ness in national governments and hostility to foreign business; economic risks stem from the instability of a country’s monetary system, changes in economic and regulatory policies, and the lack of property rights protections.
CORE CONCEPT
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Strategy Options for Entering Foreign Markets
Maintain a national (one-country) production base and export goods to foreign markets.
License foreign firms to produce and distribute the company’s products abroad.
Employ a franchising strategy.
Establish a subsidiary in a foreign market via acquisition or internal development.
Rely on strategic alliances or joint ventures with foreign partners to enter new country markets.
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Export Strategies
Exporting involves using domestic plants as a production base for exporting to foreign markets.
Advantages:
Conservative way to test international waters.
Minimizes both risk and capital investment requirements.
An export strategy is vulnerable when:
Home country manufacturing costs are higher than in foreign countries where rivals have plants.
Product transportation costs to distant markets are relatively high.
Rapid adverse shifts can occur in currency exchange rates.
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Licensing Strategies
Licensing makes sense when a firm:
Has valuable technical know-how or a patented product but has neither the internal capabilities nor resources to enter foreign markets.
Wants to avoid the risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky.
Seeks to generate income from potential royalties.
Disadvantage of licensing:
Difficulty in maintaining control over the use of technical know-how provided to foreign firms.
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Franchising Strategies
Is often better suited to the global expansion efforts of service and retailing enterprises
Advantages:
Franchisee bears many of the costs and risks of establishing foreign locations.
Franchisor has to expend only the resources to recruit, train, and support franchisees.
Disadvantages:
Maintaining quality control in franchisee operations.
Allowing franchisees discretion in adapting product offerings to local tastes and expectations.
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Foreign Subsidiary Strategies
Allows for direct control over all aspects of operating in a foreign market.
Options for developing a subsidiary:
Acquiring either a struggling or successful foreign local firm is the quickest, least risky, and most cost efficient path to hurdling local market entry barriers.
Establishing a foreign subsidiary from the ground up via internal development relies heavily on the firm’s prior experience with foreign market operations.
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Internal Development and Start-up of a Foreign Subsidiary
An internal start-up strategy is appealing when:
The parent firm has the experience, competencies, and resources required to develop and operate foreign subsidiaries.
Creating an internal start-up is less costly than making an acquisition in a foreign market.
Adding new production capacity will not adversely impact the supply–demand balance in the local market.
The start-up subsidiary can gain access to local distribution networks (perhaps due to the firm’s recognized brand name).
A start-up subsidiary will have the size, cost structure, and resources to compete head-to-head against local rivals.
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Alliance and Joint Venture Strategies
Mutual Benefits of Cross-Border Alliances:
Facilitating first entry into foreign markets
Strengthening of a firm’s competitiveness in world markets
Capturing of economies of scale in production and marketing
Filling of gaps in technical expertise and local market knowledge
Sharing of distribution facilities, dealer networks, and mutual access to customers
Attacking of mutual rivals and providing for mutual assistance
Building of working relationships with local political and host-country governmental entities
Gaining of agreements on technical and process standards
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Alliance and Joint Venture Strategies (cont’d)
Individual Partner Benefits of Alliances:
Preservation of each partner firm’s independence
Avoidance of the firm’s use of scarce financial resources to fund acquisitions
Retention of the firm’s flexibility to readily disengage once the purpose of the alliance has been served
The option to withdraw from the alliance if its benefits prove elusive, in difference to the more permanent arrangement required by an acquisition
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SOLAZYME’S CROSS-BORDER ALLIANCES WITH UNILEVER, SEPHORA, QANTAS, AND ROQUETTE
Concepts & Connections 7.1
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The Risks of Strategic Alliances with Foreign Partners
Pitfalls to the Success of Alliances:
Language and cultural barriers
Diversity in ethical standards, partner values and objectives, corporate strategies, and operating practices
Development of trust, coordination, and effective communications between partners
Interpersonal conflict among partners’ managers
Over-dependence on foreign partners for essential expertise and competitive capabilities
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International Strategy: The Three Principal Options
Choosing between localized multicountry strategies or a global strategy
Deciding upon the degree to vary a firm’s competitive approach country by country to fit the specific market conditions and buyer preferences in each host country when operating in two or more foreign markets.
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International Strategy: The Three Principal Options
Multidomestic strategy (think local, act local)
Global Strategy (think global, act global)
Options for tailoring a company’s international strategy
Transnational strategy (think global, act local)
Localization
More
Less
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A company’s international strategy is its strategy for competing in two or more countries simultaneously.
CORE CONCEPT
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A Company’s Three Principal Strategic Options for Competing Internationally
FIGURE 7.1
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Multidomestic Strategy—A Think Local, Act Local Approach to Strategy Making
Think Local, Act Local
A firm varies its product offerings and basic competitive strategy from country to country.
Useful When:
Significant country-to-country differences exist in customer preferences, buying habits, distribution channels, or marketing methods.
Host governments enact local content requirements or trade restrictions that preclude a uniform, coordinated worldwide market approach.
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A multidomestic strategy calls for varying a company’s product offering and competitive approach from country to country in an effort to be responsive to significant cross-country differences in customer preferences, buyer purchasing habits, distribution channels, or marketing methods. Think local, act local strategy-making approaches are also essential when host-government regulations or trade policies preclude a uniform, coordinated worldwide market approach.
CORE CONCEPT
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Think Local, Act Local Strategies: Two Big Drawbacks
They hinder transfer of a company’s competencies and resources across country boundaries because the strategies in different host countries can be grounded in varying competencies and capabilities.
They do not promote building a single, unified competitive advantage, especially one based on low cost.
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Global Strategy—A Think Global, Act Global Approach to Strategy Making
Think Global, Act Global Strategy
Integrates and coordinates the firm’s strategic moves worldwide.
Promotes establishing an identifiably uniform brand image and reputation from country to country.
Focuses the firm’s full resources on securing a sustainable low-cost or differentiation-based competitive advantage over both domestic rivals and global rivals.
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Global strategies employ the same basic competitive approach in all countries where a company operates and are best suited to industries that are globally standardized in terms of customer preferences, buyer purchasing habits, distribution channels, or marketing methods. This is the think global, act global strategic theme.
CORE CONCEPT
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Transnational Strategy—A Think Global, Act Local Approach to Strategy Making
A middle-ground approach that entails:
Utilizing the same basic competitive theme (low-cost, differentiation, or focused) in each country but allows local managers the latitude to:
Incorporate whatever country-specific variations in product attributes are needed to best satisfy local buyers
Make whatever adjustments in production, distribution, and marketing are needed to respond to local market conditions and compete successfully against local rivals.
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A transnational strategy is a think global, act local approach to strategy making that involves employing essentially the same strategic theme (low-cost, differentiation, focused, best-cost) in all country markets, while allowing some country-to-country customization to fit local market conditions.
CORE CONCEPT
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Using International Operations to Improve Overall Competitiveness
A firm can gain competitive advantage by expanding outside its domestic market in two important ways:
Using location to lower costs or help achieve greater product differentiation.
Using cross-border coordination in ways that a domestic-only competitor cannot.
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Using Location to Build Competitive Advantage
Multinational companies attempting to gain location-based competitive advantage should consider:
Whether to concentrate activities in a few countries or disperse performance of each process to many countries.
Which countries offer the best locational advantage for each activity.
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When to Concentrate Internal Processes in a Few Locations
Circumstances favor concentrating activities and processes in a few countries when:
The costs of manufacturing or other activities are significantly lower in some locations than in others.
Significant scale economies can be achieved by concentrating particular activities.
There is a steep learning curve associated with performing an activity.
Certain locations offer superior resources, allow for better coordination of related activities, or offer other advantages.
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When to Disperse Internal Processes Across Many Locations
Dispersing activities and processes is advantageous when:
Buyer-related activities must take place close to buyers.
High transportation costs, diseconomies of large size, and trade barriers make it too expensive to operate from a central location.
Dispersing activities reduces the risks of fluctuating exchange rates and adverse political developments.
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Using Cross-Border Coordination to Build Competitive Advantage
Multinational and global competitors coordinate activities across borders to achieve competitive advantage by:
Sharing product knowledge, operating skills, and supply chain efficiencies across their markets.
Shifting production between plants in different countries to take advantage of changes in exchange rates, energy costs, or in tariffs and quotas.
Shifting production to locations having excess capacity or underutilized personnel.
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YUM! BRANDS’S STRATEGY FOR BECOMING THE LEADING FOOD SERVICE BRAND IN CHINA
Concepts & Connections 7.2
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Strategies for Competing in the Markets of Developing Countries
Developing-Economy Markets
China, India, Brazil, Indonesia, Thailand, Poland, Russia, and Mexico—countries where business risks are considerable but opportunities for growth are huge as their economies develop and living standards climb toward those of the industrialized world.
Tailoring products to fit conditions in emerging markets often involves:
Making more than minor product adaptations.
Becoming more familiar with local cultures and habits.
Rethinking pricing, packaging and product features.
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Strategy Options for Competing in Developing-Country Markets
Prepare to compete on the basis of low price.
Modify aspects of 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.
Shun emerging markets where it is impractical or uneconomical to modify the firm’s business model to accommodate local circumstances.
Be patient, work within the system to improve the infrastructure, and lay the foundation for generating sizable revenues and profits once conditions are ripe for market take-off.
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