Chapter 7: Competing in Foreign Markets

Chapter Roadmap Why Companies Expand into Foreign Markets Cross-Country Differences in Cultural, Demographic, and Market Conditions The Concepts of Multi-country Competition and Global Competition Strategy Options for Entering and Competing in Foreign Markets The Quest for Competitive Advantage in Foreign Markets Profit Sanctuaries, Cross-Market Subsidization, and Global Strategic Offensives Strategic Alliances and Joint Ventures with Foreign Partners Competing in Emerging Foreign Markets

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Competing in Foreign Markets7ChapterScreen graphics created by:Jana F. Kuzmicki, Ph.D.Troy State University-Florida and Western Region Chapter RoadmapWhy Companies Expand into Foreign MarketsCross-Country Differences in Cultural, Demographic, and Market ConditionsThe Concepts of Multi-country Competition and Global CompetitionStrategy Options for Entering and Competing in Foreign MarketsThe Quest for Competitive Advantage in Foreign MarketsProfit Sanctuaries, Cross-Market Subsidization, and Global Strategic OffensivesStrategic Alliances and Joint Ventures with Foreign PartnersCompeting in Emerging Foreign MarketsThe Four Big Strategic Issues in Competing MultinationallyWhether to customize a company’s offerings in each different country market to match preferences of local buyers or offer a mostly standardized product worldwideWhether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by countryWhere to locate a company’s production facilities, distribution centers, and customer service operations to realize the greatest locational advantagesWhether and how to efficiently transfer a company’s resource strengths and capabilities from one country to another to secure competitive advantageWhat Is the Motivation for Competing Internationally?Gain access tonew customersCapitalizeon corecompetenciesHelpachievelower costsSpreadbusiness risk across wider market baseObtain access to valuable naturalresourcesInternational vs. Global CompetitionInternational CompetitorGlobalCompetitorCompany operates in a select few foreign countries, with modest ambitions to expand furtherCompany markets products in 50 to 100 countries and is expanding operations into additional country markets annuallyCross-Country Differences in Cultural, Demographic, and Market ConditionsCultures and lifestyles differ among countriesDifferences in market demographicsVariations in manufacturing and distribution costsFluctuating exchange ratesDifferences in host government economic and political demandsDifferent Countries Have Different Locational Appeal Manufacturing costs vary from country to country based onWage ratesWorker productivityNatural resource availabilityInflation ratesEnergy costsTax ratesQuality of the business environment varies from country to countrySuppliers, trade associations, and makers of complementary products often find it advantageous to cluster their operations in the same general locationFluctuating Exchange Rates Affect a Company’s CompetitivenessCurrency exchange rates are unpredictableCompetitiveness of a company’s operations partly depends on whether exchange rate changes affect costs favorably or unfavorablyLessons of fluctuating exchange ratesExporters always gain in competitiveness when the currency of the country where goods are manufactured grows weakerExporters are disadvantaged when the currency of the country where goods are manufactured grows strongerDifferences in Host Government Trade PoliciesLocal content requirementsRestrictions on exportsRegulations on prices of importsImport tariffs or quotasOther regulationsTechnical standardsProduct certificationPrior approval of capital spending projectsWithdrawal of funds from countryOwnership (minority or majority) by local citizensMulti-country CompetitionGlobal CompetitionTwo Primary Patterns of International CompetitionCharacteristics of Multi-Country CompetitionMarket contest among rivals in one country not closely connected to market contests in other countriesBuyers in different countries are attracted to different product attributesSellers vary from country to countryIndustry conditions and competitive forces in each national market differ in important respectsRival firms battle for national championships –winning in one country does not necessarily signal the ability to fare well in other countries!Characteristics of Global CompetitionCompetitive conditions across country markets are strongly linkedMany of same rivals compete in many of the same country marketsA true international market existsA firm’s competitive position in one country is affected by its position in other countriesCompetitive advantage is based on a firm’s world-wide operations and overall global standingRival firms in globally competitive industries vie for worldwide leadership!Strategy Options for Competing in Foreign MarketsExportingLicensingFranchising strategyMulti-country strategyGlobal strategyStrategic alliances or joint venturesExport StrategiesInvolve using domestic plants as a production base for exporting to foreign marketsExcellent initial strategy to pursue international salesAdvantagesConservative way to test international watersMinimizes both risk and capital requirementsMinimizes direct investments in foreign countriesAn export strategy is vulnerable whenManufacturing costs in home country are higher than in foreign countries where rivals have plantsHigh shipping costs are involvedAdverse fluctuations in currency exchange ratesLicensing StrategiesLicensing makes sense when a firmHas valuable technical know-how or a patented product but does not have international capabilities to enter foreign marketsDesires to avoid risks of committing resources to markets which areUnfamiliarPolitically volatileEconomically unstableDisadvantageRisk of providing valuable technical know-how to foreign firms and losing some control over its useFranchising StrategiesOften is better suited to global expansion efforts of service and retailing enterprisesAdvantagesFranchisee bears most of costs and risks of establishing foreign locationsFranchisor has to expend only the resources to recruit, train, and support franchiseesDisadvantageMaintaining cross-country quality controlMulti-Country StrategyStrategy is matched to local market needsDifferent country strategies are called for whenSignificant country-to-country differences in customers’ needs existBuyers in one country want a product different from buyers in another countryHost government regulations preclude uniform global approachTwo drawbacks1. Poses problems of transferring competencies across borders2. Works against building a unified competitive advantageGlobal Strategy Strategy for competing is similar in all country marketsInvolvesCoordinating strategic moves globallySelling in many, if not all, nations where a significant market existsWorks best when products and buyer requirements are similar from country to countryFig. 7.1: How a Multicountry Strategy Differs from a Global StrategyThe Quest for Competitive Advantage in Foreign MarketsThree ways to gain competitive advantage1. Locating activities among nations in ways that lower costs or achieve greater product differentiation2. Efficient/effective transfer of competitively valuable competencies and capabilities from company operations in one country to company operations in another country3. Coordinating dispersed activities in ways a domestic-only competitor cannotTransferring Valuable Competencies to Build a Global Competitive AdvantageTransferring competencies, capabilities, and resource strengths across borders contributes toDevelopment of broader competencies and capabilitiesAchievement of dominating depth in some competitively valuable areaDominating depth in a competitively valuable capability is a strong basis for sustainable competitive advantage overOther multinational or global competitors andSmall domestic competitors in host countriesCoordinating Cross-Border Activities to Build a Global Competitive AdvantageAligning activities located in different countries contributes to competitive advantage in several waysChoose where and how to challenge rivalsShift production from one location to another to take advantage of most favorable cost or trade conditions or exchange ratesUse Internet technology to collect ideas for new or improved products and to determine which products should be standardized or customizedEnhance brand reputation by incorporating same differentiating attributes in its products in all markets where it competesWhat Are Profit Sanctuaries?Profit sanctuaries are country markets where a firmHas a strong, protected market position and Derives substantial profitsGenerally, a firm’s most strategically crucial profit sanctuary is its home marketProfit sanctuaries are a valuable competitive asset in global industries!Fig. 5.2: Profit Sanctuary Potential of Various Competitive ApproachesWhat Is Cross-Market Subsidization?Involves supporting competitive offensives in one market with resources/profits diverted from operations in other marketsCompetitive power of cross-market subsidization results from a global firm’s ability toDraw upon its resources and profits in other country markets to mount an attack on single-market or one-country rivals andTry to lure away their customers with Lower pricesDiscount promotionsHeavy advertisingOther offensive tacticsGlobal Strategic OffensivesDirect onslaughtObjective – Capture a major slice of market share, forcing rival to retreatInvolvesPrice cuttingHeavy expenditures on marketing, advertising, and promotionEfforts to gain upper hand in one or more distribution channelsContestMore subtle and focused than an onslaughtFocuses on a particular market segment unsuited to defender’s capabilities and in which attacker has a new next-generation productFeintMove designed to divert the defender’s attention away from attacker’s main targetThree OptionsAchieving Global Competitiveness via CooperationCooperative agreements / strategic alliances with foreign companies are a means toEnter a foreign market orStrengthen a firm’s competitiveness in world marketsPurpose of alliancesJoint research effortsTechnology-sharingJoint use of production or distribution facilitiesMarketing / promoting one another’s productsCharacteristics of Competing in Emerging Foreign MarketsTailoring products for big, emerging markets often involvesMaking more than minor product changes andBecoming more familiar with local culturesCompanies have to attract buyers wit bargain prices as well as better productsSpecially designed and/or specially packaged products may be needed to accommodate local market circumstancesManagement team must usually consist of a mix of expatriate and local managers Fig. 5.3: Strategy Options for Local Companies in Competing Against Global Challengers