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STRATEGIES FOR COMPETINGIN INTERNATIONAL MARKETS

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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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.

(cont’d)

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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 intoInternational Markets

1. To gain access to new customers

2. To achieve lower costs and enhance the firm’s competitiveness

3. To further exploit its core competencies

4. To gain access to resources and capabilities located in foreign markets

5. To spread its business risk across a wider market base

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Factors That Shape Strategy Choices in International Markets

1. The degree to which there are important country differences in buyer tastes, market sizes, and growth potential

2. Whether opportunities exist to gain a location-specific advantage based on wage rates, worker productivity, inflation rates, energy costs, tax rates, and other factors that impact cost structure

3. The risks of adverse shifts in currency exchange rates

4. The extent to which governmental policies affect the business environment

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

Differences in local buyer tastesRaise manufacturing and distribution costsReduce scale economies and learning curve effects

Differences in market growth potentialDemographics, income levels, and cultural

attitudes vary widely in emerging markets Lack of infrastructure, distribution systems,

and retail networks limits market growthDifferences in the intensity of local competition

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How Market Demographics Differfrom 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 Market Demographics Differfrom Country to Country

Consumer tastes and preferencesConsumer purchasing powerConsumer buying habitsDistribution channel emphasis Demands for localized productsStrength 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

Industry subsidies

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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 ratesWorker productivityEnergy costsEnvironmental regulationsTax ratesInflation ratesIndustry subsidies

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The Risks of Adverse Exchange Rate Shifts

Exporters gain in competitiveness when the currency of the country in which the goods are manufactured is weak relative to the currency of the country to which the goods are to be exported.

Exporters are at a disadvantage when the currency of the country where goods are manufactured grows stronger relative to the country to which the goods are to be exported.

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The Impact of Host-Government Policies on the Local Business Climate

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 taxesLow-cost loansSite-development assistance

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The Impact of Host-Government Policies on the Local Business Climate (cont’d)

Negative impact of government

policies

Limits on repatriation of local funds

Local ownership or partner requirements

Subsidies for domestic companies

Environmental regulations

Customs requirements, tariffs and quotas

Local content requirements

Requiring prior approval of capital spending projects

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The Impact of Host-Government Policies on the Local Business Climate (cont’d)

Host-government policies negatively affecting foreign-based firms include:Environmental regulationsCustoms requirements, tariffs, and quotasLocal content requirementsRequiring prior approval of capital spending projectsLimits on repatriation of local fundsLocal ownership or partner requirementsSubsidies for domestic companies

Core Concept

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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.

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Strategy Options for Entering Foreign Markets

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

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

3. Employ a franchising strategy.

4. Establish a subsidiary in a foreign market.

5. 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 requirements

An export strategy is vulnerable when: Manufacturing costs in the home country are higher than

in foreign countries where rivals have plants.

The costs of shipping the product to distant markets are relatively high.

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:Providing technical know-how to foreign firms creates

risks and difficulty in maintaining control over its use.

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Franchising Strategies

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 locationsFranchisor has to expend only the resources

to recruit, train, and support franchiseesDisadvantage:

Maintaining cross-border quality controlAllowing franchisees discretion in adapting

to local preferences and tastes

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Establishing a Subsidiary in a Foreign Market

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 most feasible and direct path to overcoming market-specific entry barriers.

Establishing a foreign subsidiary from the ground up via internal development is based on the firm’s prior experience with foreign market operations.

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Developing a Wholly Owned Start-up Subsidiary in a Foreign Market

An internal start-up strategy is appealing when: Creating an internal start-up is cheaper than making

an acquisition.

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

A start-up subsidiary can gain good distribution access (perhaps because of 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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Using International Strategic Alliances and Joint Ventures to Build Competitive

Strength in Foreign Markets

Mutual Benefits of Cross-Border Alliances: Facilitation of 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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Using International Strategic Alliances and Joint Ventures to Build Competitive

Strength in Foreign Markets (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

Option to withdraw from the alliance if its benefits prove elusive to the more permanent arrangement required by an acquisition

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Concepts and Connections 7.1Examples of Cross-Border Strategic Alliances

1. Verio, a subsidiary of Japan-based NTT Communications and one of the leading global providers of Web hosting services and IP data transport, has developed an alliance-oriented business model that combines the company’s core competencies with the skills and products of best-of-breed technology partners. Verio’s strategic partners include Arsenal Digital Solutions (a provider of worry-free tape backup, data restore, and data storage services), Internet Security Systems (a provider of firewall and intrusion detection systems), and Mercantec (which develops storefront and shopping cart software). Verio management believes that its portfolio of strategic alliances allows it to use innovative, best-of-class technologies in providing its customers with fast, efficient, accurate data transport and a complete set of Web hosting services. An independent panel of 12 judges recently selected Verio as the winner of the Best Technology Foresight Award for its efforts in pioneering new technologies.

2. The engine of General Motor’s growth strategy in Asia is its three-way joint venture with Wulung, a Chinese producer of mini commercial vehicles, and SAIC (Shanghai Automotive Industrial Corporation), China’s largest automaker. The success of the SAICGM-Wulung Automotive Company is also GM’s best hope for financial recovery since it emerged from bankruptcy July 10, 2009. While GM lost $4.8 billion overall before interest and taxes during the last six months of 2009, its international operations (everything except North America and Europe) earned $1.2 billion. Its Chinese joint ventures accounted for approximately one-third of that profit, due in part to the roaring success of the no-frills Wulung Sunshine, a lightweight minivan that has become China’s best-selling vehicle. In 2010, General Motors’ sales in China topped its U.S. sales—the first time that sales in a foreign market have done so in the 102-year history of the company. GM is now positioning its Chinese joint venture to serve as a springboard for the company’s expansion in India.

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Concepts and Connections 7.1 (cont’d)Examples of Cross-Border Strategic Alliances

3. Cisco, the worldwide leader in networking components, entered into a strategic alliance with Finnish telecommunications firm Nokia Siemens Networks to develop communications networks capable of transmitting data across either the Internet or by mobile technologies. Nokia Siemens Networks was created through a 2006 international joint venture between German-based Siemens AG and the Finnish communications giant Nokia. The Cisco-Nokia Siemens alliance was created to better position both companies for convergence among Internet technologies and wireless communication devices that was expected to dramatically change how both computer networks and wireless telephones would be used.

4. European Aeronautic Defence and Space Company (EADS) was formed by an alliance of aerospace companies from Britain, Spain, Germany, and France that included British Aerospace, Daimler-Benz Aerospace, and Aerospatiale. The objective of the alliance was to create a European aircraft company capable of competing with U.S.-based Boeing Corp. The alliance has proved highly successful, infusing its commercial airline division, Airbus, with the know-how and resources to compete head-to-head with Boeing for world leadership in large commercial aircraft (over 100 passengers).

Developed with Mukund Kulashekeran.Sources: Company websites and press releases

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The Risks of Strategic Alliances with Foreign Partners

Impediments to the Success of Alliances:Language and cultural barriersDifferences 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’ managersOverdependence on foreign partners for essential

expertise and competitive capabilities

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Tailoring a Firm’s International Strategy to Country Differences in Market

Conditions and Buyer Preferences

Choosing between localized multicountry strategies or a global strategy

Deciding upon the degree to vary competitive approach country by country depends on cross-country differences in buyer preferences and market conditions

Core Concept

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A firm’s international strategy is its strategy for competing in two or more countries simultaneously.

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FIGURE 7.1

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Multidomestic Strategy—A Think Local,Act Local Approach to Strategy Making

Think Local, Act LocalA 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

Core Concept

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A multidomestic strategy calls for varying a firm’s product offering and competitive approach from country to country in an effort to be responsive to significant country differences in customer preferences, buyer purchasing habits, distribution channels, or marketing methods. Think local, act local strategy-making approaches are essential when host-government regulations or trade policies preclude a uniform, coordinated worldwide market approach.

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Think Local, Act Local Strategies: Two Big Drawbacks

1. They can hinder transfer of a firm’s competencies and resources across country boundaries because localized strategies for competing in various host countries are grounded in different competencies and capabilities.

2. They do not promote building a single, unified competitive advantage, especially one based on low cost derived from either scale economies or learning curve effects.

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Global Strategy—A Think Global, Act Global Approach to Strategy Making

Think Global, Act Global StrategyAllows the firm’s strategic moves to be integrated and

coordinated worldwide.Focuses on establishing an identifiable brand image

and reputation that is uniform from country to country.Allows the firm to focus its full resources on securing a

sustainable low-cost or differentiation-based competitive advantage over both domestic rivals and global rivals.

Core Concept

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Global strategies employ the same basic competitive approach in all countries where a firm 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.

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Transnational Strategy—A Think Global, Act Local Approach to Strategy Making

A middle-ground approach that:Utilizes the same basic competitive theme (low-cost,

differentiation, or focused) in each country but allows local managers the latitude to:

1. Incorporate whatever country-specific variations in product attributes are needed to best satisfy local buyers.

2. 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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Using International Operations to Improve Overall Competitiveness

A firm gains competitive advantage by expanding outside its domestic market in two important ways:Using its foreign operations and market locations to

lower costs or help it achieve greater product differentiation.

Using cross-border coordination among its dispersed foreign operations in strategic 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

Concentrating activities and processes in a few countries makes sense when:The cost of manufacturing or performing other

activities is lower in a specific geographic location.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 or allow

for better coordination of related activities.

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When to Disperse Internal Processes Across Many Locations

Dispersing activities and processes makes sense 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.

Core Concept

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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.

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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 marketsShifting 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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Concepts and Connections 7.2Yum! Brands’ Strategy for Becoming the Leading Food Service Brand in China

In 2011, Yum! Brands operated more than 38,000 restaurants in more than 110 countries. Its best-known brands were KFC, Taco Bell, Pizza Hut, and Long John Silver’s. Its fastest revenue growth and 36 percent of its operating profit in 2010 came from its 3,700 restaurants in China. KFC was the largest quick-service chain in China with 3,200 units in 2010, while Pizza Hut was the largest casual dining chain with more than 500 units. Yum! planned to open at least 475 new restaurant locations annually in China, including new Pizza Hut Home delivery units and East Dawning units, which had a menu offering traditional Chinese food. All of Yum! Brands’ menu items for China were developed in its R&D facility in Shanghai.

In addition to adapting its menu to local tastes and adding new units at a rapid pace, Yum! Brands also adapted the restaurant ambience and décor to appeal to local consumer preferences and behavior.

The company changed its KFC store formats to provide educational displays that supported parents’ priorities for their children and to make KFC a fun place for children to visit. The typical KFC outlet in China averaged two birthday parties per day.

In 2010, Yum! Brands operated 60 KFC, Taco Bell, Pizza Hut, A&W, and Long John Silver’s restaurants for every 1 million Americans. The company’s 3,200 units in China represented only three restaurants per 1 million people in China. Yum! Brands management believed that its strategy keyed to continued expansion in the number of units in China and additional menu refinements would allow its operating profits from restaurants located in China to account for more than 50 percent of systemwide operating profits by 2015.

Sources: Yum! Brands 2010 10-K; information posted at www.yum.com.

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Strategies for Competing in the Markets of Developing Countries

Developing-Economy MarketsChina, India, Brazil, Indonesia, Thailand, Poland,

Russia, and Mexico—countries where both business risks and opportunities for growth are huge as their economies develop and their living standards climb toward those of the industrialized world

Tailoring products to fit conditions in emerging markets often involves:Making more than minor product adaptationsBecoming more familiar with local cultures and habitsRethinking pricing, packaging, and product features

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Strategy Options for Competing in Developing-Country Markets

Be prepared to compete on the basis of low price. Be prepared to modify aspects of the firm’s

business model to accommodate local circumstances.

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

Avoid emerging markets where it is impractical or uneconomical to modify the firm’s business model to accommodate local circumstances.

Adapt the business model and strategy to local conditions and be patient in earning a profit.