-
Strategies for Competingin International Markets
Chapter Learning ObjectivesLOl. Develop an understanding of the
primary reasons companies choose
to compete in international markets.
LOz. Learn how and why differing market conditions across
coun-tries influence a company's strategy choices in international
markets.
LO3- Gain familiarity with the strategic options for entering
and competingin foreign markets.
LO4. Understand how multinational companies go about building
competi-tive advantage in foreign markets.
LO5. Gain an understanding of the unique characteristics of
competing inemerging markets.
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Chapter 7 Strategies for Competng n InternationaL Markets
Any company that aspires b industry leadership in the 21st
century mustthink in terms of global, not domestic, market
leadership. The world economyis globalizing at an accelerating pace
as countries previouslv closed to for-eign companies open up their
rnarkets, as countries with previously plannedeconomies embrace
market or mixed economies, as information technologyshrinks the
importance of geographic distance, and as ambitious, growth-minded
companies race to build stronger competitive positions in the
marketsof more and more countries.
This chapter focuses on strategy options for expanding beyond
domesticboundaries and competing in the markets of either a few or
a Sreat many coun-ties. In the process of exploring oPtions for
competing internationally, we wiilintroduce such concepts as
multicountry competition, global competition, profitsanctuaries,
and cross-country differences in cultural, demographic, and mar-ket
conditions. The chapter also includes sections on strategy oPtions
for enter-ing and competing in foreign markets; the importance of
locating operations inthe most advantageous coultries; and the
special circumstances of competingin such emerging markets as
China, India, Brazil, Russia, and Eastem Europe.
Why Companies Expand intolnternational MarketsA company may opt
to expand outside its domestic market for any of fourmaior
reasons:
1. To gain access to nezu customers-Expanding into foreign
markets offerspotential for increased revenues, profits,, and
long-term growth andbecomes an especially attractive option when a
comPany's home marketsare mature.To nchicae lozoer costs and
enhance the Jirm's competitiueness-Many comPa-nies are driven to
seli ir more than one country because domestic salesvolume alone is
not large enough to fully capture manufacturing econo-mies of scale
or learning-curve effects. The relatively small size of
countrymarkets in Europe explains why companies like Michelin, BMW,
andNestl long ago began selling their products al1 across Europe
and thenmoved into markets in North America and Latin Amertca.To
capitnlize on its core competercie.s-A company may be able to
leverageits competencies and capabiliiies into a position of
competitive advantagein foreign markets as well as domestic makets.
Walmart is capitalizing onits considerable expertise in discount
retailing to expand into the UnitedKindgom, Japan, China, and Latin
America. Walmart executives are Par-ticularly excited about the
comPany's growth opportunities in China.To spread its business risk
ncross a zuider market base-A company sprcadsbusiness risk by
operating in a number of different foreign countriesrather than
depending entirely on operations in its domestic market.Thus, if
the economies of North American countries turn down for aperiod of
time, a company with operations across much of the world maybe
sustained by buoyant sales in Latin America, Asia, or Europe.
t1
-
Part One: Section C: Crafting a Strategy
In a few cascs, companies in industries based on natural
resources (e.g., oiland gas, minerals, rubbcr, and lumber) often
find it necessary to operate inthe international arena becausc
attractive raw material supDlies are located inforeign
countries.
Factors That Shape Strategy Choicesin lnternational MarketsThere
arc four important factors that shape a companv's strategic
approachto competing in foreign markets: (1) the degree to which
there are importantcross-country differences in cultural,
demographic, and market conditions,(2) whether opportunities exist
to gain a location-based competitive advan-tage, (3) the risks of
adversc shifts in currency exchange rates, and (4) theextent to
which governrnental policics affect the business euvironment.
Cross-Country Differences n Cultural,Demographic, and Market
ConditionsRegardless of a company's motivation for expanding
outside its domestic mar-kcts, the strategies it uses to compete in
foreign markets must be situation-driven. Cultural, demographic,
and market conditions vary significantly amongthe countries of the
world.r Cultures and lifestyles are the most obvious areas inu'hich
countries differ; mnrket demographics and inconte leaels are close
behind.For many product categories, consumcrs in Spain do not have
the same tastes,preferences, and buving habits as consumers in
Norway; buyers differ yet againin Greece. Chile, New Zealand, and
Taiwan. Less than 20 percent of the popr,rla-tions of Brazil,
India, and China have annual purchasing pora,'er equivalent
to$25,000. Middle-class collsumers represent a much smaller portion
of thc popu-lation in these and other cmerging countries than in
North America, Japan, andmuch of Westem Europe-{hina's middle class
numbers aboui 125 million outof a population of 1.3 billion.':
Sometimes, product designs suitable in one coun-try are
inappropriate in another-for example, in the United States
electricaldeviccs run on 110-r'olt electrical systems, but ir some
Europcan countries thestandard is a 220-240 volt electric system,
necessitating the uie of different elec-tricai designs and
components. In parts of Asia refrigerators are a status symboland
may be placed in the living room, leading to preferences for
stylish designsand colors-in lndia bright blue and red are popular
colors. In other Asiancountries household space is constraincd and
many refrigerators are only fourfeet high so that the top can be
used for storagc.
Similarlv market growth varies from country to country. In
emergingmarkets like India, China, Brazil, and Malaysia, markct
grort'th potential is
'For an inslghtful discussion of how much significance these
kinds of demographic and marketdifferences have, see C. K. Prahalad
and Kenneth LieberthaL, "The End of Corporate lmperialism,"Horvord
Busness Review 76, no. 4 0uly August 1998), pp. 68 lg; and Marcus
Alexander andHarry Korine, "When You Shouldn't Go Global," Horvard
Business Review 86, no. rz (December2oo9), pp. 70-77.'Joseph Caron,
"The Business of Doing Business with Chna: An Ambassador Reftects,"
/yeyBusiness lournol 69, no. 5 (May-June zoo5), p. z.
-
Chapter 7 Strategies for Competing in lnternational Markets
far higher than i the more mature economies of Britain, Denmark,
Canada,and Japan. In automobiles, for examplc, the potential for
market growth isexpiosive in China, where 2008 salcs of neu'
vehicles amounted to iust over9.3 million in a country with 1.3
billion people. Market growth can be limitedby the lack of
infrastructure or established distribution and retail networksin
emerging markets. In India, there are well-developed national
channelsfor distribution of goods to ihe nation's 3 million
retailers, whereas in Chinadistribution is primarily local. Also,
the competitive rivalrv in some countrymarketplaces is only
moderate, while others are characterized by strong orfierce
competition.
One of the biggest concerns of complnies competing in foreign
markets is ruhctherlo customize their offerings in ench different
coLory market to match the tastcs andpreercnces of local buyers or
whether to ffir a mostly stnndardized product world-wide. ldhlle
making products closely matched to krcal tastes makes themmore
appealing to local buyers., customizing a cttmpany's products
countryby country may have the effcct of raising production and
distribution costsdue to the greater varieq/ of designs and
components, shorter production runs,and the complications of added
inventory handling and distribution logistics.The tension betzueen
the mnrket pressures to localize a compnny's product
offerngscountn-by-country nnd the competitiae pressures to louter
costs is one of the bigstrategic issues that participants in
foreign markets haae to resoloe.
Aside from the basic cultural and market differences among
countries, acompany also has to pay special attention to location
advantages that stemfrom country-to-country variations in
manufacturing and distribution costs,the risks of aclverse shifts
in exchange rates, and the economic and politicaldemands of host
govemments.
Gaining a Location-Based Competitive AdvantageDifferences in
wage rates, worker productivity, inflation rates, energy costs,tax
rates, government regulations, and thc like create sizable
country-to-country variations in manufactuting costs. Plants in
some cotmtries havemajor manufacturing cost advantages because of
lower input costs (espe-cially labor), relaxed government
regulations, the proximity of suppliers,or unique natural
resources. ln such cases, the low-cost countries becomeprincipal
production sites, with most of the output exported to markets
inother parts of the world.. Companies that build production
facilities in low-cost countries (or that source their products
from contract manufacturersin these countries) have a competitive
advantage over rivals u'ith piants incountrics where costs are
higher. The competitive role of low manufactur-ing costs is most
evident in low-w'age countries like China, India, Pakistan,Mexico,
Brazil, and several counties in Africa that have become
productionhavens for manufactured goods with high labor content
(especially textilesand apparel). Hourly compensation costs for
production workers in Chinaaveraged about $0.80 an hour n 2007
vcrsus about $3'00 in Mexico, $6 00 inBrazil, $8.00 in Hungary,
$19.00 in New Zealand, $24.50 in the U.S., $29.00 inCanada, $38.00
in Germany, and $48.50 in Norn'ay.3 China is fast becomingr
"lnternational Comparisons of Hourly Compensation Costs for in
Manufacturing,
"oo7," U S.
Deportment of Lobor Bureau of Lobor St?tistics Newsletter, March
26, 2oo9.
-
Part One: Secton C: Craftng a Strategy
the manufacturing capital of the world-virtually all of the
world's majormanufacturinfi companies now have facilities in China.
Likewise, concernsabor.rt short delivery times and lon, shipping
costs make some countriesbetter locations than others for
establishing distribution centers.
The quality of a country's business environment also offers
locationaladvantages-the governments of some countries are anxious
to attract foreigninvestments and go all-out to create a business
climate that outsiders will viewas favorable. A good cxample is
lreland, whch has one of the world's mostpro-business environments.
Ireland offers companies very low corporate taxrates, has a
govemment that is responsive to the nccds of industry, and
aggres-sively recruits high-tech manufacturin; facilities and
multinational companies.Ireland's policies were a major facto in
Boston Scientific's decision to locatethree medical device research
and production facilities in Ireland that employo'u'er 4,000
peoplc. Another locational advantage is the clustering of
suppliersof components and capital equipment, infrastructure
suppliers (universities,vocational training providers, rcsearch
enterprises), and makers of comple-mentary products in close
proximity to a company's ma.jor operaiions-suchgeographic
clustering not only facilitates close collaboration but in many
casesalso produces significant cost savings.
The Risks of Adverse Exchange Rate ShiftsThe volatility of
exchange rates greatly complicates the issue of geographiccost
advantages. Currency cxchange rates often move up or down 20 to40
percent annually. Changes of this magnitudc can either totally wipe
out acountry's low-cost advantage or transform a former high-cost
location intoa competitive-cost location. The growing strength of
the euro relative to theU.S. dollar has encouraged a number of
European manufacturers such asVolkswagcn, Fiat, and Airbus to shift
prodr-rction from European factories tonew facilities in thc United
States. Also, the weakening dollar caused Chryslerto discontinue
its contract manufacturing agreement with an Austrian firm
forassembly of minivans and Jeeps sold in Europe. Beginning in
2008, Chrysler'svehicles sold in Europe were exported from its
factories in Illinois and Mis-souri. The u'eak dollar n'as also a
factor in Ford's and GM's recent decisionsto begin exporting
U.S.-made vehrcles to China and Latin America. The lessonoJ
lluctuating cxclnnge rates is that cotnpnnies that export goods to
foreign coun-tries olzuaqs gnin in competitioeness when the
currency of tlrc country in which theglods re mnnufnctured is
zucak. Exporters are disadunntaged when the currencr of thecountry
Tuhere goods are being manut'nctttred grows stronger.
The lmpact of Host Government Policieson the Local Business
ClmateNational governments enact ail kinds of measLlres affecting
business condi-tions and the operations of foreign companies in
their markets. Examples ofhost government policies affecting
foreign-based companies include:. Local content requirements on
goods made inside their bordcrs by
forcign-based companies.. Policies that protect local companies
from foreign competition.
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Chapter 7 Strategies for Competing in International Markets
. Ilestrictions on exports because of national security
concerns.
. Price regulation of imported and locally produced goods.
. Deliberately burdensome procedures and requirements for
importedgoods to pass customs inspection.
. Tariffs or quotas on the import of certain goods.
. Subsidies and low-interest loans for domestic companies
competingagarnst foreign rivals.
Until 2001, when it joined the World Trade Organization, China
imposecla 100 percent tariff on motor vehicle imports. The European
Union imposesquotas on textile and apparel imports from China as a
measure to ProtectEuropean producers in southern Europe. India has
a long history of utilizingexcise taxes of as much as 50 percent on
newly purchased products to protectits domestic producers. However,
such duties were lovvered to 8 to 14 Petcentin 2008 to hetp boost
consumer demand to further accelerate India's overalleconomic
growth rate.
Other governments, anxious to obtain new plants and jobs, offer
foreigncompanies a helping hand in the form of subsidies,
privileged market access,and technical assistance. A1l of these
possibilities explain rt'hy the managcrsof companies opting to
compete in foreign markets have to take a close krokat a country's
politics and its policies toward business in general, and
towardforeign companies in particular, when deciding which countrv
markets toparticipate in and which oncs to avoid.
Strategy Options for Entering andCompeting in Foreign
MarketsThere are several general strategic options for a company
that decides toexpand outside its domestic market and compete
internationally or globally:1 . Mnintain a national (one-country)
production base and expor t goods to foreign
markets, using either company owned or foreign-controlled
forwarddistribution channels.
2. License foreign firms to use the company's teclmology or to
produce and disril:tttethe companr's products.
3. Employ a franchising strntegy.4. Follout a multicountry
strntery, varying the company's strategic approach
(perhaps a little, perhaps a lot) from country to country in
accordancewith local conditions and differing buyer tastes and
preferences.
5. Folloto a global strntegy, using essentially the same
competitive strategyapproach in all countrv markets wherc the
company has a presence.
6. L)se strategic allionces or joint aentttres zoith foreign
componies ns the primaryuehicle for entering foreign markets and
perhaps also use thcm as anongoing strategic arrangement aimed at
maintaining or strengthening thecompany's competiti'"'eness.
The following scctions discuss the six general options in more
detail.
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Part One: Section C: Crafting a Strategy
Export StrategiesUsing domestic plants as a production base for
exporting goods to foreignmarkets is an excellent initial strategy
for pursuing international sales. It isa conservative way to test
the ilternational waters. The amount of capitalneeded to begin
exporting is often quite minimal and existing procluitioncapacity
rnay well be sufficient to make goods for export, With an
exportstrategv a manufacturer can limit its involvcment in foreign
markets by con-tracting with foreign wholesalers experienced in
importing to handle theentire distribution and marketing function
in their countries or regions of thcworld. If it is more
advantageous to maintain control over these functions,howcvcr, a
manufacturer can establish its own distribution and sales
organi-zations in some or all of the target foreign markets. Either
way, a home-basedproduction and export strategy helps the firm
minimize its direct investmentsin foreign countries.
An export strategy is vulrerable when (1) manufacturing costs in
the homecountry ae substantially higher than ir foreign countrics
where rivals haveplants, (2) the costs of shipping the product to
distant foreign markets arerelatively high, or (3) adverse shifts
occur in currency exchange rates. Unlessan exporter can both keep
its production and shipping costs competitivewith rivals and
successfully hedge against unfavorable changes in currencyexchange
rates, its success will bc limited.
Licensing StrategiesLicensing makes sense u'hen a firm with
valuable techical know-how or aunique patcntcd product has neither
the internal organizational capabilitynor the resources to enter
foreign markets. Licensing also has the advantageof avoiding the
risks of committing resoutces to country markets that areunfamilia,
politicalll. volatile, economically unstable, or otherwise risky.
Bylicensing the technology or the production riJhts to
foreign-based firms, thefirm does not have to bear the costs and
risks of entering foreign marketson its own, yct it is able to
generate income from royalties. The big disad-vantage of licensing
is thc risk of providing valuable technological know-how to foreign
companies and thereby losing some degree of control overits use.
Also, monitoring licensees and safeguarding the company's
propri-etarv know-how can prove quite difficult in some
circumstances. But if theroyalty potential is consideable and the
companies to whom the licensesare being granted are both
trustr,r'orthy and reputable, then licensing can bea very
attractive option. Many software and pharmaceutical companies
uselicensing strategics.
Franchising StrategiesWhile licensing works well for
manufacturers and owners of prcprietarytechnology, franchising s
often better suited to the global expansion effortsof service and
retailing enterpriscs- McDonald's, Yum! Brands (the parentof
A&W, Pizza Hut, KFC, Long John Silver's, and Taco Bell), the
UPS Store,7-Eleven, and Hilton Hotels have all used franchising to
build a presence in
-
Chapter ? Strategies for Competing in InternationaI Markets
international markets. Franchising has much the same advantages
as licensing.The franchisee bears most of the costs and risks of
establishing foreign loca-tions, so a franchisor has to expend only
the resources to recruit, train, support,and monitor franchisees.
The big problem a franchisor faces is maintainingquality control.
ln many cases, foreign franchisees do not always exhibit
strongcommitment to consistency and standardization---especially
when the localculture does not stess the same kinds of quality
concerns. Another problemthat can arise is n'hether to allow
foreign franchisees to make modifications tothe franchisor's
product offering to better satisfy the tastes and expectations
oflocal buyers. Should McDonald's allow its franchiscd units in
Japan to modifyBig Macs slightly to suit Japanese tastes? Should
the franchised KFC units inChina be permitted to substitute spices
that appeal to Chinese consumers? Orshould the same menu offerings
be rigorously and unvaryingly required of allfranchisees
worldwide?
Establishing International Operations: Choosing betweenLocalized
Multicountry Strategies and a Global StrategyWhile exporting,
licensing, and franchising rely upon the competencies
andcapabilities of allies in international markets to deliver goods
or services tobuyers, companies pursuing international expansion
may elect to take respon-sibility for the performance of all
essential value chain activities in foreignmarkets. Once a company
chooses to establish operations in international mar-kets, deciding
upon the degree to vary its competitive approach to fit
spccificmarket conditions and buyer preferences in each host
country is perhaps theforemost strategic issue that it must
address. Figure 7.1 shows a comPany'soptions for resolving this
issue.
TIIINK LOCAL, ACT LOCAL APPROACHES TO STRATEGYNIAKING A think
local, act local approach to strategy making s essentialwhen there
are significant country-to-country differences in customer
prefer-ences and buying habits, when there are significant
cross-country differencesin distribution charurels and marketing
methods, when host Sovcrnmentsenact regulations requiring that
products sold locally meet strict manufactur-ing specifications or
performance standards, and rt'hen the trade estrictionsof host
governments are so diverse and complicated that they preclude
auniform, coordinated worldwide market approach. With localized
strategies,a company often has different product versions for
different countries andsometimes sells the products under different
brand names. Covernmcntrequirements for gasoline additives that
help reduce carbon monoxide, smog,and other emissions are almost
never the same from country to country. BPutilizes localized
strategies in its gasoline and service station business
segmentbecause of these cross-country formulation differences and
because of cus-tomer familiarity with local brand names. For
example, the company marketsgasoline in the United States under its
BP and Arco brands, but markets gaso-line in Germany, Belgium,
Poland, Hungary, and the Czech Rcpublic underthe Aral brand. In the
food products industry, it is common for companies tovary the
ingredients n their products and sell the localized versions
under
-
Part One: Sectior C: C'aftirg a StraLegy
F I G L' lt l'- ? . I A Compant's Strategic Options for Deating
with Cross-Country Variations in Buyer Prhrenres and Market
condionsStrategic Posturng
OptionsWays to Dea[ Wth Cross-Country Variatons n Buyer
Preferences and Market Conditions
Localized or multicountry strategies arenecessary when there are
srgnlfcant crosscountry differences in customer preferences,buyer
purchasing habits, distribution channels,or marketing methods.
Think local, act localskategy-making approaches are lso
essenttalwhen host government regulations or tradepolicies preclude
a uniform, coordnatedworldwide market aDoroach.
Emptoy same strategy worldwide. Pursue the some bask compettve
strotegy theme (low-cost
dfferentiation, best-cost, ot focused) in all countryma
rkets
-
a globat strategy.. Offer the same products wortdwde, with only
very minor
devations from one country to another when local marketcondtions
so dictate.
. Utitize the same capabitltes, distributon channels,
andmarketing approaches worldwide.
. Coordnate strategc actons ftom central headquarters.
Iocal brand namcs in orrler to cater to cciu r-r try-sreciftc
tastes and eatitlgl-rcferences. The strcngth of t mrloying se t oi
localized or multicountry
strategies is that tl-rc cc)mpnv's actions and
btrsinessapproaches arc dclibcratr'l'u' craftc.d to a-rpcal to
thctastes rncl exf-rcctatill-s qf bttr''ers iu each countryanr-1 to
stake or.Lt thc rnost ttr.rctive urrrket positionsvis--r'is local
competitors.r
I lor'r.ever, think local, act local strategies have t'rvobi g d
ran backs: ( 1 ) They hinr'ler transfer of a
comp.rny'sctrmpetencies and rcsotrrcc.s cross c()rlntry
bourrrl,rries bec.ruse the strategies in clifft.rcnt host
cr)untrir-scan be gronnded in r.arvin1 competcncics arrtl capa
brlilics; and (2) they rlo not pr'ontote builcling a siugle,
unified competitivearh'antage especiallv onc basec'l orr lorv cost.
Companies enrploving llighlvlocrlizc.rl or nrulticountlv
str'.rtegies face big hurdles ir-r achicving lor.r,-cost
For more details on the mcfits ot and opportunities for cross
border transfer of successfLrl sfrt'egy experlments, see C, A.
Bartlctt and S. Ghoshal, Manogitig Across Borders: fhe
TransnotionalSaiulon, 2nd ed. (Boston: Hnard BLrsiness 5chool
Press, 1998), pp. /9-Bo and Chapter 9
Employ localzed strategles-one for each country merket. Tallor
the corpany's compedtivc approech nd prodct
offering to fit speific madct condlons and buyerprehlences in
each host county.
. lrelegEte stretegy makng to local mnagers wlth rtftandknowldge
of local condions.
Employ a comblnation globat-tocal strategy. Employ essentally
the sane bosic competitlye stoEgy theme
0ow-cost, differentiation, best-rost, or focsed) ln oll
eountrymakeb.
. Develop the capablity to customize product offerings andsell
dfferent Droduct vrsions iri dfferent countries(perhaps even under
different brand names).
. Give [oca[ managrs the tatitude to adapt the globalapproach as
needed to accommodate local buyer preferencesand be responsiye to
[oca[ market and compettiyeconditons.
-
Chapter ? Strategies for Competing in International Markets
leadership unless they find ways to customize their products and
sflll be ina position to capture scale economies and learning-curve
effects. Toyota'sunique mass customization production capability
has been key to its abilityto effectively adapt product offerings
to local buyer tastes, while maintaininglon -cost leadership.
THINK GLOBAL, ACT GLOBAL APPROACIIIS TO STRATECYN,IAI(ING While
multicountry or localized strategies arc bcst suited forirdustries
where a fairly high degree of local responsiveness is
important,global strategies are best suited for globally
standardized industries. A globalstrategy is one in which the
company's approach is predominantly the samein all countries-it
sells the same products under thesame brand names everywhere,
utilizes much thesame distribution channcls in all countries, and
com-petes on the basis of the same capabilities and market-ing
approaches worldvvide. Although the company'sstrategy or product
offering may be adapted in very
Global sfetoges are best suited to industriesthat are globally
standardized in terms ofcustomer preferences, buyer purchasing
habits,disfibution channels, or marketing methods.
Ihnk global, act local strategy-makingapproaches nvolve
employing essentially thesame strategic theme (low-cost, diff
erentiation,focused, bestcost) in all country markets,
whileallowing some country-to{ountry customzatt0nto fit local
market conditions.
minor r,r'ays to accommodate specific situatior-rs in a few host
countries, thecompany's fundamental competitive approach (lou-cost,
differentiation, orfocused) remains very much intact worldwide and
local managers stick closeto the global strategy. A think global,
act global strategic theme prompts com-pany managers to integrate
and coordinate the company's strategic movesworldrt'de and to
expand irto most if not all nations where there is signifi-cant
buyer demand. It puts considerable strategic emphasis on building
aglobal brand name and aggressively pursuin; opportunities to
transfer ideas,new products, and capabilities from one country to
another.
Ford's global design strategy is a move toward a think global,,
act globalstrategy by the company and involves the developmcnt and
production ofstandardized models r+'ith country-specific
modifications limited primarily towhat is required to meet local
country emission and safety standards. The2010 Ford Fiesta and 2011
Ford Focus will be the company's first global designmodels and will
be marketed in Europe, North America, Asia, and Australia.Whcncver
country-to-country differences are small enough to be accommo-dated
within the framework of a global strategy, a global strategy is
prefera-ble to localized strate;ies because a company can more
readily unify itsoperations and focus on establishing a brand image
and tcputation that isturiform from country to country. Moreovct,
with a global strategy a comPanyis better able to focus its full
resources on securin; a sustainable low-cost ord
ifferentiation-based compeiitive advantage over both domestic
rivals andglobal rivals.
IHINK GLOBAL, ACT LOCAL APPROACHISfO STRATEGY \{AKING Often, a
company canaccommodate cross-country variations in buyer
tastes,Iocal customs, and market conditions with a thinkglobal, act
local approach b developing strategv. Thismiddle-ground approach
entails utilizing the samebasic competitive theme (low-cost,
differenhation, or
-
Part One: Section C: Crafting a Strategy
focused) in each countrv but allows local managers the latitude
to (1) incorporatewhatever country-specific variaons in product
attributes are needed to best sat-isfy local buyers ancl (2) make
whatever adjustments in production, distribution,and marketing are
needed to respond to local market conditions and
competesuccessfully against local rivals. Slightly different
product versions sold underthe same brand name may suffice to
satisfy local tastes, and it may be feasible toaccommodate thesc
versions rather economically in the course of designing
andmanufacturing the company's product offerings. Philip Morris
Intemationalmarkets brands such as Marlboro, Chesterfield,
Parliament, and Virginia Slimswoldwide. However, the company also
makes different versions of Marlborocigarettes available in
different parts of the world to better meet the somewhatdifferent
preferences and habits of smokers in each market. The
company'sMarlboro Mix 9 is a high-nicotine, clove-infused cigarette
sold in tndonesiawhere smokers prefer powerful, sweet-smelling
cigarettes. Its Marlboro Intensewas formulated for the Turkish
market, while its smooth-tasting Marlboro FilterPlus caters to the
tastes of smokers in South Korea, Russia, Kazakhstan, and
theUkraine.
As a rule, most companies that operate multinationally endeavor
to employas global a strategy as customer needs and markei
conditions permit. Elec-tronic Arts has two major design
studios-one in Vancouver, British Columbia,and one in Los
Angeles-and smaller design studios in San Francisco,
Orlando,London, and Tokyo. This dispersion of design studios helps
EA to designgames that are specific to different cultures-for
example, the London studiotook the lead in designing the popular
FIFA Soccer game to suit Europeantastes and to replicate the
stadiums, signage, and team rosters; the U.S. studiotook the lead
in designing games involving NFL football, NBA basketball,
andNASCAR racing.
Using International Strategic Alliances and Joint Venturesto
Build Competitive Strength in Foreign MarketsStrategic alliances,
joint ventures, and other cooperative agreements with for-eign
companies are a favorite and potentially fruitful means for
entering aforeign market or strengthening a firm's competitiveness
in world markets.5Historically, export-minded firms in
industrialized nations sought allianceswith firms in less-developed
countries to import and market their productslocally-such
arrangements were often necessary to win approvai for entryfrom the
host country's government. Both Japanese and American companiesare
actively forming alliances with European companies to strengthen
theirability to compete in the 27-nation European Union (and the
three countriesthat are candidates to become EU members) and to
capitalize on the open-ing up of Eastern European markets. Many
U.S. and European companies areallying with Asian companies in
their efforts to enter markets in China, India,s For two especially
insightfut studies of company experiences wth cross-border
allances, seeloef Bleeke and David Ernst, "The Way to Win in
Cross-Border Alliances," Horvord BusnessReview 69, no. 6
(November-December 1991), pp. 127-r35i and Gary Hamel, Yves L. Doz,
andC. K. Prahalad, "Coltaborate with Your Competitors-and Win,"
Horvord Business Review 67, no.7[an ua ry-February 1989), pp.
133-139.
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Chapter 7 Strategies for Competing n International Markets
Malaysia, Thailand, and other Asian countries. Many foreign
companies, ofcourse, are particularly interested in strategic
parfnerships that u'ill strengthentheir ability to Bain a foothold
in the U.S. market.
However, cooperative arrangements between domestic and foreign
com-panies have strategic appeal for reasons besides gaining better
access toattractive country markets.6 A second big appeal of
cross-bordcr alliances isto capture economies of scale in
production and/or marketing. By joiningforces in producing
components, assembling models, and marketing theirproducts,
companies can realize cost savings not achievable with their
ownsmall volumes. A third motivation for entering into a
cross-border alliance isto fill gaps in technical expertise and/or
knowleclge of local markets (buyinghabits and product preferences
of consumers, locaL customs, and so on). Allieslearn much fom one
another in performing joint research, sharing technologi-cal
know-how, studying one another's manufacturing methods, and
under-standing hon to tailor sales and marketing approaches to fit
local culturesand traditions. Indeed, one of the win-win benefits
of an alliance is to learnfrom the skills, iechnological know-how
and capabilities of alliance partnersand mplant the knowledge and
know-how of these partners in personnelthroughout the company.
A fourth motivation for coss-border alliances is to share
distribution facili-ties and dealer networks, and to mutually
strengthen each parlner's access tobuyers. A fifth benefit is that
cross-border allies can direct their compctitiveenergies more
toward mufual rivals and less toward one another; teaming upmay
help them close the gap on leading companies. A sixth driver of
cross-border alliances comes into play when companies r+'anting to
enter a new for-eign market conclude that alliances with krcal
companies are an effective wayto establish working relationships
with key officials in the host-country gov-emment.T And, finally,
alliances can be a particularly useful way for companiesacross the
world to gain agreement on important techncal standards-theyhave
been used to arrive at standards for assorted PC devices,
Internet-relatedtechnologies, high-definition televisions, and
mobile phones.
What makes cross-border alliances an attractive strategic means
of gainingthe aforementioned types of benefits (as compared to
acquiring or mergingr+.ith foreign-based companies) is that
entering into alliances and strategic part-nerships allon s a
company to preserve its independence and avoid using per-haps
scarce financial resources to fund acquisitions. Furthermore, an
allianccoffers the flexibility to readily disengage once its
purpose has been served or ifthe benefits prove elusive, whereas an
acquisition is a more permanent sort ofarrangement.s Concepts &
Connections 7.1 provides examples of cross-borderstrategic
alliances,6 See Yves L. Doz and Gary Hamel, Allonce Advantoge
(Boston, MA: Harvard Busness School Press,1998), especially
Chapters 2-4; Bleeke and Ernst, "The Way to Win in Cross-Border
Allances,"pp. 127-133i Hamel, Doz, and Prahalad, "Collaborate with
Your Compettors-and Win,"pp. 134 r35; and Porter, The Competitive
Advantage of Nations (New York: Free Press, 1990), p. 66./ H. Kurt
Christensen, "Corporate Strategy: Managing a Set of Busnesses," in
The Poftable MBAin Strotegy, ed. Liam Fahey and Robert M. Randatl
(New York: Wley, 2oo1), p. 43.3 For an excelLent presentation on
the pros and cons of alliances versus acquistons, see JeffreyH.
Dyer, Prashant Kale, and Harbir Singh, "When to Ally and When to
Acquire," Horvord BusinessRevew 82, no. Z/8 (JulV August zoo4), pp.
109-115.
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r48 Parl Olre: Se-tion C: C afting a Strategy
EXAMPLES OF CROSS.BORDER STRATEGIC ALTIANCES
1. Verio, a subsidiary ofJapan-based NTT Communica-tions and one
of the teading globat providers ofWeb hosting services and lP data
transport, hasdeveloped an alliance-oriented busness model
thatcombines the company's core competencies withthe skiLts and
products of best-of-breed technologypartners. Vero's strategic
partners include ArsenlDgitaI SoLutions (a provider of worry-free
tapebackup, data restore, and data storage services),Internet
Security Systems (a provider of flrewall andntrusion detection
systems), and Mercantec (whichdevelops storefront and shopping cart
software).Verio management beleves that its portfotio ofstrategic
allances allows t to use innovative, best-of-class technotogies in
providing its customerswith fast, efficient, accurate data
transport and acomplete set of Web hosting services. An
indepen-dent panel of rz ludges recently selected Verio asthe wnner
of the Best Technology Foresight Awardfor its efforts in pioneering
new technologies.
2. A zoo3 strategic alliance between British oitproducer BP and
Russia's Alfa, Access, Renova(AAR) oil and gas producer has
produced Russa'sthird-targest crude oiI producer. The strategic
aLliance provided BP with access to AAR's vast oilreserves and
altowed AAR access to BP's assetsin Russia, including BP's retaiL
refined gasolinenetwork. The addition of BP's oit field
Droductionexpertise increased the field production by25o percent
between 2oo3 and zoo7. BP explora-tion and drilling capabilities
also contributed tothe development of new greenfield projects
thatwere expected to come onlne n 2oo9.
j. Toyota and Frst Automotive Works, China's big-gest automaker,
entered into an alliance in zooz
to make Iuxury sedans, sport-utility vehicles, andminivehicles
for the Chinese market. The intentwas to make as many as 4oo,ooo
vehicLes annu-ally by u oro, an amount equal to the number
thatVolkswagen, lhe rorp1y w th Lhe ld gest )hdreof the Chinese
market, was making as of zooz.The alLiance envisioned a joint
investment oFabout $r.z billion. Af the [me of the
announcedalLiance, Toyota was lagging behind Honda, Gen-eraI
Motors, and Volkswagen in setting up produc-tion facilities in
China. Capturing a bigger shareof the Chinese market was seen as
crucial to-oyoLa's s:ccess ir achieving irs strategic oblective of
having a 15 percent share of the world'sautomotive market by
2o1o.
4. European Aeronautc Defence and Space Company(EADS) was formed
by an alLiance oI aerospacecompanies from Britain, Spain, Germany,
andFrance that inctuded British Aerospace, Daimler-Benz Aerospace,
and Aerospatiate. The objectiveof the alliance was to create a
European aircraftcompany capab[e oI competing with U.S.-basedBoeing
Corp. The atIiance has proved highlysuccessful, infusing its
commercial airline divi-sion, Airbus, with the know.how and
resourcesto compete head-to-head with Boeing for worldLeadership in
large commercial aircraft (over roopassengers). The company also
establshed analliance with U.S. military aircraft
manufacturerNorrhrop Grumman to deve[op a highly soph s-ticated
refuelng tanker based upon the A330a irlin e r.
Sources: Company Web s tes and press releases
Alliancc.s and joir-rt ventrrres rvitir foreign partncrs have
theirpitfalls, horveve. Cross-bordcr allics typically have to
()\,crcome language anclcttltural barriers and figlue ollt ho\^/ to
dcal i,vith diverse (or perh.r-rs confhct-ing) operating practices.
The communicatiou, tnlst-bLrilrling, anrl coorriination
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Chapter 7 Strategies for Competing in International Markets
costs are high in terms of management time.e lt is not unusual
for partnersto discover they have conflicting objectives and
strategies, deep differencesof opinion about how to proceed, or
important differences in corporate val-ues and ethical standards.
Tensions build up, working relationships cool, andthe hoped-for
benefits never materialize. The recipe for successful
alliancesrequires many meetings of many people working in good
faith over a periodof time to iron out what is to be shared, what
is to remain proprietary, and howthe cooperative arrangements will
work.t0
Even if the alliance becomes a win-win proposition for both
parties, thereis the danger of becoming overly dependent on foreign
Partners for essentialexpertise and competitive capabilities. If a
company is aiming for global marketleadership and needs to develop
capabilities of its own, then at some juncturecross-border merger
or acquisition may have to be substituted for cross-borderalliances
and joint ventures. One of the lessons about cross-border
alliancesis that they are more effective in helping a comPany
establish a beachhead ofnew opporfunity in world markets than they
are in enabling a comPany toachieve and sustain global market
leadership.
Using International Operations tolm prove Overalt
CompetitivenessThere are three important ways in which a firm can
gain competitive advan-tage by expanding outside its domestic
market.lr One, it can use location tolower costs or help achieve
greater product differentiation. Two, it can usecross-border
coordination in ways that a domestic-only competitor cannot.And
three, it can use profit sanctuaries to wage a strategic
offensive.
Using Location to Build Competitive AdvantageTo use location to
build competitive ad.vantage, a comPany must consider twoissues:
(1.) whether to concentrate each internal Process in a few
countries orto disperse performance of each process to many
nations, and (2) in whichcountries to locate particular
activities.r2
WIIIN TO CONCENTI{ATE INTERNAL PROCESSES IN A FEWLOCATIONS
Companies tend to concentrate their activities in a limitednumber
of locations in the following circumstances:. When the costs of
manufacturing or other actiuities are significantly lower in
some geographic locations than in others-For example, much of
the world'sathletic footwear is manufactured in Asia (China and
Korea) becauseof low labor costs; much of the production of circuit
boards for PCs is
e For addtional dscussion of company experiences with alliances
and partneBhps, see Doz andHamel, Allionce Advantoge, Chaptes z-7;
and Rosabeth Moss Kanter, "Collaborative Advantage:The Art of the
AlLiance," Haruard Business Revew 72, no. 4 uly-August 1994), pp.
9-ro8."Jeremy Man, "Making Gtobal Allances Work," Forune, December
79, 1990, p.725." Porter, Ihe Competitve Advontoge of Notons, pp.
53-55." lbid., pp. 5 5-58.
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Part One: Section C: Crafting a Strategy
located in Taiwan because of both low costs and the hieh-caliber
technicalskills of the Taiwanese labor force.
. When there nre significant scale cconomies--Tlte presence of
significant econo-mres of scale in components production or final
assembly means that acompany can garn malor cost savings from
operating a few superefficientplants as opposed to a host of small
plants scattered acoss the world.Makers of digital cameras and LCD
TVs located in Japan, South Korea, andTaiwan have used their scale
economies to estabiish a low-cost advantage.
o When there is n steep lerning curae associnted with
pert'orming an actiztity-lnsome industries learning-curve effects
in parts manufacture or assemblyare so great that a company
establishes one or two large plants from whichit setves the rt'orid
market, The key to riding down the learning curve isto concentrate
production in a few locations to increase the accumulatedvolume at
a plant (and thus the experience of the plant's workforce)
asrapidlv as possible.
. When certain locntions lmae superior resources, olloro better
coordination ofrelnted actittities, or offer other aalunble
adaantnges-A research unit or asophisticatcd production facility
may be situated in a particular nation
bccause of its pool of technicallv trained personnel.Companies
that compete multinationally can Samsung bccame a leder in mmory
chip technologypursue competitive advantage in world markets by
establishing a ma.jor R&D facility in Silicon Valleyby locating
their value chain activities in and transferring the.know_how it
gained back towhichever nations prove most advantageous.
headquarters and its plants in Souih Korea.
WIILN TO DISPEItSE INTIRN-:\L I'IiOCUSSES ACROSS
\tr\\\'LOC\TIONS There are several instances when dispersing a
process ismore aclvantageous than concentrating it in a single
location. Buyer-relatedactivities-such as distribution to dealers,
sales and advertising, and after-sale service-usually must take
place close to buyers. This makes it necessaryto physicallv locate
the capability to perform such activities in cvery countrymarket
where a global firm has major cllstomers. For example, the four
biggestpublic accounting firrns have numerous international offices
to service the for-eign operations of their multinational corporate
clients. Dispersing activitiesto many Iocations is also
competitively important when high transportationcosts, diseconomies
of large size, and trade barriers make it too expensive tooperate
from a central location. [n addition, it is strategically
advantageous todisperse activities to hedge against the risks of
fluchrating exchange rates andadverse political developments.
Using Cross-Border Coord inationto Build Competitive
AdvantageMultinational and global competitors are able to
coordinate activitiesacross different cor-rntries to build
competitive advantage.13 If a firm learnshow to assemble its
product more efficiently at, say, its Brazilian plant,
theaccumulated expertise and knowledge can be shared with assembly
plants'r C. K. Prahafad and Yves L Doz, The Multinotionol Mission
(New York: Free press, 1987),pp. 58 60.
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Chapter 7 Strategies for Competing in lnternational Markets
in other world locations. Also, knowledge gained in marketing a
comPany'sproduct ir-r Great Britain, for instance, can teadily be
exchanged with companypersonnel in New Zealand or Australia- Other
examples of cross-border coor-dination include shifiing production
from a plant in one countty to a plantin another to take advantage
of cxchange rate fluctuations and to respond tochanging \4age
rates, enctgv costs, or changes in tariffs and quotas.
Efficiencies can also be achieved bv shifting workloads from
where theyare unusually hcavy to locations nhere Personnel are
underutilized. Whirl-pool's efforts to link its product R&D and
manufacturing oPerations in NorthAmcrica, Latin America, Europe,
and Asia allowed it to accelerate the dis-covery of innovative
appliance features, coordinate the introduction of thesefeatures in
the appliance products marketed in differcnt countries, and createa
cost-efficient worldr,t'ide suPPly chain. Whirlpool's conscious
efforts to inte-grate and coordinate its various oPerations around
the world have helped itbecome a low-cost producer and also speed
product innovations to market,thereby giving Whirlpool an edge over
rivals worldwide.
Using Profit Sanctuaries to Wage a Strategic OffensiveProfit
sanctuaries are country markets (ot geographic regions) in which
acompany derives substantial profits because of its strong or
protected marketposition. Nike, which markets its products in 160
countries, has two big profitsanctuaries: the United States (where
it earned 35.5 percent of its pretax profitsin 2008), and Europe,
the Middle East, and Africa (where it earned 32.2 percentof 2008
pretax profits). Carrefour, the n'orld's second largest rctailer
with over15,000 stores in Europe, Asia, and the Americas, also has
two principal profitsanctuaries: its biggest is in France (which in
2008 accounted fcr 47.9 Percentof earnings before inteest and
taxes) and its second biggest is in Europe out-side of France
(which in 2008 accounted for 35.9 percent of earnings
beforeinterest and taxes). Japan is thc chief profit sanctuary for
most fapanese com-panies because tradc barriers erected by the
Japanese go\ernment effectivelyblock forcign companies from
competing for a large share of Japanese sales.Protected from the
threat of foreign competition in their homc market, Japa-nese
companies can safely charge somewhat highcr prices to their
Japanesecustomes and thus earn atlractively large profits on sales
made in Japan. Inmost cases, a company's biggest and most
strategically crucial profit sanctu-ary is its home market, but
intemational and global companies mav also enjoyprofit sanctuary
status in other nations where they have a strong
competitiveposition, big sales volume, and attractive profit
margins.
Profit sanctuaries are valuable compehtive assets, providing the
financialstrength to support strategic offensives in selected
country markets and fuela company's race for global market
leadership. The added financial capabil-ity afforded by multiple
profit sanctuaries gives a global or multicountry com-petitor the
financial slrength to wage a market offensive against a
domesticcompetitor. The global company has the flexibility of
low-balling its prices orlaunching high-cost marketin1 campaigns in
the domestic company's homemarket and grabbing market share at the
domestic company's cxpense. Razor-thin margins or even losses in
these markets can be subsidized with the healthyprofits eamed in
its profit sanctuaries. If the domcstic company retaliates
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Part One: Section C: Crafting a Strategy
with matching price cuts or increased markcting expenses, its
profits can besqueezed substantially and its competitive strength
sapped, even if it is tl-redomestic market leader.
When taken to the extreme, cut-rate pricing attacks by
multicountry com-pctitors may draw charges of unfair dumping. A
company is said to be dump-ing when it sclls its goods in foreign
markets at prices that are (1) well belowthe prices at which it
normally sells in its home market or (2) well below itsfull costs
per unit. Companies that engage in dumping usually keep
theirselling prices high enough to cover variable costs per unit,
thereby limitingtheir losses on each unit to some percentage of
fixed costs per unit.
Dumping can be a tempting offensive strategy in either of two
instances.The first may be justified as a legitimate competitive
practice, while the latteris usually viewed to be predatory in
nature. A charge of unfair dumping ismore easily dcfended r,r'hen a
company with unused production capacity dis-covers that it is
cheaper to keep producing (as long as the selling prices
coveraverage variable costs per unit) than it is to incur the costs
assocrated with idleplant capacity. By keeping its plants operating
at or near capacity, not onlymay a dumping company be able to cover
variable costs and earn a contribu-tion to fixed costs, but it also
may be able to use its below-market prices todraw price-sensitve
customers away from foreign rivals. It is wise for compa-nies
pursuing such an approach to court these new customers and retain
theirbusiness when prices latcr begin a gradual rise back to normal
market levels.
A company may use dumping to drive down the price so far in the
targetedcoturtry that domesLic firms are quickly put in dire
financial shaits or in dangerof being driven out of business.
However, using below-market pricing in thisway runs a high risk of
host govemment retaliation on bchalf of the adverselyaffected
domestic companies. L'rdeed, as the trade among nations has
mush-roomed over the past 10 years, most governments have joined
the World TiadeOrganization (VVTO), which promotes fair trade
practices among nations andactively polices dumping. Most WTO
member govemments have enacted mti-dumping laws and readily take
action against dumping wherever there is mate-rial injury to
domestic competitors. Companies based in France and China
wererecently found guilty of dumping laminate flooring at
unrcasonably lor",' prices inCanada to the detriment of Canadian
producers.ra Most all govemments can beexpccted to retaliate
against dumping by imposing special tariffs on goods beingimported
from the countries of the guilW companies. Companies deemed
guilfyof dumping frequcntly come r-rnder pressure from their
government to cease anddesist, especially if the tariffs adversely
affect irmocent companies based in thesame counky or if the advent
of special tariffs raises the specter of a trade war.
Strategies to Compete in the Marketsof Emerging
CountriesCompanies racing for global leadership have to consider
competing in emerg-ing markets like China, India, Brazil,
Indonesia, Thialand, Poland, Russia, andMexico-countries where the
business risks are considerable but where the'a Canadian
International Trade Tribunat, findings ssued lune 16, 2oo5, and
posted at www.citt,tcce.gc.ca (accessed Septem ber 28,2oo5).
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Chapter 7 Strategies for Competing in Internationat Markets
opportunities for growth are huge, especiaily as their economies
develop andliving standards climb toward levels in the
industrialized world.r5 For exam-ple, irr 2008 China was the
world's second largest economy (behind the UnitedStates) based upon
purchasing power. Its population of 1.3 billion peopleconsumed
nearly 33 percent of the world's annual cotton production, 51
per-cent of the world's pork, 35 percent of all cigarettes, 23
percent of televisions,20 percent of cell phones, and 18 percent of
the washing machines producedn'orldwide in 2003. China is also the
world's largest consumer of manycommodities-accounting for one-half
of the world's demand for cement, athid of all steel produced, 31
percent of worldwide coal production, and over25 percent of the
world's alumnum purchases. China's growth in demand forconsumer
goods has put it on track to become the second largest market
formotor vehicles by 2010 and the world's largest market for luxury
goods by2014.16 Concepts & Connections 7.2 describes Yum!
Brands' strategy to boostits sales and market share in China.
Tailoring products to fit conditions in an emerging country
market like China,however, often involves more than making minor
product changes and becom-ing more familiar with local cultures.lT
McDonald's has had to offer vegetableburgers in parts of Asia and
to rethink its prices, which are often high by localstandards and
affordable only by the well-to-do. Kellogg has struggied to
intro-duce its cereals successfully because consumers in many
less-developed cor-rn-tries do not eat cereal for
breakfast----changing habits is difficult and
expensive.Single-serving packages of detergents, shampoos, pickles,
cough syrup, andcooking oils are very popular in India because they
allow buyers to conservecash by purchasing only what they need
immediately. Thus, many companiesfind that trying to employ a
strategy akin to that used in the markets of devel-oped countries
is hazadous.r8 Experimenting with some, perhaps many, localtwists
is usually necessary to find a strategy combination that works.
Strategy Options for Emerging-Country MarketsSeveral strategy
options for tailoring a company's strategy to fit the some-times
unusual or challenging circumstances presented in emerging
countrymarkets are the following:. Prepnre to compete on the basis
of low price. Consumers in ernerging markets
are often highly focused on price, which can give lor,+-cost
local com-petitors the edge unless a company can find ways to
attract buyers with
'5This point is discussed at greater length in Prahatad and
Lieberthat, "The End of CorporatelmperiaLism," pp. 68-79t aLso, see
Davd J. Arnold and lohn A. Quelch, "New Strategies in
EmergngMarkets," Sloon Monagement Revew 40, no. r (Fall 1998), pp.
7-2o. For a more extensive discus-sion of strategy in emerging
markets, see C. K. Prahalad, The Fortune ot the Bottom of the
Pyromd:Erodicoting Povefty through Profrts (Upper Saddle river, Nl:
Wharton, zoo5), especially Chapters r-3.'6Brenda Cherry, "What
China Eats (and Drinks and . . .)," Fortune, October 4, 2oo4, pp.
rl2-r53:''A Ravenous Dragon," The Economst 386, no. 8521 (March i5,
zooS), online edition; and "China:Just the Facts," lournol of
Commerce, )une 2. 2oo8, p. 24.'7 Prahalad and Lieberthal, "The End
of Corporate lmperialism," pp. 72-73.'3 Tarun Khanna, Krishna G.
Patepu, and Jayant 5inha, "Strategies That Fit Emerging
Markets,"Harvard Busness Review 83, no. (June zoo5), p. 63; and
Arindam K. Bhattacharya and David C.Mchael, "How Local Companies
Keep Multinatonals at Bay," HaMard Business Review 86, no. 3(March
zooS), pp. 94 95.
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Part One: Section C: Crafting a Strategy
YUM! BRANDS'STRATEGY FOR BECOMING THE LEADING FOOD SERVICE
BRANDIN CHINA
In zoo9, Yuml Brands operated more than l6,ooo restau-rants in
more than 11o countries. lts best known brandswere KFC, Taco Betl,
Pizza Hut, and Long John Silver's.Its fastest revenue growth in
zooS came from its 3,roorestaurants in China, which recorded
operating profits of$469 million during the year. KFC was the
largest quick-service chain in China with 2,600 units in zoo9,
whilePizza Hut was the largest casual dining chain with morethan
5oo units. Yum! planned to open at least 425 newrestaurant
locations annualLy n China, including newPzza Hut Home detivery
units and East Dawning unts,which had a menu offerng tradtional
Chinese food. Allof Yum! Brands' menu items for China were
developed inits R&D facitity in Shanghai.
In addition to adapting its nenu to Local tastes andadding new
units at a rapid pace, Yum! Brands atsoadapted the restaurant
ambiance and dcor to appeal tolocal consumer preferences and
behavor. The company
changed its KFC store formats to provide educationaIdisplays
that supported parents' priorities for their chiL-dren and to make
KFC a fun place for children to vis t.The typical KFC outlet in
China averaged two birthdaypa rtes per day.
n 2oo9, Yuml Brands operated 60 KFC, Taco Belt,Pizza Hut,
A&W and Long John Silver's restaurants forevery r mill on
Americans. The company's j,1oo unitsin China represented only two
restaurants per r miltionpeopte in Chna. Yuml Brands management
believed thatIts strategy keyed to continued expanson in the
nurnberof units in China and add tional menu refinements wouldaLlow
its operatng profits from restaurants Located inChina to account
For 40 percent of systemwide operatngprofts by 2012.
5ou-ces Yuml B'a-d5 oo7 ro-(; ilforr?tion posted
atwww.yutt,cont,
bargain prices as well as better products.r" For cxample,
r'r{rcrr Ulrilevtrentered the rnarket for laundry cletergents in
lndia, it cleveloped a lolt,-cost cletergent (narned Wheel) that
n,as not h,rrsh to the skin, constructe('lne\^ superefficient
production facililies, clistribr-rtecl tl-re prc'rclr-rct to
locrlmcrclrants by hand carts, and crafted arl economical marketing
cam-paigr-r that includcd paintcd signs on brrildings and
dcmonstrations nearstores-the new'brand quicklv capttrred $100
million ilr salcs and rvas thcuumber-one detereent brancl in lnclia
in 200fJ basecl on clollar sales. Uni-lever later replicated the
strategy *,ih 1s1'-rricecl shanrpoos and dcodor-ants in India and
irr South America rvith a detergent brtrnd narnecl Ala.
' Bc trcpnl to ntodi.fit nstt,ct-s ol thc contlturLl's brslrrss
tttttitl or strat.gV toncconnnodttt lactL ciruuttstttttccs (bttt
not so ntuclt tlnt tlrc tonrtunry loscs[lr fiL]r,itn:le ol gloltnl
sctlc tntl glolttl ln'trttlutg).1" For instrnce ,'vherr
l)ellentered China, it discovered that inclivicluals ancl
bnsinesses \,vere notaccrrstomed to placing orders via the Internet
(irr \orth America, over50 pcrcc.nt of Dcll's sales in 2002 2008
!4e1e rarle online). Tb.rdapt,Dell modificd its dircct salcs modc'l
to rclv morc heavilv on rhone andfax orders alrd r:lecided to be
patient in gettirrg Chincsc cllstonrcrs to-rLace Inlemet orclers,
Further, becanse numeroLls Chinese t]overnnrent
'r Prahalad and Lieberthal, "The End of Corporate lmperialism,"
p. 72,'"Khanna, Palepu, and 5inha, "Strategies That Fit Ernerglng
Mrkets," pp. tJ t4.
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I .j'.,Chaptcr 7 Strategies for Competing n International
Markets
departments and state-owned enterprises insisted that hardware
vendorsmake their bids through distributors and systems integrators
(as oprposedto dealing directly with Dell salespcoplc as did large
cnterprises in othercountries), Dell opted to use third parties in
marketing its products tothis buyer segment (although it did sell
through its own sales force n hereit could). But Dell was careful
not to abandon those parts of its businessmodel that ga\-e it a
competitive edge over rivals.
. Try to change thc local market to better nntch the war the
company does busi-ness elsezuhere.2r A multinational company often
has enough markct cloutto drive major changes in the way a local
country market operates. WhenJapan's Suzuki enteed India in 7987,
it triggered a quality revolutionamong Indian auto parts
manufacturers. Local parts and componentssuppliers teamed up with
Suzuki's vendors in Japan and woked withfapanese experts to produce
higher-quality products. Over the next twodecades, Indian companies
became very proficient in making top-notchparts and componcnts for
vchiclcs, $zon morc prizcs for quality thancompanies in any country
othcr than Japan, and brokc into thc globalmarket as suppliers to
many automakers in Asia and other parts of thcworld. Mahindra and
Mahindra, one of India's premier automobilemanufacfurers, has been
recognized by a number of organizations for itsproduct quality.
Among its most noteworthy awards was its numbe-oneranking by ].D.
Power Asia Pacific ln 2007 for new vehicle overall quality.
. Stay atuay from those emerging mnrkets zuhere it is
imprnctical or uneconomicalto modify tlrc company's business model
to accommodnte locsl circumstances.2zHome Depot expanded into
Mexico in 2001 and China in 2006, but hasavoided entry into other
emerging countries because rts value propositionof goocl quality,
1ow prices, and attentive customer service relies on(1) good
highways and logistical systems to minimize store inventorycosts,
(2) employee stock ownership to help motivate store personnelto
provide good customer service, and (3) high labor costs for
housingconstruction and home repairs to encouragc homeowners to
cngagc indo-it-yourself projects. Relying on these factors in the
U.S. and Canadianmarkets has worked spectacularly for Home Depot,
but Home Depot hasfound that it cannot count on these factors in
nearby Latin America.
Company experiences in entering developing markets like China,
India,Russia, and Brazrl indicate that profitability selclom comes
quickly or easily.Building a market for the company's products can
often hrrn into a long-termprocess that involves reeducation of
consumers, sizableinvestments in advertising and promotion to alter
tastesand buying habits, and upgrades of the local infrastruc-ture
(the supplier base, transportation systems, distri-bution channels,
labor markets, and capital markets).In such cases, a company must
be patient, work withrn
Profrtability in emerging markets rarely comesquickly or
easily-new entrants have to adapttheir busness models and strateges
to localconditions and be patient in earning a profit.
the system to improve the infrastructure, and lay the foundation
for generatingsizable revenues and profits once conditions are ripe
for market take-off." tbid., p. 7 4." lbid., p. 76.
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Kev PointsCompeting in intemational markets allows multinational
companies to (1) gainaccess to new customers, (2) achieve lower
costs and enhance the firm's competi-tiveness by more easily
capturing scale economies or leaming-curve effects,(3) Ieverage
core competencies refined domestically in additional country
makets,and (4) spread business risk across a wider market
base.Companies electing to expand into international makets must
consider coss-country differences in cultural, demographic, and
market conditions, location-based cost drivers, adverse exchange
rates, and host government policies whenevaluating strategy
options.ln posturing to compete in foreign markets, a company has
three basic options:(1) a thjnk local, act local approach to
crafting a strategy, (2) a think global, actglobal approach to
crafting a strategy, and (3) a combination think global, actlocal
approach. A "think local, act local" or multicountry strategy is
appropriatefor industries or companies that must vary their product
offerings and competi-tive approaches from country to country in
order to accomrnodate differingbuyer preferences and market
conditions. A "think global, act global" approach(or global
strategy) works best in markets that support employing the same
basiccompetitive approach (low-cost, differentiation, focused) in
all country marketsand marketing essentially the same products
under the same brand names in allcountries where the company
operates. A "think global, act local" approach canbe used when it
is feasible for a company to employ essentially the same
basiccompetitive stategy in all markets, but still customize its
product offering andsome aspect of its operations to fit local
market cicumstances.Other strategy options for competing in world
markets include maintaining anational (one-country) production base
and exporting goods to foreign mar-kets, licensing foreign firms to
use the company's technology or produce anddistribute the company's
products, employing a franchising strategy, and usingstrategic
alliances or other collaborative partnerships to enter a foreign
market orstrengthen a firm's competitiveness in world
markets.Strategic alliances with foreigrr parhrers have appeal from
several angles: gain-ing wider access to attractive country
markets, allowing capture of economies ofscale in production and/or
marketing, filling gaps in technical expertise and/orknowledge of
local markets, saving on costs by sharing distribution facilities
anddealer networks, developing relationships with host country
officialg helpinggain agreement on important technical standards,
and combating a common rival.There ae thee general ways in which a
firm can gain cornpetive advantage(or offset domestic
disadvantages) in global markets. One way involves locatingvarious
value chain activities among nations in a marner that lowers costs
orachieves greater product differentiaon. A second way draws on a
multinationalor global competitor's ability to deepen or broaden
its resource strengths andcapabiJities and to coodinate its
dispersed activities in ways that a domestic-only competitor
cannot. A third involves utilizing profit sanctuaies in
protectedmarkets to wage strategic offenses in various intemational
markets. Profit sanctu-aries are country markets in which a company
derives substantial profits becauseof its strong or protected
market position. They are valuable competitive assets.A company
with multiple profit sanctuaries has the financial strength to
supportcomnetitive offensives in one market with resouces and
profits diverted fom its
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5.
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LO3 1.
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operations in other rnarkets. Thc ability of companies with
multiple profitsanctuaries to employ cross-subsidization gives them
a powerful offensiveweapon and a competitive advantage over
companies w.ith a single sanctuary.
7. Companies racing for global leadership have to considcr
competing in emerg-ing rnarkets like China, India, Brazil,
Indoncsia, and Mexico
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Farticipants whosB companies operate inIf your company c$mpetes
ory in a single
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the strategic approadr your company