Chapter 7: Strategies Chapter 7: Strategies for Competing in for Competing in Foreign Markets Foreign Markets Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University
Jan 16, 2016
Chapter 7: Strategies for Chapter 7: Strategies for
Competing in Foreign MarketsCompeting in Foreign Markets
Screen graphics created by:Jana F. Kuzmicki, Ph.D.
Troy University
““You have no choice but to You have no choice but to operate in a world shaped by operate in a world shaped by
globalization and the information globalization and the information revolution. There are two options: revolution. There are two options:
Adapt or die.”Adapt or die.”
Andrew S. GroveAndrew S. GroveCo-founder and Senior Advisor, Intel CorporationCo-founder and Senior Advisor, Intel Corporation
““Industries actually vary a Industries actually vary a great deal in the pressures great deal in the pressures
they put on a company to sell they put on a company to sell internationally.internationally.
Niraj Dawar and Tony FrostNiraj Dawar and Tony FrostProfessors, Richard Ivey School of BusinessProfessors, Richard Ivey School of Business
The Four Big Strategic Issuesin Competing Multinationally
Whether to customize a company’s offerings in each different country market to match preferences of local buyers or offer a mostly standardized product worldwide
Whether to employ essentially the samebasic competitive strategy in all countriesor modify the strategy country by country
Where to locate a company’s production facilities,distribution centers, and customer service operations to realize the greatest locational advantages
How to efficiently transfer a company’s resource strengths and capabilities from one country to another to secure competitive advantage
Why Do Companies Expandinto Foreign Markets?
Gain access tonew customers
Capitalizeon core
competencies
Achieve lowercosts and enhance competitiveness
Spreadbusiness risk across
widermarket base
Obtain access to valuable natural
resources
International vs. Global Competition
International Competitor
GlobalCompetitor
Company operates in a select few foreign
countries, with modest ambitions to expand
further
Company markets products in 50 to 100 countries andis expanding operations into additional country
markets annually
Factors Shaping Strategy Choices in Foreign Markets
Cross-country differences in cultural, demographic, and market conditions
Cross-country differences in cultural, demographic, and market conditions
Gaining competitive advantage basedon where activities are located
Gaining competitive advantage basedon where activities are located
Risks of adverse shifts incurrency exchange rates
Risks of adverse shifts incurrency exchange rates
Impact of host government policieson the local business climate
Impact of host government policieson the local business climate
Cultures and lifestyles differ among countries
Differences in market demographicsand income levels
Variations in manufacturingand distribution costs
Fluctuating exchange rates
Differences in host governmenteconomic and political demands
Cross-Country Differences in Cultural, Demographic, and Market Conditions
Consumer tastes and preferences
Consumer buying habits
Market size and growth potential
Distribution channels
Driving forces
Competitive pressures
How Markets Differ from Country to Country
One of the biggest concerns of companies competing in foreign markets is whether to customize their product offerings in each different country market to match the
tastes and preferences of local buyers or whether tooffer a mostly standardized product worldwide.
Manufacturing costs vary from country to country based on
Wage ratesWorker productivityInflation ratesEnergy costsTax ratesGovernment regulations
Quality of business environment varies from country to country
Suppliers, trade associations, and makers of complementary products often find it advantageous to cluster their operations in the same general location
Different Countries HaveDifferent Locational Appeal
Fluctuating Exchange Rates Affect a Company’s Competitiveness
Currency exchange rates are unpredictable Competitiveness of a company’s operations
partly depends on whether exchange ratechanges affect costs favorably or unfavorably
Competitive impact of fluctuating exchange rates Exporters always gain in competitiveness
when the currency of the country wheregoods are manufactured grows weaker
Exporters are disadvantaged whenthe currency of the country wheregoods are manufactured grows stronger
Differences in HostGovernment Trade Policies
Local content requirements
Restrictions on exports
Regulations on prices of imports
Import tariffs or quotas
Other regulations Technical standards
Product certification
Prior approval of capital spending projects
Withdrawal of funds from country
Ownership (minority or majority) by local citizens
Multi-country
Competition
Global
Competition
Two Primary Patternsof International Competition
Characteristics ofMulti-Country Competition
Market contest among rivals in onecountry not closely connected tomarket contests in other countries
Buyers in different countries areattracted to different product attributes
Sellers vary from country to country Industry conditions and competitive forces in
each national market differ in important respects
Rival firms battle for national championships –winning in one country does not necessarily signal the
ability to fare well in other countries!
Competitive conditions across country markets are strongly linked Many of same rivals compete in
many of the same country markets A true international market exists
A firm’s competitive position in one country is affected by its position in other countries
Competitive advantage is based on a firm’s world-wide operations and overall global standing
Characteristics of Global Competition
Rival firms in globally competitiveindustries vie for worldwide leadership!
Strategy Options for Competing in Foreign Markets
Exporting
Licensing
Franchising strategy
Strategic alliances orjoint ventures
Multi-country strategy
Global strategy
Involve using domestic plants as a production base for exporting to foreign markets
Excellent initial strategy topursue international sales
AdvantagesConservative way to test international watersMinimizes both risk and capital requirementsMinimizes direct investments in foreign countries
An export strategy is vulnerable whenManufacturing costs in home country are higher
than in foreign countries where rivals have plantsHigh shipping costs are involvedAdverse fluctuations in currency exchange rates occur
Export Strategies
Licensing Strategies
Licensing makes sense when a firm Has valuable technical know-how or a patented
product but does not have international capabilities to enter foreign markets
Desires to avoid risks of committing resources to markets which areUnfamiliarPolitically volatileEconomically unstable
Disadvantage Risk of providing valuable technical know-how
to foreign firms and losing some control over its use
Franchising Strategies
Often is better suited to global expansion efforts of service and retailing enterprises
Advantages
Franchisee bears most of costs andrisks of establishing foreign locations
Franchisor has to expend only theresources to recruit, train, and support franchisees
Disadvantage
Maintaining cross-country quality control
Achieving Global Competitivenessvia Cooperative Agreements
Cooperative agreements withforeign companies are a means to
Enter a foreign market or
Strengthen a firm’scompetitiveness in world markets
Purpose of alliances / joint ventures
Joint research efforts
Technology-sharing
Joint use of production or distribution facilities
Marketing / promoting one another’s products
Strategic Appeal of Strategic Alliances
Gain better access to attractive country markets Capture economies of scale in production and/or
marketing Fill gaps in technical expertise or knowledge of local
markets Share distribution facilities and dealer networks Direct combined competitive energies toward
defeating mutual rivals Take advantage of partner’s local market
knowledge and working relationships withkey government officials in host country
Useful way to gain agreement onimportant technical standards
Pitfalls of Strategic Alliances
Overcoming language and cultural barriers Dealing with diverse or conflicting operating
practices Time consuming for managers in
terms of communication,trust-building, and coordination costs
Mistrust when collaborating in competitively sensitive areas
Clash of egos and company cultures Dealing with conflicting objectives, strategies,
corporate values, and ethical standards Becoming too dependent on another firm for
essential expertise over the long-term
Localized Multicountry Strategyor a Global Strategy?
Whether to vary a company’s competitive approach to fit specific market conditions and buyer preferences in each host county
or
Whether to employ essentially the same strategy in all countries
Strategic IssueStrategic Issue
Figure 7.1: A Company’s Strategic Options for Dealing withCross-Country Variations in Buyer Preferences and Market Conditions
A company varies its product
offerings and basic competitive
strategy from country to country
in an effort to be responsive to
differing buyer preferences
and market conditions.
What Is a “Think-Local, Act-Local” Approach to Strategy Making?
Characteristics of a “Think-Local,Act-Local” Approach to Strategy Making
Business approaches are deliberately crafted to Accommodate differing tastes and expectations
of buyers in each country Stake out the most attractive market positions
vis-à-vis local competitors
Local managers are given considerable strategy-making latitude
Plants produce different productsfor different local markets
Marketing and distribution are adaptedto fit local customs and cultures
When Is a “Think-Local, Act-Local”Approach to Strategy Making Necessary?
Significant country-to-countrydifferences in customer preferencesand buying habits exist
Host governments enact regulations requiring products sold locally meet strict manufacturing specifications or performance standards
Trade restrictions of host governments areso diverse and complicated they preclude auniform, coordinated worldwide market approach
Drawbacks of a “Think-Local,Act-Local” Approach to Strategy Making
Poses problems of transferring
competencies across borders
Works against building a
unified competitive advantage
A company employs the same
basic competitive approach in all
countries where it operates.
What Is a “Think-Global, Act-Global” Approach to Strategy Making?
Characteristics of a “Think-Global,Act-Global” Approach to Strategy Making
Same products under the same brand names are sold everywhere
Same distribution channels are used in all countries Competition is based on the same capabilities
and marketing approaches worldwide Strategic moves are integrated and coordinated
worldwide Expansion occurs in most nations where
significant buyer demand exists Strategic emphasis is placed on
building a global brand name Opportunities to transfer ideas, new
products, and capabilities from onecountry to another are aggressively pursued
Figure 7.2: How a Localized or MulticountryStrategy Differs from a Global Strategy
A company uses the same basic
competitive theme in each country but gives
local managers the latitude to
1.Incorporate whatever country-specific
variations in product attributes are needed to
best satisfy local buyers and
2.Make whatever adjustments in production,
distribution, and marketing are needed to
compete under local market conditions.
What Is a “Think-Global, Act-Local” Approach to Strategy Making?
The Quest for CompetitiveAdvantage in Foreign Markets
Three ways to gain competitive advantage
1. Locating activities among nationsin ways that lower costs or achievegreater product differentiation
2. Efficient/effective transfer of competitivelyvaluable competencies and capabilities fromcompany operations in one country to company operations in another country
3. Coordinating dispersed activities in ways a domestic-only competitor cannot
Locating Activities to Build aGlobal Competitive Advantage
Two issues . . .
Whether to
Concentrate each activityin a few countries or
Disperse activities tomany different nations
Where to locate activities
Which country is best location for which activity?
Activities should be concentrated when Costs of manufacturing or other value chain
activities are meaningfully lower in certain locations than in others
There are sizable scale economiesin performing the activity
There is a steep learning curve associatedwith performing an activity in a single location
Certain locations have
Superior resources
Allow better coordination of related activities or
Offer other valuable advantages
Concentrating Activities to Builda Global Competitive Advantage
Dispersing Activities to Build aGlobal Competitive Advantage
Activities should be dispersed when
They need to beperformed close to buyers
Transportation costs, scale diseconomies, ortrade barriers make centralization expensive
Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed
Transferring Valuable Competencies to Build a Global Competitive Advantage
Transferring competencies, capabilities, and resource strengths across borders contributes to Development of broader
competencies and capabilities Achievement of dominating depth
in some competitively valuable area
Dominating depth in a competitively valuable capability is a strong basis for sustainable competitive advantage over Other multinational or global competitors and Small domestic competitors in host countries
Coordinating Cross-Border Activities to Build a Global Competitive Advantage
Aligning activities located in differentcountries contributes to competitive advantage in several ways
Choose where and how to challenge rivals Shift production from one location to
another to take advantage of most favorablecost or trade conditions or exchange rates
Use online systems to collectively come up with next-generation products
Achieve efficiencies by shifting workload to locations where personnel are underutilized
Enhance potential to build a global brand name by incorporating same differentiating attributes in products in all markets where a company competes
Tailoring products for big, emerging markets often involves Making more than minor product changes and
Becoming more familiar with local cultures
Companies have to attract buyers withbargain prices as well as better products
Specially designed and/or speciallypackaged products may be needed toaccommodate local market circumstances
Management team must usually consistof a mix of expatriate and local managers
Characteristics of Competingin Emerging Foreign Markets
Strategic Options: How to Competein Emerging Country Markets
Prepare to compete on the basis of low price
Be prepared to modify aspects ofthe company’s business model toaccommodate local circumstances
Try to change the local marketto better match the way thecompany does business elsewhere
Stay away from those emerging markets where it is impractical or uneconomicto modify the company’s businessmodel to accommodate local circumstances
Strategies for Local Companiesin Emerging Markets
Develop business models that exploit shortcomings
in local distribution networks or infrastructure.
Develop business models that exploit shortcomings
in local distribution networks or infrastructure.
Utilize keen understanding of local customer needs and
preferences to create customized products or services.
Utilize keen understanding of local customer needs and
preferences to create customized products or services.
Take advantage of low-cost labor and other
competitively important local workforce qualities.
Take advantage of low-cost labor and other
competitively important local workforce qualities.
Use economies of scope and scale to better
defend against expansion-minded multinationals.
Use economies of scope and scale to better
defend against expansion-minded multinationals.
Transfer company expertise to cross-border markets
and initiate actions to contend on a global level.
Transfer company expertise to cross-border markets
and initiate actions to contend on a global level.
Chapter 8: Diversification: Chapter 8: Diversification: Strategies for Managing aStrategies for Managing a
Group of BusinessesGroup of Businesses
Screen graphics created by:Jana F. Kuzmicki, Ph.D.
Troy University
Diversification and Corporate Strategy
A company is diversified when it is in two or more lines of business that operate in diverse market environments
Strategy-making in a diversifiedcompany is a bigger pictureexercise than crafting a strategyfor a single line-of-business A diversified company needs a
multi-industry, multi-business strategy
A strategic action plan must be developedfor several different businesses competingin diverse industry environments
It is faced with diminishing growthprospects in present business
It has opportunities to expand intoindustries whose technologies andproducts complement its present business
It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors
It can reduce costs by diversifying into closely related businesses
It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses
When Should a Firm Diversify?
Why Diversify?
To build shareholder value!
Diversification is capable of buildingshareholder value if it passes three tests:
1. Industry Attractiveness Test — The industry being entered presents good long-term profit opportunities
2. Cost of Entry Test — Cost of entering is not so high as to spoil the ability to earn attractive profits
3. Better-Off Test — A company’s different businesses should perform better together than as stand-alone enterprises, such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders
1 + 1 = 3
Four Main Tasks inCrafting Corporate Strategy
Pick new industries to enterand decide on means of entry
Initiate actions to boost combinedperformance of businesses
Pursue opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage
Establish investment priorities, steering resources into most attractive business units
Strategies for EnteringNew Businesses
Acquire existing company
Internal start-up
Joint ventures/strategic partnerships
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Related vs. Unrelated Diversification
Related Diversification
Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with value chain(s) of firm’s present business(es)
Unrelated Diversification
Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firm’s present business(es)
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Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for Transferring competitively valuable
expertise or technological know-howfrom one business to another
Combining performance of commonvalue chain activities to achieve lower costs
Exploiting use of a well-known brand nameCross-business collaboration to create
competitively valuable resource strengths and capabilities
Core Concept: Strategic Fit
Cross-business strategic fits can exist anywhere along the value chain
R&D and technology activities
Supply chain activities
Manufacturing activities
Distribution activities
Sales and marketing activities
Managerial and administrative support activities
Types of Strategic Fits
Related Diversificationand Competitive Advantage
Competitive advantage can result from related diversification when a company captures cross-business opportunities toTransfer expertise/capabilities/technology
from one business to anotherReduce costs by combining
related activities of differentbusinesses into a single operation
Transfer use of firm’s brand name reputation from one business to another
Create valuable competitive capabilities via cross-business collaboration in performing related value chain activities
Core Concept: Economies of Scope
Stem from cross-business opportunities to reduce costs
Arise when costs can be cutby operating two or more businessesunder same corporate umbrella
Cost saving opportunities can stem from strategic fits anywhere along the value chains of differentbusinesses
Figure 8.4: Identifying a Diversified Company’s Strategy
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How to Evaluate aDiversified Company’s Strategy
Step 1: Assess long-term attractiveness of each industry firm is in
Step 2: Assess competitive strength of firm’s business units
Step 3: Check competitive advantage potential of cross-business strategic fits among business units
Step 4: Check whether firm’s resources fit requirements of present businesses
Step 5: Rank performance prospects of businesses and determine priority for resource allocation
Step 6: Craft new strategic moves to improve overall company performance
Figure 8.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix
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Conditions making thisapproach attractive
Slow grow in current businesses
Vulnerability to seasonal orrecessionary influences or to threatsfrom emerging new technologies
Potential to transfer resources and capabilities to other related businesses
Rapidly-changing conditions in one or more core industries alter buyer requirements
Complement and strengthen market position of one or more current businesses
Strategies to Broaden aDiversified Company’s Business Base
Retrenchment Strategies
Objective
Reduce scope of diversification to smaller number of “core “ businesses
Strategic options involve divesting businesses that
Are losing money
Have little growth potential
Have little strategic fitwith core businesses
Are too small to contributemeaningfully to earnings
Options for Accomplishing Divestiture
Sell it
Involves finding a company which views the business as a good deal and good fit
Spin it off as independent company
Involves deciding whether or not to retain partial ownership
Liquidation
Involves closing down operationsand selling remaining assets
A last resort because no buyer can be found
Strategies to Restructure a Company’s Business Lineup
Objective
Make radical changes in mixof businesses in portfolio via both
Divestitures and
New acquisitions
to put a whole new face on the company’s business makeup
Multinational Diversification Strategies
Distinguishing characteristics
Diversity of businesses and
Diversity of national markets
Presents a big strategy-making challenge
Strategies must be conceived and executedfor each business, with as manymultinational variations as appropriate
Cross-business and cross-country collaboration opportunities must be pursued and managed