Strategies for Competing in Globalizing Markets

I. A. Why Companies Expand into Foreign Markets Companies opt to expand outside their domestic market for any of four major reasons: 1. To gain access to new customers expanding into foreign firms offers the potential for increased revenues, profits, and long-term growth even more so when home markets are mature. 2. To achieve lower costs and enhance the firms competitiveness Sales volume from one country isnt enough to fully capture manufacturing economies of scale. 1

Strategies for Competing in Globalizing Markets

3. To capitalize on its core competencies A company with a competitively valuable competency or capability might be able to leverage themselves and make this competency work in a foreign market, too. To spread its business risk across a wider market base If the economy in one area falls, the firm might be ok in different economic markets.
2

4.

Strategies for Competing in Globalizing Markets

B. The Difference between Competing Internationally and Competing Globally 1. International (multinational) competitor operates in a select few foreign countries. 2. Global competitor company that markets its products in 50 100 countries and is expanding its operations into additional country markets annually.
3

Strategies for Competing in Globalizing Markets

II. Cross-Country Differences in Cultural, Demographic, and Market Conditions A. Strategies used to compete in foreign markets have to be SITUATION DRIVEN. 1. Cultural, demographic and market conditions vary significantly among the different countries of the world. 2. Sometimes product designs suitable for one country are inappropriate for another. 3. The potential for rapid growth varies 4 significantly from country to country.

Strategies for Competing in Globalizing Markets

4. The market place is intensely competitive in some countries and only moderately contested in others. 5. CONCERN: Should we customize our offerings in different countries market to match the tastes and preferences of local buyers or whether to offer a mostly standardized product worldwide? a. This is one of the biggest strategic issues of competing in foreign markets. b. Basically it is an argument of "shorter production runs vs. achieving economies of scale" 5

Strategies for Competing in Globalizing Markets

B. The Potential for Locational Advantages Stemming from Country-to-Country Cost Variations 1. Plants in some locations have major manufacturing cost advantages because of lower input costs, relaxed government regulations, or unique natural resources. 2. In these cases, low cost countries become production sites with much of the product produced exported. 3. Companies with production facilities in lowcost countries have a production advantage over rivals with plants in countries where costs 6 are higher.

Strategies for Competing in Globalizing Markets

4. The quality of a countrys business environment also offers locational advantages. a. Some governments offer perks to firms locating there. b. Another location advantage is the clustering of suppliers of components and capital equipment, infrastructure suppliers, trade associations and makers of complementary products in the geographic area.
7

Strategies for Competing in Globalizing Markets

C. Fluctuating Exchange Rates 1. The volatility of exchange rates greatly complicates the issue of geographic cost advantages 2. Currency fluctuations can wipe out cost advantages quickly. 3. A strong U.S. dollar makes it attractive for U.S. firms to produce in foreign countries (and vice versa)
8

Strategies for Competing in Globalizing Markets

D. Host Government Restrictions and Requirements 1. Host governments can set a variety of rules and regulations from everything from product content to quotas, export regulations to technical standards. 2. Host governments may offer domestic firms low cost loans to help them compete. 3. Other governments try to entice foreign firms with a wide variety of perks.
9

I. Multicountry Competition or Global Competition A. Multicountry or multidomestic competition. 1. Each country is self-contained buyers have different expectations and like different styling and features. 2. Competition in each national market is essentially independent of competition in other national markets. 3. Selling rivals are different in each of the different markets. 4. With multicountry competition, there is no international or global market, just a collection of self-contained country markets. 5. Examples of industries with this competition: beer, life insurance, apparel, metal fabrication, many 10 types of food products and may types of retailing.

B. Global competition 1. Prices and competitive conditions across country markets are strongly linked together. 2. The term international or global market has true meaning. 3. A companys competitive position in one country both affects and is affected by its position in other countries. 4. The firms overall competitive advantage grows out of its entire worldwide operations 5. A global competitors strength is directly proportional to its portfolio of country based 11 competitive advantages.

Strategies for Competing in Globalizing Markets

6. Global competition exists in automobiles, television sets, tires, telecommunications equipment, copiers, watches and commercial aircraft. 7. Individual industries can have segments that are globally competitive and segments where competition is country by country.

12

Strategies for Competing in Globalizing Markets

I. Strategy Options for Entering and Competing in

Foreign Markets A. There are several generic strategic options for a company that decides to expand outside its domestic market and compete internationally or globally. 1. Maintain a national (one-country) production base and export goods to foreign markets. 2. License foreign firms to use the companys technology to produce and distribute the companys products. 3. Employ a franchising strategy 13 4. Follow a multicountry strategy

Strategies for Competing in Globalizing Markets

5. Follow a global strategy. 6. Use strategic alliances or joint ventures with foreign companies as the primary vehicle for entering foreign markets. B. Export Strategies 1. This is an excellent initial strategy as a firm starts to move toward an international market base. 2. It minimizes both risk and capital requirements and is a conservative way to test the waters. 3. Firms can limit their involvement in foreign firms 14 to the extent that they are comfortable.

Strategies for Competing in Globalizing Markets

4. The success of an export strategy depends on the cost competitiveness of the home-country production base. a. An export strategy is vulnerable when it has higher cost in its home country than which makes the price of exports even more. b. Unless an exporter can keep its production and shipping costs competitive with rivals having low-cost plants in locations close to end-user markets, its success will be limited.
15

Strategies for Competing in Globalizing Markets

C. Licensing Strategies 1. Makes sense when a firm with valuable technical know-how or a unique patented product has neither the internal organizational capability nor the resources to enter foreign markets. 2. Also avoids the risk of committing resources to country markets that are unfamiliar 3. Advantage: Can generate income without a substantial investment. 4. Disadvantage: providing technical knowledge to a foreign firm and losing some control over the 16 use of that technology.

Strategies for Competing in Globalizing Markets

D. Franchising Strategies 1. Better suited to the global expansion of service and retailing enterprises. 2. Basically has the same advantages as licensing 3. Biggest problem is to maintain control of quality. E. Multicountry Strategy or a Global Strategy 1. The need for a multicountry strategy comes from the vast differences in cultural, economic, political, and competitive conditions in different countries.
17

Strategies for Competing in Globalizing Markets

2. Multicountry strategies are tailored to fit each host countrys market situation. 3. Global strategies are where the companys approach is mostly the same in all countries. 4. A global strategy involves: a. integrating and coordinating the companys strategic moves worldwide b. selling in many if not all nations where there is significant buyer demand 5. The strength of a multicountry strategy is that it matches the companys competitive approach to hostcountry circumstances.
18

Strategies for Competing in Globalizing Markets

7. Multicountry strategy has two drawbacks: a. it is very difficult to transfer a companys competencies and resources across country boundaries. b. It does not promote building a single, unified competitive advantage.

19

Strategies for Competing in Globalizing Markets

8. The primary orientation of a multicountry strategy is responsiveness to local country conditions. a. Companies using this strategy face big hurdles as they try to encourage staff to lower costs. 9. A global strategy can concentrate on building resource strengths to secure a sustainable low-cost or differentiation-based competitive advantage over both domestic rivals and global rivals for the world market leadership.
20

IV. Pursuing Competitive Advantage by Competing Multinationally A. There are three ways that a firm can gain a competitive advantage by expanding outside its domestic market. 1. Exploit a multinational or global competitors ability to deploy R & D, parts manufacture, assembly, distribution centers, sales and marketing, customer service centers and other activities among various countries in a manner that lowers costs or achieves greater product differentiation. 2. Efficient and effective transfer of competitively valuable competencies and capabilities from its 21 domestic market to foreign markets.

Strategies for Competing in Globalizing Markets

1. Draw on a multinational or global competitors ability to deepen or broaden its resource strengths and capabilities and to coordinate its dispersed activities in ways that a domestic-only competitor cannot. B. Achieving Locational Advantages 1. To build competitive advantage, a company must consider two issues: a. whether to concentrate each activity it performs in a few select countries or to disperse performance of the activity to many nations. 22 b. Which countries to locate particular activities

Strategies for Competing in Globalizing Markets

2. Companies tend to concentrate their activities in a limited number of locations: a. When the costs of manufacturing or other activities are significantly lower in particular geographic locations than in others. b. Where there are significant scale economies in performing the activity. 1. Can generate major cost savings 2. Usually has to have greatest manufacturing share to achieve low cost producer status. c. Where there is a steep learning or experience curve associated with performing an activity in a 23 single location.

Strategies for Competing in Globalizing Markets

d. When certain locations have superior resources, allow better coordination of relocated activities, or offer other valuable advantages. 3. In several instances, dispersing activities is more advantageous than concentrating them. a. Buyer related activities have to take place close to the buyer. b. A global competitor the effectively disperses its buyer-related activities can gain a service-based competitive edge in world markets over rivals whose buyer-related activities are more 24 concentrated.

Strategies for Competing in Globalizing Markets

c. Dispersing activities to many locations is also competitively advantageous when high transportation costs, diseconomies of large size, and trade barriers make it too expensive to operate from a central location. d. The classic reason for locating an activity in a particular country is low cost.
25

C. Transferring Competencies and Capabilities across Borders 1. Expanding outside the domestic market is a way for companies to leverage their core competencies and resource strengths. 2. Transferring competencies, capabilities and resource strengths from country to country contributes to the development of broader or deeper competencies and capabilities. a. Helping a firm to obtain dominating depth in a competitively valuable area. b. Dominating depth in a competitively valuable capability or resource or value chain activity is a strong basis for a sustainable competitive 26 advantage.

D. Coordinating Cross-Border Activities 1. Aligning and coordinating company activities located in different countries contributes to a sustainable competitive advantage in several different ways. 2. Companies that compete in multiple locations across the world can choose where and how to challenge rivals. 3. Firms can use the Internet to collect new ideas for improvements on the product. The Internet can link all the people in the firm so they can develop the best project. 4. A company can enhance its brand reputation by consistently incorporating the same differentiating attributes in its products in the 27 various worldwide markets where it competes.

Strategies for Competing in Globalizing Markets

VI. Profit Sanctuaries, Cross-Market Subsidization, and Global Strategic Offensives A. Profit Sanctuaries country markets where a company derives substantial profits because of its strong or unprotected market position 1. In most cases, a companys biggest and most strategically crucial profit sanctuary is its home market. 2. Multicountry and global companies may also enjoy profit sanctuary status in other nations where they have a strong competitive position, 28 big sales volume and attractive profit margins.

Strategies for Competing in Globalizing Markets

B. Using Cross-Market Subsidization to Wage a Strategic Offensive 1. Profit sanctuaries are valuable competitive assets the provide financial strength to support strategic offensives in selected country markets and aid a companys race for global market leadership. 2. Cross-market subsidization supporting competing offensives in one market with resources and profits diverted from operations in other markets is a powerful competitive weapon. 3. Dumping foreign company intentionally prices its 29 products at a low rate to force out local competitors.

Strategies for Competing in Globalizing Markets

VII. Strategic Alliances and Joint Ventures with Foreign Partners A. Strategic alliances and cooperative agreements with foreign companies are an excellent way to enter a foreign market. 1. Export minded firms have historically sought alliances with firms in less-developed countries to import and market their products local. 2. More recently, companies from different parts of the world have formed strategic alliances and partnership arrangements to strengthen their mutual ability to serve whole continents and 30 more toward more global market participation.

3.

Cooperative arrangements between domestic and foreign companies have strategic appeal for reasons besides gaining wider access to attractive country markets. a. Capture economies of scale in production and/or marketing the cost-reductions can be the difference that allows a company to be cost competitive. b. Fill gaps in technical expertise and/or knowledge of local markets. c. Share distribution facilities and dealer networks thus mutually strengthening their access to buyers. d. Allied companies can direct their competitive energies more toward rivals and less toward one another. e. Alliances can be a particularly useful way to gain 31 agreement on important technical standards.

Strategies for Competing in Globalizing Markets

A. The Risks of Strategic Alliances with Foreign Partners 1. Achieving effective collaboration between independent companies each with different motives and conflicting objectives 2. Cross-border allies typically have to overcome language and cultural barriers: Communication, trust-building and coordination costs are high in terms of management time. 3. Often, partners discover that they have deep differences of opinion about how to proceed and conflicting objectives and strategies. 32

Strategies for Competing in Globalizing Markets

4. Getting alliance partners to make decisions fast enough to respond to rapidly advancing technological developments. Many times allies find it difficult to collaborate effectively in competitively sensitive areas, thus raising questions about mutual trust and forthright exchanges of information and expertise. Becoming overly dependent on another company for essential expertise and capabilities over the long term.
33

5.

6.

C. Making the Most of Strategic Alliances with Foreign Partners 1. When a company realizes the potential of alliances and collaborative partnerships with foreign enterprises seems to be a function of six factors: a. Picking a good partner. b. Being sensitive to cultural differences c. Recognizing that the alliance must benefit both sides. d. Ensuring that both parties live up to their commitments. e. Structuring the decision-making process so that actions can be taken swiftly when needed. f. Managing the learning process and then adjusting the alliance agreement over time to fit 34 new circumstances.

2.

Most alliances with foreign companies that aim at technology-sharing or providing market access turn out to be temporary. 3. Alliances are more likely to be long lasting when: a. they involve collaboration with suppliers or distribution allies and each partys contribution involves activities in different portions of the industry value chain. b. Both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging or perhaps because further collaboration will allow each partner to extend its market reach beyond what it could accomplish35 on its own.

Strategies for Competing in Globalizing Markets

Strategies for Competing in Globalizing Markets

VIII. Competing in Emerging Foreign Markets A. Companies racing for global leadership have to consider competing in big and emerging country markets such as China, India, Brazil, Indonesia, and Mexico. 1. A company aspiring to world market leadership (or sustained rapid growth) cannot ignore the market opportunities or the base of technical and managerial talent such countries offer. 2. Tailoring products for these big emerging markets often involves more than making minor product changes and becoming more familiar with their local 36 cultures.

Strategies for Competing in Globalizing Markets

B. Strategy Implications 1. Consumers are highly focused on price in emerging markets and often give low cost competitors the edge. 2. If building a market for the companys products is likely to be a long-term process and involve re-education of consumers, a company must not only be patient with regard to sizable revenues and profits but also prepared in the interim to invest sizable sums to alter buying habits and tastes.
37

Strategies for Competing in Globalizing Markets

3. Because managing a new venture in an emerging market requires a blend of global knowledge and local sensitivity to the culture and business practices, the management team must usually consist of a mix of expatriate and local managers. a. Expartiate managers will transfer business technology, business practice and corporate culture b. Local managers bring needed understanding of the areas uniqueness and a deep commitment to the market. 38

Strategies for Competing in Globalizing Markets

IX. Strategies for Local Companies in Emerging Markets A. What are the prospects for local firms wanting to enter emerging markets? 1. Their optimal strategic approach hinges on a. whether a firms competitive assets are suitable only for the home market or can be transferred abroad. b. Whether industry pressures to more toward global competition are strong or weak.
39

Strategies for Competing in Globalizing Markets

B. Defending against Global Competitors by Using Home-Field Advantages 1. When pressures for global competition are weak and a local firm has competitive strengths suited to the local market, a good strategy option is to concentrate on the advantages enjoyed in the home market, cater to customers who prefer a local touch, and accept the loss of customers, attracted to global brands. 2. Exploit the local orientation 3. Enjoy a significant cost advantage over global 40 rivals.

Strategies for Competing in Globalizing Markets

C. Transferring the Companys Expertise to Cross-Border Markets 1. When a company has resource strengths and capabilities suitable for competing in other country markets, launching initiatives to transfer its expertise to crossborder markets becomes a viable strategic option.
41

Strategies for Competing in Globalizing Markets

D. Dodging Global Entrants by Shifting to a New Business Model or Market Niche 1. When industry pressures to globalize are strong, any of three options make the most sense: a. Shift the resources to a piece of the industry value chain where the firms expertise and resources provide competitive advantage. b. Enter into a joint venture with a globally competitive partner c. Sell out to (or be acquired by) a global entrant into the home market who concludes the 42 company would be a good entry vehicle.

Strategies for Competing in Globalizing Markets

E. Contending on a Global Level 1. If a local company in an emerging market has transferable resources and capabilities it can sometimes launch successful initiatives to meet the pressures for globalization head-on and start to compete on a global level itself.
43