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Competing in Foreign Markets

By Denver Jones
Why do companies expand into foreign markets?

A company may opt to expand outside its domestic market for any of four major reasons:
• To gain access to new customers - Expanding into foreign markets offers potential for increased revenues, profits,
and long-term growth and becomes an especially attractive option when a company's home markets are mature.

• To achieve lower costs and enhance the firm's competitiveness - Many companies are driven to sell in more than
one country because domestic sales volume is not large enough to fully capture manufacturing economies of scale or
learning curve effects and thereby substantially improve the firm's cost-competitiveness.

• To capitalise on its core competencies - A company may be able to leverage its competencies and capabilities into a
position of competitive advantage in foreign markets as well as just domestic markets.

• To spread its business risk across a wider market base - A company spreads business risk by operating in a number
of different foreign countries rather than depending entirely on operations in its domestic market.

Cross-country differences in cultural, demographic and market conditions

Regardless of a company's motivation for expanding outside its domestic markets, the strategies it uses to compete in
foreign markets must be situation driven. Cultural, demographic, and market conditions vary significantly among the
countries of the world. Cultures and lifestyles are the most obvious areas in which countries differ; market
demographics are close behind.

One of the biggest concerns of companies competing in foreign markets is whether to customise their offerings in each
different country market to match the tastes and preferences of local buyers or whether to offer a mostly standardized
product worldwide.

Aside from basic cultural and market differences among countries, a company also has to pay special attention to
location advantages that stem from country-to-country variations in manufacturing and distribution costs, the risks of
fluctuating exchange rates, and the economic and political demands of host governments.

The potential for locational advantages

Differences in wage rates, worker productivity, inflation rates, energy costs, tax rates, government regulations, and the
like create sizable variations in manufacturing costs from country to country. The quality of a country's business
environment also offers locational advantages - the governments of some countries are anxious to attract foreign
investments and go all out to create a business climate that outsiders will view as favorable.

The risks of adverse exchange rate fluctuations

The volatility of exchange rates greatly complicates the issue of geographic cost advantages. Currency exchange
rates often fluctuate as much as 20 to 40 percent annually. Changes of this magnitude can either totally wipe out a
country's low-cost advantage or transform a former high-cost location into a competitive-cost location. Declines in the
value of the U.S. dollar against foreign currencies reduce or eliminate whatever cost advantage foreign manufacturers
might have over U.S. manufacturers and can even prompt foreign companies to establish production plants in the
United States.

Currency exchange rates are rather unpredictable, swinging first one way then another way, so the competitiveness of
any company's facilities in any country is partly dependent on whether exchange rate changes over time have a
favorable or unfavorable cost impact.

Host government restrictions and requirements

National governments exact all kinds of measures affecting business conditions and the operations of foreign
companies in their markets. Host governments may set local content requirements on goods made inside their borders
by foreign-based companies, put restrictions on exports to ensure adequate local supplies, regulate the prices of
imported and locally produced goods, and impose tariffs or quotas on the imports of certain goods.

The concepts of multicountry competition and global competition

There are important differences in the patterns of international competition from industry to industry. At one extreme is
multicountry competition in which there is so much cross-country variation in market conditions and in the companies
contending for leadership that the market contest among rivals in one country is not closely connected to the market
contests in other countries.

The standout features of multi-country competition are that:

• buyers in different countries are attracted to different product attributes
• sellers vary from country to country
• industry conditions and competitive forces in each national market differ in important respects.
With multicountry competition, rival firms battle for national championships and winning in one country does not
necessarily signal the ability to fare well in other countries. In multicountry competition, the power of a company's
strategy and resource capabilities in one country may not enhance its competitiveness to the same degree in other
countries where it operates.

At the other extreme is global competition in which prices and competitive conditions across country markets are
strongly linked and the term global or world market has true meaning. In a globally competitive industry, much the
same group of rival companies competes in many different countries, but especially so in countries where sales
volumes are large and where having a competitive presence is strategically important to building a strong global
position in the industry.

In addition to noting the obvious cultural and political differences between countries, a company should shape its
strategic approach to competing in foreign markets according to whether its industry is characterised by multicountry
competition, global competition, or a transition from one to the other.

Strategy options for entering and competing in foreign markets

There are a host of generic strategic options for a company that decides to expand outside its domestic market and
compete internationally or globally:
• maintain a national (one-country) production base and export goods to foreign markets - using either company-
owned or foreign-controlled forward
distribution channels

• license foreign firms to use the company's technology or to produce and distribute the company's products

• follow a multicountry strategy - varying the company's strategic approach from country to country in accordance with
local conditions and differing buyer tastes
and preferences

• follow a global strategy - using essentially the same competitive strategy approach in all country markets where the
company has a presence

• use strategic alliances or joint ventures with foreign companies as the primary vehicle for entering foreign markets -
and perhaps using them as an ongoing
strategic arrangement aimed at maintaining or strengthening its competitiveness.

Export strategies
Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial strategy for
pursuing international sales. With an export strategy, a manufacturer can limit its involvement in foreign markets by
contracting with foreign wholesalers experienced in importing to handle the entire distribution and marketing function
in their countries or regions of the world.

Whether an export strategy can be pursued successfully over the long run hinges on the relative cost-competitiveness
of the home-country production base. An export strategy is vulnerable when:
• manufacturing costs in the home country are substantially higher than in foreign countries where rivals have plants
• the costs of shipping the product to distant foreign markets are relatively high
• adverse fluctuations occur in currency exchange rates.

Licensing strategies
Licensing makes sense when a firm with valuable technical know-how or a unique patented product has neither the
internal organisational capability nor the resources to enter foreign markets. Licensing also has the advantage of
avoiding the risks of committing resources to country markets that are unfamiliar, politically volatile, economically
unstable, or otherwise risky.

The big disadvantage of licensing is the risk of providing valuable technological know-how to foreign companies and
thereby losing some degree of control over its use.

Franchising strategies
While licensing works well for manufacturers and owners of proprietary technology, franchising is often better suited to
the global expansion efforts of service and retailing enterprises. The franchisee bears most of the costs and risks of
establishing foreign locations while the franchisor has to expend only the resources to recruit, train, support, and
monitor franchisees. The big problem a franchisor faces is maintaining quality control. Another problem that may arise
is whether to allow foreign franchisees to make modifications in the franchisor's product offerings so as to better
satisfy the tastes and expectations of local buyers.

A multicountry strategy or a global strategy?

The need for a multicountry strategy derives from the vast differences in cultural, economic, political, and competitive
conditions in different countries. The more diverse national market conditions are, the stronger the case for a
multicountry strategy in which the company tailors its strategic approach to fit each host country's market situation.

While multicountry strategies are best suited for industries where multicountry competition dominates and a fairly high
degree of local responsiveness is competitively imperative, global strategies are best suited for globally competitive
industries. A global strategy is one in which the company's approach is predominantly the same in all countries. A
global strategy involves:
• integrating and coordinating the company's strategic moves worldwide
• selling in many if not all nations where there is a significant buyer demand.

The issue of whether to employ essentially the same basic competitive strategy in the markets of all countries or
whether to vary the company's competitive approach to fit specific market conditions and buyer preferences in each
host country is perhaps the foremost strategic issue firms face when they compete in foreign markets.The strength of
a multicountry strategy is that it matches the company's competitive approach to host country circumstances and
accommodates the differing tastes and expectations of buyers in each country. However, a multicountry strategy has
two big drawbacks:
• it hinders transfer of a company's competencies and resources across country boundaries
• it does not promote building a single, unified competitive advantage.

As a rule, most multinational competitors endeavor to employ as global a strategy as customers' needs permit. A
global strategy can concentrate on building the resource strengths to secure a sustainable low-cost or differentiation-
based competitive advantage over both domestic rivals and global rivals racing for world market leadership.

Strategic alliances and joint ventures with foreign partners

Strategic alliances, joint ventures, and other cooperative agreements with foreign companies are a favorite and
potentially fruitful means for entering a foreign market or strengthening a firm's competitiveness in world markets. Of
late, the number of alliances, joint ventures, and other collaborative efforts has exploded. Cooperative arrangements
between domestic and foreign companies have strategic appeal for reasons besides gaining wider access to attractive
country markets such as:
• to capture economies of scale in production and/or marketing
• to fill gaps in technical expertise and/or knowledge of local markets
• to share distribution facilities and dealer networks• allied companies can direct their competitive energies more
toward mutual rivals and less toward one another
• to gain from the partner's local market knowledge and working relationships with key officials in host-country
government
• to gain agreement on technical standards.

Sources
Lovelock, C.H. & Yip, G.S. 1996, 'Developing global strategies for service businesses', California Management
Review, Winter, vol. 38, iss. 2, pp. 64-87.

Thompson, AA, Strickland, AJ & Gamble, JE 2007, Crafting and Executing Srategy: Concepts and Cases, 15th edn,
McGraw-Hill/Irwin, USA.

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