Why Companies Decide to Enter Foreign Markets

1. To Gain Access to New Customers: Expanding into foreign markets allows companies
to tap into new customer bases, increasing their potential for sales and revenue growth.
For example, a U.S.-based smartphone company might enter the Indian market to
access a large and growing population of tech-savvy consumers.
2. To Achieve Lower Costs Through Economies of Scale, Experience, and Increased
Purchasing Power: By expanding their market reach, companies can produce goods in
larger quantities, which typically reduces the cost per unit. For instance, a car
manufacturer like Toyota can reduce costs by spreading development expenses across a
larger number of units sold worldwide.
3. To Gain Access to Low-Cost Inputs of Production: Many companies establish
operations in foreign countries to take advantage of lower labor costs, cheaper raw
materials, or more favorable regulatory environments. A clothing retailer, for example,
might source garments from Bangladesh to capitalize on the lower labor costs.
4. To Further Exploit Its Core Competencies: Companies with strong core competencies
can leverage these strengths in new markets. For example, a tech firm with advanced AI
technology could exploit this competency in European markets that are investing heavily
in AI-driven solutions.
5. To Gain Access to Resources and Capabilities Located in Foreign Markets:
Sometimes, foreign markets offer unique resources or capabilities that are scarce or
unavailable at home. For instance, a pharmaceutical company might enter a foreign
market to access unique biological materials that are crucial for new drug development.

Why Competing Across National Borders Makes Strategy Making

More Complex

1. Different Countries with Different Home-Country Advantages in Different

Industries: Industries can be more competitive in certain countries due to factors like
natural resources, skilled labor, technological expertise, or supportive government
policies. For example, the tech industry in Silicon Valley benefits from a cluster of tech
talent and venture capital.
2. Location-Based Value Chain Advantages for Certain Countries: Some countries offer
specific advantages in certain parts of the value chain. For instance, India has become a
hub for IT services and software development, offering cost and skill advantages in
these areas.
3. Differences in Government Policies, Tax Rates, and Economic Conditions:
Companies must navigate varying regulations, tax structures, and economic
 environments across countries. For instance, a company operating in both the U.S. and
China must adapt to different trade policies, labor laws, and market conditions.
4. Currency Exchange Rate Risks: Companies that operate internationally face risks
related to fluctuating exchange rates, which can affect profits and costs. For example, a
European company importing goods from the U.S. might find its costs increasing if the
euro weakens against the dollar.
5. Differences in Buyer Tastes and Preferences for Products and Services: Consumer
preferences can vary significantly across cultures, requiring companies to adapt their
products and marketing strategies. For example, fast-food chains like McDonald's adjust
their menus to cater to local tastes in different countries, offering rice dishes in Asia or
halal options in the Middle East.

In summary, while international expansion offers numerous benefits, it also introduces a

layer of complexity to strategy formulation and execution due to the diverse and
dynamic nature of global markets.

The Diamond Framework, also known as Porter’s Diamond, is a model

that explains why certain industries within particular nations are competitive
internationally. It consists of four main attributes:

1. Factor Conditions: This refers to a country's resources, such as skilled labor,

infrastructure, and technology. These are not just inherited resources but also those
created by a nation such as a strong technology sector or specialized expertise.
2. Demand Conditions: The nature of home-market demand for the industry’s product or
service. This includes the size and growth rate of the market and the sophistication of
consumers in the home market.
3. Related and Supporting Industries: The presence of supplier industries and related
industries that are internationally competitive can spill over and contribute to other
industries. A cluster of competitive industries can amplify each other's success.
4. Firm Strategy, Structure, and Rivalry: How companies are created, organized, and
managed, as well as the nature of domestic rivalry. Greater competition pressures
companies to innovate and improve.

The framework suggests that these elements create a reinforcing system, contributing to
a nation's competitive advantage. It also includes two outside variables, government
and chance, which can influence any of the four elements.

Using the Diamond Framework:

1. Predict from which countries foreign entrants are most likely to come: By
examining the diamond of different countries, a company can anticipate which nations
have the most favorable conditions to produce competitive players in certain industries.
For instance, Germany has a strong diamond for the automotive industry due to
excellent factor conditions (like a highly skilled labor force), demanding customers,
renowned automotive suppliers, and intense competition among local manufacturers.
2. Decide which foreign markets to enter first: A company might use the framework to
identify markets where its home-country advantages can be transferred. For instance, a
technology firm from a country with strong factor conditions for tech (like the U.S. or
South Korea) might prioritize expanding to markets with less competitive local
technology industries.
3. Choose the best country location for different value chain activities: The model can
guide firms to locate each part of their value chain in the country that offers the most
advantages for that activity. For example, a multinational might do its R&D in a country
with strong innovative capabilities and high consumer sophistication, manufacture in a
country with cost-effective production factors, and set up customer service in a country
with a highly skilled multilingual workforce.

For example, a smartphone manufacturer looking to optimize its global value chain
might consider the following:

 Factor Conditions: Set up manufacturing in China or Vietnam due to the availability of

raw materials and cost-efficient labor.
 Demand Conditions: Target sales in Europe and the U.S. where customers demand
cutting-edge features and are willing to pay a premium for high-quality devices.
 Related and Supporting Industries: Partner with software companies in India for
development due to their IT services expertise.
 Firm Strategy, Structure, and Rivalry: Base corporate headquarters in a country like
the U.S. where there's a culture of innovation and a highly competitive business
environment that pushes firms to continually improve.
 Opportunities for Location-Based Advantages

1. Lower Wage Rates: Companies can reduce labor costs by operating in countries with
lower wages. For example, many apparel companies have factories in Bangladesh or
Vietnam because the wage rates there are much lower than in Western countries.
2. Higher Worker Productivity: Sometimes, even if wages are higher, the productivity of
workers can be greater, offsetting wage costs. German workers, for example, are known
for their high productivity, which can justify the higher labor costs.
3. Lower Energy Costs: Countries like Canada and Russia have abundant energy
resources, leading to lower energy costs for industries.
4. Fewer Environmental Regulations: Manufacturing in countries with less stringent
environmental regulations can lower costs, but this also raises ethical and sustainability
concerns.
5. Lower Tax Rates: Ireland's low corporate tax rate has attracted various multinational
corporations to establish their European headquarters there.
6. Lower Inflation Rates: Stable economic conditions can make long-term planning easier
and operations more cost-effective.
7. Proximity to Suppliers and Technologically Related Industries: Being close to
suppliers and clusters of related industries, such as Silicon Valley for tech companies,
can reduce costs and spur innovation.
8. Proximity to Customers: Being closer to the customer base can reduce transportation
costs and improve service. Automotive companies like Toyota have built factories in the
U.S. to be closer to the American market.
9. Lower Distribution Costs: By manufacturing goods closer to the point of sale,
companies can reduce shipping and storage costs.
10. Available or Unique Natural Resources: Certain regions are rich in resources crucial
for particular industries, like the Middle East for oil or Congo for coltan, which is vital for
electronics.

The Impact of Government Policies and Economic Conditions in

Host Countries
Positives
1. Tax Incentives and Low Tax Rates: To attract foreign investment, countries may offer
tax incentives or have generally low tax rates, as seen in Singapore and Ireland.
2. Low-Cost Loans: Governments may offer favorable financing to attract foreign
businesses, thereby reducing their initial investment costs.
3. Site Location and Development: Some countries offer ready-to-use industrial sites or
assistance in developing new facilities.
4. Worker Training: Subsidized or government-provided training programs can improve
the skill level of the workforce at reduced costs for the company.
Negatives
1. Environmental Regulations: While essential for sustainability, strict environmental
regulations can increase operational costs.
2. Subsidies and Loans to Domestic Competitors: Government financial support to local
companies can put foreign companies at a disadvantage.
3. Import Restrictions, Tariffs, and Quotas: These can protect domestic industries but
make it more expensive for foreign companies to enter the market.
4. Local-Content Requirements: Some countries require foreign companies to use a
certain percentage of local content in their products.
5. Regulatory Approvals: Obtaining permits and going through bureaucratic processes
can be time-consuming and costly.
6. Profit Repatriation Limits: Restrictions on the amount of profit that can be sent back
to the home country can make it less attractive to invest.
7. Minority Ownership Limits: Some countries restrict foreign ownership, which can limit
control and returns on investment.

The Risks of Adverse Exchange Rate Shifts

The value of a currency in relation to another has a direct impact on international trade
dynamics. Here's how:

1. When a Currency Weakens (Depreciates): Exporters in the country with the weakened
currency become more competitive abroad because their goods are cheaper in terms of
foreign currencies. For example, if the Japanese yen weakens against the U.S. dollar,
Japanese cars become cheaper for American buyers, potentially increasing demand for
Japanese vehicles in the U.S. market.
2. When a Currency Strengthens (Appreciates): Conversely, if the yen strengthens
against the dollar, the price for Japanese cars in America would go up, and Americans
might turn to cheaper alternatives, possibly leading to a decrease in Japanese car
exports to the U.S.

Exchange rate fluctuations can be caused by numerous factors including changes in

interest rates, inflation, political stability, and economic performance. Businesses
engaging in international trade commonly use hedging techniques like forward
contracts to mitigate these risks.
 Cross-Country Differences in Demographic, Cultural, and Market
Conditions

When companies enter international markets, they must consider how to position their
products. The two main strategies are:

1. Customization (Adaptation): This approach involves tailoring products to fit local

markets' tastes and preferences. It's based on the idea that conditions, such as cultural
norms, religious beliefs, language, and lifestyle, vary significantly between countries. A
classic example is the fast-food industry, where menus are adapted to local cuisines and
dietary restrictions. For instance, McDonald's serves beer in Germany, reflecting local
drinking habits, and offers vegetarian burgers in India, where there's a large vegetarian
population due to religious and cultural practices.
2. Standardization: This strategy keeps the product and marketing mix uniform across
different markets, benefiting from economies of scale and maintaining a consistent
brand image. An example is Apple's iPhone, which remains largely the same wherever
it's sold. The variations are minimal and mostly pertain to technical compliance with
local telecommunications standards.
Key Strategic Considerations
Companies must weigh several factors:

 Cultural Sensitivity: How important is cultural adaptation for the product? Food and
fashion often require significant customization, while electronics may not.
 Cost Implications: Customization can be expensive due to the need for local R&D,
changes in production processes, and variations in marketing campaigns.
Standardization, on the other hand, can reduce costs significantly.
 Legal and Regulatory Environment: Sometimes, local laws may dictate product
specifications, like emission standards for automobiles or health and safety regulations
for food products.
 Brand Identity: Companies with strong global brands may prefer standardization to
maintain a consistent image and leverage their global reputation.
 Market Segmentation: Are there enough customers in the target market who are
willing to pay for the global version of the product, or is there a substantial demand for
localized features?
 Competition: The presence of local competitors offering tailored solutions may compel a foreign company to adapt
its offerings.

In practice, many companies use a hybrid strategy, standardizing some elements of their offerings while customizing
others. This allows them to benefit from economies of scale while still meeting the specific needs of local markets. For
example, automobile manufacturers may use the same basic platforms worldwide but adapt the cars they sell in
various markets to suit local tastes and regulatory requirements.
Primary Modes of Entry into Foreign Markets

1. Exporting

Exporting is one of the most traditional and well-established forms of operating in

foreign markets. Exporting can be direct or indirect. Companies can sell directly to a
customer in another country or indirectly through a third-party intermediary.

Advantages: Allows companies to leverage their existing production capacity and

achieve economies of scale.

Example: A company like Tesla exports its electric vehicles from its U.S. manufacturing
plants to markets in Europe and Asia, utilizing its domestic production capabilities while
expanding its global reach.

2. Licensing

Licensing allows a company in one country to allow a company in another country to

use its intellectual property, such as patents, trademarks, or technology, in exchange for
a licensing fee.

Advantages: Offers a low-cost, low-risk entry into a foreign market. The licensee bears
most of the capital investment and managerial efforts.

Example: The pharmaceutical company Pfizer might license a particular drug formula to
a foreign company, allowing them to manufacture and sell the drug in their local market
while paying a fee to Pfizer.

3. Franchising

Franchising is similar to licensing but usually involves a longer-term commitment and

includes more aspects of the business, such as the entire business model, branding, and
operational processes.

Advantages: Allows for rapid market expansion with a relatively low direct capital
investment.
Example: Fast-food chain McDonald's is a prime example of franchising, with franchises
all over the world adhering to the company's strict operating procedures and brand
guidelines.

4. Establishing a Subsidiary

Companies may choose to establish a subsidiary in a foreign market either by setting

up a new operation from scratch (a "greenfield" investment) or by acquiring an existing
local company (a "brownfield" investment).

Advantages: Provides high levels of control over operations and the ability to fully reap
the benefits of local market knowledge and customer relationships.

Example: Tech giant Apple operates subsidiaries in many countries around the world to
manage its operations locally, including retail stores and administrative functions.

5. Strategic Alliances or Joint Ventures

Strategic alliances and joint ventures involve two or more companies deciding to
undertake a project or business activity together. In a joint venture, the parties typically
create a new entity, owned by each of them, to manage the joint operation.

Advantages: Shared risks and resources, and often used to comply with local ownership
laws.

Example: Car manufacturer Ford entered into a joint venture with Chinese company
Zotye to create a new brand that would build and sell all-electric vehicles in China,
benefiting from Zotye's local market knowledge and influence.

Each of these modes of entry has distinct implications for how much control a company
maintains over its operations, how much investment and risk it undertakes, and what
degree of commitment it is making to the foreign market. The choice of mode will
depend on factors such as the company's strategic priorities, resource availability, risk
tolerance, and the nature of the target market.
 Export Strategies

Advantages:

1. Low Capital Requirements: Exporting allows companies to enter foreign markets without the need
for significant capital investment in property, plant, and equipment overseas.
2. Economies of Scale: By increasing total production to serve multiple markets, companies can lower
their per-unit costs.
3. No Distribution Risk: The company does not have to establish its own distribution channels;
instead, it can rely on local distributors.
4. No Direct Investment Risk: There's no risk associated with investing in foreign production facilities.

Disadvantages:

1. Home-Based Production Costs: Companies must maintain a cost advantage in home-country

production to remain competitive, despite the additional costs of exporting.
2. Transportation and Shipping Costs: These costs can be significant, especially for bulky or heavy
products.
3. Exchange Rates Risks: Fluctuations in currency values can make export prices volatile.
4. Tariffs and Import Duties: These can make products more expensive and less competitive in the
foreign market.
5. Loss of Channel Control: Companies are often at the mercy of foreign distributors and cannot
directly manage the end-to-end sales process.

Example: A company like Harley-Davidson exports motorcycles from the United States to markets
around the world, leveraging its domestic manufacturing while facing the challenges of transport
costs and import tariffs.

Licensing and Franchising Strategies

Advantages:

1. Low Resource Requirements: The company doesn't need to invest heavily in overseas operations.
2. Income from Royalties/Franchising Fees: It provides a steady income stream without the cost of
operating the business.
3. Rapid Expansion: Licensing or franchising can enable quick access to many markets.

Disadvantages:

1. Control of Proprietary Know-How: There's a risk of losing control over proprietary technology or
business methods.
2. Loss of Operational and Quality Control: It can be challenging to ensure that the licensee or
franchisee maintains the company’s standards.
3. Local Market Adaptation: Products and services may need to be adapted by the licensee or
franchisee to suit local tastes, which can dilute the brand's identity.

Example: Fast-food chains like McDonald's and KFC often use franchising to expand globally,
benefiting from local market knowledge while trying to maintain quality and service standards.

Foreign Subsidiary Strategies

Advantages:

1. High Level of Control: Companies have full control over operations and can enforce consistent
standards and practices.
2. Quick Large-Scale Market Entry: Acquiring an existing company provides immediate access to a
large customer base.
3. Avoids Entry Barriers: Local production can circumvent trade barriers.
4. Access to Acquired Firm’s Skills: The company can benefit from the local expertise and capabilities
of the acquired firm.

Disadvantages:

1. Costs of Acquisition: Buying an existing company can be expensive.

2. Complexity of Acquisition Process: It can be a complex legal and financial undertaking.
3. Integration Challenges: Merging operations, cultures, and personnel requires significant
management effort.

Example: When Volkswagen acquired Czech automaker Škoda, it gained immediate access to
Eastern European markets and utilized Škoda’s existing manufacturing capabilities.

Strategic Alliances and Joint Ventures

While not listed in your question, strategic alliances and joint ventures are also common modes of
entry:

Advantages:

 Shared risks and resources.

 Access to partners’ technology, expertise, and market knowledge.
 Potentially easier to manage than full acquisitions.

Disadvantages:

 Risk of conflict between partners.

 Sharing of profits.
 Potential for loss of proprietary information.
 Example: Starbucks has entered many international markets by forming joint ventures with local
companies, which help navigate local regulations and preferences.

In deciding which mode of entry to choose, a company must consider its strategic goals, the nature
of its products or services, its appetite for risk, and the characteristics of the target market. The right
mode of entry is dependent on a careful analysis of these factors.

A Greenfield strategy is where a company starts a new venture from

scratch in a foreign country by constructing new operational facilities and distribution
networks. This is in contrast to entering a market through acquisitions or partnerships.
Here’s a closer look:

When is a Greenfield Strategy Appealing?

1. Cost Considerations: It's preferred if it's more cost-effective to build a new operation
than to acquire and improve an existing one, considering acquisition premiums and
potential integration issues.
2. Market Conditions: The strategy is viable if the new subsidiary won't saturate the
market, creating a supply surplus that could drive down prices.
3. Market Access: If the company believes it can achieve good distribution and market
access without the need for local partners.
4. Competitive Advantage: The new operation must be capable of competing effectively
with established players, possibly by leveraging advanced technology, better cost
structures, or brand strength.

Advantages of a Greenfield Strategy

1. Control: The company has full control over the venture's design and operation, ensuring
that it aligns closely with its standards, culture, and objectives.
2. Learning by Doing: Establishing operations from the ground up can provide valuable
insights into the local market, including consumer behaviors, regulatory environments,
and operational challenges.
3. Direct Transfer: It allows for a direct transfer of the company’s technology,
management practices, and corporate culture without dilution or compromise.

Disadvantages of a Greenfield Strategy

1. Capital Investment: The upfront capital requirements can be substantial, as it involves
acquiring land, constructing facilities, and establishing a workforce.
2. Political and Legal Risks: There's the risk of loss due to political instability,
nationalization, or weak legal systems that fail to protect foreign ownership.
3. Time to Market: It is generally the slowest mode of entry since it may take a
considerable amount of time to build the new facilities and establish operations.

Example of a Greenfield Strategy

An example of a greenfield investment would be Volkswagen's decision to open a new

plant in Chattanooga, Tennessee. They opted to build a new facility rather than
acquiring an existing one or forming a joint venture. This allowed them to introduce
their corporate culture, processes, and technology directly into the new operation,
ensuring it met their global standards. It also provided jobs and economic growth in the
local area, which may have aided in favorable treatment from local authorities. However,
they faced the challenge of a large initial capital investment and the time it took to get
the plant up and running.

Choosing a greenfield strategy can be a significant strategic move that requires a

thorough analysis of the potential risks and rewards. Companies that go this route need
to have a strong long-term commitment to the foreign market and the resilience to
withstand initial hurdles.

Benefits of Alliance and Joint Venture Strategies

Strategic alliances and joint ventures can be very effective ways for companies to enter
new markets, access new capabilities, and share risks. Some of the benefits include:

1. Local Market Knowledge: Partnering with a local firm can provide insights into
consumer preferences, regulatory nuances, and other local market dynamics that are
crucial for success. For example, Walmart entered the Indian market through a joint
venture with Bharti Enterprises to benefit from their local knowledge.
2. Economies of Scale: Joint operations can lead to cost savings as the partners can
combine their resources and capabilities to operate more efficiently. Airbus and Boeing,
for example, have engaged in partnerships with other companies to share the hefty
R&D and production costs associated with building new airplanes.
3. Access to Technical Expertise: A local partner may possess technical skills or
knowledge that can be beneficial. A technology company from Silicon Valley might form
a joint venture with a South Korean semiconductor company to leverage their advanced
manufacturing capabilities.
4. Shared Facilities and Networks: Companies can share distribution networks and dealer
networks, reducing costs and increasing market reach. An automotive company like
Ford might share dealer networks with a local company in a new market to mutually
strengthen market presence.
5. Focusing Competitive Efforts: By partnering, companies can agree to concentrate on
beating external competitors rather than competing with each other. This can be seen in
the alliance between Renault, Nissan, and Mitsubishi, which coordinates strategies to
compete more effectively against other global automakers.
6. Government Relationships: A local partner can facilitate relationships with key
government officials, easing regulatory approvals and understanding of compliance
issues. This is often seen in industries like energy and telecommunications, where
government relations are critical.

The Risks of Strategic Alliances with Foreign Partners

However, forming strategic alliances also comes with risks:

1. Outdated Knowledge: There’s a risk that the local partner's knowledge or capabilities
are outdated, leading to ineffective strategies. For instance, a foreign IT company may
find that their local partner's knowledge of technology is not as cutting-edge as
expected.
2. Cultural and Language Barriers: Misunderstandings and misalignments due to cultural
differences can impede collaboration. A U.S. company might face challenges in
understanding the business etiquette in Japan, which can impact negotiations and
operations.
3. Establishment Costs: Time and resources must be invested to establish the partnership
and ensure it operates effectively, which can be considerable.
4. Conflicting Objectives: Partners may have different goals or strategic visions, which can
lead to disagreements and hinder joint venture progress. For instance, DaimlerChrysler
faced challenges due to differing corporate cultures and management styles.
5. Ethical and Value Differences: Variations in corporate ethics and values can lead to
conflict. This was a concern for Google in its considerations about operations in China,
given the country's approach to internet censorship.
6. Loss of Proprietary Technology: There’s always a risk that the partner could
misappropriate proprietary technology or processes, damaging competitive advantage.
7. Overdependence: Relying too much on a partner for essential expertise or market
access can become a liability, especially if the relationship sours or if the partner
encounters financial or operational difficulties.

In practice, the success of an alliance or joint venture often hinges on careful partner
selection, thorough due diligence, clear agreements about control and operations, and
effective ongoing management of the relationship.

International Strategy: The Three Main Approaches

A multidomestic strategy is an approach where a company customizes its products,
services, and strategies to each local market it operates in, effectively managing each
subsidiary as a standalone business. This is in contrast to a global strategy where a
company executes a uniform strategy across all markets.

Advantages of a Multidomestic Strategy

1. Local Market Needs: By tailoring products and services to local tastes and preferences,
companies can better meet the specific needs and demands of each market. For
instance, Nestlé follows a multidomestic strategy by adapting its product offerings to
local tastes, which means it sells different product variations in different countries.
2. Swift Local Response: Companies can respond quickly to changes in local demand and
market conditions. For example, if there is a sudden trend for health foods in Australia, a
company like Kellogg’s can quickly introduce new cereal varieties to meet that specific
demand.
3. Competition with Local Rivals: A multidomestic approach allows companies to
compete more effectively with local firms because they appear less like foreign entities
and more attuned to the local culture. HSBC bank, for example, brands itself as "The
world’s local bank," tailoring its services to the local markets it operates in.
4. Localized Opportunities and Threats: Companies can address opportunities and
threats on a local level more effectively. Toyota, for example, may adjust its car models
to better suit the environmental policies and consumer preferences in European
markets.

Disadvantages of a Multidomestic Strategy

1. Resource Sharing Limitations: It is harder to share resources and capabilities across
countries because each subsidiary operates independently. This could mean that an
innovation developed by the Spanish subsidiary of a company might not be easily
transferred to or utilized by the Thai subsidiary.
2. Higher Costs: Local customization of products and services can lead to higher
production and distribution costs due to the lack of standardization. A company like
McDonald’s, despite its global brand, has to incur extra costs to offer region-specific
menu items like the McArabia in the Middle East or the Teriyaki Burger in Japan.
3. Obstacle to Global Branding: A multidomestic strategy can make it difficult to build a
consistent global brand image. This is because the brand must be flexible enough to
adapt to various markets, which can dilute its global identity.
4. Lack of Competitive Advantage: Companies operating a multidomestic strategy may
miss out on the global competitive advantage that could come from a unified strategy.
They might fail to leverage global brand recognition or economies of scale that
competitors using a global strategy might benefit from.

In practice, companies often find themselves balancing between the multidomestic

approach and a more global strategy, trying to leverage local adaptation while still
capturing some benefits of standardization and global brand equity.

A global strategy emphasizes operating with a standardized approach across the world
as opposed to adapting to local markets. This strategy leverages the scale and scope of
a company to achieve efficiencies and maintain a consistent brand image.

Advantages of a Global Strategy

1. Economies of Scale and Scope: By standardizing products and services, companies can
produce in larger volumes and reduce costs. For example, Apple uses a global strategy
to sell its iPhones virtually identically across the world, allowing it to achieve massive
economies of scale in production.
2. Efficiency in Best Practices: A global strategy can facilitate the transfer of best
practices across all markets, leading to greater operational efficiencies. For instance,
Toyota implements its Toyota Production System globally to maintain quality and
efficiency.
3. Innovation through Knowledge Sharing: By operating globally, companies can pool
knowledge and innovations which can lead to improved products and services. A
company like Google benefits from the diverse input of its global workforce to innovate
in its product offerings.
4. Global Brand Recognition: A uniform brand and marketing approach can lead to a
strong global brand presence. Companies like Coca-Cola and Nike are recognized
worldwide and benefit from a consistent global branding strategy.

Disadvantages of a Global Strategy

1. Local Needs Not Precisely Met: A one-size-fits-all approach may not fit local
preferences or respond well to local competitors’ products that are better tailored to the
local market. For example, a global car model might not meet specific regional
emissions regulations or preferences for vehicle size.
2. Less Local Responsiveness: Centralized decision-making and standardization may
result in slower responses to local market changes. In fashion retail, for instance, Zara’s
competitor with a global strategy might not respond as quickly to local fashion trends
as Zara does with its more localized approach.
3. Transportation Costs and Tariffs: Distributing standardized products globally can lead
to higher transportation costs, and products may face tariffs that locally produced
goods do not. This can be seen in industries like steel, where shipping costs and tariffs
can be significant.
4. Coordination and Integration Costs: Maintaining a cohesive strategy across various
countries requires coordination, which can be costly and complex. For multinational
corporations like Unilever, ensuring alignment of global marketing campaigns and
product launches can be a significant undertaking.

In choosing a global strategy, companies must carefully consider their ability to

compete on a worldwide scale while offering products and services that are sufficiently
attractive to consumers with differing cultural tastes and preferences. The balance
between global standardization and local adaptation is critical and can vary by industry
and product type.
 A transnational strategy attempts to combine the advantages of global and
multidomestic strategies, seeking to achieve both global efficiency and local
responsiveness. Companies with this strategy aim to share knowledge and resources
across their global operations while also adapting to local market needs.

Advantages of a Transnational Strategy

1. Local Responsiveness and Global Integration: Companies can tailor their products
and services to the local market while also integrating operations and strategy across
borders. This helps in leveraging global brands and reputations while meeting specific
local needs. An example is McDonald's, which, while globally recognized, adapts its
menu to local tastes with offerings like the McSpicy Paneer in India and the McTurco in
Turkey.
2. Resource and Capability Transfer: Companies can shift resources (such as capital,
personnel, and materials) and capabilities (like knowledge and technology) to wherever
they can be most effectively utilized. For instance, L'Oréal uses its extensive research and
development capabilities to create products that can be adapted and marketed
differently in regions across the world.
3. Flexible Coordination: The transnational model allows companies to coordinate
product development, marketing, and other business activities flexibly across borders,
leading to a blend of both global standardization and local adaptation. An example is
Toyota's ability to coordinate production processes globally while allowing for local
variations in car models and features.

Disadvantages of a Transnational Strategy

1. Complexity: This strategy is difficult to implement because it requires a sophisticated

and often expensive organizational structure that can handle the complexities of
operating in many different environments simultaneously.
2. Conflicting Goals: Balancing global efficiency with local responsiveness often leads to
conflicting goals within different parts of the organization. For example, the central
office of a transnational corporation might push for standardized processes to save
costs, while local offices might demand more autonomy to address their unique market
conditions.
3. Costly and Time-Consuming Implementation: Establishing the right mix of
standardization and customization, developing a flexible but coherent corporate culture,
and creating efficient communication and management systems across borders is
resource-intensive and can take considerable time.
 An example of a company employing a transnational strategy is Nestlé. It has factories
and research and development centers worldwide, allowing it to achieve economies of
scale in production and innovation. At the same time, it localizes its product offerings to
the tastes of the local consumer base, as evident in its diverse food and beverage
products tailored to regional preferences.

A transnational strategy can provide a significant competitive advantage but requires a

delicate balance between global and local elements. The right infrastructure, corporate
culture, and management systems are critical for successfully implementing such a
strategy.

Using Location to Build Competitive Advantage

Key Location Issues

1. Customization vs. Standardization: Deciding whether to customize products to local

tastes or pursue a standardized global product impacts location strategy. Customization
may require dispersed operations to be closer to customers and understand their
preferences, while standardization might support centralizing operations to capitalize on
scale economies.
 Example of Customization: KFC customizes its menu to cater to local tastes,
offering spicy chicken in India and porridge in Singapore.
 Example of Standardization: Intel produces standardized semiconductor chips
in centralized locations, benefiting from economies of scale.

When to Concentrate Activities in a Few Locations

1. Cost Advantages: If specific locations offer significantly lower costs due to factors like
labor, materials, or regulations, it may be beneficial to concentrate activities there.
2. Scale Economies: Centralizing can achieve economies of scale in production or
distribution, reducing per-unit costs.
3. Learning and Experience: Concentrating activities can enhance learning, leading to
improved efficiency and innovation.
4. Resource Availability and Coordination: Some locations offer superior resources or
enable better coordination of activities.
 Example: Toyota concentrates its production in certain locations to benefit from
scale economies and the accumulated expertise of the workforce.

When to Disperse Activities Across Many Locations

1. Proximity to Buyers: Dispersing activities can be advantageous if being close to

customers is crucial for customization or service delivery.
2. High Transportation Costs: If transportation costs are significant, it may be more cost-
effective to produce goods closer to the consumer.
3. Avoidance of Trade Barriers: Locating production within different trade blocs can
circumvent tariffs and import quotas.
4. Exchange Rate Risks: Dispersing assets can mitigate the risks associated with currency
fluctuations.
5. Supply and Political Risks: Diversifying locations can reduce the risk of supply
interruptions and adverse political actions.
 Example: Companies like Coca-Cola and Unilever disperse their manufacturing to
be closer to regional markets, adapting products to local tastes and reducing
logistics costs.

Sharing and Transferring Resources Across Borders

Building a competitive advantage globally requires leveraging resources across borders:

1. Brand Extension: Using established brand names to enter new markets can provide a
significant advantage.
2. Resource and Capability Sharing: Coordinating and sharing resources and capabilities
across borders can enhance efficiency and innovation.
 Example: Apple uses its brand reputation to market products globally while
coordinating design, production, and supply chain management across different
countries to maintain quality and control costs.

In summary, the strategic use of location to build competitive advantage involves a

nuanced understanding of when to centralize and when to disperse operations, how to
leverage global brand strength, and how to share resources and capabilities effectively
across borders. The right strategy is often contingent on industry dynamics, product
characteristics, and market needs.
 Cross-Border Strategic Moves
Offensive Strategic Options
1. Exploiting Market Positions: Companies can leverage their strong market positions in
multiple countries to launch competitive moves. For instance, a firm dominant in two
regions might use its strength in one region to support aggressive pricing or marketing
in another, challenging competitors who cannot sustain similar cross-regional strategies.
2. Cross-Market Subsidization: This strategy involves using profits from one market to
support competitive strategies in another. This can be particularly effective when a
company faces different competitive conditions across markets. For example, a company
might use profits from its established European operations to fund a price war in Asia,
undercutting local competitors who lack such financial backing.
 Example: A multinational corporation might use profits from its operations in a stable
market like the U.S. to fund an aggressive expansion or price war in a growth market like
Brazil, where it seeks to quickly gain market share.
Defensive Strategic Moves
Defensive actions involving multiple markets may include matching a competitor's
moves in one market to deter or respond to aggressive strategies in another. This could
mean lowering prices or ramping up marketing efforts in response to a competitor's
actions.

Dumping as a Strategy

Dumping refers to the practice of selling a product in a foreign market at a price lower
than its cost or below the price in the home market. While it can temporarily boost
market share abroad, it is considered an unfair trade practice and is subject to
international regulations.

1. Below Home Market Prices: Selling goods abroad cheaper than at home can undercut
local competitors but may lead to accusations of unfair competition.
2. Below Cost: Selling below cost to drive out local competitors and gain market share is
risky and can lead to international trade disputes.

Government Retaliation: Countries often retaliate against dumping practices to protect

their domestic industries, potentially imposing tariffs or fines on the offending
company's goods.

WTO's Role: The World Trade Organization (WTO) oversees international trade rules
and can authorize retaliatory measures against firms or countries engaged in dumping.
 Example: Suppose a Chinese steel company sells its products in the U.S. market at prices lower
than its production cost to outcompete U.S. steel producers and capture market share. The U.S.
government, in response, might impose anti-dumping duties on Chinese steel to protect its
domestic industry, aligning with WTO guidelines to counteract unfair trade practices.

In summary, while offensive strategies like cross-market subsidization can provide

competitive advantages in international markets, practices like dumping carry significant
risks, including legal repercussions and retaliatory trade measures. Companies engaging
in international strategies must carefully navigate these dynamics to sustain long-term
success in global markets.

Strategies for Competing in Developing Countries

1. Compete on Price: Developing markets are often price-sensitive. Companies

entering these markets might need to offer more affordable products or services
without significantly compromising quality. For example, car manufacturers like Tata
Motors in India introduced the Nano, the world's cheapest car, targeting cost-conscious
consumers.

2. Modify Business Model or Strategy: Adapting the business model to suit local
conditions is crucial. This might involve altering product features, distribution strategies,
or marketing approaches. For instance, Unilever adapted its sales strategy in rural India
by creating small, affordable sachets of shampoos and soaps, catering to the purchasing
power and consumption habits of rural consumers.

3. Change the Local Market: Some firms may attempt to 'educate' the market or
influence infrastructure development to suit their business models. For example, e-
commerce companies like Alibaba in China invested in logistics and digital payment
infrastructure to support their business models in regions lacking such facilities.

4. Avoid Unfavorable Markets: If the cost of adapting the business model outweighs
potential gains, it may be prudent to avoid entering certain markets. For instance, a
luxury car manufacturer might choose to not enter a market where the demand for
luxury goods is minimal due to economic conditions.

Strategies for Local Companies in Developing Countries to Defend

Against Global Giants

1. Exploit Local Distribution or Infrastructure Shortcomings: Local companies can

leverage their understanding of local distribution networks and infrastructure to their
advantage. For instance, a local beverage company might use unique distribution
strategies that are more effective in reaching remote areas than those used by global
competitors.

2. Customize Products for Local Needs: By understanding local consumer preferences

deeply, local firms can tailor their offerings to meet specific needs. A local food brand
might incorporate traditional flavors or ingredients that appeal more to local tastes than
standardized global products.

3. Leverage Local Workforce Knowledge: Local companies might have a better

understanding of how to manage and motivate the local workforce, an aspect that
multinational companies might struggle with due to cultural differences.

4. Rapid Growth and Acquisition Strategies: To defend against global competitors,

local companies might adopt aggressive growth strategies or acquire other local firms
to consolidate their market position. For example, a local retail chain might rapidly
expand its number of stores to ensure widespread presence before a global retail giant
enters the market.

5. Going International: Local companies can also look to expand internationally,

transferring their expertise to similar markets abroad, which can provide additional
revenue streams and reduce dependency on the local market. For instance, Jollibee, a
Filipino fast-food chain, has successfully expanded to other countries by tailoring its
menu to local tastes while maintaining its core Filipino offerings.

In essence, both entering developing markets and defending against global giants in
these markets require a nuanced understanding of local conditions, flexibility in strategy,
and an innovative approach to leveraging local advantages.