CHAPTER 7

STRATEGIES FOR COMPETING IN

INTERNATIONAL MARKETS

Copyright ®2012 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin

 WHY COMPANIES DECIDE TO
ENTER FOREIGN MARKETS

To gain access to To spread business

new customers risk across a wider
To exploit core market base
competencies

To achieve lower To access resources

costs and economies and capabilities in
of scale foreign markets

7–2
WHY COMPETING ACROSS NATIONAL
BORDERS MAKES STRATEGY
MAKING MORE COMPLEX

Industry competitiveness factors that

1. vary from country to country

Location-based advantages for

2. certain countries

Differences in government policies

3. and economic conditions

4. Currency exchange rate risks

Differences in cultural, demographic,

5. and market conditions

7–3
 7.1
The Diamond of
National Advantage Demand Conditions
Home-market relative size;
domestic buyers’ needs

Related\Supporting Firm Strategy,

Industries Structure, and Rivalry
Proximity of suppliers, end Different management
users, and complementary styles and organization;
industries degree of local rivalry

Factor Conditions
Availability, quality, and
relative prices of inputs
(e.g. labor, materials)

7–4
Reasons for Locating Value Chain Activities
for Competitive Advantage
♦ Lower wage rates ♦ Proximity to
♦ Higher worker suppliers and
productivity technologically
related industries
♦ Lower energy
costs ♦ Proximity to
customers
♦ Fewer
environmental ♦ Lower distribution
regulations costs
♦ Lower tax rates ♦ Available\unique
natural resources
♦ 7–5
 The Impact of Government Policies and
Economic Conditions in Host Countries
♦ Positives ♦ Negatives
● Tax incentives ● Environmental
● Low tax rates regulations
● Low-cost loans ● Subsidies and loans to

● Site location
domestic competitors
● Import restrictions
and
development ● Tariffs and quotas
● Worker training ● Local-content
requirements
● Regulatory approvals
● 7–6
 Political and Economic Risks

♦ Political Risks
● Stem from instability or weaknesses in
national governments and hostility to foreign
business.
♦ Economic Risks
● Stem from the stability of a country’s
monetary system, economic and regulatory
policies, lack of property rights protections,
and risks due to exchange rate fluctuation.

7–7
The Risks of Adverse Exchange Rate Shifts

♦ Effects of Exchange Rate Shifts:

● Exporters experience a rising demand for
their goods whenever their currency grows
weaker relative to the importing country’s
currency.
● Exporters experience a falling demand for
their goods whenever their currency grows
stronger relative to the importing country’s
currency.

7–8
Cross-Country Differences in Demographic,
Cultural, and Market Conditions

To customize offerings in each

country market to match the tastes
and preferences of local buyers
Key Strategic
Considerations
To pursue a strategy of offering a
mostly standardized product
worldwide.

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 THE CONCEPTS OF MULTIDOMESTIC
COMPETITION AND GLOBAL
COMPETITION

♦ Multidomestic Competition
● Exists when competition in each country
market is localized and not closely connected
to competition in other country markets.
♦ Global Competition
● Exists when competitive conditions and
prices are strongly linked across many
different national markets.

7–10
Features of Multidomestic Competition

♦ 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.

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 Features of Global Competition

♦ The same group of firms competes in countries

where sales volumes are large and having a
presence is important to a strong global position.
♦ Competitive advantage is gained from the
transfer of expertise, economies of scale, and
worldwide brand-name recognition.
♦ Global competition is increasing in multidomestic
markets where custom mass production is
coinciding with converging consumer tastes.

7–12
 STRATEGIC OPTIONS FOR ENTERING
AND COMPETING IN INTERNATIONAL
MARKETS

♦ Maintain a national (one-country) production base and

export goods to foreign markets.
♦ License foreign firms to produce and distribute the firm’s
products abroad.
♦ Employ an overseas franchising strategy.
♦ Establish a wholly-owned subsidiary by either acquiring
a foreign company or through a “greenfield” venture.
♦ Form strategic alliances or joint ventures with foreign
companies.

7–13
 Export Strategies

♦ Advantages ♦ Disadvantages
● Low capital ● Maintaining relative
requirements cost advantage of
● Economies of home-based
scale in utilizing production
existing ● Transportation and
production shipping costs
capacity ● Exchange rates risks
● No distribution risk ● Tariffs\import duties
● No direct ● Loss of channel
investment risk control 7–14
 Licensing and Franchising Strategies

♦ Advantages ♦ Disadvantages
● Low resource ● Maintaining control of
requirements proprietary know-how
● Income from ● Lossof operational
royalties and and quality control
franchising fees ● Adaptingto local
● Rapid expansion market tastes and
into many markets expectations

7–15
 Acquisition Strategies

♦ Advantages ♦ Disadvantages
● High level of ● Costs of acquisition
control ● Complexity of
● Quicklarge-scale acquisition process
market entry ● Integrationof the firms’
● Avoids entry structures, cultures,
barriers operations and
● Access to acquired personnel
firm’s skills

7–16
 Greenfield Strategies

♦ Advantages ♦ Disadvantages
● Highlevel of ● Capital
costs of initial
control over development
venture ● Risks of loss due to
● “Learning by doing” political instability or
lack of legal protection
in the local market of ownership
● Directtransfer of ● Slowest form of entry
the firm’s due to extended time
technology, skills, required to construct
business practices, facility 7–17
 Greenfield Strategies

♦ DEFINITION of 'Green Field Investment’

A form of foreign direct investment where
a parent company starts a new venture in
a foreign country by constructing new
operational facilities from the ground up.
In addition to building new facilities, most
parent companies also create new long-
term jobs in the foreign country by hiring
new employees .Read more:
http://www.investopedia.com/terms/g/gre
enfield.asp#ixzz3ZdkXwfEU 7–18
 Alliance and Joint Venture Strategies

♦ Advantages ♦ Disadvantages
● Avoid entry barriers ● Cultural and language
● Allowfor resource barriers
and risk sharing ● Costsof establishing
● Partner’sknowledge the working
of local market arrangement
conditions ● Issues of joint control
● Joint
learning and ● Protectionof
sharing proprietary technology
● Preservationof or competitive
partner independence advantage 7–19
COMPETING INTERNATIONALLY:
THE THREE MAIN STRATEGIC
APPROACHES

Competing
Internationally

Multidomestic Global Transnational

Strategy Strategy Strategy

7–20
 Approaches to International Strategy
♦ Multidomestic Strategy
● Varies product offerings and competitive approaches
from country to country.
♦ Global Strategy
● Employs the same basic competitive approach in all
countries where the firm operates.
♦ Transnational Strategy
● Is a think-global, act-local approach that incorporates
elements of both multidomestic and global strategies.

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7.2 Three Approaches for Competing Internationally

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 7.1 Advantages and Disadvantages of Multidomestic,
Global, and Transnational Approaches

Multidomestic Approach
Advantages
• Can meet the specific needs of
each market more precisely
• Can respond more swiftly to
localized changes in demand
• Can target reactions to the
moves of local rivals
• Can respond more quickly to
local opportunities and threats
Disadvantages
• Hinders resource and capability
sharing or cross-market transfers
• Higher production and distribution
costs
• Not conducive to a worldwide
competitive advantage

7–23
 7.1 Advantages and Disadvantages of Multidomestic,
Global, and Transnational Approaches (cont’d)

Transnational Approach
Advantages
• Offers the benefits of both local
responsiveness and global
integration
• Enables the transfer and
sharing of resources and
capabilities across borders
• Provides the benefits of flexible
coordination
Disadvantages
• More complex and harder to
implement
• Conflicting goals may be difficult to
reconcile and require trade-offs
• Implementation more costly and
time-consuming

7–24
 7.1 Advantages and Disadvantages of Multidomestic,
Global, and Transnational Approaches (cont’d)

Global Approach
Advantages
• Lower costs due to scale and
scope economies
• Greater efficiencies due to the
ability to transfer best practices
across markets
• More innovation from
knowledge sharing and
capability transfer
• The benefit of a global brand
and reputation
Disadvantages
• Unable to address local needs
precisely
• Less responsive to changes in
local market conditions
• Higher transportation costs and
tariffs
• Higher coordination and integration
costs

7–25
THE QUEST FOR COMPETITIVE
ADVANTAGE IN THE INTERNATIONAL
ARENA

Build Competitive Advantage

in International Markets

Use international
Share resources, Gain cross-border
location to lower
competencies, coordination
cost or differentiate
and capabilities benefits
product

7–26
 Using Location to Build
Competitive Advantage

To customize offerings in each

country market to match the tastes
and preferences of local buyers
Key Location
Issues
To pursue a strategy of offering a
mostly standardized product
worldwide.

7–27
When to Concentrate Activities in a Few Locations

♦ The costs of manufacturing or other activities are

significantly lower in some geographic locations than
in others.
♦ There are significant scale economies in production
or distribution.
♦ There are sizable learning and experience benefits
associated with performing an activity in a single
location.
♦ Certain locations have superior resources, allow
better coordination of related activities, or offer other
valuable advantages.

7–28
When to Disperse Activities across Many Locations

♦ Buyer-related activities can be conducted at a distance.

♦ There are high transportation costs.
♦ There are diseconomies of large size.
♦ Trade barriers make a central location too expensive.
♦ Dispersing activities reduces exchange rate risks.
♦ Dispersion helps prevent supply interruptions.
♦ Dispersion helps avoid adverse political developments.
♦ Dispersion allows for location-based technology and
production cost competitive advantages.

7–29
 Cross-Border Coordination: Sharing and
Transferring Resources and Capabilities
♦ Build a Resource-Based
Competitive Advantage By:
● Using powerful brand names to extend
a differentiation-based competitive
advantage beyond the home market.
● Coordinating activities for sharing and
transferring resources and production
capabilities across different countries’
domains to develop market dominating
depth in key competencies.

7–30
 PROFIT SANCTUARIES AND CROSS-
BORDER STRATEGIC MOVES

♦ Profit Sanctuaries
● Are country markets (or geographic regions)
in which a firm derives substantial profits
because of its protected market position or its
competitive advantage.
♦ Cross-Market Subsidization
● Is the diversion of resources and profits from
one market to support competitive offensives
in another different market.

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7.3 Profit Sanctuary Potential of Domestic-only, International,
and Global Competitors

7–32
 Dumping as a Strategy

♦ Dumping
● Selling goods in foreign markets at prices
that are either below normal home market
prices or below the full costs per unit.
♦ Why A Firm Engages in Dumping:
● To reduce or avoid the high fixed costs of
idle production capacity.
● To use below-cost pricing to gain market
share and drive weak firms from the market.

7–33
Using Cross-Border Tactics to Defend against
International Rivals

International International
Firm A Firm B

Profit Sanctuary

Firm A moves against Firm B in Country B

Firm B counters with a response in Country C

7–34
 STRATEGIES FOR COMPETING IN THE
MARKETS OF DEVELOPING
COUNTRIES

♦ Prepare to compete on the basis of low price.

♦ Prepare to modify the firm’s business model or
strategy to accommodate local circumstances.
♦ Avoid developing markets where it is too costly
to accommodate local circumstances.
♦ Try to change the local market to better match
the way the firm does business elsewhere.

7–35
 DEFENDING AGAINST GLOBAL GIANTS:
STRATEGIES FOR LOCAL COMPANIES IN
DEVELOPING COUNTRIES

♦ Develop a business model that exploits shortcomings in

local distribution networks or infrastructure.
♦ Utilize knowledge of local customer needs and
preferences to create customized products or services.
♦ Take advantage of aspects of the local workforce with
which large multinational firms may be unfamiliar.
♦ Use local acquisition and rapid-growth strategies to
defend against expansion-minded internationals.
♦ Transfer the firm’s expertise to cross-border markets.

7–36