CHAPTER 7
STRATEGIES FOR COMPETING IN
INTERNATIONAL MARKETS
Copyright ®2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
1. Develop an understanding of the primary reasons
firms choose to compete in international markets.
2. Learn how and why differing market conditions
across countries and industries make crafting
international strategy a complex undertaking.
3. Learn about the major strategic options for
entering and competing in foreign markets.
4. Gain familiarity with the three main strategic
approaches for competing internationally.
5. Understand how international firms go about
building competitive advantage in foreign markets.
7–2
WHY COMPANIES DECIDE TO
ENTER FOREIGN MARKETS
To gain access to
new customers
To exploit core
competencies
To achieve lower
costs and economies
of scale
To spread business
risk across a wider
market base
To access resources
and capabilities in
foreign markets
7–3
WHY COMPETING ACROSS NATIONAL
BORDERS MAKES STRATEGY
MAKING MORE COMPLEX
1.
Industry competitiveness factors that
vary from country to country
2.
Location-based advantages for certain
countries
3.
Differences in government policies
and economic conditions
4.
Currency exchange rate risks
5.
Differences in cultural, demographic,
and market conditions
7–4
7.1
The Diamond of
National Advantage
Demand Conditions
Home-market relative size;
domestic buyers’ needs
Related\Supporting
Industries
Firm Strategy,
Structure, and Rivalry
Proximity of suppliers, end
users, and complementary
industries
Different management styles
and organization; degree of
local rivalry
Factor Conditions
Availability, quality, and
relative prices of inputs
(e.g. labor, materials)
7–5
The Diamond Framework
♦ Answers important questions about
competing on an international basis by:
●
Predicting where new foreign entrants are
likely to come from and their strengths.
●
Highlighting foreign market opportunities
where rivals are weakest.
●
Identifying the location-based advantages
of conducting certain value chain activities
of the firm in a particular country.
7–6
Reasons for Locating Value Chain Activities
for Competitive Advantage
♦ Lower wage rates
♦ Higher worker
productivity
♦ Proximity to suppliers
and technologically
related industries
♦ Lower energy costs
♦ Proximity to customers
♦ Fewer environmental ♦ Lower distribution costs
regulations
♦ Available\unique
natural resources
♦ Lower tax rates
♦ Lower inflation rates
7–7
The Impact of Government Policies and
Economic Conditions in Host Countries
♦ Positives
♦ Negatives
●
Tax incentives
●
Environmental regulations
●
Low tax rates
●
●
Low-cost loans
Subsidies and loans to
domestic competitors
●
Site location and
development
●
Import restrictions
●
Tariffs and quotas
Worker training
●
Local-content requirements
●
Regulatory approvals
●
Profit repatriation limits
●
Minority ownership limits
●
7–8
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.
7–9
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.
7–10
Thinking Strategically
♦ What effects has the adoption of the euro
had on the ability of European Union (EU)
countries (and firms) to respond changes
in intra-national economic conditions in
other EU countries given that they now
share a common currency?
♦ What should a EU firm do to respond to a
adverse currency exchange rate shift in a
non-EU country?
7–11
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.
7–12
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.
7–13
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.
7–14
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.
7–15
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.
7–16
Export Strategies
♦ Advantages
●
Low capital
requirements
●
♦ Disadvantages
●
Economies of scale
in utilizing existing
production capacity
Maintaining relative cost
advantage of homebased production
●
Transportation and
shipping costs
●
No distribution risk
●
Exchange rates risks
●
No direct investment
risk
●
Tariffs\import duties
●
Loss of channel control
7–17
Licensing and Franchising Strategies
♦ Advantages
♦ Disadvantages
●
Low resource
requirements
●
Maintaining control of
proprietary know-how
●
Income from royalties
and franchising fees
●
Loss of operational and
quality control
●
Rapid expansion into
many markets
●
Adapting to local market
tastes and expectations
7–18
Acquisition Strategies
♦ Advantages
♦ Disadvantages
●
High level of control
●
Costs of acquisition
●
Quick large-scale
market entry
●
Complexity of acquisition
process
●
Avoids entry barriers
●
●
Access to acquired
firm’s skills
Integration of the firms’
structures, cultures,
operations and personnel
7–19
Greenfield Strategies
♦ Advantages
♦ Disadvantages
●
High level of control
over venture
●
Capital costs of initial
development
●
“Learning by doing”
in the local market
●
●
Direct transfer of the
firm’s technology,
skills, business
practices, and culture
Risks of loss due to
political instability or lack
of legal protection of
ownership
●
Slowest form of entry due
to extended time required
to construct facility
7–20
Alliance and Joint Venture Strategies
♦ Advantages
♦ Disadvantages
●
Avoid entry barriers
●
●
Allow for resource
and risk sharing
Cultural and language
barriers
●
Partner’s knowledge of
local market conditions
Costs of establishing the
working arrangement
●
Issues of joint control
●
●
Joint learning and sharing ● Protection of proprietary
technology or competitive
● Preservation of partner
advantage
independence
7–21
COMPETING INTERNATIONALLY:
THE THREE MAIN STRATEGIC
APPROACHES
Competing
Internationally
Multidomestic
Strategy
Global
Strategy
Transnational
Strategy
7–22
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.
7–23
7.2
Three Approaches for Competing Internationally
7–24
7.1
Advantages and Disadvantages of Multidomestic,
Global, and Transnational Approaches
Multidomestic Approach
Advantages
Disadvantages
• Can meet the specific needs of
each market more precisely
• Hinders resource and capability
sharing or cross-market transfers
• Can respond more swiftly to
localized changes in demand
• Higher production and distribution
costs
• Can target reactions to the
moves of local rivals
• Not conducive to a worldwide
competitive advantage
• Can respond more quickly to
local opportunities and threats
7–25
7.1
Advantages and Disadvantages of Multidomestic,
Global, and Transnational Approaches (cont’d)
Transnational Approach
Advantages
Disadvantages
• Offers the benefits of both local
responsiveness and global
integration
• More complex and harder to
implement
• Conflicting goals may be difficult to
• Enables the transfer and sharing reconcile and require trade-offs
of resources and capabilities
• Implementation more costly and
across borders
time-consuming
• Provides the benefits of flexible
coordination
7–26
7.1
Advantages and Disadvantages of Multidomestic,
Global, and Transnational Approaches (cont’d)
Global Approach
Advantages
Disadvantages
• Lower costs due to scale and
scope economies
• Unable to address local needs
precisely
• Greater efficiencies due to the
ability to transfer best practices
across markets
• Less responsive to changes in
local market conditions
• Higher transportation costs and
• More innovation from knowledge tariffs
sharing and capability transfer
• Higher coordination and integration
• The benefit of a global brand
and reputation
costs
7–27
THE QUEST FOR COMPETITIVE
ADVANTAGE IN THE INTERNATIONAL
ARENA
Build Competitive Advantage
in International Markets
Use international
location to lower
cost or differentiate
product
Share resources,
competencies,
and capabilities
Gain cross-border
coordination
benefits
7–28
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.
7–29
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.
7–30
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.
7–31
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.
7–32
PROFIT SANCTUARIES AND CROSSBORDER 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.
7–33
7.3
Profit Sanctuary Potential of Domestic-only, International,
and Global Competitors
7–34
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.
7–35
Using Cross-Border Tactics to Defend
against International Rivals
International
Firm A
International
Firm B
Profit Sanctuary
Firm A moves against Firm B in Country B
Firm B counters with a response in Country C
7–36
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.
7–37
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.
7–38