CHAPTER SEVEN

Competing in Foreign Markets

Dr. J. U. Ahmed

“You have no choice but to operate in

a world shaped by globalization and

the information revolution. There are

two options: Adapt or die.”

Andrew S. Grove

The Global and National Environments

International expansion represents a way of earning greater returns by transferring the skills and product offerings derived from distinctive competencies to

markets where indigenous competitors lack these skills.

The trend toward globalization has many implications:

1. Industries are becoming global in scope Industry boundaries no longer stop at national borders.

2. Shift from national to global markets. This has intensified competition in industry after industry.

3. Steady decline in barriers to cross-border trade and investment. This has opened up many once protected markets to companies based outside of them.

Increasing Profitability and Profit Growth Through Global Expansion Expanding the market by leveraging products

Taking goods or services developed at home and selling them internationally Utilizing the distinctive competencies that underlie the production and

marketing

Cost economies from global volume Economies of scale from additional sales volume Lower unit costs and spreading of fixed costs

Location economies Economic benefits from performing a value creation activity in the optimal

location Leveraging the skills of global subsidiaries Applying these skills to other operations within firm’s global network

Must also consider transportation costs, trade barriers, as well as the political and economic risks.

Pressures for Cost Reductions and Local Responsiveness

The best strategy for a company to pursue may depend on the kinds of pressures it must cope with:• Cost Reductions or

• Local Responsiveness

Pressures for Cost Reductions

Where differentiation on non-price factors is difficult

Where competitors are based in low-cost location

Where consumers are powerful and face low switching costs

Where there is persistent excess capacity The liberalization of the world trade and

investment environment

Pressures for cost reductions are greatest in industries producing commodity-type products

where price is the main competitive weapon:

Pressures for Local Responsiveness

Differences in customer tastes and preferences

Differences in infrastructure and traditional practices

Differences in distribution channels Host government demands

The greatest pressures for local responsiveness arise from:

Dealing with these contradictory pressures is a difficult strategic challenge, primarily because being locally responsive tends to raise costs.

Why Do Companies Expandinto Foreign Markets?

Gain access tonew customers

Capitalizeon core

competencies

Achieve lowercosts and enhance competitiveness

Spreadbusiness risk across

widermarket base

Obtain access to valuable natural

resources

International vs. Global Competition

International Competitor

GlobalCompetitor

Company operates in a select few foreign countries,

with modest ambitions to expand further

Company markets products in 50 to 100 countries and

is expanding operations into additional country markets

annually

Multi-country

Competition

Global Competition

Two Primary Patternsof International Competition

A Company’s Strategic Options for Dealing withCross-Country Variations in Buyer Preferences and Market

Conditions

Choosing a Global Strategy Standard Globalization Strategy

Reaping the cost reductions that come from economies of scale and location economies

Business model based on pursuing a low-cost strategy on a global scale

Makes the most sense when there are strong pressures for cost reduction and the demand for local responsiveness is minimal

Localization Strategy• Customizing the company’s goods or services so that thy

provide a good match to tastes and preferences in different national markets

Most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences and where cost pressures are not too intense

Choosing a Global Strategy Transnational Strategy

Difficult to pursue due to its conflicting demandsBusiness model that simultaneously:

Achieves low costs » Differentiates across markets Fosters a flow of skills between subsidiaries

Building an organization capable of supporting a transnational strategy is a complex and challenging task.

International Strategy• Multinational companies that sell products that serve universal

needs (minimal need to differentiate) and do not face significant competitors (low cost pressure).

In most international companies the head office retains tight control over marketing and product strategy.

Basic Entry Decisions1. Which overseas markets to enter

Assessment of long-run profit potential A function of the size of the market, purchasing power of consumers,

the likely future purchasing power of consumers Balancing the benefits, costs, and risks associate with

doing business in a country A function of economic development and political stability

2. Timing of entry First-mover advantages: preempt and build share First-mover disadvantages: pioneering costs

3. Scale of Entry and Strategic Commitments Entering on a large scale is a major strategic

commitment With long term impacts that may be difficult to reverse

Benefits and drawbacks of small-scale entry

The Choice of Entry Mode

1. Exporting Most manufacturing companies begin their global expansion as exporters and

later switch to one of the other modes.

2. Licensing A foreign licensee buys the rights to produce a company’s product for a

negotiated fee; licensee puts up most of the overseas capital.

3. Franchising Franchising is a specialized form of licensing. The franchiser not only sells

intangible property, but also insists that franchisee agrees to follow strict rules as to how it does business.

4. Joint Ventures Typically a 50/50 venture – a favored mode for entering a new market

5. Wholly-Owned Subsidiaries Parent company owns 100% of subsidiary’s stock – setup or acquire

When and how to enter a new national market raise the question of how to determine the best mode or vehicle for

entry. The optimal one depends on the company’s strategy:

Choosing Among Entry Modes Distinctive Competencies and Entry Mode To earn greater returns from differentiated products or where competitors

lack comparable products, the optimal mode of entry depends on the nature of the company’s distinctive competency: Technological know-how

Wholly-owned subsidiary is preferred over licensing and joint ventures to minimize risk of losing control.

Management know-how Franchising, joint ventures, or subsidiaries are preferred as risk is

low of losing management know-how.

Pressures for Cost Reduction and Entry Mode The greater the cost pressure, the more likely a company will want to

pursue some combination of exporting and wholly-owned subsidiary: Export finished goods from wholly-owned subsidiary Marketing subsidiaries for overseeing distribution

Tight control over local operations allows company to use profits generated in one market to improve position in other markets.

Global Strategic Alliances

Advantages Facilitate entry into a foreign market Share fixed costs and associated risks Bring together complementary skills and assets Set technological standards for its industry

Disadvantages Give competitors a low-cost route to gain new

technology and market access

Global Strategic Alliances are cooperative agreements between companies from different countries that are actual or potential competitors. They range from short-term contractual cooperative arrangements to formal joint ventures with equity

participation.

Some alliances benefit the company. Beware, alliances can end up giving away technology

and market access with very little gained in return.

Making Strategic Alliances Work The failure rate for international strategic alliances is quite high.

Success seems to be a function of three main factors:

Successful partners view the alliance as an opportunity to learn rather than purely as a cost- or risk-sharing device.

1. Partner selection – A good partner: Helps the company achieve strategic goals Shares the firm’s vision for the purpose of the alliance Is unlikely to try to exploit the alliance to its own ends Conduct research on potential partners

2. Alliance structure Risk of giving too much away is at an acceptable level Guard against opportunism by partner in alliance agreement

3. Manner in which alliance is managed Sensitivity to cultural differences Build relationship capital through interpersonal relationships

Structuring Alliances to Reduce Opportunism

Opportunism includes the expropriation of technology or markets

The Four Big Strategic Issuesin Competing Multinationally

Whether to customize a company’s offerings in each different country market to match preferences of local buyers or offer a mostly standardized product worldwide

Whether to employ essentially the samebasic competitive strategy in all countriesor modify the strategy country by country

Where to locate a company’s production facilities,distribution centers, and customer service operationsto realize the greatest locational advantages

How to efficiently transfer a company’s resource strengths and capabilities from one country to another to secure competitive advantage

Thank you