Strategies for competing in international markets · 2020. 5. 7. · COMPETING IN INTERNATIONAL...

Strategies for competing in international markets

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LEARNING OBJECTIVES

1. primary reasons companies choose to compete in international markets

2. how and why differing market conditions across countries influence a company’s strategy choices in international markets

3. the five major strategic options for entering foreign markets

4. the three main strategic approaches for competing internationally

5. how multinational companies are able to use international operations to improve overall competitiveness

6. the unique characteristics of competing in developing-country markets.

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To further exploit core competencies

To spread business risk across a wider market

base

To gain access to new customers

To achieve lower costs through economies of scale,

experience, and increased purchasing power

To gain access to resources and

capabilities located in foreign markets

To enter foreing markets: why?

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Higher degree of complexity

u Different countries have different home-country advantages in different industries

u Location-based value chain advantages for certain countries

u Differences in government policies, tax rates, and economic conditionsu Currency exchange rate risksu Differences in buyer tastes and preferences for products and services

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REASONS FOR LOCATING VALUE CHAIN ACTIVITIES ADVANTAGEOUSLYu Lower wage rates

u Higher worker productivity

u Lower energy costs

u Fewer environmental regulations

u Lower tax rates

u Lower inflation rates

u Proximity to suppliers and technologically related industries

u Proximity to customers

u Lower distribution costs

u Available\unique natural resources

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THE IMPACT OF GOVERNMENT POLICIES AND ECONOMIC CONDITIONS IN HOST COUNTRIES

u Positives

üTax incentives

üLow tax rates

üLow-cost loans

üSite location and development

üWorker training

u Negativesü Environmental regulations

ü Subsidies and loans to domestic competitors

ü Import restrictionsü Tariffs and quotasü Local-content requirements

ü Regulatory approvalsü Profit repatriation limitsü Minority ownership limits

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THE RISKS OF ADVERSE EXCHANGE RATE SHIFTSuEffects of Exchange Rate Shifts:

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

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

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THE RISKS OF ADVERSE EXCHANGE RATE SHIFTSu Fluctuating exchange rates pose significant economic risks to a firm’s

competitiveness in foreign markets. Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger relative to the currency of the importing country.

u Domestic companies facing competitive pressure from lower-cost importsbenefit when their government’s currency grows weaker in relation to the currencies of the countries where the lower-cost imports are being made.

u 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 economicconditions in other EU countries given that they now share a common currency?

u What should a EU firm do to respond to a adverse currency exchange rate shiftin a non-EU country?

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STRATEGIC OPTIONS FOR ENTERING AND COMPETING IN INTERNATIONAL MARKETS1. Maintain a national (one-country) production base and export goods

to foreign markets.2. License foreign firms to produce and distribute the firm’s products

abroad.3. Employ an overseas franchising strategy.4. Establish a wholly-owned subsidiary by either acquiring a foreign

company or through a “greenfield” venture.5. Rely on strategic alliances or joint ventures with foreign companies.

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EXPORT STRATEGIES

u Advantages

ü Low capital requirements

ü Economies of scale in utilizing existing production capacity

ü No distribution risk

ü No direct investment risk

u Disadvantages

ü Maintaining relative cost advantage of home-based production

ü Transportation and shipping costs

ü Exchange rates risks

ü Tariffs\import duties

ü Loss of channel control

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LICENSING AND FRANCHISING STRATEGIES

u Advantages

üLow resource requirements

ü Income from royalties and franchising fees

üRapid expansion into many markets

u Disadvantages

üMaintaining control of proprietary know-how

üLoss of operational and quality control

üAdapting to local market tastes and expectations

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FOREIGN SUBSIDIARY STRATEGIES

u Advantages

üHigh level of control

üQuick large-scale market entry

üAvoids entry barriers

üAccess to acquired firm’s skills

u Disadvantages

üCosts of acquisition

üComplexity of acquisition process

ü Integration of the firms’ structures, cultures, operations and personnel

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Greenfield venture

uA greenfield venture is a subsidiary business that is established by setting up the entire operation from the ground up.

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FOREIGN SUBSIDIARY STRATEGIES

u Conditions are favorable for using an internal startup strategy when:ü Creating an internal startup is cheaper than making an acquisition.ü Adding production capacity will not adversely impact the supply–

demand balance in the local market.ü A startup subsidiary has the ability to gain good distribution access.ü A startup subsidiary will have the size, cost structure, and resource

strengths to compete head-to-head against local rivals.

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GREENFIELD STRATEGIES

u Advantages

üHigh level of control over venture

ü“Learning by doing” in the local market

üDirect transfer of the firm’s technology, skills, business practices, and culture

u Disadvantages

üCapital costs of initial development

üRisks of loss due to political instability or lack of legal protection of ownership

üSlowest form of entry due to extended time required to construct facility

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BENEFITS OF ALLIANCE AND JOINT VENTURE STRATEGIESu Gaining partner’s knowledge of local market conditionsu Achieving economies of scale through joint operationsu Gaining technical expertise and local market knowledgeu Sharing distribution facilities and dealer networks, and mutually

strengthening each partner’s access to buyers.u Directing competitive energies more toward mutual rivals and less

toward one anotheru Establishing working relationships with key officials in the host-country

government

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THE RISKS OF STRATEGIC ALLIANCES WITH FOREIGN PARTNERSu Outdated knowledge and expertise of local partnersu Cultural and language barriersu Costs of establishing the working arrangementu Conflicting objectives and strategies and/or deep differences of opinion

about joint controlu Differences in corporate values and ethical standards.u Loss of legal protection of proprietary technology or competitive

advantageu Over dependence on foreign partners for essential expertise and

competitive capabilities.

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COMPETING INTERNATIONALLY: THREE STRATEGIC APPROACHESAn international strategy is a strategy for competing in two or more countries simultaneously.1. A multidomestic strategy is one in which a firm

varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions. It is a think-local, act-local type of international strategy, facilitated by decision making decentralized to the local level.

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COMPETING INTERNATIONALLY: THREE STRATEGIC APPROACHES2. A global strategy is one in which a company employs the

same basic competitive approach in all countries where it operates, sells much the same products everywhere, strives to build global brands, and coordinates its actions worldwide with strong headquarters control. It represents a think-global, act-global approach.

3. A transnational strategy is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies.

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THE QUEST FOR COMPETITIVE ADVANTAGE IN THE INTERNATIONAL ARENA1. Use international location to lower

cost or differentiate product

2. Share resources and capabilities

3. Gain cross-border coordination benefits

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Key Location Issues

u To customize offerings in each country market to match tastes and preferences of local buyers

u To pursue a strategy of offering a mostly standardized product worldwide.

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TO CONCENTRATE VS TO DISPERSE

WHEN TO CONCENTRATE ACTIVITIES IN A FEW LOCATIONS?u The costs of manufacturing or other activities are significantly lower in

some geographic locations than in others.u There are significant scale economies

in production or distribution.u There are sizable learning and experience benefits associated with

performing an activity in a single location.u Certain locations have superior resources, allow better coordination of

related activities, or offer other valuable advantages.

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TO CONCENTRATE VS TO DISPERSE

WHEN TO DISPERSE ACTIVITIES ACROSS MANY LOCATIONS?u Buyer-related activities can be conducted at a distance.u There are high transportation costs.u There are diseconomies of large size.u Trade barriers make a central location too expensive.u Dispersing activities reduces exchange rate risks.u Dispersion helps prevent supply interruptions.u Dispersion helps avoid adverse political developments.u Dispersion allows for location-based technology and production cost

competitive advantages.

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DUMPING AS A STRATEGY

u Dumpingü Selling goods in foreign markets at prices

that are either below normal home market prices or below the full costs per unit.

u Dumping is NOT a fair-trade practiceü Governments can be expected to n coretaliate against such

practices by foreigmpetitors. ü The World Trade Organization (WTO) actively polices dumping to

discourage such practices.Focus - European antitrust case: https://www.theguardian.com/technology/2012/jun/27/microsoft-loses-eu-antitrust-fine-appeal

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STRATEGY OPTIONS FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIESuPrepare to compete on the basis of low price.uPrepare to modify the firm’s business model or strategy

to accommodate local circumstances.u Try to change the local market to better match the

way the firm does business elsewhere.uAvoid developing markets where it is too difficult or

costly to accommodate local circumstances.

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

u Develop a business model that exploits shortcomings in local distribution networks or infrastructure.

u Utilize knowledge of local customer needs and preferences to create customized products or services.

u Take advantage of aspects of the local workforce with which large multinational firms may be unfamiliar.

u Use local acquisition and rapid-growth strategies to defend against expansion-minded internationals.

u Transfer the firm’s expertise to cross-border markets.

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Strategies for competing in international markets · 2020. 5. 7. · COMPETING IN INTERNATIONAL...

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