UGB202

Introduction to Strategic Management

Lecture 8
Competing in Foreign
Markets

Lecturer : Ms. Lim Ooi Wei (FOBAM)

Date : 21 April 2010

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 Chapter Roadmap
 Why Companies Expand into Foreign Markets
 The Concepts of Multi-country Competition and
Global Competition
 Strategy Options for Entering and Competing in
Foreign Markets
 The Quest for Competitive Advantage in Foreign
Markets
 Profit Sanctuaries, Cross-Market Subsidization, and
Global Strategic Offensives
 Strategies That Fit the Markets of Emerging
Countries
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 The Four Big Strategic Issues
in 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 same

basic competitive strategy in all countries
or modify the strategy country by country

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 The Four Big Strategic Issues
in Competing Multinationally
 Where to locate a company’s production facilities,
distribution centers, and customer service operations
to 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

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 Why Do Companies Expand
into Foreign Markets?

Gain access to Obtain access to

new customers valuable natural
resources
Achieve lower
costs and enhance
competitiveness
Capitalize Spread
business risk across
on core
wider
competencies
market base
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 International vs. Global Competition

Company operates in a
select few foreign
International
countries, with modest
Competitor ambitions to expand
further

Company markets products

in 50 to 100 countries and
Global
is expanding operations
Competitor into additional country
markets annually
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 Two Primary Patterns
of International Competition

Multi-country
Competition

Global
Competition

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 Characteristics of
Multi-Country Competition
 Market contest among rivals in one country not
closely connected to market contests in other
countries
 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
Rival firms battle for national championships –
winning in one country does not necessarily signal the
ability to fare well in other countries!
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 Characteristics of Global Competition

 Competitive conditions across

country markets are strongly linked
 Many of same rivals compete in
many of the same country markets
 A true international market exists

A firm’s competitive position in one country is

affected by its position in other countries
 Competitive advantage is based on a firm’s world-
wide operations and overall global standing
Rival firms in globally competitive
industries vie for worldwide leadership!
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 Strategy Options for
Competing in Foreign Markets

 Exporting

 Licensing

 Franchising strategy

 Multi-country strategy

 Global strategy

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 Export Strategies

 Involveusing domestic plants as a production

base for exporting to foreign markets
 Excellent initial strategy to pursue international
sales
 Advantages
 Conservative way to test international waters
 Minimizes both risk and capital requirements
 Minimizes direct investments in foreign countries
 An export strategy is vulnerable when
 Manufacturing costs in home country are higher
than in foreign countries where rivals have plants
 High shipping costs are involved
 Adverse fluctuations in currency exchange rates
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 Licensing Strategies

 Licensing makes sense when a firm

 Has valuable technical know-how or a patented product
but does not have international capabilities to enter
foreign markets
 Desires to avoid risks of committing resources to
markets which are
 Unfamiliar
 Politically volatile
 Economically unstable
 Disadvantage
 Risk of providing valuable technical know-how to foreign
firms and losing some control over its use
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 Franchising Strategies

 Oftenis better suited to global expansion efforts

of service and retailing enterprises
 Advantages

 Franchisee bears most of costs and

risks of establishing foreign locations
 Franchisor has to expend only the
resources to recruit, train, and support franchisees

 Disadvantage

 Maintaining cross-country quality control

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 Localized Multicountry Strategies
or a Global Strategy?

Strategic Issue

 Whether to vary a company’s competitive

approach to fit specific market conditions and
buyer preferences in each host county
OR
 Whether to employ essentially the same strategy
in all countries

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What Is a “Think-Local, Act-Local”
Approach to Strategy Making?

A company varies its product

offerings and basic competitive
strategy from country to country
in an effort to be responsive to
differing buyer preferences and
market conditions.
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 Characteristics of a “Think-Local,
Act-Local” Approach to Strategy Making
 Business approaches are deliberately crafted to
 Accommodate differing tastes and expectations of
buyers in each country
 Stake out the most attractive market positions vis-à-vis
local competitors
 Local managers are given considerable
strategy-making latitude
 Plants produce different products
for different local markets
 Marketing and distribution are adapted
to fit local customs and cultures
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 When Is a “Think-Local, Act-Local”
Approach to Strategy Making Necessary?

 Significant
country-to-country differences in
customer preferences and buying habits exist

 Host governments enact regulations requiring

products sold locally meet strict manufacturing
specifications or performance standards

 Trade restrictions of host governments are

so diverse and complicated they preclude a
uniform, coordinated worldwide market approach
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 Drawbacks of a “Think-Local,
Act-Local” Approach to Strategy Making

Poses problems of transferring

competencies across borders

Works against building a

unified competitive advantage
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What Is a “Think-Global, Act-Global”
Approach to Strategy Making?

A company employs the same

basic competitive approach in all

countries where it operates.

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 Characteristics of a “Think-Global,
Act-Global” Approach to Strategy Making
 Same products under the same brand names are sold
everywhere
 Same distribution channels are used in all countries
 Competition is based on the same capabilities
and marketing approaches worldwide
 Strategic moves are integrated and coordinated worldwide
 Expansion occurs in most nations where significant buyer
demand exists
 Strategic emphasis is placed on building
a global brand name
 Opportunities to transfer ideas, new
products, and capabilities from one
country to another are aggressively pursued
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Fig. 7.2: How a Localized or Multicountry Strategy Differs from a Global Strategy

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 What Is a “Think-Global, Act-Local”
Approach to Strategy Making?

A company uses the same basic

competitive theme in each country but
allows local managers latitude to . . .
1. Incorporate whatever country-specific
variations in product attributes are needed to
best satisfy local buyers and
2. Make whatever adjustments in production,
distribution, and marketing are needed to
compete under local market conditions
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 The Quest for Competitive
Advantage in Foreign Markets

 Three ways to gain competitive advantage

1. Locating activities among nations in ways that lower

costs or achieve greater product differentiation

2. Efficient/effective transfer of competitively

valuable competencies and capabilities from
company operations in one country to
company operations in another country

3. Coordinating dispersed activities in

ways a domestic-only competitor cannot
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 Locating Activities to Build a
Global Competitive Advantage

 Two issues
 Whether to
 Concentrate each activity in a
few countries or

 Disperse activities to many

different nations

 Where to locate activities

 Which country is best
location for which activity?
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 Concentrating Activities to Build
a Global Competitive Advantage
 Activities should be concentrated when
 Costs of manufacturing or other value chain activities are
meaningfully lower in certain locations than in others
 There are sizable scale economies
in performing the activity
 There is a steep learning curve 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
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 Dispersing Activities to Build a
Global Competitive Advantage

 Activities should be dispersed when

 They need to be performed close to buyers

 Transportation costs, scale diseconomies, or

trade barriers make centralization expensive

 Buffers for fluctuating exchange rates, supply

interruptions, and adverse politics are needed

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 Transferring Valuable Competencies to
Build a Global Competitive Advantage
 Transferring competencies, capabilities, and
resource strengths across borders contributes to
 Development of broader competencies and capabilities
 Achievement of dominating depth in some competitively
valuable area
 Dominating depth in a competitively valuable
capability is a strong basis for sustainable
competitive advantage over
 Other multinational or global competitors and
 Small domestic competitors in host countries
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 Coordinating Cross-Border Activities to
Build a Global Competitive Advantage
 Aligningactivities located in different countries
contributes to competitive advantage in several
ways
 Choose where and how to challenge rivals
 Shift production from one location to
another to take advantage of most favorable
cost or trade conditions or exchange rates
 Use online systems to collect ideas for new
or improved products and to determine which
products should be standardized or customized
 Enhance brand reputation by incorporating
same differentiating attributes in its
products in all markets where it competes
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 What Are Profit Sanctuaries?

 Profit
sanctuaries are country
markets where a firm
 Has a strong, protected market
position and
 Derives substantial profits
 Generally, a firm’s most strategically
crucial profit sanctuary is its home market

Profit sanctuaries are a valuable

competitive asset in global industries!
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Fig. 7.3: Profit Sanctuary Potential of Domestic-Only,
International, and Global Competitors

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 What Is Cross-Market Subsidization?

 Involves supporting competitive offensives in one

market with resources/profits diverted from operations
in other markets
 Competitive power of cross-market subsidization
results from a global firm’s ability to
 Draw upon its resources and profits in other country
markets to mount an attack on single-market or one-
country rivals and
 Try to lure away their customers with
 Lower prices
 Discount promotions
 Heavy advertising
 Other offensive tactics
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 Global Strategic Offensives
Three Options
 Attack a foreign rival’s profit sanctuaries
 Approach places a rival on the defensive, forcing it to
 Spend more on marketing/advertising
 Trim its prices
 Boost product innovation efforts
 Take actions raising its costs and eroding its profits
 Employ cross-market subsidization
 Attractive offensive strategy for companies competing in multiple
country markets with multiple products
 Dump goods at cut-rate prices
 Approach involves a company selling goods in foreign markets at
prices
 Well below prices at which it sells in its home market or
 Well below its full costs per unit
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 Characteristics of Competing
in Emerging Foreign Markets
 Tailoring products for big, emerging markets often
involves
 Making more than minor product changes and
 Becoming more familiar with local cultures

 Companies have to attract buyers with

bargain prices as well as better products
 Specially designed and/or specially
packaged products may be needed to
accommodate local market circumstances
 Management team must usually consist
of a mix of expatriate and local managers
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 Strategic Options: How to Compete
in Emerging Country Markets
 Prepare to compete on the basis of low price
 Be prepared to modify aspects of
the company’s business model to
accommodate local circumstances
 Tryto change the local market to better match the
way the company does business elsewhere
 Stay away from those emerging markets where it is
impractical or uneconomic to modify the company’s
business model to accommodate local
circumstances
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Fig. 8.4: Strategy Options for Local Companies
in Competing Against Global Challengers

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 Strategic Options for Local Companies:
Use Home-Field Advantages
 Concentrate on advantages enjoyed in the home
market
 Cater to customers who prefer a local touch
 Accept loss of customers attracted to global brands
 Astutely exploit its local orientation based on
 Familiarity with local preferences
 Expertise in traditional products
 Long-standing customer relationships
 Caterto the local market in ways that
pose difficulties for global rivals
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 Strategic Options for Local Companies:
Transfer Expertise to Cross-Border Markets
 When a local company trying to defend against a global
challenger has resource strengths and capabilities suitable
for competing in other country markets, then it should
consider
 Launching initiatives to transfer its expertise to
cross-border markets
 Becoming more of an international competitor
 Such a move to enter foreign markets can help
 Build a bigger customer base (to offset
any losses in its home market)
 Grow sales and profits
 Put in a stronger position to contend with
global challengers in its home market
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Strategic Options for Local Companies: Dodging Rivals
by Shifting to a New Business Model or Market Niche

 When industry pressures to globalize are high, viable

strategic options for a local company trying to defend
against global challengers in its home market include

 Shifting the business to a piece of the industry

value chain where the firm’s expertise/resources
provide a defendable position or maybe even
a competitive advantage

 Entering a joint venture with a globally

competitive partner

 Selling out to a global entrant into its

home market
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 Strategic Options for Local Companies:
Contend on a Global Level
 If a local company has resources and capabilities
that it can transfer to operations in other countries,
it can launch a strategy aimed at :-
 Entering markets of other countries as rapidly as
possible
 Shifting to a more globalized strategy
 Building brand recognition and a brand
image that extends to more and more
countries
 Gradually establishing the resources and
capabilities to go head-to-head against
large global rivals
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