Session 6 Notes 1
chapter 7Lecture Notes
Competing in
Foreign Markets
Chapter Summary
Chapter 7 focuses on strategy options for expanding beyond domestic boundaries and competing in the markets of either a few or a great many countries. The spotlight will be on four strategic issues unique to competing multinationally. It will introduce a number of core concepts including multicountry competition, global competition, profit sanctuaries, and cross-market subsidization. Chapter Seven includes sections on cross-country differences in cultural, demographic, and market conditions; strategy options for entering and competing in foreign markets; the growing role of alliances with foreign partners; the importance of locating operations in the most advantageous countries; and the special circumstances of competing in such emerging markets as China, India, and Brazil.
Lecture Outline
I. Introduction
1. Any company that aspires to industry leadership in the 21st century must think in terms of global, not domestic, market leadership.
2. Companies in industries that are already globally competitive or in the process of becoming so are under the gun to come up with a strategy for competing successfully in foreign markets.
II. Why Companies Expand Into Foreign Markets
1. A company may opt to expand outside its domestic market for any of four major reasons:
a. To gain access to new customers – Expanding into foreign markets offers potential for increased revenues, profits, and long-term growth and becomes an especially attractive option when a company’s home markets are mature.
b. To achieve lower costs and enhance the firm’s competitiveness – Many companies are driven to sell in more than one country because domestic sales volume is not large enough to fully capture manufacturing economies of scale or learning curve effects and thereby substantially improve the firm’s cost-competitiveness.
c. To capitalize on its core competencies – A company may be able to leverage its competencies and capabilities into a position of competitive advantage in foreign markets as well as just domestic markets.
d. To spread its business risk across a wider market base – A company spreads business risk by operating in a number of different foreign countries rather than depending entirely on operations in its domestic market.
A. The Difference between Competing Internationally and Competing Globally
1. Typically, a company will start to compete internationally by entering just one or maybe a select few foreign markets.
2. There is a meaningful distinction between the competitive scope of a company that operates in a select few foreign countries (accurately termed an international competitor) and a company that markets its products in 50 to 100 countries and is expanding its operations into additional country markets annually (which qualifies as a global competitor).
III. Cross-Country Differences In Cultural, Demographic, and Market Conditions
1. Regardless of a company’s motivation for expanding outside its domestic markets, the strategies it uses to compete in foreign markets must be situation driven.
2. Cultural, demographic, and market conditions vary significantly among the countries of the world. Cultures and lifestyles are the most obvious areas in which countries differ; market demographics are close behind.
3. Market growth varies from country to country. In emerging markets, market growth potential is far higher than in the more mature economies.
4. One of the biggest concerns of companies competing in foreign markets is whether to customize their offerings in each different country market to match the tastes and preferences of local buyers or whether to offer a mostly standardized product worldwide.
5. Aside from basic cultural and market differences among countries, a company also has to pay special attention to location advantages that stem from country-to-country variations in manufacturing and distribution costs, the risks of fluctuating exchange rates, and the economic and political demands of host governments.
A. The Potential for Locational Advantages
1. Differences in wage rates, worker productivity, inflation rates, energy costs, tax rates, government regulations, and the like create sizable variations in manufacturing costs from country to country.
2. The quality of a country’s business environment also offers locational advantages - the governments of some countries are anxious to attract foreign investments and go all-out to create a business climate that outsiders will view as favorable.
B. The Risks of Adverse Exchange Rate Fluctuations
1. The volatility of exchange rates greatly complicates the issue of geographic cost advantages. Currency exchange rates often fluctuate as much as 20 to 40 percent annually. Changes of this magnitude can either totally wipe out a country’s low- cost advantage or transform a former high-cost location into a competitive-cost location.
CORE CONCEPT: Companies with manufacturing facilities in Brazil are more cost-competitive in exporting goods to world markets when the Brazilian real is weak; their competitiveness erodes when the Brazilian real grows stronger relative to the currencies of the countries where the Brazilian-made goods are being sold.
2. Declines in the value of the U.S. dollar against foreign currencies reduce or eliminate whatever cost advantage foreign manufacturers might have over U.S. manufacturers and can even prompt foreign companies to establish production plants in the United States.
3. Currency exchange rates are rather unpredictable, swinging first one way then another way, so the competitiveness of any company’s facilities in any country is partly dependent on whether exchange rate changes over time have a favorable or unfavorable cost impact.
CORE CONCEPT: Fluctuating exchange rates pose significant risks to a company’s competitiveness in foreign markets. Exporters win when the currency of the country where goods are being manufactured grows weaker and they lose when the currency grows stronger. Domestic companies under pressure from lower-cost imports are benefited when their government’s currency grows weaker in relation to the countries where the imported goods are being made.
4. Companies making goods in one country for export to foreign countries always gain in competitiveness as the currency of that county grows weaker. Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger.
C. Host Government Restrictions and Requirements
1. National governments exact all kinds of measures affecting business conditions and the operations of foreign companies in their markets.
2. Host governments may set local content requirements on goods made inside their borders by foreign-based companies, put restrictions on exports to ensure adequate local supplies, regulate the prices of imported and locally produced goods, and impose tariffs or quotas on the imports of certain goods.
IV. The Concepts of Multicountry Competition and Global Competition
1. There are important differences in the patterns of international competition from industry to industry.
2. At one extreme is multicountry competition in which there is so much cross-country variation in market conditions and in the companies contending for leadership that the market contest among rivals in one country is not closely connected to the market contests in other countries.
3. The standout features of multicountry competition are that:
a. Buyers in different countries are attracted to different product attributes
b. Sellers vary from country to country
c. Industry conditions and competitive forces in each national market differ in important respects
4. With multicountry competition, rival firms battle for national championships and winning in one country does not necessarily signal the ability to fare well in other countries.
5. In multicountry competition, the power of a company’s strategy and resource capabilities in one country may not enhance its competitiveness to the same degree in other countries where it operates.
CORE CONCEPT: Multicountry competition exists when competition in one national market is not closely connected to competition in another national market – there is no global or world market, just a collection of self-contained country markets.
6. At the other extreme is global competition in which prices and competitive conditions across country markets are strongly linked and the term global or world market has true meaning.
7. In a globally competitive industry, much the same group of rival companies competes in many different countries, but especially so in countries where sales volumes are large and where having a competitive presence is strategically important to building a strong global position in the industry.
8. A company’s competitive position in one country both affects and is affected by its position in other countries.
CORE CONCEPT: Global competition exists when competitive conditions across national markets are linked strongly enough to form a true international market and when leading competitors compete head to head in many different countries.
9. Rival firms in globally competitive industries vie for worldwide leadership.
10. An industry can have segments that are globally competitive and segments in which competition is country by country.
11. It is important to recognize that an industry can be in transition from multicountry competition to global competition.
12. In addition to noting the obvious cultural and political differences between countries, a company should shape its strategic approach to competing in foreign markets according to whether its industry is characterized by multicountry competition, global competition, or a transition from one to the other.
V. Strategy Options for Entering and Competing in Foreign Markets
1. There are a host of generic strategic options for a company that decides to expand outside its domestic market and compete internationally or globally:
a. Maintain a national (one-country) production base and export goods to foreign markets – using either company-owned or foreign-controlled forward distribution channels
b. License foreign firms to use the company’s technology or to produce and distribute the company’s products
c. Employ a franchising strategy
d. Follow a multicountry strategy – varying the company’s strategic approach from country to country in accordance with local conditions and differing buyer tastes and preferences
e. Follow a global strategy – using essentially the same competitive strategy approach in all country markets where the company has a presence
f. Use strategic alliances or joint ventures with foreign companies as the primary vehicle for entering foreign markets – and perhaps using them as an ongoing strategic arrangement aimed at maintaining or strengthening its competitiveness
A. Export Strategies
1. Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial strategy for pursuing international sales.
2. With an export strategy, a manufacturer can limit its involvement in foreign markets by contracting with foreign wholesalers experienced in importing to handle the entire distribution and marketing function in their countries or regions of the world.
3. Whether an export strategy can be pursued successfully over the long run hinges on the relative cost-competitiveness of the home-country production base.
4. An export strategy is vulnerable when:
a. Manufacturing costs in the home country are substantially higher than in foreign countries where rivals have plants
b. The costs of shipping the product to distant foreign markets are relatively high
c. Adverse fluctuations occur in currency exchange rates
B. Licensing Strategies
1. Licensing makes sense when a firm with valuable technical know-how or a unique patented product has neither the internal organizational capability nor the resources to enter foreign markets.
2. Licensing also has the advantage of avoiding the risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky.
3. The big disadvantage of licensing is the risk of providing valuable technological know-how to foreign companies and thereby losing some degree of control over its use.
C. Franchising Strategies
1. While licensing works well for manufacturers and owners of proprietary technology, franchising is often better suited to the global expansion efforts of service and retailing enterprises.
2. Franchising has much the same advantages as licensing.
3. The franchisee bears most of the costs and risks of establishing foreign locations while the franchisor has to expend only the resources to recruit, train, support, and monitor franchisees.
4. The big problem a franchisor faces is maintaining quality control.
5. Another problem that may arise is whether to allow foreign franchisees to make modifications in the franchisor’s product offerings so as to better satisfy the tastes and expectations of local buyers.
D. A Multicountry Strategy or a Global Strategy?
1. The need for a multicountry strategy derives from the vast differences in cultural, economic, political, and competitive conditions in different countries.
2. The more diverse national market conditions are, the stronger the case for a multicountry strategy in which the company tailors its strategic approach to fit each host country’s market situation.
CORE CONCEPT: A multicountry strategy is appropriate for industries where multicountry competition dominates and local responsiveness is essential. A global strategy works best in markets that are globally competitive or beginning to globalize.
3. While multicountry strategies are best suited for industries where multicountry competition dominates and a fairly high degree of local responsiveness is competitively imperative, global strategies are best suited for globally competitive industries.
4. A global strategy is one in which the company’s approach is predominantly the same in all countries.
5. A global strategy involves:
a. Integrating and coordinating the company’s strategic moves worldwide
b. Selling in many if not all nations where there is a significant buyer demand
6. Figure 7.1, How a Multicountry Strategy Differs from a Global Strategy, provides a point-by-point comparison of multicountry versus global strategies.
7. The issue of whether to employ essentially the same basic competitive strategy in the markets of all countries or whether to vary the company’s competitive approach to fit specific market conditions and buyer preferences in each host country is perhaps the foremost strategic issues firms face when they compete in foreign markets.
8. The strength of a multicountry strategy is that it matches the company’s competitive approach to host country circumstances and accommodates the differing tastes and expectations of buyers in each country.
9. Illustration Capsule 7.1, Coca-Cola, Microsoft, McDonald’s, and Nestle: Users of Multicountry Strategies, examines these organization’s multicountry strategies.
Illustration Capsule 7.1, Coca-Cola, Microsoft, McDonald’s, and Nestle: Users of Multicountry Strategies
Discussion Question
1. Identify how these companies have adapted their original organizational strategies to better serve their multicountry operational needs. Has this proven to be advantageous for these organizations? Explain why or why not.
Answer: All of these companies have modified their original home country strategies in order to better meet and satisfy the needs of their customers around the world. The applied modifications include such actions as language changes, alteration of menu offerings, utilization of local host-country suppliers, and designing packaging to reflect the various foreign cultures.