Study Notes Chapter 7 PDF

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Notes for Business Policy Course BMGT 355...

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Chapter 7 Strategies for Competing in International Markets 1. Identify the primary reasons companies choose to compete in international markets. I. To gain access to new customers. Potential for increased revenues, profits, and long-term growth. II. To achieve lower costs through economies of scale, experience, and increased purchasing power. Domestic sales volume alone is not large enough to capture fully economies of scale in product development, manufacturing, or marketing, so they sell in more than 1 country. III. To gain access to low-cost inputs of production. Raw material supplies are located in different parts of the world and can be accessed more cost-effectively at the source. IV. To further exploit its core competencies. A company may be able to extend a marketleading position nationally to a position of regional or global market leadership by leveraging its core competencies further. V. To gain access to resources and capabilities located in foreign markets. Acquire resources and capabilities that may be unavailable in a company’s home market. Note: companies that are the suppliers of other companies often expand internationally when their major customers do so, to meet their customers’ needs abroad and retain their position as a key supply chain partner. 2. Home-Country Industry Advantages and the Diamond Model.

The advantages of competing locally are immense and they are divided into 4 categories: Demand Conditions – the company already know the market size, customers taste, what is the growth potential. Firm Strategy, structure and rivalry – Firm is aware of the local rivalry and what management and organization style best suits the market. Factor Conditions – availability, quality, and price of input (labour, materials, space) Related and Supporting Industries – Good knowledge of their supplier.

The diamond Framework can be used to - Predict from which countries foreign entrants are most likely to come this can help managers prepare to cope with new foreign competitors. - Decide which foreign markets to enter first: can reveal the countries in which foreign rivals are likely to be weakest. - Choose the best country location for different value chain activities: because it focuses on the attributes of a country’s business environment that allow firms to flourish, it reveals the advantages of conducting business in a specific country. 3. Defending against global giants: Strategies for local companies in developing countries ● 1. Develop business models that exploits shortcomings in local distribution networks or infrastructure u A business model that overcomes shortcomings (failures) in a different distribution network. Example: POS system that tolerates India’s frequent power-outages and continues to work when power is down. ● 2. Utilize knowledge of local customer needs and preferences to create a customized products or services u Example: small Middle Eastern phones compete against Apple and Samsung. The small company is successful because they offer values associated with their target market. ● 3. Take advantage of aspects of the local workforce with which large international companies may be unfamiliar ● Focused Media is China’s largest advertising firm and relies on low-cost labour to update billboards. While large international competitors use expensive networked screens that can be changed remotely. u Focus Media is taking advantage of the local workforce. ● 4. Use acquisitions and rapid-growth strategies to better defend against expansion minded internationals ● As a (small) domestic corporation, acquire (as many as possible) companies for rapid-growth strategies against larger rivals. ● 5. Transfer company expertise to cross-border markets and initiate actions to contend on an international level ● Taking your company’s expertise into a new market (country) and testing your international capabilities; to determine what works and what doesn’t work. Example: Company A starts in the US and expands into Canada. They transfer their most successful product/service from the US and implements best practices into Canada to evaluate how well they can export their product/service.

4. Five primary modes of entry into foreign markets 1. Export Strategy - Maintain a home-country production base and export goods to foreign markets. Use domestic plants as a production base. It is a conservative way to test the international waters. The amount of capital needed to begin exporting is often minimal. export strategy is vulnerable when (1) manufacturing costs in the home country are substantially higher than in foreign countries where rivals have plants, (2) the costs of shipping the product to distant foreign markets are relatively high, (3) adverse shifts occur in currency exchange rates, and (4) importing countries impose tariffs or erect other trade barriers. Ex. Food and Beverages companies 2. Licensing Strategy - License foreign firms to produce and distribute the company’s products abroad. 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. Ex. Best Buy (licensed by Apple, Samsung to sell their products) 3. Franchising Strategy - Employ a franchising strategy in foreign markets. The big problem a franchisor faces is maintaining quality control; foreign franchisees do not always exhibit strong commitment to consistency and standardization, especially when the local culture does not stress the same kinds of quality concerns. Ex. McDonald 4. Foreign Subsidiary Strategy - Establish a subsidiary in a foreign market via acquisition or internal development. Prefer to have direct control over all aspects of operating in a foreign market. A subsidiary business that is established internally from scratch is called an internal startup or a greenfield venture. Acquiring a local business is the quicker of the two options; it may be the least risky and most cost-efficient means of hurdling such entry barriers as gaining access to local distribution channels, building supplier relationships, and establishing working relationships with government officials and other key constituencies. Ex. Toyota Four more conditions combine to make a greenfield venture strategy appealing: • When creating an internal startup is cheaper than making an acquisition. • When adding new production capacity will not adversely impact the supply– demand balance in the local market. • When a startup subsidiary has the ability to gain good distribution access (perhaps because of the company’s recognized brand name). • When a startup subsidiary will have the size, cost structure, and capabilities to compete head-to-head against local rivals. 5. Alliance and Joint Venture Strategy - Rely on strategic alliances or joint ventures with foreign companies. Collaborative strategies involving Cross-border alliances or Joint ventures with foreign partners is a popular way for companies to edge their way into

foreign markets. They enable a growth-minded company to widen its geographic coverage and strengthen its competitiveness internationally. 5. Risks of International Expansion - The impact of government policies and economic conditions a. Political risks i. stem from instability or weaknesses in national governments and hostility to foreign business b. Economic risks i. stem from the stability of a country’s monetary system (exchange rate), economic and regulatory policies, the lack of property rights protections. c. Differences in demographic, culture, and market condition risks i. stem from the stability of a country’s monetary system, economic and regulatory policies, the lack of property rights protections. 6. Three main strategic approaches for competing internationally. Multidomestic strategy –a company varies its product offering and competitive approach from country to country in an effort to meet differing buyer needs and to address divergent local-market conditions. The decision making is decentralized to the local level giving local managers decision-making authority to address specific market needs and respond to local changes in demand. Example: BP utilizes localized strategies in its gasoline and service station business segment Global - it takes a standardized, globally integrated approach to producing, packaging, selling, and delivering the company’s products and services worldwide. Companies employing a global strategy sell the same products under the same brand names everywhere, utilize much the same distribution channels in all countries, and compete on the basis of the same capabilities and marketing approaches worldwide. A think-global, act-global approach prompts company managers to integrate and coordinate the company’s strategic moves worldwide and to expand into most. It puts considerable strategic emphasis on building a global brand name and aggressively pursuing opportunities to transfer ideas, new products, and capabilities from one country to another. Global strategies are characterized by relatively centralized value chain activities, such as production and distribution. Example: Consumer electronics like Apple, Nokia, Motorola… A transnational strategy (sometimes called glocalization) incorporates elements of both a globalized and a localized approach to strategy making. This type of middle-ground strategy is called for when there are relatively high needs for local responsiveness as well as appreciable

benefits to be realized from standardization. Often, companies implement a transnational strategy with mass-customization techniques that enable them to address local preferences in an efficient, semi-standardized manner. Example: McDonald’s, KFC, and Starbucks have discovered ways to customize their menu offerings in various countries without compromising costs, product quality, and operating effectiveness.

7. 3 ways to gain competitive advantage - Use of international operations to improve overall competitiveness. There are three important ways in which a firm can gain competitive advantage (or offset domestic disadvantages) by expanding outside its domestic market: - Use location to lower costs or achieve greater product differentiation - Companies that compete internationally can pursue competitive advantage in world markets by locating their value chain activities in whatever nations prove most advantageous. (Most cars are manufactured in Mexico; however, their corporate offices are in the US and Canada to take advantage of lower wages) - Transfer competitively valuable resources and capabilities from one country to another or share them across international borders to extend its competitive advantages.

- Benefit from cross-border coordination opportunities that are not open to domestic-only competitors. (Example: Transferring production from a plant in one country to another to save money in foreign exchange rates/energy costs/wages/taxation/logistics) There are two types of strategic moves that are particularly suited for companies competing internationally: o Offensive more that an international competitor is uniquely positioned to make, due to the fact that it may have a strong or protected market position in more than one country. The international company has the flexibility of lowballing its prices or launching high-cost marketing campaigns in the domestic company’s home market and grabbing market share at the domestic company’s expense. Razor thin margins or even losses in these markets can be subsidized with the healthy profits earned in its markets abroad—a practice called cross-market subsidization. o Defensive action involving multiple markets. Cross-border tactics involving multiple country markets can also be used as a means of defending against the strategic moves of rivals with multiple profitable markets of their own. If a company finds itself under competitive attack by an international rival in one country market, one way to respond is to conduct a counterattack against the rival in one of its key markets in a different country—preferably where the rival is least protected and has the most to lose. This is a possible option when rivals compete against one another in much the same markets around the world and engage in multimarket competition.

8. Characteristics of competing in developing-country markets. • Prepare to compete on the basis of low price. • Modify aspects of the company’s business model to accommodate the unique local circumstances of developing countries. • Try to change the local market to better match the way the company does business elsewhere. • Stay away from developing markets where it is impractical or uneconomical to modify the company’s business model to accommodate local circumstances....