Strategies for Competingin International Markets

Chapter Learning ObjectivesLOl. Develop an understanding of the primary reasons companies choose

to compete in international markets.

LOz. Learn how and why differing market conditions across coun-tries influence a company's strategy choices in international markets.

LO3- Gain familiarity with the strategic options for entering and competingin foreign markets.

LO4. Understand how multinational companies go about building competi-tive advantage in foreign markets.

LO5. Gain an understanding of the unique characteristics of competing inemerging markets.

Chapter 7 Strategies for Competng n InternationaL Markets

Any company that aspires b industry leadership in the 21st century mustthink in terms of global, not domestic, market leadership. The world economyis globalizing at an accelerating pace as countries previouslv closed to for-eign companies open up their rnarkets, as countries with previously plannedeconomies embrace market or mixed economies, as information technologyshrinks the importance of geographic distance, and as ambitious, growth-minded companies race to build stronger competitive positions in the marketsof more and more countries.

This chapter focuses on strategy options for expanding beyond domesticboundaries and competing in the markets of either a few or a Sreat many coun-ties. In the process of exploring oPtions for competing internationally, we wiilintroduce such concepts as multicountry competition, global competition, profitsanctuaries, and cross-country differences in cultural, demographic, and mar-ket conditions. The chapter also includes sections on strategy oPtions for enter-ing and competing in foreign markets; the importance of locating operations inthe most advantageous coultries; and the special circumstances of competingin such emerging markets as China, India, Brazil, Russia, and Eastem Europe.

Why Companies Expand intolnternational MarketsA company may opt to expand outside its domestic market for any of fourmaior reasons:

1. To gain access to nezu customers-Expanding into foreign markets offerspotential for increased revenues, profits,, and long-term growth andbecomes an especially attractive option when a comPany's home marketsare mature.To nchicae lozoer costs and enhance the Jirm's competitiueness-Many comPa-nies are driven to seli ir more than one country because domestic salesvolume alone is not large enough to fully capture manufacturing econo-mies of scale or learning-curve effects. The relatively small size of countrymarkets in Europe explains why companies like Michelin, BMW, andNestl long ago began selling their products al1 across Europe and thenmoved into markets in North America and Latin Amertca.To capitnlize on its core competercie.s-A company may be able to leverageits competencies and capabiliiies into a position of competitive advantagein foreign markets as well as domestic makets. Walmart is capitalizing onits considerable expertise in discount retailing to expand into the UnitedKindgom, Japan, China, and Latin America. Walmart executives are Par-ticularly excited about the comPany's growth opportunities in China.To spread its business risk ncross a zuider market base-A company sprcadsbusiness risk by operating in a number of different foreign countriesrather than depending entirely on operations in its domestic market.Thus, if the economies of North American countries turn down for aperiod of time, a company with operations across much of the world maybe sustained by buoyant sales in Latin America, Asia, or Europe.

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Part One: Section C: Crafting a Strategy

In a few cascs, companies in industries based on natural resources (e.g., oiland gas, minerals, rubbcr, and lumber) often find it necessary to operate inthe international arena becausc attractive raw material supDlies are located inforeign countries.

Factors That Shape Strategy Choicesin lnternational MarketsThere arc four important factors that shape a companv's strategic approachto competing in foreign markets: (1) the degree to which there are importantcross-country differences in cultural, demographic, and market conditions,(2) whether opportunities exist to gain a location-based competitive advan-tage, (3) the risks of adversc shifts in currency exchange rates, and (4) theextent to which governrnental policics affect the business euvironment.

Cross-Country Differences n Cultural,Demographic, and Market ConditionsRegardless of a company's motivation for expanding outside its domestic mar-kcts, the strategies it uses to compete in foreign markets must be situation-driven. Cultural, demographic, and market conditions vary significantly amongthe countries of the world.r Cultures and lifestyles are the most obvious areas inu'hich countries differ; mnrket demographics and inconte leaels are close behind.For many product categories, consumcrs in Spain do not have the same tastes,preferences, and buving habits as consumers in Norway; buyers differ yet againin Greece. Chile, New Zealand, and Taiwan. Less than 20 percent of the popr,rla-tions of Brazil, India, and China have annual purchasing pora,'er equivalent to$25,000. Middle-class collsumers represent a much smaller portion of thc popu-lation in these and other cmerging countries than in North America, Japan, andmuch of Westem Europe-{hina's middle class numbers aboui 125 million outof a population of 1.3 billion.': Sometimes, product designs suitable in one coun-try are inappropriate in another-for example, in the United States electricaldeviccs run on 110-r'olt electrical systems, but ir some Europcan countries thestandard is a 220-240 volt electric system, necessitating the uie of different elec-tricai designs and components. In parts of Asia refrigerators are a status symboland may be placed in the living room, leading to preferences for stylish designsand colors-in lndia bright blue and red are popular colors. In other Asiancountries household space is constraincd and many refrigerators are only fourfeet high so that the top can be used for storagc.

Similarlv market growth varies from country to country. In emergingmarkets like India, China, Brazil, and Malaysia, markct grort'th potential is

'For an inslghtful discussion of how much significance these kinds of demographic and marketdifferences have, see C. K. Prahalad and Kenneth LieberthaL, "The End of Corporate lmperialism,"Horvord Busness Review 76, no. 4 0uly August 1998), pp. 68 lg; and Marcus Alexander andHarry Korine, "When You Shouldn't Go Global," Horvard Business Review 86, no. rz (December2oo9), pp. 70-77.'Joseph Caron, "The Business of Doing Business with Chna: An Ambassador Reftects," /yeyBusiness lournol 69, no. 5 (May-June zoo5), p. z.

Chapter 7 Strategies for Competing in lnternational Markets

far higher than i the more mature economies of Britain, Denmark, Canada,and Japan. In automobiles, for examplc, the potential for market growth isexpiosive in China, where 2008 salcs of neu' vehicles amounted to iust over9.3 million in a country with 1.3 billion people. Market growth can be limitedby the lack of infrastructure or established distribution and retail networksin emerging markets. In India, there are well-developed national channelsfor distribution of goods to ihe nation's 3 million retailers, whereas in Chinadistribution is primarily local. Also, the competitive rivalrv in some countrymarketplaces is only moderate, while others are characterized by strong orfierce competition.

One of the biggest concerns of complnies competing in foreign markets is ruhctherlo customize their offerings in ench different coLory market to match the tastcs andpreercnces of local buyers or whether to ffir a mostly stnndardized product world-wide. ldhlle making products closely matched to krcal tastes makes themmore appealing to local buyers., customizing a cttmpany's products countryby country may have the effcct of raising production and distribution costsdue to the greater varieq/ of designs and components, shorter production runs,and the complications of added inventory handling and distribution logistics.The tension betzueen the mnrket pressures to localize a compnny's product offerngscountn-by-country nnd the competitiae pressures to louter costs is one of the bigstrategic issues that participants in foreign markets haae to resoloe.

Aside from the basic cultural and market differences among countries, acompany also has to pay special attention to location advantages that stemfrom country-to-country variations in manufacturing and distribution costs,the risks of aclverse shifts in exchange rates, and the economic and politicaldemands of host govemments.

Gaining a Location-Based Competitive AdvantageDifferences in wage rates, worker productivity, inflation rates, energy costs,tax rates, government regulations, and thc like create sizable country-to-country variations in manufactuting costs. Plants in some cotmtries havemajor manufacturing cost advantages because of lower input costs (espe-cially labor), relaxed government regulations, the proximity of suppliers,or unique natural resources. ln such cases, the low-cost countries becomeprincipal production sites, with most of the output exported to markets inother parts of the world.. Companies that build production facilities in low-cost countries (or that source their products from contract manufacturersin these countries) have a competitive advantage over rivals u'ith piants incountrics where costs are higher. The competitive role of low manufactur-ing costs is most evident in low-w'age countries like China, India, Pakistan,Mexico, Brazil, and several counties in Africa that have become productionhavens for manufactured goods with high labor content (especially textilesand apparel). Hourly compensation costs for production workers in Chinaaveraged about $0.80 an hour n 2007 vcrsus about $3'00 in Mexico, $6 00 inBrazil, $8.00 in Hungary, $19.00 in New Zealand, $24.50 in the U.S., $29.00 inCanada, $38.00 in Germany, and $48.50 in Norn'ay.3 China is fast becomingr "lnternational Comparisons of Hourly Compensation Costs for in Manufacturing,

"oo7," U S.

Deportment of Lobor Bureau of Lobor St?tistics Newsletter, March 26, 2oo9.

Part One: Secton C: Craftng a Strategy

the manufacturing capital of the world-virtually all of the world's majormanufacturinfi companies now have facilities in China. Likewise, concernsabor.rt short delivery times and lon, shipping costs make some countriesbetter locations than others for establishing distribution centers.

The quality of a country's business environment also offers locationaladvantages-the governments of some countries are anxious to attract foreigninvestments and go all-out to create a business climate that outsiders will viewas favorable. A good cxample is lreland, whch has one of the world's mostpro-business environments. Ireland offers companies very low corporate taxrates, has a govemment that is responsive to the nccds of industry, and aggres-sively recruits high-tech manufacturin; facilities and multinational companies.Ireland's policies were a major facto in Boston Scientific's decision to locatethree medical device research and production facilities in Ireland that employo'u'er 4,000 peoplc. Another locational advantage is the clustering of suppliersof components and capital equipment, infrastructure suppliers (universities,vocational training providers, rcsearch enterprises), and makers of comple-mentary products in close proximity to a company's ma.jor operaiions-suchgeographic clustering not only facilitates close collaboration but in many casesalso produces significant cost savings.

The Risks of Adverse Exchange Rate ShiftsThe volatility of exchange rates greatly complicates the issue of geographiccost advantages. Currency cxchange rates often move up or down 20 to40 percent annually. Changes of this magnitudc can either totally wipe out acountry's low-cost advantage or transform a former high-cost location intoa competitive-cost location. The growing strength of the euro relative to theU.S. dollar has encouraged a number of European manufacturers such asVolkswagcn, Fiat, and Airbus to shift prodr-rction from European factories tonew facilities in thc United States. Also, the weakening dollar caused Chryslerto discontinue its contract manufacturing agreement with an Austrian firm forassembly of minivans and Jeeps sold in Europe. Beginning in 2008, Chrysler'svehicles sold in Europe were exported from its factories in Illinois and Mis-souri. The u'eak dollar n'as also a factor in Ford's and GM's recent decisionsto begin exporting U.S.-made vehrcles to China and Latin America. The lessonoJ lluctuating cxclnnge rates is that cotnpnnies that export goods to foreign coun-tries olzuaqs gnin in competitioeness when the currency of tlrc country in which theglods re mnnufnctured is zucak. Exporters are disadunntaged when the currencr of thecountry Tuhere goods are being manut'nctttred grows stronger.

The lmpact of Host Government Policieson the Local Business ClmateNational governments enact ail kinds of measLlres affecting business condi-tions and the operations of foreign companies in their markets. Examples ofhost government policies affecting foreign-based companies include:. Local content requirements on goods made inside their bordcrs by

forcign-based companies.. Policies that protect local companies from foreign competition.

Chapter 7 Strategies for Competing in International Markets

. Ilestrictions on exports because of national security concerns.

. Price regulation of imported and locally produced goods.

. Deliberately burdensome procedures and requirements for importedgoods to pass customs inspection.

. Tariffs or quotas on the import of certain goods.

. Subsidies and low-interest loans for domestic companies competingagarnst foreign rivals.

Until 2001, when it joined the World Trade Organization, China imposecla 100 percent tariff on motor vehicle imports. The European Union imposesquotas on textile and apparel imports from China as a measure to ProtectEuropean producers in southern Europe. India has a long history of utilizingexcise taxes of as much as 50 percent on newly purchased products to protectits domestic producers. However, such duties were lovvered to 8 to 14 Petcentin 2008 to hetp boost consumer demand to further accelerate India's overalleconomic growth rate.

Other governments, anxious to obtain new plants and jobs, offer foreigncompanies a helping hand in the form of subsidies, privileged market access,and technical assistance. A1l of these possibilities explain rt'hy the managcrsof companies opting to compete in foreign markets have to take a close krokat a country's politics and its policies toward business in general, and towardforeign companies in particular, when deciding which countrv markets toparticipate in and which oncs to avoid.

Strategy Options for Entering andCompeting in Foreign MarketsThere are several general strategic options for a company that decides toexpand outside its domestic market and compete internationally or globally:1 . Mnintain a national (one-country) production base and expor t goods to foreign

markets, using either company owned or foreign-controlled forwarddistribution channels.

2. License foreign firms to use the company's teclmology or to produce and disril:tttethe companr's products.

3. Employ a franchising strntegy.4. Follout a multicountry strntery, varying the company's strategic approach

(perhaps a little, perhaps a lot) from country to country in accordancewith local conditions and differing buyer tastes and preferences.

5. Folloto a global strntegy, using essentially the same competitive strategyapproach in all countrv markets wherc the company has a presence.

6. L)se strategic allionces or joint aentttres zoith foreign componies ns the primaryuehicle for entering foreign markets and perhaps also use thcm as anongoing strategic arrangement aimed at maintaining or strengthening thecompany's competiti'"'eness.

The following scctions discuss the six general options in more detail.

Part One: Section C: Crafting a Strategy

Export StrategiesUsing domestic plants as a production base for exporting goods to foreignmarkets is an excellent initial strategy for pursuing international sales. It isa conservative way to test the ilternational waters. The amount of capitalneeded to begin exporting is often quite minimal and existing procluitioncapacity rnay well be sufficient to make goods for export, With an exportstrategv a manufacturer can limit its involvcment in foreign markets by con-tracting with foreign wholesalers experienced in importing to handle theentire distribution and marketing function in their countries or regions of thcworld. If it is more advantageous to maintain control over these functions,howcvcr, a manufacturer can establish its own distribution and sales organi-zations in some or all of the target foreign markets. Either way, a home-basedproduction and export strategy helps the firm minimize its direct investmentsin foreign countries.

An export strategy is vulrerable when (1) manufacturing costs in the homecountry ae substantially higher than ir foreign countrics where rivals haveplants, (2) the costs of shipping the product to distant foreign markets arerelatively high, or (3) adverse shifts occur in currency exchange rates. Unlessan exporter can both keep its production and shipping costs competitivewith rivals and successfully hedge against unfavorable changes in currencyexchange rates, its success will bc limited.

Licensing StrategiesLicensing makes sense u'hen a firm with valuable techical know-how or aunique patcntcd product has neither the internal organizational capabilitynor the resources to enter foreign markets. Licensing also has the advantageof avoiding the risks of committing resoutces to country markets that areunfamilia, politicalll. volatile, economically unstable, or otherwise risky. Bylicensing the technology or the production riJhts to foreign-based firms, thefirm does not have to bear the costs and risks of entering foreign marketson its own, yct it is able to generate income from royalties. The big disad-vantage of licensing is thc risk of providing valuable technological know-how to foreign companies and thereby losing some degree of control overits use. Also, monitoring licensees and safeguarding the company's propri-etarv know-how can prove quite difficult in some circumstances. But if theroyalty potential is consideable and the companies to whom the licensesare being granted are both trustr,r'orthy and reputable, then licensing can bea very attractive option. Many software and pharmaceutical companies uselicensing strategics.

Franchising StrategiesWhile licensing works well for manufacturers and owners of prcprietarytechnology, franchising s often better suited to the global expansion effortsof service and retailing enterpriscs- McDonald's, Yum! Brands (the parentof A&W, Pizza Hut, KFC, Long John Silver's, and Taco Bell), the UPS Store,7-Eleven, and Hilton Hotels have all used franchising to build a presence in

Chapter ? Strategies for Competing in InternationaI Markets

international markets. Franchising has much the same advantages as licensing.The franchisee bears most of the costs and risks of establishing foreign loca-tions, so a franchisor has to expend only the resources to recruit, train, support,and monitor franchisees. The big problem a franchisor faces is maintainingquality control. ln many cases, foreign franchisees do not always exhibit strongcommitment to consistency and standardization---especially when the localculture does not stess the same kinds of quality concerns. Another problemthat can arise is n'hether to allow foreign franchisees to make modifications tothe franchisor's product offering to better satisfy the tastes and expectations oflocal buyers. Should McDonald's allow its franchiscd units in Japan to modifyBig Macs slightly to suit Japanese tastes? Should the franchised KFC units inChina be permitted to substitute spices that appeal to Chinese consumers? Orshould the same menu offerings be rigorously and unvaryingly required of allfranchisees worldwide?

Establishing International Operations: Choosing betweenLocalized Multicountry Strategies and a Global StrategyWhile exporting, licensing, and franchising rely upon the competencies andcapabilities of allies in international markets to deliver goods or services tobuyers, companies pursuing international expansion may elect to take respon-sibility for the performance of all essential value chain activities in foreignmarkets. Once a company chooses to establish operations in international mar-kets, deciding upon the degree to vary its competitive approach to fit spccificmarket conditions and buyer preferences in each host country is perhaps theforemost strategic issue that it must address. Figure 7.1 shows a comPany'soptions for resolving this issue.

TIIINK LOCAL, ACT LOCAL APPROACHES TO STRATEGYNIAKING A think local, act local approach to strategy making s essentialwhen there are significant country-to-country differences in customer prefer-ences and buying habits, when there are significant cross-country differencesin distribution charurels and marketing methods, when host Sovcrnmentsenact regulations requiring that products sold locally meet strict manufactur-ing specifications or performance standards, and rt'hen the trade estrictionsof host governments are so diverse and complicated that they preclude auniform, coordinated worldwide market approach. With localized strategies,a company often has different product versions for different countries andsometimes sells the products under different brand names. Covernmcntrequirements for gasoline additives that help reduce carbon monoxide, smog,and other emissions are almost never the same from country to country. BPutilizes localized strategies in its gasoline and service station business segmentbecause of these cross-country formulation differences and because of cus-tomer familiarity with local brand names. For example, the company marketsgasoline in the United States under its BP and Arco brands, but markets gaso-line in Germany, Belgium, Poland, Hungary, and the Czech Rcpublic underthe Aral brand. In the food products industry, it is common for companies tovary the ingredients n their products and sell the localized versions under

Part One: Sectior C: C'aftirg a StraLegy

F I G L' lt l'- ? . I A Compant's Strategic Options for Deating with Cross-Country Variations in Buyer Prhrenres and Market condionsStrategic Posturng

OptionsWays to Dea[ Wth Cross-Country Variatons n Buyer

Preferences and Market Conditions

Localized or multicountry strategies arenecessary when there are srgnlfcant crosscountry differences in customer preferences,buyer purchasing habits, distribution channels,or marketing methods. Think local, act localskategy-making approaches are lso essenttalwhen host government regulations or tradepolicies preclude a uniform, coordnatedworldwide market aDoroach.

Emptoy same strategy worldwide. Pursue the some bask compettve strotegy theme (low-cost

dfferentiation, best-cost, ot focused) in all countryma rkets

-

a globat strategy.. Offer the same products wortdwde, with only very minor

devations from one country to another when local marketcondtions so dictate.

. Utitize the same capabitltes, distributon channels, andmarketing approaches worldwide.

. Coordnate strategc actons ftom central headquarters.

Iocal brand namcs in orrler to cater to cciu r-r try-sreciftc tastes and eatitlgl-rcferences. The strcngth of t mrloying se t oi localized or multicountry

strategies is that tl-rc cc)mpnv's actions and btrsinessapproaches arc dclibcratr'l'u' craftc.d to a-rpcal to thctastes rncl exf-rcctatill-s qf bttr''ers iu each countryanr-1 to stake or.Lt thc rnost ttr.rctive urrrket positionsvis--r'is local competitors.r

I lor'r.ever, think local, act local strategies have t'rvobi g d ran backs: ( 1 ) They hinr'ler transfer of a comp.rny'sctrmpetencies and rcsotrrcc.s cross c()rlntry bourrrl,rries bec.ruse the strategies in clifft.rcnt host cr)untrir-scan be gronnded in r.arvin1 competcncics arrtl capa

brlilics; and (2) they rlo not pr'ontote builcling a siugle, unified competitivearh'antage especiallv onc basec'l orr lorv cost. Companies enrploving llighlvlocrlizc.rl or nrulticountlv str'.rtegies face big hurdles ir-r achicving lor.r,-cost

For more details on the mcfits ot and opportunities for cross border transfer of successfLrl sfrt'egy experlments, see C, A. Bartlctt and S. Ghoshal, Manogitig Across Borders: fhe TransnotionalSaiulon, 2nd ed. (Boston: Hnard BLrsiness 5chool Press, 1998), pp. /9-Bo and Chapter 9

Employ localzed strategles-one for each country merket. Tallor the corpany's compedtivc approech nd prodct

offering to fit speific madct condlons and buyerprehlences in each host county.

. lrelegEte stretegy makng to local mnagers wlth rtftandknowldge of local condions.

Employ a comblnation globat-tocal strategy. Employ essentally the sane bosic competitlye stoEgy theme

0ow-cost, differentiation, best-rost, or focsed) ln oll eountrymakeb.

. Develop the capablity to customize product offerings andsell dfferent Droduct vrsions iri dfferent countries(perhaps even under different brand names).

. Give [oca[ managrs the tatitude to adapt the globalapproach as needed to accommodate local buyer preferencesand be responsiye to [oca[ market and compettiyeconditons.

Chapter ? Strategies for Competing in International Markets

leadership unless they find ways to customize their products and sflll be ina position to capture scale economies and learning-curve effects. Toyota'sunique mass customization production capability has been key to its abilityto effectively adapt product offerings to local buyer tastes, while maintaininglon -cost leadership.

THINK GLOBAL, ACT GLOBAL APPROACIIIS TO STRATECYN,IAI(ING While multicountry or localized strategies arc bcst suited forirdustries where a fairly high degree of local responsiveness is important,global strategies are best suited for globally standardized industries. A globalstrategy is one in which the company's approach is predominantly the samein all countries-it sells the same products under thesame brand names everywhere, utilizes much thesame distribution channcls in all countries, and com-petes on the basis of the same capabilities and market-ing approaches worldvvide. Although the company'sstrategy or product offering may be adapted in very

Global sfetoges are best suited to industriesthat are globally standardized in terms ofcustomer preferences, buyer purchasing habits,disfibution channels, or marketing methods.

Ihnk global, act local strategy-makingapproaches nvolve employing essentially thesame strategic theme (low-cost, diff erentiation,focused, bestcost) in all country markets, whileallowing some country-to{ountry customzatt0nto fit local market conditions.

minor r,r'ays to accommodate specific situatior-rs in a few host countries, thecompany's fundamental competitive approach (lou-cost, differentiation, orfocused) remains very much intact worldwide and local managers stick closeto the global strategy. A think global, act global strategic theme prompts com-pany managers to integrate and coordinate the company's strategic movesworldrt'de and to expand irto most if not all nations where there is signifi-cant buyer demand. It puts considerable strategic emphasis on building aglobal brand name and aggressively pursuin; opportunities to transfer ideas,new products, and capabilities from one country to another.

Ford's global design strategy is a move toward a think global,, act globalstrategy by the company and involves the developmcnt and production ofstandardized models r+'ith country-specific modifications limited primarily towhat is required to meet local country emission and safety standards. The2010 Ford Fiesta and 2011 Ford Focus will be the company's first global designmodels and will be marketed in Europe, North America, Asia, and Australia.Whcncver country-to-country differences are small enough to be accommo-dated within the framework of a global strategy, a global strategy is prefera-ble to localized strate;ies because a company can more readily unify itsoperations and focus on establishing a brand image and tcputation that isturiform from country to country. Moreovct, with a global strategy a comPanyis better able to focus its full resources on securin; a sustainable low-cost ord ifferentiation-based compeiitive advantage over both domestic rivals andglobal rivals.

IHINK GLOBAL, ACT LOCAL APPROACHISfO STRATEGY \{AKING Often, a company canaccommodate cross-country variations in buyer tastes,Iocal customs, and market conditions with a thinkglobal, act local approach b developing strategv. Thismiddle-ground approach entails utilizing the samebasic competitive theme (low-cost, differenhation, or

Part One: Section C: Crafting a Strategy

focused) in each countrv but allows local managers the latitude to (1) incorporatewhatever country-specific variaons in product attributes are needed to best sat-isfy local buyers ancl (2) make whatever adjustments in production, distribution,and marketing are needed to respond to local market conditions and competesuccessfully against local rivals. Slightly different product versions sold underthe same brand name may suffice to satisfy local tastes, and it may be feasible toaccommodate thesc versions rather economically in the course of designing andmanufacturing the company's product offerings. Philip Morris Intemationalmarkets brands such as Marlboro, Chesterfield, Parliament, and Virginia Slimswoldwide. However, the company also makes different versions of Marlborocigarettes available in different parts of the world to better meet the somewhatdifferent preferences and habits of smokers in each market. The company'sMarlboro Mix 9 is a high-nicotine, clove-infused cigarette sold in tndonesiawhere smokers prefer powerful, sweet-smelling cigarettes. Its Marlboro Intensewas formulated for the Turkish market, while its smooth-tasting Marlboro FilterPlus caters to the tastes of smokers in South Korea, Russia, Kazakhstan, and theUkraine.

As a rule, most companies that operate multinationally endeavor to employas global a strategy as customer needs and markei conditions permit. Elec-tronic Arts has two major design studios-one in Vancouver, British Columbia,and one in Los Angeles-and smaller design studios in San Francisco, Orlando,London, and Tokyo. This dispersion of design studios helps EA to designgames that are specific to different cultures-for example, the London studiotook the lead in designing the popular FIFA Soccer game to suit Europeantastes and to replicate the stadiums, signage, and team rosters; the U.S. studiotook the lead in designing games involving NFL football, NBA basketball, andNASCAR racing.

Using International Strategic Alliances and Joint Venturesto Build Competitive Strength in Foreign MarketsStrategic alliances, joint ventures, and other cooperative agreements with for-eign companies are a favorite and potentially fruitful means for entering aforeign market or strengthening a firm's competitiveness in world markets.5Historically, export-minded firms in industrialized nations sought allianceswith firms in less-developed countries to import and market their productslocally-such arrangements were often necessary to win approvai for entryfrom the host country's government. Both Japanese and American companiesare actively forming alliances with European companies to strengthen theirability to compete in the 27-nation European Union (and the three countriesthat are candidates to become EU members) and to capitalize on the open-ing up of Eastern European markets. Many U.S. and European companies areallying with Asian companies in their efforts to enter markets in China, India,s For two especially insightfut studies of company experiences wth cross-border allances, seeloef Bleeke and David Ernst, "The Way to Win in Cross-Border Alliances," Horvord BusnessReview 69, no. 6 (November-December 1991), pp. 127-r35i and Gary Hamel, Yves L. Doz, andC. K. Prahalad, "Coltaborate with Your Competitors-and Win," Horvord Business Review 67, no.7[an ua ry-February 1989), pp. 133-139.

Chapter 7 Strategies for Competing n International Markets

Malaysia, Thailand, and other Asian countries. Many foreign companies, ofcourse, are particularly interested in strategic parfnerships that u'ill strengthentheir ability to Bain a foothold in the U.S. market.

However, cooperative arrangements between domestic and foreign com-panies have strategic appeal for reasons besides gaining better access toattractive country markets.6 A second big appeal of cross-bordcr alliances isto capture economies of scale in production and/or marketing. By joiningforces in producing components, assembling models, and marketing theirproducts, companies can realize cost savings not achievable with their ownsmall volumes. A third motivation for entering into a cross-border alliance isto fill gaps in technical expertise and/or knowleclge of local markets (buyinghabits and product preferences of consumers, locaL customs, and so on). Allieslearn much fom one another in performing joint research, sharing technologi-cal know-how, studying one another's manufacturing methods, and under-standing hon to tailor sales and marketing approaches to fit local culturesand traditions. Indeed, one of the win-win benefits of an alliance is to learnfrom the skills, iechnological know-how and capabilities of alliance partnersand mplant the knowledge and know-how of these partners in personnelthroughout the company.

A fourth motivation for coss-border alliances is to share distribution facili-ties and dealer networks, and to mutually strengthen each parlner's access tobuyers. A fifth benefit is that cross-border allies can direct their compctitiveenergies more toward mufual rivals and less toward one another; teaming upmay help them close the gap on leading companies. A sixth driver of cross-border alliances comes into play when companies r+'anting to enter a new for-eign market conclude that alliances with krcal companies are an effective wayto establish working relationships with key officials in the host-country gov-emment.T And, finally, alliances can be a particularly useful way for companiesacross the world to gain agreement on important techncal standards-theyhave been used to arrive at standards for assorted PC devices, Internet-relatedtechnologies, high-definition televisions, and mobile phones.

What makes cross-border alliances an attractive strategic means of gainingthe aforementioned types of benefits (as compared to acquiring or mergingr+.ith foreign-based companies) is that entering into alliances and strategic part-nerships allon s a company to preserve its independence and avoid using per-haps scarce financial resources to fund acquisitions. Furthermore, an allianccoffers the flexibility to readily disengage once its purpose has been served or ifthe benefits prove elusive, whereas an acquisition is a more permanent sort ofarrangement.s Concepts & Connections 7.1 provides examples of cross-borderstrategic alliances,6 See Yves L. Doz and Gary Hamel, Allonce Advantoge (Boston, MA: Harvard Busness School Press,1998), especially Chapters 2-4; Bleeke and Ernst, "The Way to Win in Cross-Border Allances,"pp. 127-133i Hamel, Doz, and Prahalad, "Collaborate with Your Compettors-and Win,"pp. 134 r35; and Porter, The Competitive Advantage of Nations (New York: Free Press, 1990), p. 66./ H. Kurt Christensen, "Corporate Strategy: Managing a Set of Busnesses," in The Poftable MBAin Strotegy, ed. Liam Fahey and Robert M. Randatl (New York: Wley, 2oo1), p. 43.3 For an excelLent presentation on the pros and cons of alliances versus acquistons, see JeffreyH. Dyer, Prashant Kale, and Harbir Singh, "When to Ally and When to Acquire," Horvord BusinessRevew 82, no. Z/8 (JulV August zoo4), pp. 109-115.

r48 Parl Olre: Se-tion C: C afting a Strategy

EXAMPLES OF CROSS.BORDER STRATEGIC ALTIANCES

1. Verio, a subsidiary ofJapan-based NTT Communica-tions and one of the teading globat providers ofWeb hosting services and lP data transport, hasdeveloped an alliance-oriented busness model thatcombines the company's core competencies withthe skiLts and products of best-of-breed technologypartners. Vero's strategic partners include ArsenlDgitaI SoLutions (a provider of worry-free tapebackup, data restore, and data storage services),Internet Security Systems (a provider of flrewall andntrusion detection systems), and Mercantec (whichdevelops storefront and shopping cart software).Verio management beleves that its portfotio ofstrategic allances allows t to use innovative, best-of-class technotogies in providing its customerswith fast, efficient, accurate data transport and acomplete set of Web hosting services. An indepen-dent panel of rz ludges recently selected Verio asthe wnner of the Best Technology Foresight Awardfor its efforts in pioneering new technologies.

2. A zoo3 strategic alliance between British oitproducer BP and Russia's Alfa, Access, Renova(AAR) oil and gas producer has produced Russa'sthird-targest crude oiI producer. The strategic aLliance provided BP with access to AAR's vast oilreserves and altowed AAR access to BP's assetsin Russia, including BP's retaiL refined gasolinenetwork. The addition of BP's oit field Droductionexpertise increased the field production by25o percent between 2oo3 and zoo7. BP explora-tion and drilling capabilities also contributed tothe development of new greenfield projects thatwere expected to come onlne n 2oo9.

j. Toyota and Frst Automotive Works, China's big-gest automaker, entered into an alliance in zooz

to make Iuxury sedans, sport-utility vehicles, andminivehicles for the Chinese market. The intentwas to make as many as 4oo,ooo vehicLes annu-ally by u oro, an amount equal to the number thatVolkswagen, lhe rorp1y w th Lhe ld gest )hdreof the Chinese market, was making as of zooz.The alLiance envisioned a joint investment oFabout $r.z billion. Af the [me of the announcedalLiance, Toyota was lagging behind Honda, Gen-eraI Motors, and Volkswagen in setting up produc-tion facilities in China. Capturing a bigger shareof the Chinese market was seen as crucial to-oyoLa's s:ccess ir achieving irs strategic oblective of having a 15 percent share of the world'sautomotive market by 2o1o.

4. European Aeronautc Defence and Space Company(EADS) was formed by an alLiance oI aerospacecompanies from Britain, Spain, Germany, andFrance that inctuded British Aerospace, Daimler-Benz Aerospace, and Aerospatiate. The objectiveof the alliance was to create a European aircraftcompany capab[e oI competing with U.S.-basedBoeing Corp. The atIiance has proved highlysuccessful, infusing its commercial airline divi-sion, Airbus, with the know.how and resourcesto compete head-to-head with Boeing for worldLeadership in large commercial aircraft (over roopassengers). The company also establshed analliance with U.S. military aircraft manufacturerNorrhrop Grumman to deve[op a highly soph s-ticated refuelng tanker based upon the A330a irlin e r.

Sources: Company Web s tes and press releases

Alliancc.s and joir-rt ventrrres rvitir foreign partncrs have theirpitfalls, horveve. Cross-bordcr allics typically have to ()\,crcome language anclcttltural barriers and figlue ollt ho\^/ to dcal i,vith diverse (or perh.r-rs confhct-ing) operating practices. The communicatiou, tnlst-bLrilrling, anrl coorriination

Chapter 7 Strategies for Competing in International Markets

costs are high in terms of management time.e lt is not unusual for partnersto discover they have conflicting objectives and strategies, deep differencesof opinion about how to proceed, or important differences in corporate val-ues and ethical standards. Tensions build up, working relationships cool, andthe hoped-for benefits never materialize. The recipe for successful alliancesrequires many meetings of many people working in good faith over a periodof time to iron out what is to be shared, what is to remain proprietary, and howthe cooperative arrangements will work.t0

Even if the alliance becomes a win-win proposition for both parties, thereis the danger of becoming overly dependent on foreign Partners for essentialexpertise and competitive capabilities. If a company is aiming for global marketleadership and needs to develop capabilities of its own, then at some juncturecross-border merger or acquisition may have to be substituted for cross-borderalliances and joint ventures. One of the lessons about cross-border alliancesis that they are more effective in helping a comPany establish a beachhead ofnew opporfunity in world markets than they are in enabling a comPany toachieve and sustain global market leadership.

Using International Operations tolm prove Overalt CompetitivenessThere are three important ways in which a firm can gain competitive advan-tage by expanding outside its domestic market.lr One, it can use location tolower costs or help achieve greater product differentiation. Two, it can usecross-border coordination in ways that a domestic-only competitor cannot.And three, it can use profit sanctuaries to wage a strategic offensive.

Using Location to Build Competitive AdvantageTo use location to build competitive ad.vantage, a comPany must consider twoissues: (1.) whether to concentrate each internal Process in a few countries orto disperse performance of each process to many nations, and (2) in whichcountries to locate particular activities.r2

WIIIN TO CONCENTI{ATE INTERNAL PROCESSES IN A FEWLOCATIONS Companies tend to concentrate their activities in a limitednumber of locations in the following circumstances:. When the costs of manufacturing or other actiuities are significantly lower in

some geographic locations than in others-For example, much of the world'sathletic footwear is manufactured in Asia (China and Korea) becauseof low labor costs; much of the production of circuit boards for PCs is

e For addtional dscussion of company experiences with alliances and partneBhps, see Doz andHamel, Allionce Advantoge, Chaptes z-7; and Rosabeth Moss Kanter, "Collaborative Advantage:The Art of the AlLiance," Haruard Business Revew 72, no. 4 uly-August 1994), pp. 9-ro8."Jeremy Man, "Making Gtobal Allances Work," Forune, December 79, 1990, p.725." Porter, Ihe Competitve Advontoge of Notons, pp. 53-55." lbid., pp. 5 5-58.

Part One: Section C: Crafting a Strategy

located in Taiwan because of both low costs and the hieh-caliber technicalskills of the Taiwanese labor force.

. When there nre significant scale cconomies--Tlte presence of significant econo-mres of scale in components production or final assembly means that acompany can garn malor cost savings from operating a few superefficientplants as opposed to a host of small plants scattered acoss the world.Makers of digital cameras and LCD TVs located in Japan, South Korea, andTaiwan have used their scale economies to estabiish a low-cost advantage.

o When there is n steep lerning curae associnted with pert'orming an actiztity-lnsome industries learning-curve effects in parts manufacture or assemblyare so great that a company establishes one or two large plants from whichit setves the rt'orid market, The key to riding down the learning curve isto concentrate production in a few locations to increase the accumulatedvolume at a plant (and thus the experience of the plant's workforce) asrapidlv as possible.

. When certain locntions lmae superior resources, olloro better coordination ofrelnted actittities, or offer other aalunble adaantnges-A research unit or asophisticatcd production facility may be situated in a particular nation

bccause of its pool of technicallv trained personnel.Companies that compete multinationally can Samsung bccame a leder in mmory chip technologypursue competitive advantage in world markets by establishing a ma.jor R&D facility in Silicon Valleyby locating their value chain activities in and transferring the.know_how it gained back towhichever nations prove most advantageous. headquarters and its plants in Souih Korea.

WIILN TO DISPEItSE INTIRN-:\L I'IiOCUSSES ACROSS \tr\\\'LOC\TIONS There are several instances when dispersing a process ismore aclvantageous than concentrating it in a single location. Buyer-relatedactivities-such as distribution to dealers, sales and advertising, and after-sale service-usually must take place close to buyers. This makes it necessaryto physicallv locate the capability to perform such activities in cvery countrymarket where a global firm has major cllstomers. For example, the four biggestpublic accounting firrns have numerous international offices to service the for-eign operations of their multinational corporate clients. Dispersing activitiesto many Iocations is also competitively important when high transportationcosts, diseconomies of large size, and trade barriers make it too expensive tooperate from a central location. [n addition, it is strategically advantageous todisperse activities to hedge against the risks of fluchrating exchange rates andadverse political developments.

Using Cross-Border Coord inationto Build Competitive AdvantageMultinational and global competitors are able to coordinate activitiesacross different cor-rntries to build competitive advantage.13 If a firm learnshow to assemble its product more efficiently at, say, its Brazilian plant, theaccumulated expertise and knowledge can be shared with assembly plants'r C. K. Prahafad and Yves L Doz, The Multinotionol Mission (New York: Free press, 1987),pp. 58 60.

Chapter 7 Strategies for Competing in lnternational Markets

in other world locations. Also, knowledge gained in marketing a comPany'sproduct ir-r Great Britain, for instance, can teadily be exchanged with companypersonnel in New Zealand or Australia- Other examples of cross-border coor-dination include shifiing production from a plant in one countty to a plantin another to take advantage of cxchange rate fluctuations and to respond tochanging \4age rates, enctgv costs, or changes in tariffs and quotas.

Efficiencies can also be achieved bv shifting workloads from where theyare unusually hcavy to locations nhere Personnel are underutilized. Whirl-pool's efforts to link its product R&D and manufacturing oPerations in NorthAmcrica, Latin America, Europe, and Asia allowed it to accelerate the dis-covery of innovative appliance features, coordinate the introduction of thesefeatures in the appliance products marketed in differcnt countries, and createa cost-efficient worldr,t'ide suPPly chain. Whirlpool's conscious efforts to inte-grate and coordinate its various oPerations around the world have helped itbecome a low-cost producer and also speed product innovations to market,thereby giving Whirlpool an edge over rivals worldwide.

Using Profit Sanctuaries to Wage a Strategic OffensiveProfit sanctuaries are country markets (ot geographic regions) in which acompany derives substantial profits because of its strong or protected marketposition. Nike, which markets its products in 160 countries, has two big profitsanctuaries: the United States (where it earned 35.5 percent of its pretax profitsin 2008), and Europe, the Middle East, and Africa (where it earned 32.2 percentof 2008 pretax profits). Carrefour, the n'orld's second largest rctailer with over15,000 stores in Europe, Asia, and the Americas, also has two principal profitsanctuaries: its biggest is in France (which in 2008 accounted fcr 47.9 Percentof earnings before inteest and taxes) and its second biggest is in Europe out-side of France (which in 2008 accounted for 35.9 percent of earnings beforeinterest and taxes). Japan is thc chief profit sanctuary for most fapanese com-panies because tradc barriers erected by the Japanese go\ernment effectivelyblock forcign companies from competing for a large share of Japanese sales.Protected from the threat of foreign competition in their homc market, Japa-nese companies can safely charge somewhat highcr prices to their Japanesecustomes and thus earn atlractively large profits on sales made in Japan. Inmost cases, a company's biggest and most strategically crucial profit sanctu-ary is its home market, but intemational and global companies mav also enjoyprofit sanctuary status in other nations where they have a strong competitiveposition, big sales volume, and attractive profit margins.

Profit sanctuaries are valuable compehtive assets, providing the financialstrength to support strategic offensives in selected country markets and fuela company's race for global market leadership. The added financial capabil-ity afforded by multiple profit sanctuaries gives a global or multicountry com-petitor the financial slrength to wage a market offensive against a domesticcompetitor. The global company has the flexibility of low-balling its prices orlaunching high-cost marketin1 campaigns in the domestic company's homemarket and grabbing market share at the domestic company's cxpense. Razor-thin margins or even losses in these markets can be subsidized with the healthyprofits eamed in its profit sanctuaries. If the domcstic company retaliates

Part One: Section C: Crafting a Strategy

with matching price cuts or increased markcting expenses, its profits can besqueezed substantially and its competitive strength sapped, even if it is tl-redomestic market leader.

When taken to the extreme, cut-rate pricing attacks by multicountry com-pctitors may draw charges of unfair dumping. A company is said to be dump-ing when it sclls its goods in foreign markets at prices that are (1) well belowthe prices at which it normally sells in its home market or (2) well below itsfull costs per unit. Companies that engage in dumping usually keep theirselling prices high enough to cover variable costs per unit, thereby limitingtheir losses on each unit to some percentage of fixed costs per unit.

Dumping can be a tempting offensive strategy in either of two instances.The first may be justified as a legitimate competitive practice, while the latteris usually viewed to be predatory in nature. A charge of unfair dumping ismore easily dcfended r,r'hen a company with unused production capacity dis-covers that it is cheaper to keep producing (as long as the selling prices coveraverage variable costs per unit) than it is to incur the costs assocrated with idleplant capacity. By keeping its plants operating at or near capacity, not onlymay a dumping company be able to cover variable costs and earn a contribu-tion to fixed costs, but it also may be able to use its below-market prices todraw price-sensitve customers away from foreign rivals. It is wise for compa-nies pursuing such an approach to court these new customers and retain theirbusiness when prices latcr begin a gradual rise back to normal market levels.

A company may use dumping to drive down the price so far in the targetedcoturtry that domesLic firms are quickly put in dire financial shaits or in dangerof being driven out of business. However, using below-market pricing in thisway runs a high risk of host govemment retaliation on bchalf of the adverselyaffected domestic companies. L'rdeed, as the trade among nations has mush-roomed over the past 10 years, most governments have joined the World TiadeOrganization (VVTO), which promotes fair trade practices among nations andactively polices dumping. Most WTO member govemments have enacted mti-dumping laws and readily take action against dumping wherever there is mate-rial injury to domestic competitors. Companies based in France and China wererecently found guilty of dumping laminate flooring at unrcasonably lor",' prices inCanada to the detriment of Canadian producers.ra Most all govemments can beexpccted to retaliate against dumping by imposing special tariffs on goods beingimported from the countries of the guilW companies. Companies deemed guilfyof dumping frequcntly come r-rnder pressure from their government to cease anddesist, especially if the tariffs adversely affect irmocent companies based in thesame counky or if the advent of special tariffs raises the specter of a trade war.

Strategies to Compete in the Marketsof Emerging CountriesCompanies racing for global leadership have to consider competing in emerg-ing markets like China, India, Brazil, Indonesia, Thialand, Poland, Russia, andMexico-countries where the business risks are considerable but where the'a Canadian International Trade Tribunat, findings ssued lune 16, 2oo5, and posted at www.citt,tcce.gc.ca (accessed Septem ber 28,2oo5).

Chapter 7 Strategies for Competing in Internationat Markets

opportunities for growth are huge, especiaily as their economies develop andliving standards climb toward levels in the industrialized world.r5 For exam-ple, irr 2008 China was the world's second largest economy (behind the UnitedStates) based upon purchasing power. Its population of 1.3 billion peopleconsumed nearly 33 percent of the world's annual cotton production, 51 per-cent of the world's pork, 35 percent of all cigarettes, 23 percent of televisions,20 percent of cell phones, and 18 percent of the washing machines producedn'orldwide in 2003. China is also the world's largest consumer of manycommodities-accounting for one-half of the world's demand for cement, athid of all steel produced, 31 percent of worldwide coal production, and over25 percent of the world's alumnum purchases. China's growth in demand forconsumer goods has put it on track to become the second largest market formotor vehicles by 2010 and the world's largest market for luxury goods by2014.16 Concepts & Connections 7.2 describes Yum! Brands' strategy to boostits sales and market share in China.

Tailoring products to fit conditions in an emerging country market like China,however, often involves more than making minor product changes and becom-ing more familiar with local cultures.lT McDonald's has had to offer vegetableburgers in parts of Asia and to rethink its prices, which are often high by localstandards and affordable only by the well-to-do. Kellogg has struggied to intro-duce its cereals successfully because consumers in many less-developed cor-rn-tries do not eat cereal for breakfast----changing habits is difficult and expensive.Single-serving packages of detergents, shampoos, pickles, cough syrup, andcooking oils are very popular in India because they allow buyers to conservecash by purchasing only what they need immediately. Thus, many companiesfind that trying to employ a strategy akin to that used in the markets of devel-oped countries is hazadous.r8 Experimenting with some, perhaps many, localtwists is usually necessary to find a strategy combination that works.

Strategy Options for Emerging-Country MarketsSeveral strategy options for tailoring a company's strategy to fit the some-times unusual or challenging circumstances presented in emerging countrymarkets are the following:. Prepnre to compete on the basis of low price. Consumers in ernerging markets

are often highly focused on price, which can give lor,+-cost local com-petitors the edge unless a company can find ways to attract buyers with

'5This point is discussed at greater length in Prahatad and Lieberthat, "The End of CorporatelmperiaLism," pp. 68-79t aLso, see Davd J. Arnold and lohn A. Quelch, "New Strategies in EmergngMarkets," Sloon Monagement Revew 40, no. r (Fall 1998), pp. 7-2o. For a more extensive discus-sion of strategy in emerging markets, see C. K. Prahalad, The Fortune ot the Bottom of the Pyromd:Erodicoting Povefty through Profrts (Upper Saddle river, Nl: Wharton, zoo5), especially Chapters r-3.'6Brenda Cherry, "What China Eats (and Drinks and . . .)," Fortune, October 4, 2oo4, pp. rl2-r53:''A Ravenous Dragon," The Economst 386, no. 8521 (March i5, zooS), online edition; and "China:Just the Facts," lournol of Commerce, )une 2. 2oo8, p. 24.'7 Prahalad and Lieberthal, "The End of Corporate lmperialism," pp. 72-73.'3 Tarun Khanna, Krishna G. Patepu, and Jayant 5inha, "Strategies That Fit Emerging Markets,"Harvard Busness Review 83, no. (June zoo5), p. 63; and Arindam K. Bhattacharya and David C.Mchael, "How Local Companies Keep Multinatonals at Bay," HaMard Business Review 86, no. 3(March zooS), pp. 94 95.

Part One: Section C: Crafting a Strategy

YUM! BRANDS'STRATEGY FOR BECOMING THE LEADING FOOD SERVICE BRANDIN CHINA

In zoo9, Yuml Brands operated more than l6,ooo restau-rants in more than 11o countries. lts best known brandswere KFC, Taco Betl, Pizza Hut, and Long John Silver's.Its fastest revenue growth in zooS came from its 3,roorestaurants in China, which recorded operating profits of$469 million during the year. KFC was the largest quick-service chain in China with 2,600 units in zoo9, whilePizza Hut was the largest casual dining chain with morethan 5oo units. Yum! planned to open at least 425 newrestaurant locations annualLy n China, including newPzza Hut Home detivery units and East Dawning unts,which had a menu offerng tradtional Chinese food. Allof Yum! Brands' menu items for China were developed inits R&D facitity in Shanghai.

In addition to adapting its nenu to Local tastes andadding new units at a rapid pace, Yum! Brands atsoadapted the restaurant ambiance and dcor to appeal tolocal consumer preferences and behavor. The company

changed its KFC store formats to provide educationaIdisplays that supported parents' priorities for their chiL-dren and to make KFC a fun place for children to vis t.The typical KFC outlet in China averaged two birthdaypa rtes per day.

n 2oo9, Yuml Brands operated 60 KFC, Taco Belt,Pizza Hut, A&W and Long John Silver's restaurants forevery r mill on Americans. The company's j,1oo unitsin China represented only two restaurants per r miltionpeopte in Chna. Yuml Brands management believed thatIts strategy keyed to continued expanson in the nurnberof units in China and add tional menu refinements wouldaLlow its operatng profits from restaurants Located inChina to account For 40 percent of systemwide operatngprofts by 2012.

5ou-ces Yuml B'a-d5 oo7 ro-(; ilforr?tion posted atwww.yutt,cont,

bargain prices as well as better products.r" For cxample, r'r{rcrr Ulrilevtrentered the rnarket for laundry cletergents in lndia, it cleveloped a lolt,-cost cletergent (narned Wheel) that n,as not h,rrsh to the skin, constructe('lne\^ superefficient production facililies, clistribr-rtecl tl-re prc'rclr-rct to locrlmcrclrants by hand carts, and crafted arl economical marketing cam-paigr-r that includcd paintcd signs on brrildings and dcmonstrations nearstores-the new'brand quicklv capttrred $100 million ilr salcs and rvas thcuumber-one detereent brancl in lnclia in 200fJ basecl on clollar sales. Uni-lever later replicated the strategy *,ih 1s1'-rricecl shanrpoos and dcodor-ants in India and irr South America rvith a detergent brtrnd narnecl Ala.

' Bc trcpnl to ntodi.fit nstt,ct-s ol thc contlturLl's brslrrss tttttitl or strat.gV toncconnnodttt lactL ciruuttstttttccs (bttt not so ntuclt tlnt tlrc tonrtunry loscs[lr fiL]r,itn:le ol gloltnl sctlc tntl glolttl ln'trttlutg).1" For instrnce ,'vherr l)ellentered China, it discovered that inclivicluals ancl bnsinesses \,vere notaccrrstomed to placing orders via the Internet (irr \orth America, over50 pcrcc.nt of Dcll's sales in 2002 2008 !4e1e rarle online). Tb.rdapt,Dell modificd its dircct salcs modc'l to rclv morc heavilv on rhone andfax orders alrd r:lecided to be patient in gettirrg Chincsc cllstonrcrs to-rLace Inlemet orclers, Further, becanse numeroLls Chinese t]overnnrent

'r Prahalad and Lieberthal, "The End of Corporate lmperialism," p. 72,'"Khanna, Palepu, and 5inha, "Strategies That Fit Ernerglng Mrkets," pp. tJ t4.

I .j'.,Chaptcr 7 Strategies for Competing n International Markets

departments and state-owned enterprises insisted that hardware vendorsmake their bids through distributors and systems integrators (as oprposedto dealing directly with Dell salespcoplc as did large cnterprises in othercountries), Dell opted to use third parties in marketing its products tothis buyer segment (although it did sell through its own sales force n hereit could). But Dell was careful not to abandon those parts of its businessmodel that ga\-e it a competitive edge over rivals.

. Try to change thc local market to better nntch the war the company does busi-ness elsezuhere.2r A multinational company often has enough markct cloutto drive major changes in the way a local country market operates. WhenJapan's Suzuki enteed India in 7987, it triggered a quality revolutionamong Indian auto parts manufacturers. Local parts and componentssuppliers teamed up with Suzuki's vendors in Japan and woked withfapanese experts to produce higher-quality products. Over the next twodecades, Indian companies became very proficient in making top-notchparts and componcnts for vchiclcs, $zon morc prizcs for quality thancompanies in any country othcr than Japan, and brokc into thc globalmarket as suppliers to many automakers in Asia and other parts of thcworld. Mahindra and Mahindra, one of India's premier automobilemanufacfurers, has been recognized by a number of organizations for itsproduct quality. Among its most noteworthy awards was its numbe-oneranking by ].D. Power Asia Pacific ln 2007 for new vehicle overall quality.

. Stay atuay from those emerging mnrkets zuhere it is imprnctical or uneconomicalto modify tlrc company's business model to accommodnte locsl circumstances.2zHome Depot expanded into Mexico in 2001 and China in 2006, but hasavoided entry into other emerging countries because rts value propositionof goocl quality, 1ow prices, and attentive customer service relies on(1) good highways and logistical systems to minimize store inventorycosts, (2) employee stock ownership to help motivate store personnelto provide good customer service, and (3) high labor costs for housingconstruction and home repairs to encouragc homeowners to cngagc indo-it-yourself projects. Relying on these factors in the U.S. and Canadianmarkets has worked spectacularly for Home Depot, but Home Depot hasfound that it cannot count on these factors in nearby Latin America.

Company experiences in entering developing markets like China, India,Russia, and Brazrl indicate that profitability selclom comes quickly or easily.Building a market for the company's products can often hrrn into a long-termprocess that involves reeducation of consumers, sizableinvestments in advertising and promotion to alter tastesand buying habits, and upgrades of the local infrastruc-ture (the supplier base, transportation systems, distri-bution channels, labor markets, and capital markets).In such cases, a company must be patient, work withrn

Profrtability in emerging markets rarely comesquickly or easily-new entrants have to adapttheir busness models and strateges to localconditions and be patient in earning a profit.

the system to improve the infrastructure, and lay the foundation for generatingsizable revenues and profits once conditions are ripe for market take-off." tbid., p. 7 4." lbid., p. 76.

Kev PointsCompeting in intemational markets allows multinational companies to (1) gainaccess to new customers, (2) achieve lower costs and enhance the firm's competi-tiveness by more easily capturing scale economies or leaming-curve effects,(3) Ieverage core competencies refined domestically in additional country makets,and (4) spread business risk across a wider market base.Companies electing to expand into international makets must consider coss-country differences in cultural, demographic, and market conditions, location-based cost drivers, adverse exchange rates, and host government policies whenevaluating strategy options.ln posturing to compete in foreign markets, a company has three basic options:(1) a thjnk local, act local approach to crafting a strategy, (2) a think global, actglobal approach to crafting a strategy, and (3) a combination think global, actlocal approach. A "think local, act local" or multicountry strategy is appropriatefor industries or companies that must vary their product offerings and competi-tive approaches from country to country in order to accomrnodate differingbuyer preferences and market conditions. A "think global, act global" approach(or global strategy) works best in markets that support employing the same basiccompetitive approach (low-cost, differentiation, focused) in all country marketsand marketing essentially the same products under the same brand names in allcountries where the company operates. A "think global, act local" approach canbe used when it is feasible for a company to employ essentially the same basiccompetitive stategy in all markets, but still customize its product offering andsome aspect of its operations to fit local market cicumstances.Other strategy options for competing in world markets include maintaining anational (one-country) production base and exporting goods to foreign mar-kets, licensing foreign firms to use the company's technology or produce anddistribute the company's products, employing a franchising strategy, and usingstrategic alliances or other collaborative partnerships to enter a foreign market orstrengthen a firm's competitiveness in world markets.Strategic alliances with foreigrr parhrers have appeal from several angles: gain-ing wider access to attractive country markets, allowing capture of economies ofscale in production and/or marketing, filling gaps in technical expertise and/orknowledge of local markets, saving on costs by sharing distribution facilities anddealer networks, developing relationships with host country officialg helpinggain agreement on important technical standards, and combating a common rival.There ae thee general ways in which a firm can gain cornpetive advantage(or offset domestic disadvantages) in global markets. One way involves locatingvarious value chain activities among nations in a marner that lowers costs orachieves greater product differentiaon. A second way draws on a multinationalor global competitor's ability to deepen or broaden its resource strengths andcapabiJities and to coodinate its dispersed activities in ways that a domestic-only competitor cannot. A third involves utilizing profit sanctuaies in protectedmarkets to wage strategic offenses in various intemational markets. Profit sanctu-aries are country markets in which a company derives substantial profits becauseof its strong or protected market position. They are valuable competitive assets.A company with multiple profit sanctuaries has the financial strength to supportcomnetitive offensives in one market with resouces and profits diverted fom its

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operations in other rnarkets. Thc ability of companies with multiple profitsanctuaries to employ cross-subsidization gives them a powerful offensiveweapon and a competitive advantage over companies w.ith a single sanctuary.

7. Companies racing for global leadership have to considcr competing in emerg-ing rnarkets like China, India, Brazil, Indoncsia, and Mexico

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the strategic approadr your company