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1
Strategic ManagementPart II: Strategic Actions: StrategyFormulation
Chapter 6: International
Strategy/ Competing in
Foreign Markets
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2
The Strategic ManagementProcess
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You have no choice but to operate in a
world shaped by globalization and the
information revolution.
There are two options: Adapt or die.
Andrew S. Grove
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Chapter Roadmap
Why Companies Expand into Foreign Markets Cross-Country Differences in Cultural, Demographic, and
Market Conditions
The Concepts of Multi-country Competition and Global
Competition
Strategy Options for Entering and Competing in ForeignMarkets
The Quest for Competitive Advantage in Foreign Markets
Profit Sanctuaries, Cross-Market Subsidization, and GlobalStrategic Offensives
Strategic Alliances and Joint Ventures with ForeignPartners
Strategies That Fit the Markets of Emerging Countries
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5
Chapter 8: InternationalStrategy (IS)
Overview: Eight content areas
Traditional vs. emerging motives
Four major benefits of International Strategies (IS)
Four factors as basis for international business strategy
Three international corporate-level strategies
Environmental trends affecting IS
Five alternative modes for entering international markets
Effects of international diversification on returns &innovation
2 major risks of international diversification
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Introduction
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7
Shanghai Automotive IndustryCorp (SAIC): Reaching for Global
Markets One of Chinas oldest automotive companies and
among top three auto companies in China
Goal: Become one of the worlds top 10 auto companies
Of note, as all major auto co.s compete in US market
Produces autos, tractors, motorcycles, trucks and isalso involved with car leasing and financing
Successful joint ventures (JV) with GM and VW Owns 51% of Korean automaker SsangYong, IP right
to Rover
SAIC learned much from partnerships and with
licensed technology launched own branded vehicles
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8
Introduction
Many firms choose direct investment in assetsover indirect investment
Provides better protection for assets
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Opportunities and Outcomes ofInternational Strategy
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Opportunities/ Reasons ForPursuing International
Strategies
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The Four Big Strategic Issuesin Competing Multinationally
Whether to customize a companys offerings in eachdifferent country market to match preferences of localbuyers or offer a mostly standardizedproduct worldwide
Whether to employ essentially the samebasic competitive strategyin all countriesor modify the strategy country by country
Where to locatea companys production facilities,
distribution centers, and customer service operationsto realize the greatest locational advantages
How to efficiently transfer a companysresource strengthsand capabilities from one country to another to securecompetitive advantage
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Identifying International Opportunities:Incentives to Use an International Strategy (IS)
International Strategy (IS): firm sells its goods orservices outside the domestic market
Reasons for an IS International markets yield potential new opportunities
International diversification: innovation occurs in home-
country market, especially in an advanced economy, anddemand for product develops in other countries, soexports provided by domestic organization
Multinational strategy: Secure need resources
Other motives exist (i.e., pressure for global integration,borderless demand for loball branded roducts
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Identifying International Opportunities:Incentives to Use an International Strategy (IS) (Contd)
Four primary reasons 1. Increased market size
Domestic market may lack the size to support efficient
scale manufacturing facilities
2. Return on Investment (ROI)
Large investment projects may require global marketsto justify the capital outlays
Weak patent protection in some countries implies thatfirms should expand overseas rapidly in order to
preempt imitators
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Identifying International Opportunities:Incentives to Use an International Strategy (IS)(Contd)
Four primary reasons(Contd) 3. Economies of Scale and Learning
Expanding size or scope of markets helps to achieveeconomies of scale in manufacturing as well asmarketing, R&D, or distribution
Costs are spread over a larger sales base
Profit per unit is increased
4. Location advantages: Low cost markets may
aid in developing competitive advantage
achieve better access to critical resources:
i.e., raw materials, lower cost labor, key customers,ener
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Why Do Companies Expandinto Foreign Markets?
Gain access to
new customers
Capitalizeon core
competencies
Achieve lower
costs and enhance
competitiveness
Spreadbusiness risk across
wider
market base
Obtain access to
valuable natural
resources
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Types OfInternational Strategies
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International Strategies (IS)
Firms choose one or both of two basic type of IS:Business level and/or corporate level
1. International business-level strategy
Follows generic strategies of cost-leadership,differentiation, focused or broad
2. International corporate-level strategy (N=3)
Home country usually most important source ofcompetitive advantage
Resources and capabilities frequently allow firm topursue markets in other countries
The determinants of national advantage includes 4factors
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Determinants of NationalAdvantage
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Types of International
Corporate LevelStrategies
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International Corporate-LevelStrategies
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International Strategies (IS) (Contd)
International Corporate-level Strategies (N=3)(Contd)
1. MULTIDOMESTIC
Decentralized strategic & operating decisions by StrategicBusiness-unit (SBU) in each country allows units to tailorproducts to local markets
Focuses on variations of competition within each country
Customized products to meet local customers specific needs
and preferences Takes steps to isolate the firm from global competitive forces
Establish protected market positions
Compete in industry segments most affected by differences amonglocal countries
Deals with uncertainty due to differences across markets
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22
International Strategies (IS) (Contd)
2. GLOBAL
Firm offers standardized products across countrymarkets, with the competitive strategy being dictated by
the home office Emphasizes economies of scale
Facilitated by improved global reporting standards (i.e.,accounting and financial)
Strategic & operating decisions centralized at homeoffice
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23
International Strategies (IS) (Contd)
2. GLOBAL(Contd)
Involves interdependent SBUs operating in each country
Home office attempts to achieve integration across SBUs,
adding management complexity
Produces lower risk
Is less responsive to local market opportunities
Offers less effective learning processes (pressure toconform and standardize)
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24
International Strategies (IS) (Contd)
3. TRANSNATIONAL Firm seeks to achieve both global efficiency and local
responsiveness these are competing goals!
Requires both global coordination and local flexibility with
this strategy/structure combination Flexible Coordination: Building a shared vision and
individual commitment through an integrated network
Challenging, but becoming increasingly necessary tocompete in international markets
Growing number of global competitors heightens need tokeep costs down while greater information flow anddesire for specialized products pressures firms todifferentiate and even customize products nonetheless,
Increasingly used as a strategy
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International
v/s. Global Competition
I i l / Gl b l
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International v/s. GlobalCompetition
International
Competitor
Global
Competitor
Company operates in aselect few foreign
countries, with modest
ambitions to expandfurther
Company markets products
in 50 to 100 countries andis expanding operationsinto additional country
markets annually
Cross Country Differences in
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Cultures and lifestyles differ among countries
Differences in market demographics
and income levels
Variations in manufacturingand distribution costs
Fluctuating exchange rates
Differences in host government
economic and political demands
Cross-Country Differences inCultural, Demographic, and MarketConditions
H M k t Diff f
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Consumer tastes and preferences
Consumer buying habits
Market size and growth potential Distribution channels
Driving forces
Competitive pressures
How Markets Differ fromCountry to Country
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How Markets Differ fromCountry to Country (cont.)
29
One of the biggest concerns of companies
competing in foreign markets is whether
to customizetheir product offeringsineach different country market to match
the tastes and preferences of local
buyers or whether to offera mostly standardized
productworldwide.
Diff t C t i H
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Manufacturing costs vary from country to country based on
Wage rates
Worker productivity
Inflation rates
Energy costs
Tax rates
Government regulations
Quality of business environment varies from country tocountry
Suppliers, trade associations, and makers of complementaryproducts often find it advantageous to cluster their
operations in the same general location
Different Countries HaveDifferent Locational Appeal
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Fluctuating Exchange Rates Affect aCompanys Competitiveness
Currency exchange ratesare unpredictable
Competitiveness of a companys operationspartly depends on whether exchange rate
changes affect costs favorably or unfavorably
Lessonsof fluctuating exchange rates
Exporters always gain in competitiveness when the
currency of the country where goods aremanufactured grows weaker
Exporters are disadvantaged when the currency of
the country where goods are manufactured growsstron er
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Test Your Knowledge
Which one of the following statements concerning the effects offluctuating exchange rates on companies competing in foreignmarkets is true?
A. Japan-based manufacturers exporting goods to the U.S. would bedisadvantaged if the Japanese yen grows weaker in relation to the U.S.
dollar.B. Fluctuating foreign exchange rates greatly reduce the risks of competing
in foreign marketsthe big problem occurs when exchange rates arefixed at unreasonably low levels.
C. Domestic companies under pressure from lower-cost imports arebenefited when their governments currency grows weaker in relation to
the currencies of the countries where the imported goods are beingmade.
D. Chinese exports to Europe would likely be grow in volume if the Chinesecurrency because much stronger relative to the euro.
E. If the exchange rate of U.S. dollars for euros changes from $1.25 per
euro to $1.30 per euro, then it is correct to say that the U.S. dollar hasgrown stronger.
Diff i H t
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Differences in HostGovernment Trade Policies
Local content requirements Restrictions on exports
Regulations on prices of imports
Import tariffs or quotas
Other regulations
Technical standards
Product certification
Prior approval of capital spending projects
Withdrawal of funds from country
Ownership (minority or majority) by local citizens
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Multi-country
Competition
Global
Competition
Two Primary Patternsof International Competition
Characteristics of Multi Country
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Characteristics of Multi-CountryCompetition
Market contest among rivals in one country notclosely connected to market contests in othercountries
Buyers in different countries are attracted todifferent product attributes
Sellers vary from country to country
Industry conditions and competitive forces ineach national market differ in important respects
Rival firms battle for national championships
winning in one country does not necessarily signal the
ability to fare well in other countries!
Characteristics of Global
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Competitive conditions acrosscountry markets are strongly linked
Many of same rivals compete in many of thesame country markets
A true international market exists
A firms competitive position in one country isaffected by its position in other countries
Competitive advantage is based on a firms world-wide operations and overall global standing
Rival firms in globally competitive
industries vie forworldwide leadership!
Characteristics of GlobalCompetition
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Strategy Options for
Competing in
Foreign Markets
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Strategy Options forCompeting in Foreign Markets
1. Exporting
2. Licensing
3. Franchising Strategy
4. Multi-country Strategy
5. Global Strategy
6. Strategic Alliances Or Joint Ventures
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Involve using domestic plantsas a productionbasefor exportingto foreign markets
Excellent initial strategyto pursue internationalsales
Advantages Conservative way to test international waters Minimizes both risk and capital requirements Minimizes direct investments in foreign countries
1. Export Strategies
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1. Export Strategies (cont.)
An export strategyis vulnerablewhen
Manufacturing costs in home country are
higher than in foreign countries where rivalshave plants
High shipping costs are involved Adverse fluctuations in currency exchange
rates
40
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2. Licensing Strategies
Licensingmakes sense when a firm
Has valuable technical know-how or a patentedproduct but does not have international capabilities
to enter foreign markets
Desires to avoid risks of committing resources to
markets which are Unfamiliar
Politically volatile
Economically unstable
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2. Licensing Strategies (cont.)
Disadvantage
Risk of providing valuable technical know-how to
foreign firms and losing some control over itsuse
42
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3. Franchising Strategies
Often is better suitedto global expansioneffortsof service and retailing enterprises
Advantages
Franchisee bears most of costs and risks ofestablishing foreign locations
Franchisor has to expend only the resources torecruit, train, and support franchisees
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3. Franchising Strategies
Disadvantage
Maintaining cross-country quality control
44
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4. & 5. Localized MulticountryStrategies or a Global Strategy?
Whether to vary a companys competitiveapproach to fit specific market conditions and
buyer preferences in each host countyOR
Whether to employ essentially the same
strategyin all countries
Strategic Issue
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Companys Strategic Options for
Dealing withCross-Country Variations in BuyerPreferences and Market Conditions
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A Companys Strategic Options for
Dealing with Cross-CountryVariations in Buyer Preferences andMarket Conditions
1. Think Local, Act Local
2. Think Global, Act Global
3. Think Global, Act Local
Fig. 7.1: A Companys Strategic Options for Dealing withC C t V i ti i B P f d M k t
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Cross-Country Variations in Buyer Preferences and MarketConditions
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1. What Is a Think-Local, Act-LocalApproach to Strategy Making?
A company variesits product
offeringsand basic competitive
strategy from country to country
in an effort to be responsive to
differing buyer preferences and
market conditions.
Characteristics of a Think Local
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Characteristics of a Think-Local,Act-Local Approach to Strategy Making
Business approaches are deliberately crafted to Accommodate differing tastes and expectations of
buyers in each country
Stake out the most attractive market positions vis--vis local competitors
Local managers are given considerablestrategy-making latitude
Plants produce different productsfor different local markets
Marketing and distribution are adapted
to fit local customs and cultures
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When Is a Think-Local, Act-LocalApproach to Strategy Making Necessary?
Significant country-to-country differences incustomer preferences and buying habits exist
Host governments enact regulations requiringproducts sold locally meet strict manufacturingspecifications or performance standards
Trade restrictions of host governments areso diverse and complicated they preclude a
uniform, coordinated worldwide market approach
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Drawbacks of a Think-Local,Act-Local Approach to Strategy Making
Poses problems of transferring
competencies across borders
Works against building a
unified competitive advantage
2 What Is a Think Global Act
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2. What Is a Think-Global, Act-Global Approach to Strategy
Making?
A company employsthe same
basic competitive approachin all
countries where it operates.
Characteristics of a Think Global
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Characteristics of a Think-Global,Act-Global Approach to Strategy Making
Same products under the same brand names are soldeverywhere
Same distribution channels are used in all countries
Competition is based on the same capabilities
and marketing approaches worldwide Strategic moves are integrated and coordinated worldwide
Expansion occurs in most nations where significant buyerdemand exists
Strategic emphasis is placed on buildinga global brand name
Opportunities to transfer ideas, newproducts, and capabilities from onecountry to another are aggressively pursued
Fig. 7.2: How a Localized or Multicountry Strategy
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g y gyDiffers from a Global Strategy
3 What Is a Think Global Act Local
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3. What Is a Think-Global, Act-LocalApproach to Strategy Making?
A company uses the same basic competitive
theme in each country but allows local managers
latitude to . . .1. Incorporate whatever country-specific variations in
product attributes are needed to best satisfy local
buyers and2. Make whatever adjustments in production,
distribution, and marketing are needed to compete
under local market conditions
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Test Your Knowledge
The stand-out characteristic of multicountry competitionis
A. The varying driving forces from country to country.
B. varying competitive pressures from country to country.
C. varying buyer requirements and expectations from country tocountry.
D. that there is so much cross-country variation in marketconditions and in the companies contending for leadership that
the market contest among rivals in one country is not closelyconnected to the market contests in other countriesas aconsequence, there is no global or world market, just acollection of self-contained country markets.
E. varying degrees of product differentiation from country to
country.
F Di i Y O i i
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For Discussion: Your Opinion
Assume you are in charge of developing the strategy for a
multinational company selling products in several different countriesaround the world.
A. If your companys product is personal computers, do you think it would
make better strategic sense to employ a multicountry strategy or aglobal strategy? Why?
B. If your companys product is dry soup mixes and canned soups, woulda multicountry strategy seem to be more advisable than a globalstrategy? Why?
C. If your companys product is washing machines, would it seem tomake more sense to pursue a multicountry strategy or a globalstrategy? Why?
D. If your companys product is basic work tools (hammers, screwdrivers,pliers, wrenches, saws), would a multicountry strategy or a global
strategy seem to have more appeal? Why?
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Ways To Gain
Competitive AdvantageIn Foreign Markets
The Quest for Competitive
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The Quest for CompetitiveAdvantage in Foreign Markets
Three waysto gain competitive advantage
1. Locating activities among nations in ways thatlower costs or achieve greater product
differentiation
2. Efficient/effective transfer of competitivelyvaluable competencies and capabilities from
company operations in one country to companyoperations in another country
3. Coordinating dispersed activities in ways a
domestic-only competitor cannot
1 Locating Activities to Build a
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1. Locating Activities to Build aGlobal Competitive Advantage
Two issues
1. Whether to
Concentrate each activity in afew countries or
Disperse activities to manydifferent nations
2. Where to locate activities
Which country is best location for which activity?
2 C t ti A ti iti t B ild
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Activitiesshould be concentrated when
Costs of manufacturing or other value chain activitiesare meaningfully lower in certain locations than inothers
There are sizable scale economies in performing theactivity
2. Concentrating Activities to Builda Global Competitive Advantage
2 C t ti A ti iti t B ild
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2. Concentrating Activities to Builda Global Competitive Advantage (cont.)
There is a steep learning curve associatedwith performing an activity in a single location
Certain locations have
Superior resources
Allow better coordination of related activitiesor
Offer other valuable advantages
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3. Dispersing Activities to Build a
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3. Dispersing Activities to Build aGlobal Competitive Advantage
Activitiesshould be dispersed when
They need to be performed close to buyers
Transportation costs, scale diseconomies, ortrade barriers make centralization expensive
Buffers for fluctuating exchange rates, supplyinterruptions, and adverse politics are needed
4. Transferring Valuable
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4. Transferring ValuableCompetencies to Build a GlobalCompetitive Advantage
Transferringcompetencies, capabilities, andresource strengths across borders contributes
to
Development of broader competencies and
capabilities
Achievement of dominating depth in somecompetitively valuable area
4. Transferring Valuable
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4. Transferring ValuableCompetencies to Build a GlobalCompetitive Advantage (cont.)
Dominating depth in a competitively valuablecapability is a strong basis for sustainable
competitive advantageover
Other multinational or global competitors and
Small domestic competitors in host countries
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5. Coordinating Cross-Border
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Activities to Build a GlobalCompetitive Advantage
Aligning activities located in different countriescontributes to competitive advantage in several
ways
Choose where and how to challenge rivals
Shift production from one location to another totake advantage of most favorable cost or tradeconditions or exchange rates
5. Coordinating Cross-Border
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5 Coo d at g C oss o deActivities to Build a GlobalCompetitive Advantage (cont.)
Use online systems to collect ideas for new orimproved products and to determine which products
should be standardized or customized
Enhance brand reputation by incorporating samedifferentiating attributes in its products in all markets
where it competes
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Profit Sanctuaries
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What Are Profit Sanctuaries?
Profit sanctuaries are countrymarkets where a firm
Has a strong, protected market
position and Derives substantial profits
Generally, a firms most strategically
crucial profit sanctuary is its home market
Profit sanctuaries are avaluablecompetitive assetin global industries!
Fig. 7.3: Profit Sanctuary Potential of Domestic-Only,International and Global Competitors
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International, and Global Competitors
Test Your Knowledge
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Test Your Knowledge
Profit sanctuaries are valuable competitive assets because
A. they enable a company pursuing a think global, act local typeof strategy to be more successful.
B. a domestic competitor with multiple profit sanctuaries can wage
and generally win a competitive offensive against a globalcompetitor whose profits are scattered across many differentcountries.
C. they provide the financial strength to support strategicoffensives in selected country markets and can help fuel a
companys race for global market leadership.D. without having at least two profit sanctuaries a company is
virtually precluded from competing globally.
E. they enable a company pursuing a global strategy to compete onan equal footing with companies employing a multicountry
strategy.
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Cross-MarketSubsidization
What Is Cross-Market
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Involves supporting competitive offensives in onemarket with resources/profits diverted from operationsin other markets
Competitive power of cross-market subsidization resultsfrom a global firms ability to
Draw upon its resources and profits in other countrymarkets to mount an attack on single-market or one-country rivals and
What Is Cross MarketSubsidization?
What Is Cross-Market
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What Is Cross MarketSubsidization? (cont.)
Try to lure away their customers with
Lower prices
Discount promotions
Heavy advertising
Other offensive tactics
75
For Discussion: Your Opinion
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For Discussion: Your Opinion
Assume that you are a multinational soft-drink company with alarge, well-protected profit sanctuary in your home country (and
perhaps some smaller profit sanctuaries in other countries as
well).
Further assume that you are interested in entering an importantnew foreign market in which the leading soft drink competitors
are all domestic companies.
Do you think that a cross-market subsidization strategy based
on under-pricing local competitors might be an appealing way to
gain a market foothold? Why or why not? If you were one of
the local competitors being attacked, what strategic moves
mi ht ou make to defend our market osition?
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Options for GlobalStrategic Offensives
Global Strategic Offensives
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Global Strategic Offensives
1. Attack a foreign rivals profit sanctuaries
Approach places a rival on the defensive, forcing it to
Spend more on marketing/advertising
Trim its prices
Boost product innovation efforts
Take actions raising its costs and eroding its profits
2. Employ cross-market subsidization
Attractive offensive strategy for companies competing in multiplecountry markets with multiple products
3. Dump goods at cut-rate prices
Approach involves a company selling goods in foreign markets at prices
Well below prices at which it sells in its home market or
Well below its full costs er unit
Three Options
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Strategic Alliances
Achieving Global Competitiveness
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g pvia Cooperation
Cooperative agreements with foreign companiesare a means to
Enter a foreign market or
Strengthen a firms competitiveness in world markets
Purpose of alliances
Joint research efforts
Technology-sharing
Joint use of production or distribution facilities
Marketin / romotin one anothers roducts
Strategic Appeal of Strategic
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g pp gAlliances
Gain better access to attractive country markets from hostcountrys government to import and market products locally
Capture economies of scale in production and/or marketing
Fill gaps in technical expertise or knowledge of local markets
Share distribution facilities and dealer networks
Direct combined competitive energiestoward defeating mutual rivals
Take advantage of partners local market
knowledge and working relationships withkey government officials in host country
Useful way to gain agreement on importanttechnical standards
Pitfalls of Strategic Alliances
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Pitfalls of Strategic Alliances
Overcoming language and cultural barriers
Dealing with diverse or conflicting operating practices
Time consuming for managers in terms of communication,
trust-building, and coordination costs Mistrust when collaborating in
competitively sensitive areas
Clash of egos and company cultures
Dealing with conflicting objectives, strategies, corporatevalues, and ethical standards
Becoming too dependent on another firm for essential
expertise over the long-term
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Competing in ForeignMarkets
Characteristics of Competingi E i F i M k
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Tailoring products for big, emerging marketsoften involves
Making more than minor product changes and
Becoming more familiar with local cultures
Companies have to attract buyers withbargain prices as well as better products
Specially designed and/or specially packagedproducts may be needed to accommodate localmarket circumstances
Management team must usually consist of a mix
of expatriate and local managers
in Emerging Foreign Markets
Strategic Options: How to Compete in
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Emerging Country Markets
Prepare to compete on the basis of low price
Be prepared to modify aspects of the companysbusiness model to accommodate local
circumstances
Try to change the local market to better matchthe way the company does business elsewhere
Stay away from those emerging markets where itis impractical or uneconomic to modify thecompanys business model to accommodate local
circumstances
Fig. 7.4: Strategy Options for Local Companiesin Competing Against Global Challengers
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p g g g
1. Strategic Options for Local Companies:Use Home-Field Advantages
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Use Home Field Advantages
Concentrate on advantages enjoyed in the home
market
Cater to customers who prefer a local touch
Accept loss of customers attracted to global
brands
Astutely exploit its local orientation based on
Familiarity with local preferences
Expertise in traditional products
Long-standing customer relationships
Cater to the local market in ways that
pose difficulties for global rivals
2. Strategic Options for Local
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Companies: Transfer Expertise toCross-Border Markets
When a local company trying to defend against aglobal challenger has resource strengths andcapabilities suitable for competing in other countrymarkets, then it should consider
Launching initiatives to transfer its expertise tocross-border markets
Becoming more of an international competitor
2.Strategic Options for Local
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Companies: Transfer Expertise toCross-Border Markets (Cont.)
Such a move to enter foreign markets can help
Build a bigger customer base (to offset any lossesin its home market)
Grow sales and profits
Put in a stronger position to contend with globalchallengers in its home market
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3. Strategic Options for Local Companies:
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Dodging Rivals by Shifting to a NewBusiness Model or Market Niche
When industry pressures to globalize are high, viablestrategic options for a local company trying to defendagainst global challengers in its home market include
Shifting the business to a piece of the industry value chainwhere the firms expertise/resources provide a defendableposition or maybe even a competitive advantage
Entering a joint venture with a globally competitive partner
Selling out to a global entrant into its home market90
4. Strategic Options for LocalCompanies: Contend on a Global
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Companies: Contend on a GlobalLevel
If a local company has resources andcapabilities that it can transfer to operations inother countries, it can launch a strategy aimed
at Entering markets of other countries as rapidly as
possible
Shifting to a more globalized strategy
Building brand recognition and a brand image thatextends to more and more countries
Gradually establishing the resources and capabilities
to go head-to-head against large global rivals
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Environmental Trends
affecting
International Strategies
E i t l T d
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Environmental Trends
Transnational strategy hard to implement
Two new trends
1. Liability of foreignness
Increased after terrorists attacks and Iraq War
Global strategies not as prevalent today, still
difficult to implement even with Internet-basedstrategies
Regional focus allows firms to marshal resourcesto compete effectively in regional markets
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Environmental Trends
2. Regionalization Focus to a particular region of the world
Increases understanding of market
Achieve some economies Trade agreements (I.e., EU, OAS, NAFTA)
promote flow of trade across countryboundaries with their respective regions
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International EntryModes
I i l E M d (N 5)
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International Entry Modes (N = 5)
Follows the selection of an IS
Five main entry modes
1. Exporting
2. Licensing
3. Strategic Alliances
4. Acquisitions
5. New Wholly-Owned Subsidiary
I t ti l E t M d (N 5)
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International Entry Modes (N = 5) (Contd)
1. Exporting
Involves low expense to establish operations inhost country
Often involves contractual agreements
Involves high transportation costs
May have some tariffs imposed Offers low control over marketing and distribution
International Entry Modes (N = 5)
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International Entry Modes (N = 5) (Contd)
2. Licensing
Involves low cost to expand internationally
Allows licensee to absorb risks
Has low control over manufacturing andmarketing
Offers lower potential returns (shared with
licensee) Involves risk of licensee imitating technology and
product for own use
May have inflexible ownership arrangement
I t ti l E t M d (N 5)
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International Entry Modes (N = 5) (Contd)
3. Strategic Alliances
Involve shared risks and resources
Facilitate development of core competencies
Involve fewer resources and costs required forentry
May involve possible incompatibility, conflict, orlack of trust with partner
Are difficult to manage
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I t ti l E t M d (N 5)
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International Entry Modes (N = 5) (Contd)
5. New Wholly-Owned Subsidiary
Is costly
Involves complex processes
Allows for maximum control
Has the highest potential returns
Carries high risk
Greenfield venture: Establish entirely newsubsidiary
International Entry Modes (N = 5) (Contd)
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y ( ) ( )
Dynamics of Mode of Entry: Use the best suited tothe situation at hand; affected by several factors
Export, licensing and strategic alliance: good tactics for
early market development
Strategic alliance: used in more uncertain situations
Wholly-owned subsidiary may be preferred if
IP rights in emerging economy not well protected Number of firms in industry is growing fast
Need for global integration is high
Acquisitions or greenfield ventures: secure a stronger
presence in international markets
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Effects Of International
Diversification OnReturns & Innovation
Strategic Competitive Outcomes(N 3)
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Strategic Competitive Outcomes(N = 3)
International diversification: firm expands sales of
its goods or services across the borders of globalregions and countries into different geographiclocations or markets
Implementation follows selection of internationalstrategy and mode of entry (N=3)
1. International diversification and returns
2. International diversification and innovation
3 Complexity of managing multinational firms
Strategic Competitive Outcomes
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g p(N = 3) (Contd)
1. International diversification and returns As international diversification increases, firms returns
initiallydecrease, but the increase quickly as firm learns tomanage international expansion
2. International diversification and innovation
Exposure to new products and markets
Opportunity to integrate new knowledge into operations
Generation of resources to sustain innovation efforts
Strategic Competitive Outcomes (N = 3)
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Strategic Competitive Outcomes (N = 3)(Contd)
3. Complexity of managing multinational firms
Geographic dispersion
Costs of coordination
Logistical costs
Trade barriers
Cultural diversity
Host government
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Risks in InternationalEnvironment
Risks in InternationalEnvironment
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Environment
2 major risks1. Political
2. Economic
Limits to international expansions: managementproblems
Risk in the InternationalEnvironment
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Environment
Risks in InternationalEnvironment
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Environment(Contd)
1. Political risks Government instability
Conflict or war
Government regulations
Conflicting and diverse legal authorities
Potential nationalization of private assets
Government corruption
Changes in government policies
Risks in InternationalEnvironment
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Environment(Contd)
2. Economic risks Differences and fluctuations in currency values
Investment losses due to political risks
Limits to international expansions: management problems
Geographic dispersion
Trade barriers
Logistical costs Cultural diversity
Other differences by country
Relationship between organization and host country
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