1. Chapter 7: Strategies for Competing in Foreign Markets Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

2. “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 Co-founder and Senior Advisor, Intel Corporation

3. “Industries actually vary a great deal in the pressures they put on a company to sell internationally. Niraj Dawar and Tony Frost Professors, Richard Ivey School of Business

4. The Four Big Strategic Issues in Competing Multinationally Whether to customize a company’s offerings in each different country market to match preferences of local buyers or offer a mostly standardized product worldwide Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country Where to locate a company’s production facilities, distribution centers, and customer service operations to realize the greatest locational advantages How to efficiently transfer a company’s resource strengths and capabilities from one country to another to secure competitive advantage

5. Why Do Companies Expand into Foreign Markets? Gain access to new customers Capitalize on core competencies Achieve lower costs and enhance competitiveness Spread business risk across wider market base Obtain access to valuable natural resources

6. International vs. Global Competition International Competitor Global Competitor Company operates in a select few foreign countries, with modest ambitions to expand further Company markets products in 50 to 100 countries and is expanding operations into additional country markets annually

7. Factors Shaping Strategy Choices in Foreign Markets Cross-country differences in cultural, demographic, and market conditions Gaining competitive advantage based on where activities are located Risks of adverse shifts in currency exchange rates Impact of host government policies on the local business climate

8. Cultures and lifestyles differ among countries Differences in market demographics and income levels Variations in manufacturing and distribution costs Fluctuating exchange rates Differences in host government economic and political demands Cross-Country Differences in Cultural, Demographic, and Market Conditions

9. Consumer tastes and preferences Consumer buying habits Market size and growth potential Distribution channels Driving forces Competitive pressures How Markets Differ from Country to Country One of the biggest concerns of companies competing in foreign markets is whether to customize their product offerings in each different country market to match the tastes and preferences of local buyers or whether to offer a mostly standardized product worldwide.

10. 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 to country Suppliers, trade associations, and makers of complementary products often find it advantageous to cluster their operations in the same general location Different Countries Have Different Locational Appeal

11. Fluctuating Exchange Rates Affect a Company’s Competitiveness Currency exchange rates are unpredictable  Competitiveness of a company’s operations partly depends on whether exchange rate changes affect costs favorably or unfavorably Competitive impact of fluctuating exchange rates  Exporters always gain in competitiveness when the currency of the country where goods are manufactured grows weaker  Exporters are disadvantaged when the currency of the country where goods are manufactured grows stronger

12. Differences in Host Government 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

13. Multi-country Competition Global Competition Two Primary Patterns of International Competition

14. Characteristics of Multi-Country Competition Market contest among rivals in one country not closely connected to market contests in other countries Buyers in different countries are attracted to different product attributes Sellers vary from country to country Industry conditions and competitive forces in each national market differ in important respects Rival firms battle for national championships – winning in one country does not necessarily signal the ability to fare well in other countries!

15. Competitive conditions across country markets are strongly linked  Many of same rivals compete in many of the same country markets  A true international market exists A firm’s competitive position in one country is affected by its position in other countries Competitive advantage is based on a firm’s world-wide operations and overall global standing Characteristics of Global Competition Rival firms in globally competitive industries vie for worldwide leadership!

16. Strategy Options for Competing in Foreign Markets Exporting Licensing Franchising strategy Strategic alliances or joint ventures Multi-country strategy Global strategy

17. Involve using domestic plants as a production base for exporting to foreign markets Excellent initial strategy to pursue international sales Advantages  Conservative way to test international waters  Minimizes both risk and capital requirements  Minimizes direct investments in foreign countries An export strategy is vulnerable when  Manufacturing costs in home country are higher than in foreign countries where rivals have plants  High shipping costs are involved  Adverse fluctuations in currency exchange rates occur Export Strategies

18. Licensing Strategies Licensing makes sense when a firm  Has valuable technical know-how or a patented product but does not have international capabilities to enter foreign markets  Desires to avoid risks of committing resources to markets which are  Unfamiliar  Politically volatile  Economically unstable Disadvantage  Risk of providing valuable technical know-how to foreign firms and losing some control over its use

19. Franchising Strategies Often is better suited to global expansion efforts of service and retailing enterprises Advantages  Franchisee bears most of costs and risks of establishing foreign locations  Franchisor has to expend only the resources to recruit, train, and support franchisees Disadvantage  Maintaining cross-country quality control

20. Achieving Global Competitiveness via Cooperative Agreements Cooperative agreements with foreign companies are a means to  Enter a foreign market or  Strengthen a firm’s competitiveness in world markets Purpose of alliances / joint ventures  Joint research efforts  Technology-sharing  Joint use of production or distribution facilities  Marketing / promoting one another’s products

21. Strategic Appeal of Strategic Alliances Gain better access to attractive country markets 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 energies toward defeating mutual rivals Take advantage of partner’s local market knowledge and working relationships with key government officials in host country Useful way to gain agreement on important technical standards

22. 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, corporate values, and ethical standards Becoming too dependent on another firm for essential expertise over the long-term

23. Localized Multicountry Strategy or a Global Strategy? Whether to vary a company’s competitive approach to fit specific market conditions and buyer preferences in each host county or Whether to employ essentially the same strategy in all countries Strategic Issue

24. Figure 7.1: A Company’s Strategic Options for Dealing with Cross-Country Variations in Buyer Preferences and Market Conditions

25. A company varies its product offerings and basic competitive strategy from country to country in an effort to be responsive to differing buyer preferences and market conditions. What Is a “Think-Local, Act-Local” Approach to Strategy Making?

26. Characteristics of a “Think-Local, Act-Local” Approach to Strategy Making Business approaches are deliberately crafted to  Accommodate differing tastes and expectations of buyers in each country  Stake out the most attractive market positions vis-à-vis local competitors Local managers are given considerable strategy-making latitude Plants produce different products for different local markets Marketing and distribution are adapted to fit local customs and cultures

27. When Is a “Think-Local, Act-Local” Approach to Strategy Making Necessary? Significant country-to-country differences in customer preferences and buying habits exist Host governments enact regulations requiring products sold locally meet strict manufacturing specifications or performance standards Trade restrictions of host governments are so diverse and complicated they preclude a uniform, coordinated worldwide market approach

28. 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

29. A company employs the same basic competitive approach in all countries where it operates. What Is a “Think-Global, Act-Global” Approach to Strategy Making?

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

31. Figure 7.2: How a Localized or Multicountry Strategy Differs from a Global Strategy

32. A company uses the same basic competitive theme in each country but gives local managers the latitude to 1.Incorporate whatever country-specific variations in product attributes are needed to best satisfy local buyers and 2.Make whatever adjustments in production, distribution, and marketing are needed to compete under local market conditions. What Is a “Think-Global, Act-Local” Approach to Strategy Making?

33. The Quest for Competitive Advantage in Foreign Markets Three ways to gain competitive advantage 1. Locating activities among nations in ways that lower costs or achieve greater product differentiation 2. Efficient/effective transfer of competitively valuable competencies and capabilities from company operations in one country to company operations in another country 3. Coordinating dispersed activities in ways a domestic-only competitor cannot

34. Locating Activities to Build a Global Competitive Advantage Two issues...  Whether to  Concentrate each activity in a few countries or  Disperse activities to many different nations  Where to locate activities  Which country is best location for which activity?

35. Activities should be concentrated when  Costs of manufacturing or other value chain activities are meaningfully lower in certain locations than in others  There are sizable scale economies in performing the activity  There is a steep learning curve associated with performing an activity in a single location  Certain locations have  Superior resources  Allow better coordination of related activities or  Offer other valuable advantages Concentrating Activities to Build a Global Competitive Advantage

36. Dispersing Activities to Build a Global Competitive Advantage Activities should be dispersed when  They need to be performed close to buyers  Transportation costs, scale diseconomies, or trade barriers make centralization expensive  Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed

37. Transferring Valuable Competencies to Build a Global Competitive Advantage Transferring competencies, capabilities, and resource strengths across borders contributes to  Development of broader competencies and capabilities  Achievement of dominating depth in some competitively valuable area Dominating depth in a competitively valuable capability is a strong basis for sustainable competitive advantage over  Other multinational or global competitors and  Small domestic competitors in host countries

38. Coordinating Cross-Border Activities to Build a Global Competitive Advantage Aligning activities located in different countries contributes to competitive advantage in several ways  Choose where and how to challenge rivals  Shift production from one location to another to take advantage of most favorable cost or trade conditions or exchange rates  Use online systems to collectively come up with next-generation products  Achieve efficiencies by shifting workload to locations where personnel are underutilized  Enhance potential to build a global brand name by incorporating same differentiating attributes in products in all markets where a company competes

39. Tailoring products for big, emerging markets often involves  Making more than minor product changes and  Becoming more familiar with local cultures Companies have to attract buyers with bargain prices as well as better products Specially designed and/or specially packaged products may be needed to accommodate local market circumstances Management team must usually consist of a mix of expatriate and local managers Characteristics of Competing in Emerging Foreign Markets

40. Strategic Options: How to Compete in Emerging Country Markets Prepare to compete on the basis of low price Be prepared to modify aspects of the company’s business model to accommodate local circumstances Try to change the local market to better match the way the company does business elsewhere Stay away from those emerging markets where it is impractical or uneconomic to modify the company’s business model to accommodate local circumstances

41. Strategies for Local Companies in Emerging Markets Develop business models that exploit shortcomings in local distribution networks or infrastructure. Utilize keen understanding of local customer needs and preferences to create customized products or services. Take advantage of low-cost labor and other competitively important local workforce qualities. Use economies of scope and scale to better defend against expansion-minded multinationals. Transfer company expertise to cross-border markets and initiate actions to contend on a global level.

42. Chapter 8: Diversification: Strategies for Managing a Group of Businesses Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

43. Diversification and Corporate Strategy A company is diversified when it is in two or more lines of business that operate in diverse market environments Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business  A diversified company needs a multi-industry, multi-business strategy  A strategic action plan must be developed for several different businesses competing in diverse industry environments

44. It is faced with diminishing growth prospects in present business It has opportunities to expand into industries whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors It can reduce costs by diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses When Should a Firm Diversify?

45. Why Diversify? To build shareholder value! Diversification is capable of building shareholder value if it passes three tests: 1. Industry Attractiveness Test — The industry being entered presents good long-term profit opportunities 2. Cost of Entry Test — Cost of entering is not so high as to spoil the ability to earn attractive profits 3. Better-Off Test — A company’s different businesses should perform better together than as stand-alone enterprises, such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders 1 + 1 = 3

46. Four Main Tasks in Crafting Corporate Strategy Pick new industries to enter and decide on means of entry Initiate actions to boost combined performance of businesses Pursue opportunities to leverage cross- business value chain relationships and strategic fits into competitive advantage Establish investment priorities, steering resources into most attractive business units

47. Strategies for Entering New Businesses Acquire existing company Internal start-up Joint ventures/strategic partnerships 8-47

48. Related vs. Unrelated Diversification Related Diversification Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with value chain(s) of firm’s present business(es) Unrelated Diversification Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firm’s present business(es) 8-48

49. Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for  Transferring competitively valuable expertise or technological know-how from one business to another  Combining performance of common value chain activities to achieve lower costs  Exploiting use of a well-known brand name  Cross-business collaboration to create competitively valuable resource strengths and capabilities Core Concept: Strategic Fit

50. Cross-business strategic fits can exist anywhere along the value chain  R&D and technology activities  Supply chain activities  Manufacturing activities  Distribution activities  Sales and marketing activities  Managerial and administrative support activities Types of Strategic Fits

51. Related Diversification and Competitive Advantage Competitive advantage can result from related diversification when a company captures cross-business opportunities to  Transfer expertise/capabilities/technology from one business to another  Reduce costs by combining related activities of different businesses into a single operation  Transfer use of firm’s brand name reputation from one business to another  Create valuable competitive capabilities via cross-business collaboration in performing related value chain activities

52. Core Concept: Economies of Scope Stem from cross-business opportunities to reduce costs  Arise when costs can be cut by operating two or more businesses under same corporate umbrella  Cost saving opportunities can stem from strategic fits anywhere along the value chains of different businesses

53. Figure 8.4: Identifying a Diversified Company’s Strategy 8-53

54. How to Evaluate a Diversified Company’s Strategy Step 1: Assess long-term attractiveness of each industry firm is in Step 2: Assess competitive strength of firm’s business units Step 3: Check competitive advantage potential of cross-business strategic fits among business units Step 4: Check whether firm’s resources fit requirements of present businesses Step 5: Rank performance prospects of businesses and determine priority for resource allocation Step 6: Craft new strategic moves to improve overall company performance

55. Figure 8.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix 8-55

56. Conditions making this approach attractive  Slow grow in current businesses  Vulnerability to seasonal or recessionary influences or to threats from emerging new technologies  Potential to transfer resources and capabilities to other related businesses  Rapidly-changing conditions in one or more core industries alter buyer requirements  Complement and strengthen market position of one or more current businesses Strategies to Broaden a Diversified Company’s Business Base

57. Retrenchment Strategies Objective  Reduce scope of diversification to smaller number of “core “ businesses Strategic options involve divesting businesses that  Are losing money  Have little growth potential  Have little strategic fit with core businesses  Are too small to contribute meaningfully to earnings

58. Options for Accomplishing Divestiture Sell it  Involves finding a company which views the business as a good deal and good fit Spin it off as independent company  Involves deciding whether or not to retain partial ownership Liquidation  Involves closing down operations and selling remaining assets  A last resort because no buyer can be found

59. Strategies to Restructure a Company’s Business Lineup Objective  Make radical changes in mix of businesses in portfolio via both  Divestitures and  New acquisitions to put a whole new face on the company’s business makeup

60. Multinational Diversification Strategies Distinguishing characteristics  Diversity of businesses and  Diversity of national markets Presents a big strategy-making challenge  Strategies must be conceived and executed for each business, with as many multinational variations as appropriate  Cross-business and cross-country collaboration opportunities must be pursued and managed