[MHR 410] International Strategy

Key Points:

1. Competing in international markets allows multinational companies to 
1. (1) gain access to new customers, 
2. (2) achieve lower costs and enhance the firm’s competitiveness by more easily capturing scale economies or learning-curve effects, 
3. (3) leverage core competencies refined domestically in additional country markets, and 
4. (4) spread business risk across a wider market base.
2. Companies electing to expand into international markets must consider cross-country differences in cultural, demographic, and market conditions, location-based cost drivers, adverse exchange rates, and host government policies when evaluating strategy options.
3. In posturing to compete in foreign markets, a company has three basic options: 
• (1) a think local, act local approach to crafting a strategy, 
• (2) a think global, act global approach to crafting a strategy, and 
• (3) a combination think global, act local approach. 
1. A “think local, act local” or multicountry strategy is appropriate for industries or companies that must vary their product offerings and competitive approaches from country to country in order to accommodate differing buyer preferences and market conditions. 
2. A “think global, act global” approach (or global strategy) works best in markets that support employing the same basic competitive approach (low-cost, differentiation, focused) in all country markets and marketing essentially the same products under the same brand names in all countries where the company operates. 
3. A “think global, act local” approach can be used when it is feasible for a company to employ essentially the same basic competitive strategy in all markets, but still customize its product offering and some aspect of its operations to fit local market circumstances.
4. Other strategy options for competing in world markets include 
1. maintaining a national (one-country) production base and exporting goods to foreign markets, 
2. licensing foreign firms to use the company’s technology or produce and distribute the company’s products, 
3. employing a franchising strategy, and 
4. using strategic alliances or other collaborative partnerships to enter a foreign market or strengthen a firm’s competitiveness in world markets.
5. Strategic alliances with foreign partners have appeal from several angles: 
1. gaining wider access to attractive country markets, 
2. allowing capture of economies of scale in production and/or marketing, 
3. filling gaps in technical expertise and/or knowledge of local markets, 
4. saving on costs by sharing distribution facilities and dealer networks, 
5. developing relationships with host country officials, 
6. helping gain agreement on important technical standards, and 
7. combating a common rival.
6. There are three general ways in which a firm can gain competitive advantage (or offset domestic disadvantages) in global markets. 
1. One way involves locating various value chain activities among nations in a manner that lowers costs or achieves greater product differentiation. 
2. A second way draws on a multinational or global competitor’s ability to deepen or broaden its resource strengths and capabilities and to coordinate its dispersed activities in ways that a domestic-only competitor cannot. 
3. A third involves utilizing profit sanctuaries in protected markets to wage strategic offenses in various international markets. Profit sanctuaries are country markets in which a company derives substantial profits because of its strong or protected market position. They are valuable competitive assets. A company with multiple profit sanctuaries has the financial strength to support competitive offensives in one market with resources and profits diverted from its operations in other markets. The ability of companies with multiple profit sanctuaries to employ cross-subsidization gives them a powerful offensive weapon and a competitive advantage over companies with a single sanctuary.
7. Companies racing for global leadership have to consider competing in emerging markets like China, India, Brazil, Indonesia, and Mexico—countries where the business risks are considerable but the opportunities for growth are huge. To succeed in these markets, companies often have to 
1. (1) compete on the basis of low price, 
2. (2) be prepared to modify aspects of the company’s business model or strategy to accommodate local circumstances (but not so much that the company loses the advantage of global scale and global branding), and/or 
3. (3) try to change the local market to better match the way the company does business elsewhere. Profitability is unlikely to come quickly or easily in emerging markets, typically because of the investments needed to alter buying habits and tastes and/or the need for infrastructure upgrades. And there may be times when a company should simply stay away from certain emerging markets until conditions for entry are better suited to its business model and strategy.

INTERNATIONAL STRATEGY

WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS:

• To exploit core competencies
• To spread business risk across a wider market base 
• To gain access to new customers 
• To achieve lower costs and economies of scale 
• To access resources and capabilities in foreign markets 

WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX 

1. Industry competitiveness factors that vary from country to country 
2. Location-based advantages for certain countries 
3. Differences in government policies and economic conditions 
4. Currency exchange rate risks 
5. Differences in cultural, demographic, and market conditions

The Diamond of National Advantage

• Demand Conditions:
• Home-market relative size; domestic buyers’ needs 
• Related\Supporting Industries 
• Proximity of suppliers, end users, and complementary industries 
• Firm Strategy, Structure, and Rivalry 
• Different management styles and organization; degree of local rivalry 
• Factor Conditions
• Availability, quality, and relative prices of inputs (e.g. labor, materials)

The Diamond Framework

• Answers important questions about competing on an international basis by:
• Predicting where new foreign entrants are likely to come from and their strengths. 
• Highlighting foreign market opportunities where rivals are weakest. 
• Identifying the location-based advantages of conducting certain value chain activities of the firm in a particular country.

Reasons for Locating Value Chain Activities for Competitive Advantage 

• Lower wage rates 
• Higher worker productivity 
• Lower energy costs 
• Fewer environmental regulations 
• Lower tax rates 
• Lower inflation rates 
• Proximity to suppliers and technologically related industries 
• Proximity to customers 
• Lower distribution costs 
• Available\unique natural resources

The Impact of Government Policies and Economic Conditions in Host Countries

• Positives 
• Tax incentives 
• Low tax rates 
• Low-cost loans 
• Site location and development 
• Worker training
• Negatives 
• Environmental regulations 
• Subsidies and loans to domestic competitors 
• Import restrictions 
• Tariffs and quotas 
• Local-content requirements 
• Regulatory approvals 
• Profit repatriation limits 
• Minority ownership limits

Political and Economic Risks

• Political Risks 
• Stem from instability or weaknesses in national governments and hostility to foreign business. 
• Economic Risks 
• Stem from the stability of a country’s monetary system, economic and regulatory policies, lack of property rights protections, and risks due to exchange rate fluctuation.

The Risks of Adverse Exchange Rate Shifts

• Effects of Exchange Rate Shifts: 
• Exporters experience a rising demand for their goods whenever their currency grows weaker relative to the importing country’s currency. 
• Exporters experience a falling demand for their goods whenever their currency grows stronger relative to the importing country’s currency.

Cross-Country Differences in Demographic, Cultural, and Market Conditions 

• Key Strategic Considerations:
• To pursue a strategy of offering a mostly standardized product worldwide. 
• To customize offerings in each country market to match the tastes and preferences of local buyers 

THE CONCEPTS OF MULTIDOMESTIC COMPETITION AND GLOBAL COMPETITION

• Multidomestic Competition 
• Exists when competition in each country market is localized and not closely connected to competition in other country markets.
• Global Competition 
• Exists when competitive conditions and prices are strongly linked across many different national markets.

Features of Multidomestic Competition

• 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.

Features of Global Competition

• The same group of firms competes in countries where sales volumes are large and having a presence is important to a strong global position.
• Competitive advantage is gained from the transfer of expertise, economies of scale, and worldwide brand-name recognition. 
• Global competition is increasing in multidomestic markets where custom mass production is coinciding with converging consumer tastes.

STRATEGIC OPTIONS FOR ENTERING AND COMPETING IN INTERNATIONAL MARKETS 

• Maintain a national (one-country) production base and export goods to foreign markets. 
• License foreign firms to produce and distribute the firm’s products abroad. 
• Employ an overseas franchising strategy. 
• Establish a wholly-owned subsidiary by either acquiring a foreign company or through a “greenfield” venture. 
• Form strategic alliances or joint ventures with foreign companies.

Export Strategies 

• Advantages 
• Low capital requirements 
• Economies of scale in utilizing existing production capacity 
• No distribution risk 
• No direct investment risk 
• Disadvantages 
• Maintaining relative cost advantage of home-based production 
• Transportation and shipping costs 
• Exchange rates risks 
• Tariffs\import duties 
• Loss of channel control

Licensing and Franchising Strategies 

• Advantages 
• Low resource requirements 
• Income from royalties and franchising fees 
• Rapid expansion into many markets 
• Disadvantages 
• Maintaining control of proprietary know-how 
• Loss of operational and quality control 
• Adapting to local market tastes and expectations

Acquisition Strategies 

• Advantages 
• High level of control 
• Quick large-scale market entry 
• Avoids entry barriers 
• Access to acquired firm’s skills 
• Disadvantages 
• Costs of acquisition 
• Complexity of acquisition process 
• Integration of the firms’ structures, cultures, operations and personnel

"Greenfield" Strategies  *i.e....establishing a wholly-owned subsidiary in area...

• Advantages 
• High level of control over venture 
• “Learning by doing” in the local market 
• Direct transfer of the firm’s technology, skills, business practices, and culture 
• Disadvantages 
• Capital costs of initial development 
• Risks of loss due to political instability or lack of legal protection of ownership 
• Slowest form of entry due to extended time required to construct facility

Alliance and Joint Venture Strategies

• Advantages 
• Avoid entry barriers 
• Allow for resource and risk sharing 
• Partner’s knowledge of local market conditions 
• Joint learning and sharing 
• Preservation of partner independence 
• Disadvantages 
• Cultural and language barriers 
• Costs of establishing the working arrangement 
• Issues of joint control 
• Protection of proprietary technology or competitive advantage

COMPETING INTERNATIONALLY: THE THREE MAIN STRATEGIC APPROACHES 

• Competing Internationally:
1. Multidomestic Strategy 
2. Global Strategy 
3. Transnational Strategy 

Approaches to International Strategy 

• .Multidomestic Strategy 
• Varies product offerings and competitive approaches from country to country. 
• Global Strategy 
• Employs the same basic competitive approach in all countries where the firm operates. 
• Transnational Strategy 
• Is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies.

Three Approaches for Competing Internationally

Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches 

• Multidomestic Approach
• Advantages
• Can meet the specific needs of each market more precisely 
• Can respond more swiftly to localized changes in demand 
• Can target reactions to the moves of local rivals 
• Can respond more quickly to local opportunities and threats 
• Disadvantages
• Hinders resource and capability sharing or cross-market transfers 
• Higher production and distribution costs 
• Not conducive to a worldwide competitive advantage
• Transnational Approach
• Advantages
• Offers the benefits of both local responsiveness and global integration 
• Enables the transfer and sharing of resources and capabilities across borders 
• Provides the benefits of flexible coordination 
• Disadvantages
• More complex and harder to implement 
• Conflicting goals may be difficult to reconcile and require trade-offs 
• Implementation more costly and timeconsuming 
• Global Approach 
• Advantages
• Lower costs due to scale and scope economies 
• Greater efficiencies due to the ability to transfer best practices across markets 
• More innovation from knowledge sharing and capability transfer 
• The benefit of a global brand and reputation 
• Disadvantages
• Unable to address local needs precisely 
• Less responsive to changes in local market conditions 
• Higher transportation costs and tariffs 
• Higher coordination and integration costs

THE QUEST FOR COMPETITIVE ADVANTAGE IN THE INTERNATIONAL ARENA

• Build Competitive Advantage in International Markets
• Use international location to lower cost or differentiate product 
• Share resources, competencies, and capabilities 
• Gain cross-border coordination benefits 

Using Location to Build Competitive Advantage

• Key Location Issues:
• To pursue a strategy of offering a mostly standardized product worldwide. 
• To customize offerings in each country market to match the tastes and preferences of local buyers 

When to Concentrate Activities in a Few Locations 

• The costs of manufacturing or other activities are significantly lower in some geographic locations than in others. 
• There are significant scale economies in production or distribution. 
• There are sizable learning and experience benefits 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.

When to Disperse Activities across Many Locations 

• Buyer-related activities can be conducted at a distance.
• There are high transportation costs. 
• There are dis-economies of large size. 
• Trade barriers make a central location too expensive. 
• Dispersing activities reduces exchange rate risks. 
• Dispersion helps prevent supply interruptions. 
• Dispersion helps avoid adverse political developments. 
• Dispersion allows for location-based technology and production cost competitive advantages.