LU6:

International
Strategies

CHAPTER 7
Strategies for
Competing in
International
Markets
 Why companies decide to enter foreign markets

WHY COMPANIES DECIDE TO

ENTER FOREIGN MARKETS

To gain access to To gain access to

new customers lower-cost inputs of
and meet current To further exploit production
customer needs core competencies

To achieve lower costs To gain access to

through economies of scale, resources and
experience, and increased capabilities located
purchasing power in foreign markets

© McGraw-Hill Education. Jump to Appendix 1 long image description

 WHY COMPETING ACROSS NATIONAL BORDERS
MAKES STRATEGY-MAKING MORE COMPLEX

♦ 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, the lack of property
rights protections.

1. Different countries with different home-country advantages in different

industries
2. Location-based value chain advantages for certain countries
3. Differences in government policies, tax rates & economic conditions
4. Currency exchange rate risks
5. Differences in buyer tastes and preferences for products and services

© McGraw-Hill Education.
 FIGURE 7.1 The Diamond of National Advantage

Jump to Appendix 2 long image description

© McGraw-Hill Education.
 CROSS-COUNTRY DIFFERENCES IN
DEMOGRAPHIC, CULTURAL, AND
MARKET CONDITIONS

Whether to customize offerings

in each country market to
match the tastes and the
preferences of local buyers
Key Strategic
Considerations
Whether to pursue a strategy of
offering a mostly standardized
product worldwide

Jump to Appendix 3 long image description

© McGraw-Hill Education.
 STRATEGIC OPTIONS FOR ENTERING AND
COMPETING IN INTERNATIONAL MARKETS

♦ Maintain a home country production base and

export goods to foreign markets.
♦ License foreign firms to produce and distribute
the firm’s products abroad.
♦ Employ a franchising strategy in foreign markets.
♦ Establish a subsidiary in a foreign market via
acquisition or internal development.
♦ Rely on strategic alliances or joint ventures with
foreign companies.

© McGraw-Hill Education.
 EXPORT STRATEGIES
♦ Advantages ♦ Disadvantages
● Low capital ● Maintaining relative
requirements cost advantage of
● Economies of scale home-based
in utilizing existing production
production capacity ● Transportation and
● No distribution risk shipping costs

● No direct investment
● Exchange rates risks
risk ● Tariffs and import
duties
● Loss of channel control

© McGraw-Hill Education.
 LICENSING AND FRANCHISING
STRATEGIES
♦ Advantages ♦ Disadvantages
● Low resource ● Maintaining control of
requirements proprietary know-how
● Income from royalties ● Loss of operational and
and franchising fees quality control
● Rapid expansion into ● Adapting to local
many markets market tastes and
expectations

© McGraw-Hill Education.
 FOREIGN SUBSIDIARY STRATEGIES
♦ Advantages ♦ Disadvantages
● High level of control ● Costs of acquisition
● Quick large-scale ● Complexity of
market entry acquisition process
● Avoids entry ● Integration of the
barriers firms’ structures,
● Access to acquired cultures, operations,
firm’s skills and personnel

© McGraw-Hill Education.
 USING A GREENFIELD STATEGY FOR
DEVELOPING A FOREIGN SUBSIDIARY
A greenfield venture is a subsidiary business that is
established by setting up the entire operation from
the ground up.
A greenfield strategy is appealing when:
● Creating an internal startup is cheaper than making
an acquisition
● Adding new production capacity will not adversely impact the
supply-demand balance in the local market
● A startup subsidiary has ability to gain good distribution
access
● A startup subsidiary will have size, cost structure & resource
strengths to compete head-to-head against local rivals
© McGraw-Hill Education.
 PURSUING A GREENFIELD STRATEGY
♦ Advantages ♦ Disadvantages
● High level of control ● Capital costs of initial
over venture development
● “Learning by doing” ● Risks of loss due to
in the local market political instability or
● Direct transfer of the lack of legal protection
firm’s technology, of ownership
skills, business ● Slowest form of entry
practices, and culture due to extended time
required to construct
facility

© McGraw-Hill Education.
 BENEFITS OF ALLIANCE AND
JOINT VENTURE STRATEGIES
Cross-border alliances enable a growth-minded firm to widen its
geographic coverage and strengthen its competitiveness in
foreign markets; at the same time, they offer flexibility and allow a
firm to retain some degree of autonomy and operating control.
♦ Gaining partner’s knowledge of local market conditions
♦ Achieving economies of scale through joint operations
♦ Gaining technical expertise and local market knowledge
♦ Sharing distribution facilities and dealer networks, and mutually
strengthening each partner’s access to buyers
♦ Directing competitive energies more toward mutual rivals and less
toward one another
♦ Establishing working relationships with key officials in the host-
country government
© McGraw-Hill Education.
 THE RISKS OF STRATEGIC ALLIANCES
WITH FOREIGN PARTNERS
♦ Outdated knowledge and expertise of local partners
♦ Cultural and language barriers
♦ Costs of establishing the working arrangement
♦ Conflicting objectives and strategies or deep differences
of opinion about joint control
♦ Differences in corporate values and ethical standards
♦ Loss of legal protection of proprietary technology or
competitive advantage
♦ Overdependence on foreign partners for essential
expertise and competitive capabilities

© McGraw-Hill Education.
 FIGURE 7.2 Three
Approaches for Competing
Internationally

Jump to Appendix 4 long image description

© McGraw-Hill Education.
 INTERNATIONAL OPERATIONS AND THE
QUEST FOR COMPETITIVE ADVANTAGE

Build Competitive Advantage

in International Markets

Use international
Gain cross-border
location to lower Share resources
coordination
cost or differentiate and capabilities
benefits
product

© McGraw-Hill Education. Jump to Appendix 5 long image description

 TABLE 7.1 Advantages and
Disadvantages of a Multidomestic Strategy

Multidomestic (think local, act local)

Advantages Disadvantages
• Can meet the specific needs of • Hinders resource and capability
each market more precisely sharing or cross-market transfers

• Can respond more swiftly to • Has higher production and

localized changes in demand distribution costs

• Can target reactions to the • Is not conductive to a worldwide

moves of local rivals competitive advantage

• Can respond more quickly to

local opportunities and threats

© McGraw-Hill Education.
 TABLE 7.1 Advantages and Disadvantages of a
Global Strategy

Global (think global, act global)

Advantages Disadvantages
• Has lower costs due to scale and • Cannot address local needs
scope economies precisely
• Can lead to greater efficiencies
due to the ability to transfer best • Is less responsive to changes in
practices across markets local market conditions

• Increases innovation from

knowledge sharing and capability • Involves higher transportation
transfer costs and tariffs

• Offers the benefit of a global • Has higher coordination and

brand and reputation integration costs

© McGraw-Hill Education.
 TABLE 7.1 Advantages and Disadvantages of
Transnational Strategy

Transnational (think global, act local)

Advantages Disadvantages
• Offers the benefits of both local • Is more complex and harder to
responsiveness and global implement
integration

• Enables the transfer and sharing • Entails conflicting goals, which

of resources and capabilities may be difficult to reconcile and
across borders require trade-offs

• Provides the benefits of flexible • Involves more costly and time-

coordination consuming implementation

© McGraw-Hill Education.
 USING LOCATION TO BUILD
COMPETITIVE ADVANTAGE

To customize offerings in each

country market to match tastes
and preferences of local buyers
Key Location
Issues
To pursue a strategy of offering
a mostly standardized product
worldwide

© McGraw-Hill Education. Jump to Appendix 6 long image description

 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.
© McGraw-Hill Education.
 WHEN TO DISPERSE ACTIVITIES
ACROSS MANY LOCATIONS
♦ Buyer-related activities can be conducted at a distance.
♦ There are high transportation costs.
♦ There are diseconomies 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.

© McGraw-Hill Education.
 SHARING AND TRANSFERRING
RESOURCES AND CAPABILITIES TO
BUILD COMPETITIVE ADVANTAGE
♦ Building a resource-based competitive advantage
requires:
● Using powerful brand names to extend a differentiation-
based competitive advantage beyond the home market
● Coordinating activities for sharing and transferring
resources and production capabilities across different
countries’ domains to develop market dominating depth
in key competencies

© McGraw-Hill Education.
 CORE CONCEPTS (5 of 6)
Profit sanctuaries are country markets that
provide a firm with substantial profits because of a
strong or protected market position.
Cross-market subsidization—supporting
competitive offensives in one market with
resources and profits diverted from operations in
another market—can be a powerful competitive
weapon.

© McGraw-Hill Education.
 PROFIT SANCTUARY POTENTIAL OF DOMESTIC-
ONLY AND INTERNATIONAL COMPETITORS

© McGraw-Hill Education. Jump to Appendix 7 long image description

 PROFIT SANCTUARY POTENTIAL
OF GLOBAL COMPETITORS

© McGraw-Hill Education. Jump to Appendix 8 long image description

 DUMPING AS A STRATEGY
♦ Dumping
● Selling goods in foreign markets at prices
that are either below normal home market
prices or below the full costs per unit
♦ Dumping is NOT a fair-trade practice.
● Governments can be expected to retaliate
against such practices by foreign competitors.
● The World Trade Organization (WTO) actively
polices dumping to discourage such practices.

© McGraw-Hill Education.
 USING PROFIT SANCTUARIES TO DEFEND
AGAINST INTERNATIONAL RIVALS

International International
Firm A Firm B

Profit Sanctuary

Firm A moves against Firm B in Country B

Firm B counters with a response in Country C

© McGraw-Hill Education. Jump to Appendix 9 long image description

 CORE CONCEPT (6 of 6)
When the same companies compete against one
another in multiple geographic markets, the threat
of cross-border counterattacks may be enough to
deter aggressive competitive moves and
encourage mutual restraint among international
rivals.

© McGraw-Hill Education.
 STRATEGY OPTIONS FOR COMPETING IN
THE MARKETS OF DEVELOPING COUNTRIES

♦ Prepare to compete on the basis of low price.

♦ Prepare to modify the firm’s business model or
strategy to accommodate local circumstances.
♦ Try to change the local market to better match
the way the firm does business elsewhere.
♦ Stay away from developing markets where it is
impractical or uneconomical to modify the
company’s business model to accommodate
local circumstances.

© McGraw-Hill Education.
 DEFENDING AGAINST GLOBAL GIANTS:
STRATEGIES FOR LOCAL COMPANIES IN
DEVELOPING COUNTRIES
1. Develop a business model that exploits shortcomings in
local distribution networks or infrastructure.
2. Utilize knowledge of local customer needs and
preferences to create customized products or services.
3. Take advantage of aspects of the local workforce with
which large multinational firms may be unfamiliar.
4. Use acquisition and rapid-growth strategies to defend
against expansion-minded internationals.
5. Transfer company expertise to cross-border markets and
initiate actions to contend on an international level.

© McGraw-Hill Education.