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Why companies expand in foreign markets?

o To gain access to new customers:

Expanding into foreign market offers potential for increased revenues, profits, long term growth etc.
by attracting new customers internationally.
 Any MNCs like Avon, Toyota etc. are moving rapidly to extend their market reach.
o To achieve lower costs, enhance the firm’s competitiveness:
Many companies are driven to sell in more than one country because domestic sales volume is not
large enough to fully capture manufacturing economies of scale or learning experience curve effects
and there by substantially improve the firm’s competitiveness.
 Toyota’s plant in Chennai to produce cars for Asian markets
o To capitalize on its core competencies :
A company may be able to leverage its competencies and capabilities into a position of competitive
advantage in foreign market as well as just domestic markets.
o To spread its business risk across wider market base:
A company spreads business risk by operating in a no. of different foreign market rather than
depending entirely on operations in its domestic market.
 McDonalds franchising model. They open franchise in various country to spread their risk.

Cross country differences in cultural, demographics & market conditions

o Cultures and lifestyles differ among countries to countries. The company cannot apply same concept
all over world. Because culture and lifestyle will always be different.
 McDonalds face an issue of BEEF in India, while it was well accepted in other countries.
o Differences in market demographics and income levels
 Muslim countries do not accept very fashionable clothes
o Variations in manufacturing and distribution costs:
Produce the products that are closely matched to local tastes makes them more appealing to local
buyers, customizing a company’s product country by country may lead to increase production and
distribution costs due to greater variety of designs and components, shorter production runs, and
complications of added inventory handling and distribution logistics.
Gaining competitive advantage based on where activities are located…..
o Manufacturing costs vary from country to country based on
 Wage rates
 Low wage – India, China, Pakistan, Brazil and several countries in Africa that have
become production haven for manufacture goods with high labor content and
specially China is fast becoming the manufacturing capital of the world.
 Worker productivity, Inflation rates, Energy costs, Tax rates etc also affects the
manufacturing cost of a company.
 Government regulations
 Chinese government puts high regulation on foreign companies while in India it’s
comparatively lower.
o Quality of business environment also offers locational advantages like government of some
countries are anxious to attract foreign investments and go all out to create a business climate that
outsiders view as favorable.
Risks of Adverse Exchange Rate Shifts
o Currency exchange rates are unpredictable
 Competitiveness of a company’s operations partly depends on whether exchange rate
changes affect costs favorably or unfavorably
o Lessons 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
o Risk reduction strategies
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 Forward contracts
 Fixing the price of the exchange rate at the date of contract. (Eg. – 42.50 Rs per $)
 No matter that the exchange rates rise or falls, a sum amounted of Rs. 42.50 is only
payable per $, at the time of payment during future.
Host Government policies
o Local content requirements:
Host governments may set local content requirements on goods made inside their border by foreign
based companies, have rules and policies that protect local companies from foreign competition.
o It may also put restrictions on exports to ensure adequate local supplies, regulate the prices of
imported goods to pass customs inspection and impose tariff on quotas on the imports of certain
goods. Like until 2002 when china joined the WTO, it imposed 100% tariff on motor vehicle imports.
o Other regulations:
 Technical standards
 Product certification
 Prior approval of capital spending projects
 Withdrawal of funds from country
 Ownership (minority or majority) by local citizens

The concept of Multi-country competition & Global competition

o Multi-Country competition
 Multi – country competition exists when competition in one national market is not closely
connected to competition in another national market –there is no global or world market.
There is just a collection of self- contained country market.
 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.
 And here sellers vary from country to country.
 Industry conditions and competitive forces in each national market differ in
important respects like in banking industry in India, China and Pakistan ; the
requirements of banking customers vary among three countries.
 Eg. – Mittal Steels corp. ltd.
 Eg. – Suzlon Energy ltd.

o Global Competition
 Global competition exists when competitive conditions among national markets are linked
strongly enough to form a true international market and when leading competitors compete
head to head in many different countries.
 Company markets products in 50 to 100 countries and is expanding operations into
additional country markets annually.
 Characteristics of Global competition:
 Competitive conditions across country markets are strongly linked like
o Many of same rivals compete in many of the same countries.
o A true international market exists here.
 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
 Eg. – PepsiCo, Coca-Cola , McDonalds, Dell etc.
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Strategy options for entering & competing in foreign markets.

o Exporting
 A company can use its domestic plants as a production base for exporting goods to foreign
markets. It is an excellent initial strategy for pursuing international sales.
 With an export strategy, a manufacture can limit its involvement in foreign market by
contracting with foreign wholesalers who are expert in handling entire distribution and
marketing function in their country.
 But sometimes export strategy is vulnerable when
 Manufacturing costs in home country are substantially higher than in foreign
countries where rivals have plants.
 The cost of shipping the product to distant foreign market is relatively high.
 Best situation for exporting is when…….
 The firm has no foreign manufacturing expertise and requires investment only in
distribution.
o Licensing
 Licensing makes sense when a firm with valuable technical know-how or a unique patented
product has neither the internal organizational capability nor the resources to enter foreign
market
 Licensing involves low cost, low risk, little control and as well as low returns.
 Best situation for Licensing is when…….
 The firm needs to facilitate the product improvements necessary to enter foreign
markets
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o Strategic alliances
 Strategic alliance allow firms to share costs, share resources, share risks, problems of
integration (e.g., two corporate cultures)
 The strategic alliance between GM and SAIC has been successful over the years because of
the way it was managed.
 Best situation for Strategic alliance is when…….
 The firm needs to connect with an experienced partner already in the targeted
market.
 The firm needs to reduce its risk through the sharing of costs.
 The firm is facing uncertain situations such as an emerging economy in its targeted
market.
o Acquisition
 Acquisition provides quick access to new market and largest initial international expansion of
any of the alternatives.
 In acquisition there is high cost, complex negotiations, problems of merging with domestic
operations. Because it requires debt financing, this carries an extra cost.

o New wholly owned subsidiary

 The establishment of a new wholly owned subsidiary is referred to as a greenfield venture.
 So it is very Complex, often costly, time consuming, high risk, maximum control, potential
above-average returns.
 Best situation for New wholly owned subsidiary is when……
 The firm’s intellectual property rights in an emerging economy are not well
protected, the number of firms in the industry is growing fast, and the need for
global integration is high.
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Localized Multi-Country strategies or a Global Strategies

Think Local – Act Local Approaches to strategy making

o 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.
 Eg. KFC has changed its menu to accommodate Indian Taste. But these kinds of dishes
KFC will never offer to any other country in Europe.
o Characteristics of this strategy
 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
 Here 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.
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o When this approach works?

 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
o Drawbacks of this strategy
 Poses problems of transferring competencies across borders
 Works against building a unified competitive advantage
Think Global – Act Global Approaches to strategy making
o A company employs the same basic competitive approach in all countries where it operates.
 Eg. SAP, Caterpiller, JCB etc.
o Characteristics of the strategy:
 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
Think Global – Act Local Approaches to strategy making
o A company uses the same basic
competitive theme in each country but allows local managers latitude to . . .
 Incorporate whatever country-specific variations in product attributes are needed to
best satisfy local buyers and
 Make whatever adjustments in production, distribution, and marketing are needed to
compete under local market conditions
o Eg. – Whirlpool
 Basic competitive theme – Low cost leadership
 It changes products according to the local tastes, eg. In Indian context, it has started
giving different colors in the outer body of the Television.
o Eg. – General Motors
 Basic competitive strategy – Using minimum varieties in the particular component. Eg.
Radio of only 50 varieties against other companies’ 100 – 250 varieties of radios.
 It offers customization from these available variants according to country’s requirement.

The Quest for Competitive Advantage in Foreign Markets:

o Three ways to gain competitive advantage

 Locating activities among nations in ways that lower costs or achieve greater product
differentiation

 Efficient/effective transfer of competitively valuable competencies and capabilities from

company operations in one country to company operations in another country

 Coordinating dispersed activities in ways a domestic-only competitor cannot

Locating Activities to Build a Global Competitive Advantage:

 Two issues

 Whether to
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o Concentrate each activity in a few countries or

o Disperse activities to many different nations

 Where to locate activities

o Which country is best location for which activity?

When to Concentrate Activity in a few Locations

 When the cost of manufacturing or other activities are significantly lower in some geographic
location than other

For example –Much of the world’s athletic footwear in manufactured in Asia (China and Korea)
because of low labor costs.

Concentrating Activities to Build a Global Competitive Advantage:

 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

o Superior resources

o Allow better coordination of related activities or

o Offer other valuable advantages

Dispersing Activities to Build a Global Competitive Advantage:

 When to disperse Activites Across many Locations

There are several instances when dispersing activities is more advantageous than concentrating
them.

For example – Firms that make mining and oil-drillilng equipment maintain operations in many
international locations to support customer’s needs for speedy equipment repair and technical
assistance.

Transferring Valuable Competencies to Build a Global Competitive Advantage:

o 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

o 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

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For example - Philips Electronics sells more color TVs and DVD recorders in Europe than any other
company does.

What Are Profit Sanctuaries?

 Profit sanctuaries are country markets where a firm

o Has a strong, protected market position and

o Derives substantial profits

 Generally, a firm’s most strategically crucial profit sanctuary is its home market

For example – McDonalds profits sanctuaries is United States where there making the highest revenues.

What Is Cross-Market Subsidization?

 Involves supporting competitive offensives in one market with resources/profits diverted from
operations in other markets

 Competitive power of cross-market subsidization results from a global firm’s ability to

o Draw upon its resources and profits in other country markets to mount an attack on single-
market or one-country rivals and

o Try to lure away their customers with

 Lower prices

 Discount promotions

 Heavy advertising

 Other offensive tactics

Global Strategic Offensives:

 Attack a foreign rival’s profit sanctuaries

o 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

 Employ cross-market subsidization

o Attractive offensive strategy for companies competing in multiple country markets with
multiple products

 Dump goods at cut-rate prices

o 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 per unit

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Achieving Global Competitiveness via Cooperation:

 Cooperative agreements with foreign companies are a means to

o Enter a foreign market or

o Strengthen a firm’s competitiveness

in world markets

 Purpose of alliances

o Joint research efforts

o Technology-sharing

o Joint use of production or distribution facilities

o Marketing / promoting one another’s products

Strategic Appeal of Strategic Alliances:

 Gain better access to attractive country markets from host country’s 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 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

For example – American and Japanese Government are actively forming alliances with European
countries to strengthen their ability.

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
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Characteristics of Competing in Emerging Foreign Markets:

 Tailoring products for big, emerging markets often involves

o Making more than minor product changes and

o 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.

Strategic Options for Local Companies: 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

o Familiarity with local preferences

o Expertise in traditional products

o Long-standing customer relationships

 Cater to the local market in ways that

pose difficulties for global rivals

For example – Voltas AC

Strategic Options for Local Companies: Transfer Expertise to Cross-Border Markets:

 When a local company trying to defend against a global challenger has resource strengths and
capabilities suitable for competing in other country markets, then it should consider

o Launching initiatives to transfer its expertise to

cross-border markets

o Becoming more of an international competitor

 Such a move to enter foreign markets can help

o Build a bigger customer base (to offset

any losses in its home market)

o Grow sales and profits

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o Put in a stronger position to contend with

global challengers in its home market

For example – Tata Motors

Strategic Options for Local Companies: Dodging Rivals by Shifting to a New Business Model
or Market Niche:

 When industry pressures to globalize are high, viable strategic options for a local company trying to
defend against global challengers in its home market include

o Shifting the business to a piece of the industry value chain where the firm’s
expertise/resources provide a defendable position or maybe even a competitive advantage

o Entering a joint venture with a globally competitive partner

o Selling out to a global entrant into its home market

For example – Tata Docomo.

Strategic Options for Local Companies: Contend on a Global Level

 If a local company has resources and capabilities that it can transfer to operations in other
countries, it can launch a strategy aimed at

o Entering markets of other countries as rapidly as possible

o Shifting to a more globalized strategy

o Building brand recognition and a brand image that extends to more and more countries

o Gradually establishing the resources and capabilities to go head-to-head against large

global rivals