Week 10 / Chapter 10: Global Environment Flashcards
e-book: Pages 58-68. Why companies decide to enter foreign markets
e-book: Pages 58-68. Why companies decide to enter foreign markets
A company may opt to expand outside its domestic market for any of five major reasons:
1) To gain access to new customers.
2) To achieve lower costs through economies of scale, experience, and increased purchasing power.
3) To gain access to low-cost inputs of production.
4) To further exploit its core competencies.
5) To gain access to resources and capabilities located in foreign markets
1) To gain access to new customers.
Expanding into foreign markets offers potential for increased revenues, profits, and long-term growth; it becomes an especially attractive option when a company encounters dwindling growth opportunities in its home market.
A larger target market also offers companies the opportunity to earn a return on large investments more rapidly. This can be par-ticularly important in R&D-intensive industries, where development is fast-paced or competitors imitate innovations rapidly.
2) To achieve lower costs through economies of scale, experience, and increased purchasing power.
Many companies are driven to sell in more than one country because domestic sales volume alone is not large enough to capture fully economies of scale in product development, manufacturing, or marketing
Move down learning curve quicker
3) To gain access to low-cost inputs of production.
Natural resource companies find this good as these resources are scattered across the globe
Other companies enter foreign markets to access low-cost human resources; this is particularly true of industries in which labor costs make up a high proportion of total production costs.
4) To further exploit its core competencies.
A company may be able to extend a market-leading position in its domestic market into a position of regional or global market leadership by leveraging its core competencies further.
5) To gain access to resources and capabilities located in foreign markets
An increasingly important motive for entering foreign markets is to acquire resources and capabilities that may be unavailable in a company’s home market.
Companies that are the suppliers of other companies often expand inter-nationally when their major customers do so,
to meet their customers’ needs abroad and retain their position as a key supply chain partner.
Crafting a strategy to compete in one or more countries of the world is inherently more complex for five reasons.
First, different countries have different home-country advantages in different industries; competing effectively requires an understanding of these differences.
Second, there are location-based advantages to conducting particular value chain activities in different parts of the world.
Third, different political and economic conditions make the general business climate more favorable in some countries than in others.
Fourth, companies face risk due to adverse shifts in currency exchange rates when operating in foreign markets.
And fifth, differences in buyer tastes and preferences present a challenge for companies concerning customizing versus standardizing their products and services.
The demand conditions in an industry’s home market include:
1) the relative size of the market,
2) its growth potential,
3) and the nature of domestic buyers’ needs and wants
Factor conditions describe:
the availability, quality, and cost of raw materials and other inputs (called factors of production) that firms in an industry require for producing their products and services.
Related and Supporting Industries
often develop in locales where there is a cluster of related industries, including others within the same value chain system (e.g., suppliers of components and equipment, distributors) and the mak-ers of complementary products or those that are technologically related.
Firm Strategy, Structure, and Rivalry
Different country environments foster the development of different styles of management, organization, and strategy.
For an industry in a particular country to become competitively strong, all four
factors must be favorable for that industry.
1) Demand conditions
2) Factor conditions
3) Related and supporting ideas
4) Firm strategy, structure, and rivalry
The Diamond Framework can be used to
- predict from which countries foreign entrants are most likely to come
- decide which foreign markets to enter first
- choose the best country location for different value chain activities
Cross-country variations in government policies and economic conditions affect both
the opportunities available to a foreign entrant and the risks of operating within the host country
Governments eager to spur economic growth,
create more jobs, and raise living standards for their citizens usually enact policies aimed at stimulating business innovation and capital investment;
Political risks
stem from instability or weakness in national governments and hostility to foreign business.
Economic risks
stem from instability in a country’s monetary system, economic and regulatory policies, and the lack of p
Sizable shifts in exchange rates pose significant risks for two reasons:
- They are hard to predict because of the variety of factors involved and the uncertainties surrounding when and by how much these factors will change.
- They create uncertainty regarding which countries represent the low-cost manufacturing locations and which rivals have the upper hand in
A weaker U.S. dollar is therefore an economically _______ exchange rate shift for
manufacturing plants based in the United States.
favorable
Pages 68-83. Strategies to go global. Competing internationally: 3 main approaches
Pages 68-83. Strategies to go global. Competing internationally: 3 main approaches
There are five primary modes of entry
5 ways to enter foreign markets
- Maintain a home-country production base and export goods to foreign markets.
- License foreign firms to produce and distribute the company’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
Export Strategies
Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial strategy for pursuing international sales.
The amount of capital needed to begin exporting is often minimal; existing production capacity may well be sufficient to make goods for export.
An export strategy is vulnerable when:
(1) manufacturing costs in the home country are substantially higher than in foreign countries where rivals have plants,
(2) the costs of shipping the product to distant foreign markets are relatively high,
(3) adverse shifts occur in currency exchange rates, and
(4) importing countries impose tariffs or erect other trade barriers.
Licensing Strategies
Licensing as an entry strategy makes sense when a firm with valuable technical know-how, an appealing brand, or a unique patented product has neither the internal organizational capability nor the resources to enter foreign markets.
Licensing also has the advantage of avoiding the risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky
One downside of the licensing alternative is that the partner who bears the risk is also likely to be the biggest beneficiary from any upside gain.
Many software and pharmaceutical companies use licensing strategies to participate in foreign markets.
Franchising Strategies
While licensing works well for manufacturers and owners of proprietary technology, franchising is often better suited to the international expansion efforts of service and retailing enterprises.
The franchisee bears most of the costs and risks
of establishing foreign locations; a franchisor has to expend only the resources to recruit, train, support, and monitor franchisees.
Disadvantage: Maintaining quality control
Foreign Subsidiary Strategies
Very often companies electing to compete internationally prefer to have direct control over all aspects of operating in a foreign market. Companies that want to participate in direct performance of all essential value chain activities typically establish a wholly owned subsidiary, either by acquiring a local company or by establishing its own new operating organization from the ground up
Greenfield Venture (aka internal startup)
is a subsidiary business that is established by setting up the entire operation from the ground up.
One thing an acquisition-minded firm must consider is whether to pay a premium
price for a successful local company or to buy a struggling competitor at a bargain price.
Disadvantages: They represent a costly capital investment, subject to a high level of risk, They require numerous other company resources as well, diverting them from other uses, They do not work well in countries without strong, well-functioning markets and institutions that protect the rights of foreign investors and provide other legal protections.
Four more conditions combine to make a greenfield venture strategy appealing:
- When creating an internal startup is cheaper than making an acquisition. • When adding new production capacity will not adversely impact the supply–demand balance in the local market.
- When a startup subsidiary has the ability to gain good distribution access (perhaps because of the company’s recognized brand name).
- When a startup subsidiary will have the size, cost structure, and capabilities to compete head-to-head against local rivals
Alliance and Joint Venture Strategies
Both Japanese and American companies are actively forming alliances with European companies to better compete
Another reason for cross-border alliances is to capture economies of scale in
production and/or marketing.
A third reason to employ a collaborative strategy is to share distribution facilities and dealer networks, thus mutually strengthening each partner’s access to buyers.
A fourth benefit of a collaborative strategy is the learning and added expertise that comes from performing joint research, sharing technological know-how, studying one another’s manufacturing methods, and understanding how to tailor sales and marketing approaches to fit local cultures and traditions.
The Risks of Strategic Alliances with Foreign Partners
Sometimes a local partner’s knowledge and expertise turns out to be less valuable than expected (because its knowledge is rendered obsolete by fast-changing market conditions or because its operating practices are archaic).
Cross-border allies typically must overcome language and cultural barriers and figure out how to deal with diverse (or conflicting) operating practices.
The transaction costs of working out a mutually agreeable arrangement and monitoring
partner compliance with the terms of the arrangement can be high.
International strategy
simply its strategy for competing in two or more countries simultaneously.
But as a company expands further internationally, it will have to confront head-on two conflicting pressures:
the demand for responsiveness to local needs versus the prospect of efficiency gains from offering a standardized product globally.
Three options for resolving this issue:
Choosing either a:
1) multidomestic,
2) global,
3) or transnational strategy.
A multidomestic strategy (think local, act local)
multi-domestic
Is one in which a company varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions
A think-local, act-local approach to strategy
is most appropriate when the need for local responsiveness is high due to significant cross-country differences in demographic, cultural, and market conditions and when the potential for efficiency gains from standardization is limited
Despite their obvious benefits, think-local, act-local strategies have three big
drawbacks:
- They hinder transfer of a company’s capabilities, knowledge, and other resources across country boundaries, since the company’s efforts are not integrated or coordinated across country boundaries. This can make the company less innovative overall.
- They raise production and distribution costs due to the greater variety of designs and components, shorter production runs for each product version, and complications of added inventory handling and distribution logistics.
- They are not conducive to building a single, worldwide competitive advantage. When a company’s competitive approach and product offering vary from country to country, the nature and size of any resulting competitive edge also tends to vary. At the most, multidomestic strategies are capable of producing a group of local competitive advantages of varying types and degrees of strength
Global strategy (Think global, act global)
is one in which a company employs the same basic competitive approach in all countries where it operates, sells standardized products glob-ally, strives to build global brands, and coordinates its actions worldwide with strong headquarters control.
A think-global, act-global approach
Prompts company managers to integrate and
coordinate the company’s strategic moves worldwide and to expand into most, if not all, nations where there is significant buyer demand.
Emphasizes building a global name
Several drawbacks to global strategies:
(1) They do not enable firms to address local needs as precisely as locally based rivals can;
(2) they are less responsive to changes in local market conditions, in the form of either new opportunities or competitive threats;
(3) they raise transportation costs and may involve higher tariffs;
and (4) they involve higher coordination costs due to the more complex task of managing a globally integrated enterprise.
Transnational strategy (think-global, act-local) Glocalization
is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies
called for when there are relatively high needs for local responsiveness as well as appreciable benefits to be realized from standardization
Transnational strategies also have significant drawbacks:
- They are the most difficult of all international strategies to implement due to the added complexity of varying the elements of the strategy to situational conditions.
- They place large demands on the organization due to the need to pursue conflicting objectives simultaneously.
- Implementing the strategy is likely to be a costly and time-consuming enterprise, with an uncertain outcome.
Positives and Negatives for the 3 options
Table 7.1 (textbook green page 77)
There are three important ways in which a firm can gain competitive advantage (or offset domestic disadvantages)
First, it can use location to lower costs or achieve greater product differentiation.
Second, it can transfer competitively valuable resources and capabilities from one country to another or share them across international borders to extend its competitive advantages.
And third, it can benefit from cross-border coordination opportunities that are not open to domestic-only competitors
To use location to build competitive advantage, a company must consider two issues:
(1) whether or not to concentrate some of the activities it performs in only a few select countries of those in which they operate and if so
(2) in which countries to locate particular activities.
It is advantageous for a company to concentrate its activities in a limited number of locations when
1) The costs of manufacturing or other activities are significantly lower in some geographic locations than in others.
2) Significant scale economies exist in production or distribution.
3) Sizable learning and experience benefits are associated with performing an activity.
4) Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages.
Ghemawat, P. (2001). Distance Still Matters. The Hard Reality of Global Expansion. Harvard Business Review
Ghemawat, P. (2001). Distance Still Matters. The Hard Reality of Global Expansion. Harvard Business Review
Country portfolio analysis (CPA)
The hoary but still widely used technique for deciding where a company should compete. By focusing on national GDP, levels of consumer wealth, and people’s propensity to consume, CPA places all the emphasis on potential sales. It ignores the costs and risks of doing business in a new market.
The Four Dimensions of Distance (CAGE FRAMEWORK)
1) cultural,
2) administrative,
3) geographic,
4) and economic
Cultural distance (CAGE FRAMEWORK)
A country’s cultural attributes determine how people
interact with one another and with companies and institutions
Differences in
religious beliefs, race, social norms, and
language are all capable of creating distance between two countries
affects consumers’ product
preferences. It is a crucial consideration
for any consumer goods or media company, but it is much less important for
a cement or steel business.
Geographic
distance (CAGE FRAMEWORK)
In general, the farther you are from a country, the
harder it will be to conduct business in that country
affects the costs of transportation and communications, so it is of particular importance to companies that deal with heavy or bulky products, or whose operations require a high degree of coordination among highly dispersed people or activities
Administrative or Political Distance (CAGE FRAMEWORK)
Historical and political associations shared by countries greatly affect
trade between them.
Economic Distance (CAGE FRAMEWORK)
The wealth or income of consumers is the most important economic attribute that creates distance between countries, and it has a marked effect on the levels of trade and the types of partners a country
trades with
Rich countries, research suggests, engage in relatively more crossborder economic activity relative to
their economic size than do their poorer
cousins
But poor countries also trade more with rich countries than with other poor ones.
