Context of Strategic Management: Foreign Markets

1
Context of Strategic Management Foreign Markets
MAN 4720 Strategic Management
Chapter 2A
2
Chapter Checklist

• Factors Affecting a Nations Competitiveness
• International Expansion Motivations and Risks
• Global Dispersion of Value Chains
• Expansion into Foreign Markets
• Variations in National Markets
• Multinational Strategy Options
• Profit Sanctuaries, Cross-Market Subsidization,
  and Dumping

3
Factors Affecting a Nations Competitiveness

• Factor conditions
• Nations position in factors of production
• Skilled labor
• Infrastructure
• Demand conditions
• Nature of home-market demand
• Industrys product
• Industrys service

4
Factors Affecting a Nations Competitiveness

• Related and supporting industries
• Presence or absence in the nation of
  internationally competitive
• Supplier industries
• Other related industries
• Firm strategy, structure, and rivalry
• Conditions in the nation governing how companies
  are
• Created, Organized, and Managed
• Nature of domestic rivalry

2-4
5
Factors Affecting a Nations Competitiveness

• Factor Conditions
• To achieve competitive advantage, factors of
  production must be created
• Industry specific
• Firm specific
• Pool of resources at a firms or countrys
  disposal is less important than the speed and
  efficiency with which the resources are deployed

6
Factors Affecting a Nations Competitiveness

• Demand Conditions
• Demands that consumers place on an industry for
  goods and services
• Demanding consumers push firms to move ahead of
  companies from other nations
• Demanding consumers drive firms in a country to
• Meet high standards
• Upgrade existing products and services
• Create innovative products and services

7
Example
Factors Affecting a Nations Competitiveness

• The demand for gasoline in the United States has
  fallen somewhat but not significantly despite
  surges in gasoline prices. Oil companies had
  record profits in 2007 and 2008.
• An increased supply has eased the price of
  gasoline for consumers recently.
• There are still several risks that could affect
  the demand conditions for gasoline
• The high price of Ethanol
• Volatility in the oil market

2-7
Source Business Week, June 5, 2006
8
Factors Affecting a Nations Competitiveness

• Related and Supporting Industries
• Enable firms to manage inputs more effectively
• Strong supplier base adds efficiency to
  downstream activities
• Competitive supplier base lets a firm obtain
  inputs using cost-effective, timely methods
• Allow joint efforts among firms
• Create the probability that new entrants will
  enter the market

9
Factors Affecting a Nations Competitiveness

• Firm Strategy, Structure and Rivalry
• Rivalry is intense in nations with conditions of
• Strong consumer demand
• Strong supplier bases
• High new entrant potential from related
  industries
• Competitive rivalry increases the efficiency with
  which firms develop, market, and distribute
  products and services within the home country

10
Factors Affecting a Nations Competitiveness

• Competitive rivalry increases the efficiency with
  which firms
• Develop within the home country
• Market within the home country
• Distribute products and services within the home
  country

11
Factors Affecting a Nations Competitiveness

• Domestic rivalry provides a strong impetus for
  firms to
• Innovate
• Find new sources of competitive advantage
• Domestic rivalry forces firms to look beyond
  national borders for new markets

2-11
12
International Expansion Motivations and Risks

• A Companys Motivation for International
  Expansion
• Increase the size of potential markets
• World population exceeds 6.5 billion
• U.S. represents 5 of world population
• China and India increased middle class
• Attain economies of scale
• Larger revenue and asset base
• Advantage is spreading fixed costs over larger
  volume of production

13
International Expansion Motivations and Risks
2-13
14
International Expansion Motivations and Risks

• A Companys Motivation for International
  Expansion (Continued)
• Reducing the costs of RD as well as operating
  costs
• Attainment of greater purchasing power by pooling
  purchases
• Extend the life cycle of a product
• Four stages introduction, growth, maturity,
  decline
• Optimize the physical location for every activity
  in its value chain
• Performance enhancement
• Cost reduction
• Risk reduction

15
International Expansion Motivations and Risks

• Political and economic risk
• Social unrest
• Military turmoil
• Demonstrations
• Violent conflicts and terrorism
• Laws and their enforcement

16
International Expansion Motivations and Risks

• Currency risks
• Must constantly monitor exchange rate between its
  own currency and host country
• Currency exchange fluctuations
• Appreciation of the U.S. dollar
• Exchange rates can significantly affect
  production costs or net profit

2-16
17
International Expansion Motivations and Risks

• Management risks
• Culture
• Customs
• Language
• Symbols
• Income levels
• Customer preferences
• Distribution system
• Recent trend -- Dispersion of value chains of
  multinational corporations across different
  countries

2-17
18
Global Dispersion of Value Chains

• Outsourcing occurs when a firm decides to utilize
  other firms to perform value-creating activities
  that were previously performed in-house.
• Offshoring takes place when a firm decides to
  shift an activity that they were previously
  performing in a domestic location to a foreign
  location.

19
Global Dispersion of Value Chains

• Until 1960s, entire value chain was in one
  location
• Production took place near customers to limit
  transportation costs
• Rapid decline in transportation costs has enabled
  firms to disperse over multiple locations
• Service industry followed manufacturing
• Outsourcing low-level programming and data entry
  work

20
Expansion into Foreign Markets

• International vs. Global Competition
• International
• Company operates in a few foreign markets
• Expands slowly, if at all, into other markets
• Global
• Company operates in 50 to 100 countries
• Expands continually into other markets
• Expands operations within existing foreign
  markets

21
Expansion into Foreign Markets

• Multinational Strategic Considerations
• Strategic Approach
• Same strategy in all countries
• Unique strategy in each country
• Product Offerings
• Standardized product worldwide
• Customized product in each country
• Extent of operations in each country
• Utilizing native resources and skills
• Transferring resources and skills

22
Variations in National Markets

• Markets differ from country to country
• Available resources
• Different suppliers
• Consumer tastes and preferences
• Market size and growth potential
• Distribution networks
• Competitive environment
• Product substitutes
• Differences in market demographicsand income
  levels
• Fluctuating exchange rates

23
Variations in National Markets

• Manufacturing costs vary from country to country
• Wage rates
• Worker productivity
• Inflation rates
• Energy costs
• Tax rates
• Government regulations

24
Variations in National Markets

• 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

25
Multinational Strategy Options

• Options for entering foreign markets
• Exporting
• Licensing
• Franchising strategy
• Multi-country strategy
• Global strategy
• Strategic alliances or joint ventures

26
Multinational Strategy Options

• Exporting
• Domestic plants manufacture product
• Partial assembly
• Full assembly
• Foreign market countries
• Complete the assembly process
• Handle sales and marketing functions
• Provide service
• Conservative initial strategy for entering new
  markets that mitigates risk

27
Multinational Strategy Options

• Licensing Strategies
• Ideal when 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

28
Multinational Strategy Options

• Franchising Strategies
• Often is better suited to global expansion
  effortsof service and retailing enterprises
• Advantages
• Franchisee bears most of costs andrisks of
  establishing foreign locations
• Franchisor has to expend only theresources to
  recruit, train, and support franchisees
• Disadvantage
• Maintaining cross-country quality control

29
Multinational Strategy Options

• Strategic Alliances and Joint Ventures
• Cooperative agreements with foreign companies
• Used to enter a foreign market
• Used to strengthen a firms competitivenessin
  world markets
• Purpose of alliances
• Joint research efforts
• Technology-sharing
• Joint use of production or distribution
  facilities
• Marketing / promoting one anothers products
• Other mutual benefits

30
Profit Sanctuaries, Cross-Market Subsidization,
and Dumping

• Profit sanctuaries
• Countries in which firm has
  secure market position
• Proportionately high profits in
  comparison to other countries
• Usually, but not always, the home market is the
  firms most crucial profit sanctuary

31
Profit Sanctuaries, Cross-Market Subsidization,
and Dumping

• Cross-Market Subsidization
• Competitive strategies in a specific country
  supported by profits and resources obtained from
  one or more other countries
• The home country often provides the bulk of these
  resources
• Intent is to create independent competitiveness

32
Profit Sanctuaries, Cross-Market Subsidization,
and Dumping

• Dumping
• Company sells products in foreign markets at very
  low prices
• Prices below the home market
• Prices below full costs per unit
• Not well received in host countries
• Invites retaliatory response from competitors in
  same market
• Host government may take counter action
• Illegal in some cases