Competing in International Markets Chapter 7

1. Competing in International MarketsChapter 7 Miles A. Zachary MGT 4380

2. Competing in New Markets • The rise of international business has followed globalization and the development of BRIC economies • Good or Bad? • Good • Access to new customers • Lower costs—access to cheaper raw goods and labor • Diversification of business risk • Bad • Political risk • Economic risk • Cultural risk

3. Access to New Customers • Moving into an international market provides access to new customers • US population accounts for only 5% of global consumers • What are some new emerging markets into which US businesses could enter?

4. Lowering Costs • Different cost advantages can be gained by internationally-diverse firms • Increasing volume lowers production costs (economies of scale) • Access to cheaper labor/raw goods • Offshoring: relocating a business activity to another country • Despite these advantages, some firms are finding that offshoring is not appropriate for their business • Led to reshoring—jobs and businesses return to their home country

5. Diversification of Business Risk • Business risk is the potential that business operations might fail • Firms located in a single country are open to “mono-directional” business risk—either up or down • However, international firms operate in a variety of markets and therefore less susceptible to mono-directional business risk • Similar to the idea of diversifiable or unsystematic risk

6. International Business Risks • Political risk-the potential for government upheaval or interference with business to harm an operation within a country • Difficult to plan business operations • Possibility of excessive hostility toward foreign businesses • In rare but extreme cases, a countries government could nationalize an industry or industries, eliminating foreign control • Underdeveloped countries tend to have the highest political risk(s)

7. International Business Risk • Economic risk-the potential for a country’s economic conditions and policies, property rights, protections, and currency exchange rates to harm business operations • Dynamic economic conditions make it difficult to know how to anticipate economic risks • Cultural risk-the potential for a company’s operations in a country to struggle because of differences in language, customs, norms, and customer preferences • Businesses should research local customs and be prepared to adapt business operations

8. Competing in International Markets • In some ways, globalization has decreased the advantages gained and disadvantages lost to operating in one country over another • In others, research has suggested that business still derive advantages and disadvantages from locating in specific countries • Michael Porter at HBS developed the Diamond Model of National Advantage (1990) to help determine the potential for firm success in a given international environment

9. Diamond Model • The model helps determine a firm’s ability to compete in a particular country • Four dimensions: • Home demand conditions • Home factor conditions • Home related and supporting industries • Firm strategy, structure, and domestic rivalry

10. Diamond Model • Home demand conditions refer to the local demand characteristics and nature of domestic customers • Local customers with high standards help prepare firms for competing on a global scale • E.g., Toyota and Japanese consumers • Home factor conditions refers to the nature of raw materials and other inputs needed to create goods and services • Includes land, labor, capital, and entrepreneurial ability • While some countries have their advantages, overcoming disadvantages can have its benefits • E.g., Japan develops the JIT inventory system due to space shortages

11. Diamond Model • Home related and supporting industries refers to the extent to which a firm’s domestic suppliers and other complementary industries are developed and helpful • How does the value chain support our business? • E.g., US cattle industry is supported well by incredible productive capabilities of US farmers • Firm strategy, structure, and domestic rivalry determines how challenging it is to survive domestic competition • Companies that survive intense competition among domestic competitors are better equipped to handle foreign competitors • E.g., Toyota had to contend with other Japanese auto firms

12. Types of International Strategies • A multinational corporation (MNC) is a firm that has operations in more than one country • Such firms must choose how to structure their international strategy • Three (3) main strategies • Multidomestic • Global • Transnational

13. Multidomestic Strategy • Focuses on responsiveness to local requirements while sacrificing efficiency • Many times firms must adapt their products to fit in a variety of domestic markets • Coca-cola has dozens of brands with distinct flavors in different countries

14. Global Strategy • A global strategy sacrifices responsiveness to local requirements in favor of efficiency • It is the opposite of the multidomestic strategy • While some minor modifications may occur, the products and services remain generally unaltered for foreign markets • E.g., Microsoft products are only adapted to meet local language needs, but are otherwise homogenous

15. Transnational Strategy • Firms following a transnational strategy try to balance the desire for efficiency with the need to adjust to local preferences • In between a multidomestic strategy and global strategy • E.g., KFC and McDonald’s keep a core menu while making some concessions in local markets such as poutine in McDonald’s in Canada

16. Options for Competing in Int’l Markets • Once an firm decides to enter a foreign market, it must then determine how to do so • Five (5) basic entry options • Exporting • Wholly-owned subsidiary • Franchising • Licensing • Joint venture or strategic alliance • These options vary in the amount of control a business has on operations, how much risk is involved, and what share of the foreign operation’s profits a firm gets to keep

17. Exporting • Exporting refers to creating goods within a firm’s home country and then shipping them to another country where they are sold to customers by a local firm • Typically seen as a starting point for most firms starting international operations • A lower-cost way to determine foreign preferences and demand for a firm’s products • After the products become desirable in a foreign market, exporting becomes a unattractive • Firms loose control of goods once they enter a foreign market—potentially allowing local merchants to hurt the brand

18. Creating a Wholly Owned Subsidiary • A wholly owned subsidiary is a business operation in a foreign country that a firm fully owns • Can occur in two (2) ways: • Greenfield venture in which the firm creates the entire operation itself • Acquiring a foreign operator • Attractive because the firm maintains complete control over the operation and keeps all the profits • Can be risky since a firm must pay all the expenses to setup and operate the business

19. Franchising • Franchising is when an organization (franchisor) grants the right to use its brand name, products, and processes to another organization (franchisee) • Usually occurs in exchange for up-front payment (franchise fee) and a percentage of revenues (royalty fee) • Attractive because it requires little investment • But, franchisors enjoy only some of the profits, must monitor franchisees for undesirable behavior, and must provide a clear and effective business model

20. Licensing • In licensing, one organization grants another organization the right to create its products, often using patented technology, in exchange for a fee • Most frequently used in manufacturing industries • Attractive because granting firms deflect costs, but lose control over how technology is used and limits their profitability

21. Joint Ventures and Strategic Alliances • Foreign joint ventures and strategic alliances occur when a firm believes it to be beneficial to work with one or more local partners • In a joint venture, two or more organization contribute to a new organization • In a strategic alliance, two or more organizations work together without establishing a new organization • Attractive because local organizations can supply valuable local knowledge and facilitate local acceptance • Can be difficult to manage when firms have trouble getting along