Global Strategies Each week, you will be asked to respond to the prompt or prompts in the discussion forum. Your initial post should be a minimum of 300 words in length and you should respon
Global Strategies
Each week, you will be asked to respond to the prompt or prompts in the discussion forum. Your initial post should be a minimum of 300 words in length and you should respond to two additional posts from your peers. If you have not done so lately, please review the Rules of Discussion.
Understanding global strategies are critical to survival in a global market. Consider what are some global environmental trends affecting the choice of international strategies, particularly international corporate-level strategies.
chapter 7 Strategies for Competing Internationally or Globally
Arthur A. Thompson The University of Alabama
Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
All rights reserved. Not for distribution to non-registrants without permission.
An e-book published and distributed by McGraw Hill Education
Sixth Edition of Strategy: Core Concepts and Analytical Approaches (2020-2021). Arthur A. Thompson, The University of Alabama. Published and distributed by McGraw Hill Education. Image of globe comprised of puzzle pieces with several pieces dislodged and scattered below the globe. Chapter 5 The Five Generic Competitive Strategy Options: Which One to Employ
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“You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or die.”
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
Andrew S. Grove former Chairman and CEO, Intel Corporation
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“You do not choose to become global. The market chooses for you; it forces your hand.”
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
Alain Gomez former CEO, Thomson, S.A.
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“[I]ndustries actually vary a great deal in the pressures they put on a company to sell internationally.”
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
Niraj Dawar and Tony Frost Professors, Richard Ivey School of Business
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Learning Objectives
Learn why companies decide to enter foreign markets.
Understand why competing across national borders makes strategy-making more complex.
Learn the difference between multi-country competition and global competition.
Gain command of the strategic options for establishing a competitive presence in foreign markets.
Become familiar with the three main strategic approaches to competing internationally.
Learn how multinational competitors can use their international operations to improve their competitiveness.
Learn about profit sanctuaries and global strategic offensives.
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Chapter 7 Roadmap
Why Companies Decide to Enter Foreign Markets
Why Competing across National Borders Makes Strategy-Making More Complex
The Concepts of Multicountry Competition and Global Competition
Strategy Options for Entering and Competing in International and Global Markets
The Quest for Competitive Advantage in Global Markets
Profit Sanctuaries and Global Strategic Offensives
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Whether to customize the firm’s offerings in different country markets to match local buyer preferences or offer mostly standardized products worldwide
Whether to employ the same basic competitive strategy in all countries or to modify the strategy country by country to better match local market and competitive conditions
Where to locate facilities, distribution centers, and service operations to realize the greatest locational advantages
When and how to efficiently transfer some of a firm’s competitively powerful resources and capabilities from its operations in some countries to its operations in one or more other countries in order to better spearhead the company’s strategic offensives to enter new country markets and to more effectively battle local rivals for sales and market share
Strategic Issues Unique to Competing across National Borders
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Competing Across National Borders
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
Strategic Issues Unique To Competing Across National Borders
Whether to customize the firm’s offerings in each country market or to offer a mostly standardized product worldwide
Whether to employ the same basic competitive strategy in all countries or modify the strategy
country by country
Where to locate the firm’s operations
to realize the greatest location-related advantages.
When and how to transfer some of a firm’s competitively powerful resources and capabilities from its operations in some countries to its operations in one or more other countries in order to compete more effectively against local rivals
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A firm that competes in relatively few foreign countries is an international or multinational competitor
A global competitor has operations on several continents, is actively marketing its products or services in many different parts of the world, and is pursuing a strategy of expanding into additional countries
Typically, a firm will start to compete internationally by entering one or two foreign markets and then expand gradually or perhaps rapidly into the markets of other countries over time.
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International Competitors versus Global Competitors—What’s the Difference?
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Why Companies Decide to Enter Foreign Markets
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To gain access to new customers
To achieve lower costs and thereby become more cost competitiveness
To further exploit competitively valuable resources and capabilities
To spread business risk across a wider market base
To meet their customers’ needs abroad and retain their position as a key supply chain partner.
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The presence of important cross-country differences in buyer tastes, market sizes, and growth potential
The existence of sizable cross-country differences in wages, worker productivity, inflation rates, energy costs, taxes, and other factors that impact a firm’s costs and profit prospects
Differing cross-country governmental policies and regulations that make the business climate more favorable in some countries than others
The need to consider ways to mitigate the risks of adverse shifts in currency exchange rates
Why Competing Across National Borders Causes Strategy Making to Be More Complex
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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Cross-Country Differences in Buyer Tastes, Market Sizes, and Growth Potential
Many cross-country factors affect an international or global competitor’s strategic decisions:
Country-to-country differences in population sizes, income levels, and other demographic factors that help drive market size and rates of growth in market demand
Country-to-country differences in buyer tastes
Country-to-country differences in distribution channels, competitive conditions, and other market-related factors
Perhaps the biggest market-related issue:
Whether and how much to customize offerings to match local buyers’ tastes and preferences in each different country market OR
Whether to pursue a strategy of offering a mostly standardized product worldwide
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
Core Concept
The tension between the market pressures to localize a firm’s product offerings country by country and the competitive pressures to lower costs by offering mostly standardized products in all countries where it competes is one of the big strategic issues that firms operating in few or many country markets must address.
The managerial challenge in operating internationally or globally is tailoring a firm’s strategy to take a variety of country-to-country differences into account.
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Cross-Country Differences in Operating Costs and Profitability
Country-to-country differences are often so large that a firm’s operating costs and profitability are significantly impacted by local factors such as:
Wage rates • Worker productivity
Inflation rates • Energy costs
Tax rates • Government regulations
Cost advantages are gained by locating operations in countries with:
Low wage rates • Less costly government regulations
Low taxes • Low energy costs
Cheaper access to natural resources
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The Impact of Host Government Policies on the Local Business Climate
Host government policies and attitudes of toward business create a favorable or unfavorable business climate for local firms and foreign firms.
“Pro-business” governments
Provide incentives for expansion-minded firms (lower tax rates, site location and site development assistance, government-sponsored worker training, seek the advice and counsel of business leaders)
Make the transition to more costly and stringent regulations business-friendly rather than adversarial
“Anti-business” governments
Tend to enact costly regulations and procedures, institute burdensome taxes, impose tariffs and/or quotas on imports, create uneven playing field that favors domestic companies, and pursue various other policies that make the local business climate less attractive to foreign firms
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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Political Risks
Instability of weak governments
Civil unrest and revolt
Passage of anti-business legislation or regulations
Systemic corruption in governmental and business operations
Suspicion of foreign firms operating within their borders
Loss of assets to nationalization by socialist politicians
Economic Risks
Instability of the national economy and monetary system—inflation rates, deficit-spending, and economic distress
Threat of piracy
Lack of intellectual property protection
The Impact of Host Government Policies on the Local Business Climate (continued)
Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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The Risks of Adverse Exchange-Rate Shifts
Sizable shifts in currency exchange rates pose significant risks for two reasons:
They are very hard to predict because of the variety of factors involved and the uncertainties surrounding when and by how much these factors will change
Shifting exchange rates affect which countries—either temporarily or long term—represent the low-cost manufacturing location and which rivals have a temporary or longer-term cost-based competitive advantage because of the countries where their production operations are located
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Core Concept
Firms that export goods to foreign countries always gain in competitiveness when the currency of the producing country grows weaker relative to the currencies of countries to which the goods are exported.
A firm is competitively disadvantaged when the currency of country where its products are produced grows stronger relative to the currencies of countries to which its goods are exported and marketed.
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Consider the case of a firm with manufacturing facilities in Brazil (where the currency is reals—pronounced ray-alls) that exports its Brazilian-made goods to European Union markets (where the currency is euros).
Assume that the current exchange rate is 4 Brazilian reals for 1 euro and that the product made in Brazil has a manufacturing cost of 4 Brazilian reals (or 1 euro).
Now suppose that the exchange rate shifts from 4 reals per euro to 5 reals per euro (meaning that the real has declined in value and that the euro is stronger).
The Brazilian-made product is now more cost-competitive because a Brazilian-made good costing 4 reals has fallen to only 0.8 euros at the new exchange rate (4 reals divided by 5 reals per euro = 0.8 euros). The producer of the Brazilian-made good is better positioned to compete against European makers of the same good.
On the other hand, if the value of the real grows stronger in relation to the euro—resulting in an exchange rate of 3 reals to 1 euro—the same Brazilian-made good formerly costing 4 reals (or 1 euro) now has a cost of 1.33 euros (4 reals divided by 3 reals per euro = 1.33), This puts a producer of the Brazilian-made good in a weaker competitive position versus European producers of the same good.
Clearly, manufacturing in Brazil to sell in Europe is more attractive when the euro is strong (a rate of 1 euro for 5 reals) than when weak and 1 euro exchanges for 3 reals.
Example: Who Gains and Who Loses When Currency Exchange Rates Shift?
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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When the exchange rate changes from 4 reals per euro to 5 reals per euro:
The Brazilian-made good that formerly cost 1 euro and now costs only 0.8 euros can be sold to European Union consumers for a lower euro price than before.
In other words, the combination of a stronger euro and a weaker real acts to lower the price of Brazilian-made goods in the European Union. This spurs sales of Brazilian goods and boost exports of Brazilian goods to Europe
Conversely, an exchange rate shift from 4 reals to 3 reals per euro makes a Brazilian manufacturer less cost competitive with European manufacturers of the same item—the Brazilian-made good that formerly cost 1 euro and now costs 1.33 euros will sell for a higher price in euros than before, weakens European consumer demand for Brazilian-made goods and reduces Brazilian exports to Europe.
Brazilian exporters experience (1) rising demand for their goods in Europe whenever the Brazilian real grows weaker relative to the euro and (2) falling demand for their goods in Europe whenever the Brazilian real grows stronger relative to the euro.
Example: Who Gains and Loses When Currency Exchange Rates Shift? (continued)
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The Impact of Exchange Rates on Domestic Competitors Competing with Foreign Rivals
Weaker dollar policies best serve U.S. manufacturers affected by low-cost foreign imports by:
Raising the dollar-costs of foreign goods produced in countries whose currencies have grown stronger relative to the dollar
Making foreign goods more expensive to U.S. consumers—curtailing demand for those goods and stimulating demand for U.S. goods
Allowing U.S. goods to be sold at lower prices to consumers in countries with strong currencies—thereby stimulating exports to meet foreign demand for U.S. goods and creating U.S.-based jobs
Increasing the dollar value of profits a firm earns in foreign markets where local currencies are now stronger relative to the dollar
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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Core Concept
Domestic companies facing competitive pressure from lower-cost foreign rivals benefit when their country’s currency grows weaker in relation to currencies of countries where lower-cost foreign rivals have their manufacturing plants.
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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Questions for Company Co-Managers
When your simulation company is facing an unfavorable exchange rate change that negatively affects profitability in one or more geographic regions, should you and your co-managers:
Consider raising price or adjusting marketing efforts to reduce/eliminate the negative impact on earnings?
Consider temporarily curtailing sales and marketing efforts in the negatively affected regions and boosting sales efforts in regions where profits are favorably impacted by the exchange rate shifts?
Do nothing, absorb whatever adverse financial impact occurs, and suffer the consequences of lower earnings?
Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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When your simulation firm experiences a favorable exchange rate change that positively affects profitability in one or more geographic regions, should you and your co-managers:
Consider lowering price or boosting marketing efforts to increase sales and further exploit the positive impact on earnings in those regions where the exchange rate shifts are favorable?
Consider temporarily boosting sales efforts in regions where profits are favorably impacted by the exchange rate shifts and curtailing sales and marketing efforts in regions with unfavorable exchange rate impacts?
Do nothing and enjoy the benefits of whatever temporary boost to earnings occurs?
Questions for Company Co-Managers (continued)
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Global competition
There Are Two Importantly Different Patterns of Competition in World Markets
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Multi-country competition
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Core Concepts
Multicountry competition exists when competition in one national market is not closely connected to competition in any other national market. There is no global or world market, only a collection of self-contained country markets.
Global competition exists when competitive conditions across national markets are linked strongly enough to form a true international market and when leading competitors compete head-to-head in many different countries.
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Traits of Multicountry Competition
The country’s market is localized to that country and not closely connected to the market contest in other countries
Buyers in different countries are attracted to different product attributes
The numbers and identities of rival sellers vary from country to country
Industry conditions and competitive forces in each national market differ in important respects
Rival firms battle for national championships and winning in one country does not necessarily signal the ability to fare well in other countries!
Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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Traits of Global Competition
Prices and competitive conditions across country markets are strongly linked
Leading competitors compete head-to-head in many of the same country markets
A firm’s competitive position in one country both affects and is affected by its position in other countries
A true global or world market exists
Competitive advantage is based on a firm’s world-wide operations and global standing
Rival firms in globally competitive industries vie for global leadership (world championships)!
Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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Maintain a national (one-country) production base and export goods to foreign markets
License foreign firms to use the firm’s technology or to produce and distribute the firm’s products in foreign markets
Employ a franchising strategy in foreign markets
Rely upon acquisitions or internal startup ventures to gain entry into foreign markets
Rely on strategic alliances or joint ventures with foreign firms as the primary vehicle for entering foreign country markets
Strategy Options for Establishing a Competitive Presence in Foreign Markets
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
Export Strategies
Using domestic plant capacity to produce goods for export to foreign markets is a good initial strategy to pursue international sales
Advantages
Is a conservative way to test the risks of international markets
Increases the utilization of existing capital investment in production facilities
Minimizes direct investments in foreign countries
An export strategy is vulnerable when:
Home country manufacturing costs are higher than the manufacturing costs that rivals incur in the countries where they have plants
Product shipping costs to distant markets are high
Adverse shifts can occur quickly in currency exchange rates
Importing countries impose tariffs or erect other trade barriers to protect local firms against competition from foreign-made goods
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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Licensing Strategies
Licensing makes sense when a firm
Has valuable technical know-how or a unique patented product but lacks the organizational capability or resources to enter foreign markets
Desires to avoid risks of committing resources to markets that are unfamiliar, politically volatile, and/or economically unstable.
Can earn considerable royalties from licensees who are trustworthy and reputable
Disadvantage
Licensing firm risks providing valuable technical know-how to foreign firms and losing control over its use—monitoring the actions of foreign licensees and safeguarding the company’s proprietary know-how is not always as easy as it might seem
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Franchising Strategies
Well suited to the global expansion efforts of service and retailing enterprises
Advantages
Franchisee bears in-country costs and risks of establishing foreign locations
Franchisor has to expend only the resources to attract, recruit, train, support, and monitor franchisees
Disadvantage
Maintaining quality control when franchisees in certain locations are not strongly committed to consistency and standardization
Issue: To allow localization or not
Should franchisees be allowed to make modifications in the franchisor’s product offering to better satisfy the tastes and expectations of local buyers?
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Copyright © 2020 by Arthur A. Thompson and Glo-Bus Software, Inc.
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Acquisition Strategies
Acquiring a local business to compete internationally or globally:
Is quicker than creating a new subsidiary and having to build a new operating organization from the ground up
Is the least risky and most cost-efficient means of hurdling such entry barriers as gaining access to local distribution channels, building supplier relationships, and establishing relationships with government officials and other constituencies
Allows acquirer to move directly to the tasks of transferring resources and personnel, integrating and redirecting the acquired firm into its own operations, putting its own strategy in place, and building a stronger market position
The big issue an acquisition-minded firm must consider is whether to pay a premium price to buy a successful local firm or to buy a struggling competitor at a bargain price (and then spend monies to boost its competitiveness).
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Internal Startup Strategies
Creating an internal startup (greenfield venture) to build a new business subsidiary from scratch makes sense when a firm:
Has foreign market operating experience in rapidly getting new foreign subsidiaries up and running and overseeing their operations
Can create the subsidiary for less cost than making an acquisition.
Can add the subsidiary’s production capacity to the local market without adversely impacting the supply–demand balance in that market.
Can provide the subsidiary with the resources and capabilities needed to achieve the cost structure and competitive strength to battle local rivals head to head.
Can create a subsidiary with the resources and cap
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