Miles A. Zachary

MGT 4380

Competing in International Markets

Chapter 7

The rise of international business has followed globalization and the development of BRIC economies

Good or Bad?Good

Access to new customersLower costs—access to cheaper raw goods and laborDiversification of business risk

BadPolitical riskEconomic riskCultural risk

Competing in New Markets

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?

Access to New Customers

Different cost advantages can be gained by internationally-diverse firmsIncreasing 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

Lowering Costs

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

Diversification of Business Risk

Political risk-the potential for government upheaval or interference with business to harm an operation within a countryDifficult to plan business operationsPossibility of excessive hostility toward foreign

businessesIn 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)

International Business Risks

Economic risk-the potential for a country’s economic conditions and policies, property rights, protections, and currency exchange rates to harm business operationsDynamic economic conditions make it difficult

to know how to anticipate economic risksCultural risk-the potential for a company’s

operations in a country to struggle because of differences in language, customs, norms, and customer preferencesBusinesses should research local customs and

be prepared to adapt business operations

International Business Risk

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

Competing in International Markets

The model helps determine a firm’s ability to compete in a particular country

Four dimensions:1. Home demand conditions2. Home factor conditions3. Home related and supporting industries4. Firm strategy, structure, and domestic rivalry

Diamond Model

Home demand conditions refer to the local demand characteristics and nature of domestic customersLocal customers with high standards help prepare firms

for competing on a global scaleE.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 abilityWhile some countries have their advantages,

overcoming disadvantages can have its benefitsE.g., Japan develops the JIT inventory system due to space

shortages

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 helpfulHow does the value chain support our business?E.g., US cattle industry is supported well by incredible

productive capabilities of US farmersFirm strategy, structure, and domestic rivalry

determines how challenging it is to survive domestic competitionCompanies 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

Diamond Model

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 strategiesMultidomesticGlobalTransnational

Types of International Strategies

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

Multidomestic 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

Global 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

Transnational Strategy

Once an firm decides to enter a foreign market, it must then determine how to do so

Five (5) basic entry optionsExportingWholly-owned subsidiaryFranchisingLicensing 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

Options for Competing in Int’l Markets

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 operationsA lower-cost way to determine foreign preferences

and demand for a firm’s productsAfter the products become desirable in a foreign

market, exporting becomes a unattractiveFirms loose control of goods once they enter a foreign

market—potentially allowing local merchants to hurt the brand

Exporting

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 itselfAcquiring 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

Creating a Wholly Owned Subsidiary

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

Franchising

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

Licensing

Foreign joint ventures and strategic alliances occur when a firm believes it to be beneficial to work with one or more local partnersIn a joint venture, two or more organization

contribute to a new organizationIn 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

Joint Ventures and Strategic Alliances