The Four Big Strategic Issues in Competing Multinationally Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University Whether to customize a company s offerings in each different country market to match preferences of local buyers or offer a mostly standardized product worldwide Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country Where to locate a company s production facilities, distribution centers, and customer service operations to realize the greatest locational advantages How to efficiently transfer a company s resource strengths and capabilities from one country to another to secure competitive advantage Why Do Companies Expand into Foreign Markets? International vs. Global Competition Gain access to new customers Capitalize on core competencies Achieve lower costs and enhance competitiveness Obtain access to valuable natural resources Spread business risk across wider market base International Competitor Global Competitor Company operates in a select few foreign countries, with modest ambitions to expand further Company markets products in 50 to 100 countries and is expanding operations into additional country markets annually Factors Shaping Strategy Choices in Foreign Markets Cross-country differences in cultural, demographic, and market conditions Gaining competitive advantage based on where activities are located Risks of adverse shifts in currency exchange rates Impact of host government policies on the local business climate Cross-Country Differences in Cultural, Demographic, and Market Conditions Cultures and lifestyles differ among countries Differences in market demographics and income levels Variations in manufacturing and distribution costs Fluctuating exchange rates Differences in host government economic and political demands 1
How Markets Differ from Country to Country Consumer tastes and preferences Consumer buying habits Market size and growth potential Distribution channels Driving forces Competitive pressures One of the biggest concerns of companies competing in foreign markets is whether to customize their product offerings in each different country market to match the tastes and preferences of local buyers or whether to offer a mostly standardized product worldwide. Two Primary Patterns of International Competition Multi-country Competition Global Competition Strategy Options for Competing in Foreign Markets Exporting Licensing Franchising strategy Strategic alliances or joint ventures Multi-country strategy Global strategy Achieving Global Competitiveness via Cooperative Agreements Cooperative agreements with foreign companies are a means to Enter a foreign market or Strengthen a firm s competitiveness in world markets Purpose of alliances / joint ventures Joint research efforts Technology-sharing Joint use of production or distribution facilities Marketing / promoting one another s products Localized Multicountry Strategy or a Global Strategy? What Is a Think-Local, Act-Local Approach to Strategy Making? Whether to vary a company s competitive approach to fit specific market conditions and buyer preferences in each host county or Whether to employ essentially the same strategy in all countries A company varies its product offerings and basic competitive strategy from country to country in an effort to be responsive to differing buyer preferences and market conditions. 2
What Is a Think-Global, Act-Global Approach to Strategy Making? A company employs the same basic competitive approach in all countries where it operates. What Is a Think-Global, Act-Local Approach to Strategy Making? A company uses the same basic competitive theme in each country but gives local managers the latitude to 1. Incorporate whatever country-specific variations in product attributes are needed to best satisfy local buyers and 2. Make whatever adjustments in production, distribution, and marketing are needed to compete under local market conditions. The Quest for Competitive Advantage in Foreign Markets Three ways to gain competitive advantage 1. Locating activities among nations in ways that lower costs or achieve greater product differentiation 2. Efficient/effective transfer of competitively valuable competencies and capabilities from company operations in one country to company operations in another country 3. Coordinating dispersed activities in ways a domestic-only competitor cannot Characteristics of Competing in Emerging Foreign Markets Tailoring products for big, emerging markets often involves Making more than minor product changes and Becoming more familiar with local cultures Companies have to attract buyers with bargain prices as well as better products Specially designed and/or specially packaged products may be needed to accommodate local market circumstances Management team must usually consist of a mix of expatriate and local managers Strategies for Local Companies in Emerging Markets Develop business models that exploit shortcomings in local distribution networks or infrastructure. Utilize keen understanding of local customer needs and preferences to create customized products or services. Take advantage of low-cost labor and other competitively important local workforce qualities. Use economies of scope and scale to better defend against expansion-minded multinationals. Transfer company expertise to cross-border markets and initiate actions to contend on a global level. Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University 3
Diversification and Corporate Strategy A company is diversified when it is in two or more lines of business that operate in diverse market environments Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business A diversified company needs a multi-industry, multi-business strategy A strategic action plan must be developed for several different businesses competing in diverse industry environments When Should a Firm Diversify? It is faced with diminishing growth prospects in present business It has opportunities to expand into industries whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors It can reduce costs by diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses Why Diversify? To build shareholder value! 1 + 1 = 3 Diversification is capable of building shareholder value if it passes three tests: 1. Industry Attractiveness Test The industry being entered presents good long-term profit opportunities 2. Cost of Entry Test Cost of entering is not so high as to spoil the ability to earn attractive profits 3. Better-Off Test A company s different businesses should perform better together than as stand-alone enterprises, such that company A s diversification into business B produces a 1 + 1 = 3 effect for shareholders Four Main Tasks in Crafting Corporate Strategy Pick new industries to enter and decide on means of entry Initiate actions to boost combined performance of businesses Pursue opportunities to leverage crossbusiness value chain relationships and strategic fits into competitive advantage Establish investment priorities, steering resources into most attractive business units Strategies for Entering New Businesses Related vs. Unrelated Diversification Acquire existing company Internal start-up Related Diversification Involves diversifying into businesses whose value chains possess competitively valuable strategic fits with value chain(s) of firm s present business(es) Unrelated Diversification Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firm s present business(es) Joint ventures/strategic partnerships 8-23 8-24 4
Related Diversification and Competitive Advantage Figure 8.4: Identifying a Diversified Company s Strategy Competitive advantage can result from related diversification when a company captures cross-business opportunities to Transfer expertise/capabilities/technology from one business to another Reduce costs by combining related activities of different businesses into a single operation Transfer use of firm s brand name reputation from one business to another Create valuable competitive capabilities via cross-business collaboration in performing related value chain activities 8-26 How to Evaluate a Diversified Company s Strategy Figure 8.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix Step 1: Assess long-term attractiveness of each industry firm is in Step 2: Assess competitive strength of firm s business units Step 3: Check competitive advantage potential of cross-business strategic fits among business units Step 4: Check whether firm s resources fit requirements of present businesses Step 5: Rank performance prospects of businesses and determine priority for resource allocation Step 6: Craft new strategic moves to improve overall company performance 8-28 Retrenchment Strategies Objective Reduce scope of diversification to smaller number of core businesses Strategic options involve divesting businesses that Are losing money Have little growth potential Have little strategic fit with core businesses Are too small to contribute meaningfully to earnings Options for Accomplishing Divestiture Sell it Involves finding a company which views the business as a good deal and good fit Spin it off as independent company Involves deciding whether or not to retain partial ownership Liquidation Involves closing down operations and selling remaining assets A last resort because no buyer can be found 5
Strategies to Restructure a Company s Business Lineup Objective Make radical changes in mix of businesses in portfolio via both Divestitures and New acquisitions to put a whole new face on the company s business makeup Multinational Diversification Strategies Distinguishing characteristics Diversity of businesses and Diversity of national markets Presents a big strategy-making challenge Strategies must be conceived and executed for each business, with as many multinational variations as appropriate Cross-business and cross-country collaboration opportunities must be pursued and managed 6