Strategies for Competing
in International Markets
Chapter Summary
Chapter 7 focuses on strategy options for expanding beyond domestic boundaries and competing in the markets of
either a few or a great many countries. The spotlight will be on strategic issues unique to competing successfully
in an economy that is globalizing. It will introduce a number of core concepts including multi-domestic, global,
andtransnationalstrategiesaswellasthePorterdiamondofnationaladvantageandcross-countrydifferencesin
cultural, demographic, and market conditions.
Lecture Outline
I. Why Companies Expand Into Foreign Markets
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1. A company may opt to expand outside its domestic market for any of four major reasons:
a. Togainaccesstonewcustomers—Expandingintoforeignmarketsofferspotentialforincreased
revenues, profits, and long-term growth and becomes an especially attractive option when a
company’s home markets are mature.
b. Toachievelowercostsandenhancethefirm’scompetitiveness—Manycompaniesaredrivento
d. To gain access to resources and capabilities located in foreign markets—A company may be able
to access resources and capabilities through cross-border alliances, joint ventures, or even cross-
border acquisitions.
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II. Why Competing Across National Borders makes Strategy Making More Complex
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A. Home-Country Industry Advantages and the Diamond Model
1. Where industries are more likely to develop competitive strength depends on a set of factors that describe
the nature of each country’s business environment and vary from country to country.
2. The four major factors are summarized in a framework developed by Michael Porter and known as the
Diamond of National Competitive Advantage.
3. Figure 7.1, The Diamond of National Competitive Advantage, provides an illustration of Porter’s
Diamondandhowthefactorsrelatetothefirmandeachother.
4. Demand Conditions
5. FactorConditions
6. Related and Supporting Industries
a. Robust industries often develop as part of a cluster of related industries, including suppliers of
7. Firm Strategy, Structure, and Rivalry
8. For an industry in a particular country to become competitively strong, all four factors must be favorable
for that industry.
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B. Opportunities for Location-Based Advantages
1. Differences in wage rates, worker productivity, ination rates, energy costs, tax rates, government
regulations, and the like create sizable variations in manufacturing costs from country to country.
2. For other types of value chain activities, input quality or availability are more important considerations.
These might include high quality raw material or educated workers.
C. The Impact of Government Policies and Economic Conditions in Host Countries
1. Cross-countryvariationsingovernmentpoliciesandeconomicconditionsaffectboththeopportunities
available to a foreign entrant and the risks of operating within the host country.
2. The governments of some countries are anxious to attract foreign investments, and thus they go all out
to create a business climate that outsiders will view as favorable.
3. Host governments may set local content requirements on goods made inside their borders by foreign-
based companies, put restrictions on exports to ensure adequate local supplies, regulate the prices of
importedandlocallyproducedgoods,andimposetariffsorquotasontheimportsofcertaingoods.
4. Host governments provide specific risks in two intertwined categories; political risks based upon
instability of weak governments and economic risks based upon instability of a country’s economy and
monetary system.
CORE CONCEPT
Political risks stem from instability or weaknesses in national governments and hostility
of foreign business. Economic risks stem from the stability of a country’s monetary
system, economic and regulatory policies, lack of property rights protections, and risks
due to exchange rate fluctuations.
D. The Risks of Adverse Exchange Rate Shifts
1. The volatility of exchange rates greatly complicates the issue of geographic cost advantages. Currency
exchangeratesoftenuctuateasmuchas20to40percentannually.
2. Sizableshiftsinexchangeratesposesignificantrisksfortworeasons:
and which rivals have the upper hand in the marketplace.
3. Toillustratethis,U.S.manufacturersbenefitfromaweakerdollarastheycompetegloballywithlow
cost manufacturers:
a. Declinesinthe valueofthe U.S.dollaragainst foreigncurrencieshave theeffectof raisingthe
U.S. dollar–costs of goods manufactured by foreign rivals at plants located in the countries whose
currencies have grown stronger relative to the U.S. dollar.
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d. Aweakerdollarhastheeffectofincreasingthedollarvalueofprofitsacompanyearnsinthose
plants based in the United States.
E. Cross-Country Differences in Demographic, Cultural, and Market Conditions
1. Buyerdemandforparticularproductsandservicescandiffersubstantiallyfromcountrytocountry.
2. Companies operating in an international marketplace have to wrestle with whether and how much to
customizetheirofferingsineachcountrymarkettomatchlocalbuyers’tastesandpreferencesorwhether
markets have to resolve.
III. Strategy Options for Entering and Competing in Foreign Markets
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1. There are five primary strategic options for a company that decides to expand outside its domestic
market and compete internationally or globally:
a. Maintain a home-country production base and export goods to foreign markets.
b. Licenseforeignfirmstoproduceanddistributethecompany’sproducts.
A. Export Strategies
1. Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial
strategy for pursuing international sales.
2. With an export strategy, a manufacturer can limit its involvement in foreign markets by contracting with
foreign wholesalers experienced in importing to handle the entire distribution and marketing function in
their countries or regions of the world.
3. Whether an export strategy can be pursued successfully over the long run hinges on the relative cost-
competitiveness of the home-country production base.
4. An export strategy is vulnerable when:
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B. Licensing Strategies
1. Licensingmakessensewhenafirmwithvaluabletechnicalknow-howorauniquepatentedproducthas
neither the internal organizational capability nor the resources to enter foreign markets.
C. Franchising Strategies
1. Franchisingisoftenbettersuitedtotheglobalexpansioneffortsofserviceandretailingenterprisesand
has much the same advantages as licensing.
3. The franchisee bears most of the costs and risks of establishing foreign locations while the franchisor
has to expend only the resources to recruit, train, support, and monitor franchisees.
D. Foreign Subsidiary Strategies
1. Companies pursuing international expansion may elect to take responsibility for the performance of all
essential value chain activities in foreign markets.
2. Companies that prefer direct control over all aspects of operating in a foreign market can establish a
wholly owned subsidiary
CORE CONCEPT
A greenfield venture (or internal startup) is a subsidiary business that is established by
setting up the entire operation from the ground up.
3. Asignificantissueanacquisition-mindedfirmmustconsideriswhethertopayapremiumpricefora
successful local company or to buy a struggling competitor at a bargain price.
4. Four other conditions make an internal startup strategy appealing:
a. When creating an internal startup is cheaper than making an acquisition.
b. When adding new production capacity will not adversely impact the supply–demand balance in the
local market.
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E. Alliances and Joint Venture Strategies
1. Strategic alliances, joint ventures, and other cooperative agreements with foreign companies are a
widely used means of entering foreign markets
2. The strategic appeal of cooperative arrangements between domestic and foreign companies:
a. Firmscanbenefitimmenselyfromaforeignpartner’sfamiliaritywithlocalgovernmentregulations,
its knowledge of the buying habits and product preferences of consumers, its distribution channel
relationships, and so on.
b. By joining forces in producing components, assembling models, and marketing their products,
firmscanrealizecostsavingsnotachievablewiththeirownsmallvolumes.
c. Firms can share distribution facilities and dealer networks, and to mutually strengthen each partner’s
access to buyers.
3. Illustration Capsule 7.1 shows how Walgreens pursued an Alliance based strategy with Alliance Boots
in order to facilitate its expansion abroad.
ILLUSTRATION CAPSULE 7.1
Walgreens Boots Alliance, Inc.: Entering Foreign Markets via Alliance
Followed by Merger
Discussion Question: How did Walgreens use its alliance with Boots Alliance to gain sustainable
global competitive advantage?
Answer: The student should note that the two companies have complementary rather than
competitive assets and expertise. Walgreens is dominantly a US retail seller while Boots Alliance is a
European retail and wholesale seller. The alliance gave Walgreens a swift entry into foreign markets
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4. The Risks of Strategic Alliances with Foreign Partners – Alliances and joint ventures with foreign
partners have their pitfalls.
a. Sometimes the knowledge and expertise of local partners turns out to be less valuable than expected.
b. Cross-borderalliestypicallymustovercomelanguageandculturalbarriersandfigureouthowto
dealwithdiverse(orperhapsconicting)operatingpractices.
becoming overly dependent on foreign partners for essential expertise and competitive capabilities.
IV. International Strategy: The three main strategic approaches
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1. Companiesmustchoosewhethertovarythecompetitiveapproachtofitspecificmarketconditionsand
buyer preferences in each country or to employ essentially the same strategy in all countries.
2. Figure 7.2, Three Approaches for Competing Internationally illustrates the two main drivers for this
choice.
3. As a company expands internationally, it will have to confront head-on two conicting pressures:
thedemandforresponsivenesstolocalneedsversustheprospectofeciencygainsfromofferinga
1. Thebiggerthedifferencesinbuyertastes,culturaltraditions,andmarkerconditionsindifferentcountries,
the stronger the case for a think-local, act-local approach to strategy making.
2. The strength of this approach is that the company’s actions and business approach are deliberately
craftedtoaccommodatedifferingtastesandexpectationsofbuyersineachcountryandtostakeoutthe
most attractive market positions vis-a-vis local competitors.
CORE CONCEPT
A multidomestic strategy is one in which a company varies its product offering
an competitive approach from country to country in an effort to be responsive to
differing buyer preferences and market conditions. It is a think-local, act-local type of
international strategy facilitated by decision making decentralized to the local level.
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3. There are three main disadvantages to this strategic choice:
B. Global Strategy—Think-Global, Act-Global
1. A global strategy sells the same products under the same brand names everywhere, uses much of the
same distribution channels in all countries, and competes on the basis of the same capabilities and mar–
2. This strategic theme prompts company managers to integrate and coordinate the company’s strategic
movesworldwideandtoexpandintomostifnotallnationswherethereissignificantbuyerdemand.
3. There are four main disadvantages to this approach:
C. Transnational Strategy—Think-Global, Act-Local
1. This middle-ground approach sometimes called ‘glocalization’ entails using the same basic competitive
theme in each country but allowing local managers the latitude:
a. Incorporate whatever country-specific variations in product attributes are needed to best satisfy
local buyers
b. Make whatever adjustments in production, distribution, and marketing are needed to be responsive
to local market conditions and compete successfully against local rivals.
CORE CONCEPT
A transnational strategy is a think-global, act local approach that incorporates elements
of both multidomestic and global strategies.
2. While a transnational strategy is more conducive for transferring and leveraging subsidiary skills and
capabilities,itcanhavesignificantdrawbacks:
a. Itisthemostdiculttoimplementduetoaddedcomplexity
b. Itcanplacedemandsontheorganizationtopursueconictingobjectives.
c. It is likely to be costly and time consuming to implement.
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3. Table 7.1, Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches
provides a summary of the pros and cons of each approach.
ILLUSTRATION CAPSULE 7.2
Four Seasons Hotels: Local Character, Global Service
Discussion Question: How has Four Seasons Hotels operationalized a Transnational Strategy in
order to gain competitive advantage in the global high-end hotel industry?
Answer: By combining local architectural and cultural experiences with globally consistent luxury
service. When moving into a new area, the firm seeks out a local capital partner with understanding
of the local customs and business relationships. The firm then hires local architects and structures
ACTIVITY
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the company operationalized a Transnational strategy to gain competitive advantage. Ask the student
to describe areas where the company leveraged global scale economies as well as areas where
the company leveraged national responsiveness. You can send the student to the following links to
supplement the information in the Illustration Capsule:
http://press.fourseasons.com/corporate
http://jobs.fourseasons.com/home/working-at-fs/corporate-oce
V. International Operations and the Quest for Competitive Advantage in the International Arena
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1. Therearethreewaysinwhichafirmcangaincompetitiveadvantageoroffsetdomesticdisadvantages
by expanding outside its domestic markets:
a. Uselocationtolowercostsorachievegreaterproductdifferentiation
A. Using Location to Build Competitive Advantage
1. Companies that compete multi-nationally can pursue competitive advantages in world markets by
b. In which countries to locate particular activities
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2. When to Concentrate Activities in a Few Locations
a. When the costs of manufacturing or other activities are significantly lower in some geographic
locations than in others
3. When to Disperse Activities Across Many Locations
a. Buyer-related activities—such as distribution, marketing, and after-sale service—usually must take
place close to buyers.
B. Sharing and Transferring Resources and Capabilities across Borders to Build Competitive Advantage
1. If the firm’s resources retain their value in foreign contexts, then entering new foreign markets can
extend the company’s resource-based competitive advantage over a broader domain.
3. Thefirmcanextenditscompetitiveadvantageinternationallybytransferring technological know-how
or other important resources and capabilities from its operations in one country to its operations in other
countries.
4. Cross-border sharing or transferring resources and capabilities provides a cost-effective way for a
C. Benefiting from Cross-Border Coordination
1. Companies that compete on an international basis have another source of competitive advantage relative
to their purely domestic rivals:
a. Theyareabletobenefitfromcoordinatingactivitiesacrossdifferentcountries’domains.
VI. Cross-Border Strategic Moves
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1. Profit sanctuaries are country markets (or geographic regions) in which a company derives substantial
profitsbecauseofastrongorprotectedmarketposition.
3. Razor-thinmarginsorevenlossesinthesemarketscanbesubsidizedwiththehealthyprofitsearnedin
itsprofitsanctuaries—apracticecalledcross-market subsidization.
CORE CONCEPT
Cross-market subsidization—supporting competitive offensives in one market with
resources and profits diverted from operations in another market—can be a powerful
competitive weapon.
4. When taken to the extreme, pricing cutting moves in foreign markets might draw charges of dumping,
the act of selling products well below the price charged in home markets or well below its full costs.
CORE CONCEPT
When the same companies compete against one another in multiple geographic
markets, the great of cross-border counterattacks may be enough to deter aggressive
competitive moves and encourage mutual restraint among international rivals.
VII. Strategies for Competing in the Markets of Developing Countries
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1. Companies racing for global leadership have to consider competing in developing economy markets
like China, India, Brazil, Indonesia, Thailand, Poland, Mexico, and Russia.
2. Tailoringproductstofitmarketconditionsindevelopingcountries,however,ofteninvolvesmorethan
making minor product changes and becoming more familiar with local cultures.
3. Strategy Options for Emerging Country Markets:
a. Prepare to compete on the basis of low price.
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4. Profitability in emerging markets rarely comes quickly or easily—new entrants have to adapt their
business models and strategies to local conditions which may not always be possible.
VIII. Defending against Global Giants: Strategies for Local Companies in Emerging Markets
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1. Localfirmsmustbeabletodefendthemselvesagainstresourcerichmultinationalcompanies.
2. Studiesoflocalcompaniesindevelopingmarketshavedisclosedfivesuccessfulstrategies:
a. Develop business models that exploit shortcomings in local distribution networks or infrastructure.
b. Utilize keen understanding of local customer needs and preferences to create customized products
3. Illustration Capsule 7.3 discusses how a travel agency in China used a combination of these strategies
to become that country’s largest travel consolidator and online travel agent.
ILLUSTRATION CAPSULE 7.3
How Ctrip Successfully Defended against Multinationals to Become China’s
Largest Online Travel Agency
Discussion Question: How did Ctrip use a combination of the above five strategies to become
the largest travel consolidator and online travel agent.
Answer: Ctrip took advantage of the lack of infrastructure (no national ticketing agency in China
and of national or global hotel chains) to create its own proprietary data base to provide travel