Crafting and Executing Strategy The Quest for

Competitive Advantage Concepts 21st Edition by

Thompson Peteraf Gamble and Strickland ISBN
1259899691 9781259899690
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CHAPTER 7

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

ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.

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
sell in more than one country because domestic sales volume is not large enough to fully capture
manufacturing economies of scale or learning curve effects and thereby substantially improve the
firm’s cost-competitiveness.

c. To gain access to low-cost inputs of production—Companies in industries based on natural resources

or labor content often find it necessary to operate in the international arena in order to minimize
material and labor costs.

d. To further exploit its core competencies—A company may be able to leverage its competencies
and capabilities into a position of competitive advantage in foreign markets as well as just domestic
markets.

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.

185
 Chapter 7 Strategies for Competingin International Markets 186

II. Why Competing Across National Borders makes Strategy Making More Complex

ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.

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

a. The demand conditions in an industry’s home market include the relative size of the market, its
growth potential, and the nature of domestic buyers’ needs and wants.

b. Demanding domestic buyers for an industry’s products spur greater innovativeness and improvements
in quality. Such conditions foster the development of stronger industries, with firms that are capable
of translating a home-market advantage into a competitive advantage in the international arena.

5. Factor Conditions

a. Factor conditions describe the availability, quality, and cost of raw materials and other inputs (called
factors of production) that firms in an industry require to produce their products and services.

b. Competitively strong industries and firms develop where relevant factor conditions are favorable.

6. Related and Supporting Industries

a. Robust industries often develop as part of a cluster of related industries, including suppliers of
components and capital equipment, end users, and the makers of complementary products, including
those that are technologically related.

b. The advantage to firms that develop as part of a related-industry cluster comes from the close
collaboration with key suppliers and the greater knowledge sharing throughout the cluster, resulting
in greater efficiency and innovativeness.

7. Firm Strategy, Structure, and Rivalry

a. Different country environments foster the development of different styles of management,

organization, and strategy.

b. Fierce rivalry in home markets tends to hone domestic firms’ competitive capabilities and ready
them for competing internationally.

8. For an industry in a particular country to become competitively strong, all four factors must be favorable
for that industry.
 Chapter 7 Strategies for Competingin International Markets 187

B. Opportunities for Location-Based Advantages

1. Differences in wage rates, worker productivity, inflation 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 fluctuate as much as 20 to 40 percent annually.

2. Sizable shifts in exchange rates pose significant risks for two reasons:

a. They are hard to predict because of the variety of factors involved and the uncertainties surrounding
when and by how much these factors will change.

b. They create uncertainty regarding which countries represent the low-cost manufacturing locations
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.

b. A weaker dollar makes foreign-made goods more expensive in dollar terms to U.S. consumers—
this acts to curtail U.S. buyer demand for foreign-made goods, stimulate greater demand on the part
of U.S. consumers for U.S.-made goods, and reduce U.S. imports of foreign-made goods.

c. A weaker U.S. dollar has the effect of enabling the U.S.-made goods to be sold at lower prices to
consumers in those countries whose currencies have grown stronger relative to the U.S. dollar.
 Chapter 7 Strategies for Competingin International Markets 188

d. A weaker dollar has the effect of increasing the dollar value of profits a company earns in those
foreign country markets where the local currency is stronger relative to the dollar.

e. A weaker U.S. dollar is therefore an economically favorable exchange rate shift for manufacturing
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
to pursue a strategy of offering a mostly standardized product worldwide.

3. The tension between the market pressures to localize a company’s product offerings country by country
and the competitive pressures to lower costs is one of the big strategic issues that participants in foreign
markets have to resolve.

III. Strategy Options for Entering and Competing in Foreign Markets

ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.

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.

c. Employ a franchising strategy in foreign markets.

d. Establish a subsidiary in a foreign market.

e. Rely on strategic alliances or joint ventures with foreign companies.

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:

a. Manufacturing costs in the home country are substantially higher than in foreign countries where
rivals have plants

b. The costs of shipping the product to distant foreign markets are relatively high
 Chapter 7 Strategies for Competingin International Markets 189

c. Adverse fluctuations occur in currency exchange rates

d. Importing countries impose tariffs or erect other trade barriers.

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.

2. Licensing also has the advantage of avoiding the risks of committing resources to country markets that
are unfamiliar, politically volatile, economically unstable, or otherwise risky.

3. The big disadvantage of licensing is the risk of providing valuable technological know-how to foreign
companies and thereby losing some degree of control over its use.

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.

4. The big problem a franchisor faces is maintaining quality control.

5. Another issue that may arise is whether to allow foreign franchisees to make modifications in the
franchisor’s product offerings so as to better satisfy the tastes and expectations of local buyers.

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

a. Acquisition—quicker option and might be the least risky and cost effective means of entry

b. Internal Development—requires experience and strong global position

c. A subsidiary business that is established by setting up the entire operation from the ground up is
called an internal startup or a greenfield venture.

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. A significant 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.
 Chapter 7 Strategies for Competingin International Markets 190

c. When a startup subsidiary has the ability to gain good distribution access (perhaps because of the
company’s recognized brand name).

d. When a startup subsidiary will have the size, cost structure, and resource strengths to compete head-
to-head against local rivals.

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.

d. Firms can benefit from the learning and added expertise that comes from performing joint research,
sharing technological know-how, studying one another’s manufacturing methods, and understanding
how to tailor sales and marketing approaches to fit local cultures and traditions.

e. Firms can direct their competitive energies more toward mutual rivals and less toward one another;
teaming up may help them close the gap on leading companies.

f. Alliances can be a particularly useful way for firms across the world to gain agreement on important
technical standards.

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
by leveraging the global footprint of Boots Alliance with 3,300 stores across 10 countries. They were
also able to spread into the related field of wholesale drug sales via Boots Alliance’s large European
distribution network for wholesale drugs.

The student should also note that the success of the alliance let to the acquisition of Boots Alliance
by Walgreens, and that the resulting global company gained significant price negotiating power in
addition to growing global revenue and market share. This had the net effect of greatly increasing
revenue while reducing overall costs thereby producing sustainable global competitive advantage.
 Chapter 7 Strategies for Competingin International Markets 191

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 conflicting) operating practices.

c. The communication, trust building, and coordination costs are not trivial in terms of management
time.

d. Partners can discover they have conflicting objectives and strategies, deep differences of opinion
about how to proceed, or important differences in corporate values and ethical standards.

e. Even if the alliance proves to be a win–win proposition for both parties, there is the danger of
becoming overly dependent on foreign partners for essential expertise and competitive capabilities.

IV. International Strategy: The three main strategic approaches

ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.

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 conflicting pressures:
the demand for responsiveness to local needs versus the prospect of efficiency gains from offering a
standardized product globally.

CORE CONCEPT
An international strategy is a strategy for competing in two or more countries
simultaneously .

A. Multi-domestic Strategy—Think Local, Act Local

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 .
 Chapter 7 Strategies for Competingin International Markets 192

3. There are three main disadvantages to this strategic choice:

a. Hinders the transfer of company capabilities, knowledge, and other resources across borders.

b. Raises production and distribution costs.

c. Is not conducive to building a single worldwide competitive advantage.

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-
keting approaches worldwide.

CORE CONCEPT
A global strategy is one in which a company employs the same basic competitive
approach in all countries where it operates, sells much the same products everywhere,
strives to build global brands, and coordinates its actions worldwide with strong
headquarters control . It represents a think-global, act global approach .

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:
a. Does not enable firms to address local needs.
b. Is less responsive to changes in local market conditions.
c. Raises transportation costs and may involve higher tariffs.

d. Raises coordination costs.

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 difficult to implement due to added complexity

b. It can place demands on the organization to pursue conflicting objectives.

c. It is likely to be costly and time consuming to implement.

 Chapter 7 Strategies for Competingin International Markets 193

3. Table 7.1,Advantages and Disadvantages of Multidomestic, Global, and TransnationalApproaches

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
the interior spaces to match the needs of local customers. To maintain a local touch, the firm hires
local workers that understand the unique needs of local customers to complement experienced
global hotel staff. Finally, the firm supports all of this with globally based best practices for service
and administrative support.

ACTIVITY
Consider adding a File Attachment assignment requiring the student to fully explore and explain how
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-office

V. International Operations and the Quest for Competitive Advantage in the International Arena

ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.

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

b. Transfer competitively valuable competencies and capabilities from its domestic markets to foreign
markets

c. Use cross-border coordination in ways that a domestic-only competitor cannot

A. Using Location to Build Competitive Advantage

1. Companies that compete multi-nationally can pursue competitive advantages in world markets by
locating their value chain activities in whatever nations prove most advantageous. To use location to
build competitive advantage, a company must consider two issues:

a. Whether to concentrate each activity it performs in a few select countries or to disperse performance
of the activity to many nations

b. In which countries to locate particular activities

 Chapter 7 Strategies for Competingin International Markets 194

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

b. When there are significant scale economies in production or distribution

c. There are sizable learning and experience benefits associated with performing an activity in a single
location.

d. When certain locations have superior resources, allow better coordination of related activities, or
offer other valuable advantages

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. Dispersing activities helps hedge against the risks of fluctuating exchange rates, supply interruptions,
and adverse political developments.

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
company to leverage its core competencies more fully and extend its competitive advantages into a wider
array of geographic markets.

4. Sharing and transferring resources and capabilities across country borders may also contribute to the
development of broader or deeper competencies and capabilities

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.

b. They can enhance their leverage with host-country governments or respond adaptively to changes
in tariffs and quotas.

c. They can achieve efficiencies by shifting workloads from where they are unusually heavy to
locations where personnel are underutilized.

VI. Cross-Border Strategic Moves

ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.
 Chapter 7 Strategies for Competingin International Markets 195

1. Profit sanctuaries are country markets (or geographic regions) in which a company derives substantial
profits because of a strong or protected market position.

2. Using Profit Sanctuaries to Wage a Strategic Offensive—Profit sanctuaries can provide a firm with
the opportunity to use the higher profits derived in the protected market to offset lower profits in markets
where it is using price to gain market share.

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.

5. Using Cross-Border Tactics to Defend against International Rivals—Companies can also employ
these tactics to defend against attacks in their home markets by launching a counter-attack in the rival’s
least defended or most vulnerable market.

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

ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.

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.

b. Modify aspects of the company’s business model or strategy to accommodate local circumstances
(but not so much that the company loses the advantage of global scale and global branding).

c. Try to change the local market to better match the way the company does business elsewhere.

d. Stay away from developing markets where it is impractical or uneconomic to modify the company’s
business model to accommodate local circumstances.
 Chapter 7 Strategies for Competingin International Markets 196

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

ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.

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
or services.

c. Take advantage of aspects of the local workforce with which large multinational companies may be
unfamiliar.
d. Use acquisition and rapid growth strategies to better defend against expansion-minded multinationals.
e. Transfer company expertise to cross-border markets and initiate actions to contend on a global
level.

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
information for up to 100,000 customers per day. Since the Chinese prefer paper tickets, and only
30 percent of customers use the internet, the company is able to hire low cost couriers to collect
payments and deliver tickets.

ACTIVITY
Use the Question Bank to build a quiz for the chapter to measure and reinforce learning. Consider
using the questions you select to build a comprehensive mid-term and final exam for the course. The
assignment can be graded and posted automatically.
 Chapter 7 Strategies for Competingin International Markets 197

ASSURANCE OF LEARNING EXERCISES

1. L’Oréal markets 32 brands of cosmetics, fragrances, and hair care products in 130 countries. The company’s
international strategy involves manufacturing these products in 40 plants located around the world. L’Oréal’s
international strategy is discussed in its operations section of the company’s website (careers.loreal.com/en/
operations) and in its press releases, annual reports, and presentations.

Why has the company chosen to pursue a foreign subsidiary strategy?

Are there strategic advantages to global sourcing and production in the cosmetics, fragrances, and hair care
products industry relative to an export strategy?

Response:

In reviewing the 2015 annual report, the student should identify that L’Oreal operates in key markets
including North America, Latin America, Eastern Europe, Western Europe, and Africa/ Middle East. The
company has shown growth in each of these key markets due to its ability to target brands as well as
marketing/sales strategies to each unique area. This can only be effectively accomplished with a nationally
responsive structure such as a foreign subsidiary structure.

The student should also identify that there are significant advantages to global sourcing and production in
this industry. In the Operations section of the 2015 Annual Report, the company discusses the importance
of Product Development, Local Sourcing, Innovative Manufacturing, and Supply Chain Efficiency. By
managing these on a global scale, the company is able to increase effectiveness and efficiency. This advantage
can be extended to specific products such as the World Brands identified in the 2015 Annual Report. With
this mix of products the company is leveraging economies of scale and economies of scope.

Taken together, the student might propose that L’Oreal is pursuing a Transnational strategy which combines
advantages through globalization with advantages through national responsiveness.

2. Alliances, joint ventures, and mergers with foreign companies are widely used as a means of entering foreign
markets. Such arrangements have many purposes, including learning about unfamiliar environments, and the
opportunity to access the complementary resources and capabilities of a foreign partner. Illustration Capsule
7.1 provides an example of how Walgreens used a strategy of entering foreign markets via alliance, followed
by a merger with the same entity.

What was this entry strategy designed to achieve, and why would this make sense for a company like
Walgreens?

ACTIVITY
This Assurance of Learning exercise is available as a Connect Assignment. The assignment can be
graded and posted automatically.

Response:

The student should identify that the strategy was designed to achieve global competitive advantage. The two
companies have complementary rather than competitive assets and expertise in that 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 by leveraging the global footprint of Boots Alliance with 3,300 stores
across 10 countries. They were also able to spread into the related field of wholesale drug sales via Boots
Alliance’s large European distribution network for wholesale drugs.

The student should also note that the success of the alliance let to the acquisition of Boots Alliance by
Walgreens, and that the resulting global company gained significant price negotiating power in addition
 Chapter 7 Strategies for Competingin International Markets 198

to growing global revenue and market share. This had the net effect of greatly increasing revenue while
reducing overall costs thereby producing sustainable global competitive advantage.

3. Assume you are in charge of developing the strategy for a multinational company selling products in
some 50 countries around the world. One of the issues you face is whether to employ a multi-domestic, a
transnational, or a global strategy.

a. If your company’s product is mobile phones, which of these strategies do you think it would make better
strategic sense to employ? Why?

b. If your company’s product is dry soup mixes and canned soups, would a multi-domestic strategy seem
to be more advisable than a transnational or global strategy? Why?

c. If your company’s product is large home appliances such as washing machines, ranges, ovens, and
refrigerators, would it seem to make more sense to pursue a multi-domestic strategy or a transnational
strategy or a global strategy? Why?

ACTIVITY
This Assurance of Learning exercise is available as a Connect Assignment. The assignment can be
graded and posted automatically.

Response:

All student responses will be contingent on their understanding of multi-domestic, global, and transnational
strategies. Students should reference information from Figure 7.1 to support and validate their chosen
viewpoints. All responses should be supported with rational information gleaned from the text material
differentiating the three strategies.

The student’s responses should be based upon the following three overviews:

A multi-domestic strategy is essential when there are significant country-to-country differences in customer
preferences and buying habits, when there are significant cross-country differences in distribution channels
and marketing methods, when host governments enact regulations requiring that products sold locally
meet strict manufacturing specifications or performance standards, and when the trade restrictions of host
governments are so diverse and complicated that they preclude a uniform, coordinated worldwide market
approach. Packaged food and appliances might fit well here.

A global strategy is one in which the company’s approach is predominantly the same in all Countries and
it sells the same products under the same brand names everywhere. It utilizes much the same distribution
channels in all countries, and competes on the basis of the same capabilities and marketing approaches
worldwide. - Cell Phones might fit well here.

A transnational strategy accommodates cross-country variations in buyer tastes, local customs, and market
conditions while also striving for the benefits of standardization. This middle-ground approach entails
utilizing the same basic competitive theme (low-cost, differentiation, or focused) in each country but allows
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 respond to local market conditions and compete successfully against local rivals.
Packaged food and appliances might also fit well here.
 Chapter 7 Strategies for Competingin International Markets 199

4. Using your university library’s subscription to LexisNexis, EBSCO, or a similar database, identify and
discuss three key strategies that Volkswagen is using to compete in China.

Response:

The student should identify several key initiatives that Volkswagen has undertaken in the Chinese market.
These could include:

They have entered into a partnership with First Auto Works (FAW) to produce a product specifically aimed
at the Chinese market

They have established a dedicated dealership network, doubling the number of dealers.

They have established a strategic objective of developing improved powertrains that will reduce average
fuel consumption and generate more power. They are leveraging this into a Green Fleet marketing initiative.