Several strategy options for tailoring a company’s strategy to fit the sometimes unusual or challenging circumstances presented in developing-country markets include:
• Prepare to compete on the basis of low price. Consumers in emerging markets are often highly focused on price, which can give low-cost local competitors the edge unless a company can find ways to attract buyers with bargain prices as well
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as better products. For example, when Unilever entered the market for laundry detergents in India, it developed a low-cost detergent (named Wheel) that was not harsh to the skin, constructed new superefficient production facilities, distributed the product to local merchants by handcarts, and crafted an economical marketing campaign that included painted signs on buildings and demonstrations near stores.
The new brand quickly captured $100 million in sales and was the top detergent brand in India in 2014 based on dollar sales. Unilever later replicated the strategy with low-price shampoos and deodorants in India and in South America with a detergent brand named Ala.
• 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). For instance, Honeywell had sold industrial products and services for more than 100 years outside the United States and Europe using a foreign subsidiary model that focused international activities on sales only. When Honeywell entered China, it discovered that industrial customers in that country considered how many key jobs foreign companies created in China in addition to the quality and price of the product or service when making purchasing decisions.
Honeywell added about 150 engineers, strategists, and marketers in China to demonstrate its commitment to bolstering the Chinese economy. Honeywell replicated its “East for East” strategy when it entered the market for industrial products and services in India. Within 10 years of Honeywell establishing operations in China and three years of expanding into India, the two emerging markets accounted for 30 percent of the firm’s worldwide growth.
• Try to change the local market to better match the way the company does business elsewhere. A multinational company often has enough market clout to drive major changes in the way a local country market operates. When Japan’s Suzuki entered India, it triggered a quality revolution among Indian auto parts manufacturers.
Local parts and components suppliers teamed up with Suzuki’s vendors in Japan and worked with Japanese experts to produce higher-quality products. Over the next two decades, Indian companies became very proficient in making top-notch parts and components for vehicles, won more prizes for quality than companies in any country other than Japan, and broke into the global market as suppliers to many automakers in Asia and other parts of the world. Mahindra and Mahindra, one of India’s premier automobile manufacturers, has been recognized by a number of organizations for its product quality. Among its most noteworthy awards was its number-one ranking by J. D. Power Asia Pacific for new-vehicle overall quality.
• Stay away from those emerging markets where it is impractical or uneconomical to modify the company’s business model to accommodate local circumstances. Home Depot expanded successfully into Mexico but has avoided entry into other emerging countries because its value proposition of good quality, low prices, and attentive customer service relies on (1) good highways and logistical systems to minimize store inventory costs, (2) employee stock ownership to help motivate store personnel to provide good customer service, and (3) high labor costs for housing construction and home repairs to encourage homeowners to engage in do-it- yourself projects. Relying on these factors in the U.S. and Canadian markets has worked spectacularly for Home Depot, but Home Depot has found that it cannot count on these factors in China, from which it withdrew in 2012.
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Company experiences in entering developing mar- kets such as China, India, Russia, and Brazil indicate that profitability seldom comes quickly or easily.
Building a market for the company’s products can often turn into a long-term process that involves reedu- cation of consumers, sizable investments in advertising
and promotion to alter tastes and buying habits, and upgrades of the local infrastruc- ture (the supplier base, transportation systems, distribution channels, labor markets, and capital markets). In such cases, a company must be patient, work within the system to improve the infrastructure, and lay the foundation for generating sizable revenues and profits once conditions are ripe for market takeoff.
Profitability in emerging markets rarely comes quickly or easily. New entrants have to adapt their business models and strategies to local conditions and be patient in earning a profit.
KEY POINTS
1. Competing in international markets allows multinational companies to (1) gain access to new customers, (2) achieve lower costs and enhance the firm’s competitiveness by more easily capturing scale economies or learning-curve effects, (3) leverage core competencies refined domestically in additional country markets, (4) gain access to resources and capa- bilities located in foreign markets, and (5) spread business risk across a wider market base.
2. Companies electing to expand into international markets must consider cross-country dif- ferences in buyer tastes, market sizes, and growth potential; location-based cost drivers;
adverse exchange rates; and host-government policies when evaluating strategy options.
3. Options for entering foreign markets include maintaining a national (one-country) pro- duction base and exporting goods to foreign markets, licensing foreign firms to use the company’s technology or produce and distribute the company’s products, employing a franchising strategy, establishing a foreign subsidiary, and using strategic alliances or other collaborative partnerships.
4. In posturing to compete in foreign markets, a company has three basic options: (1) a mul- tidomestic or think local, act local approach to crafting a strategy, (2) a global or think global, act global approach to crafting a strategy, and (3) a transnational strategy or combi- nation think global, act local approach. A “think local, act local” or multicountry strategy is appropriate for industries or companies that must vary their product offerings and com- petitive approaches from country to country to accommodate differing buyer preferences and market conditions. A “think global, act global” approach (or global strategy) works best in markets that support employing the same basic competitive approach (low-cost, dif- ferentiation, focused) in all country markets and marketing essentially the same products under the same brand names in all countries where the company operates. A “think global, act local” approach can be used when it is feasible for a company to employ essentially the same basic competitive strategy in all markets but still customize its product offering and some aspect of its operations to fit local market circumstances.
5. There are two general ways in which a firm can gain competitive advantage (or offset domestic disadvantages) in global markets. One way involves locating various value chain activities among nations in a manner that lowers costs or achieves greater product differen- tiation. A second way draws on a multinational or global competitor’s ability to deepen or broaden its resources and capabilities and to coordinate its dispersed activities in ways that a domestic-only competitor cannot.
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6. Companies racing for global leadership have to consider competing in emerging markets such as China, India, Brazil, Indonesia, and Mexico—countries where the business risks are considerable but the opportunities for growth are huge. To succeed in these markets, companies often have to (1) compete on the basis of low price, (2) be prepared to 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), and/or (3) try to change the local market to better match the way the company does business elsewhere.
Profitability is unlikely to come quickly or easily in emerging markets, typically because of the investments needed to alter buying habits and tastes and/or the need for infrastructure upgrades. And there may be times when a company should simply stay away from certain emerging markets until conditions for entry are better suited to its business model and strategy.
ASSURANCE OF LEARNING EXERCISES
1. L’Oréal markets 34 brands of cosmetics, fragrances, and hair care products in 130 countries.
The company’s international strategy involves manufacturing these products in 42 plants located around the world. L’Oréal’s international strategy is discussed in its operations section of the company’s website (http://www.loreal.com/careers/who-you-can-be/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?
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. Concepts & Connections 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?
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 multidomestic, transnational, or global strategy.
a. If your company’s product is mobile phones, do you think it would make better strategic sense to employ a multidomestic strategy, a transnational strategy, or a global strategy? Why?
b. If your company’s product is dry soup mixes and canned soups, would a multidomestic strategy seem to be more advisable than a transnational or global strategy? Why or why not?
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 multidomestic strategy or a transnational strategy or a global strategy? Why?
4. Using your university library’s business research resources and Internet sources, identify and discuss three key strategies that Volkswagen is using to compete in China.
EXERCISES FOR SIMULATION PARTICIPANTS
The following questions are for simulation participants whose companies operate in an interna- tional market arena. If your company competes only in a single country, then skip the questions in this section.
1. To what extent, if any, have you and your co-managers adapted your company’s strategy to take shifting exchange rates into account? In other words, have you undertaken any actions to try to minimize the impact of adverse shifts in exchange rates?
LO7-1, LO7-3
LO7-1, LO7-3
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LO7-2, LO7-3
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LO7-5, LO7-6
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LO7-2
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2. To what extent, if any, have you and your co-managers adapted your company’s strategy to consider geographic differences in import tariffs or import duties?
3. What are the attributes of each of the following approaches to competing in international markets?
• Multidomestic or think local, act local approach • Global or think global, act global approach • Transnational or think global, act local approach
Explain your answer and indicate two or three chief elements of your company’s strategy for competing in two or more different geographic regions.
LO7-2 LO7-4
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ENDNOTES
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