Market Strategy and the Firm…
A firm’s strategy refers to the actions that managers take to attain the goals of the firm.
Profitability can be defined as the rate of return the firm makes on its invested capital.
Profit growth is the percentage increase in net profits over time,
Expanding internationally can boost profitability and profit growth.
Strategic choices (Choosing a strategy…)
There are four basic strategies to compete in the international environment:
1. Global Standardization
2. Localization
3. Transnational
4. International
The appropriateness of each strategy depends on the pressures for cost reduction and local
responsiveness in the industry.
1. The global standardization strategy focuses on increasing profitability and profit growth
by reaping the cost reductions that come from economies of scale, learning effects, and
location economies.
The strategic goal is to pursue a low-cost strategy on a global scale.
The global standardization strategy makes sense when:
 There are strong pressures for cost reductions.
 Demands for local responsiveness are minimal.
2. The localization strategy focuses on increasing profitability by customizing the firm’s
goods or services so that they provide a good match to tastes and preferences in different
national markets.
The localization strategy makes sense when:
 There are substantial differences across nations with regard to consumer tastes and
preferences.
 Where cost pressures are not too intense.
3. The transnational strategy tries to simultaneously:
 achieve low costs through location economies, economies of scale, and learning effects
 Differentiate the product offering across geographic markets to account for local
differences.
 Foster a multidirectional flow of skills between different subsidiaries in the firm’s global
network of operations.
The transnational strategy makes sense when:
 Cost pressures are intense.
 Pressures for local responsiveness are intense.
4. The international strategy involves taking products first produced for the domestic
market and then selling them internationally with only minimal local customization.
The international strategy makes sense when:
 There are low cost pressures.
 Low pressures for local responsiveness.
Strategic Alliances…
 Strategic alliances refer to cooperative agreements between potential or actual
competitors.
 Strategic alliances range from formal joint ventures to short-term contractual agreements.
 The number of strategic alliances has exploded in recent decades.
Modes to enter Foreign Market…
These are six different ways to enter a foreign market:
1. Exporting.
2. Turnkey projects.
3. Licensing.
4. Franchising.
5. Establishing joint ventures with a host country firm.
6. Setting up a new wholly owned subsidiary in the host country.
 Managers need to consider the advantages and disadvantages of each entry mode.
Selecting an Entry Mode…
 All entry modes have advantages and disadvantages.
 The optimal choice of entry mode involves trade-offs.
Potential Gains and Losses of Exporting…
 Exporting is a way to increase market size--the rest of the world is usually much larger
market than the domestic market.
 Large firms often proactively seek new export opportunities.
 Many smaller firms are reactive and wait for the world to come to them.
 Many firms fail to realize the potential of the export market.
 Smaller firms are often intimidated by the complexities of exporting and initially run into
problems.
Common losses include:
 Poor market analysis.
 Poor understanding of competitive conditions.
 A lack of customization for local markets.
 A poor distribution program.
 Poorly executed promotional campaigns.
 Problems securing financing.
 A general underestimation of the differences and expertise required for foreign market
penetration.
 An underestimation of the amount of paperwork and formalities involved.
Factors that determine where to manufacture…
Three factors are important when making location decisions:
1. Country factors
2. Technological factors
3. Product factors
1. Country Factors:
 Firms should locate manufacturing activities in those locations where economic, political,
and cultural conditions, including relative factor costs, are most conducive to the
performance of that activity.
Country factors that can affect location decisions include:
 The availability of skilled labor and supporting industries.
 Formal and informal trade barriers.
 Expectations about future exchange rate changes.
 Transportation costs.
 Regulations affecting FDI.
2. Technological Factors:
 The type of technology a firm uses in its manufacturing can affect location decisions.
Three characteristics of a manufacturing technology are of interest:
1. The level of fixed costs.
2. The minimum efficient scale.
3. The flexibility of the technology.
3. Product Factors:
Two product factors impact location decisions:
1. The product's value-to-weight ratio:
 If the value-to-weight ratio is high, it is practical to produce the product in a single
location and export it to other parts of the world.
 If the value-to-weight ratio is low, there is greater pressure to manufacture the product in
multiple locations across the world.
2. Whether the product serves universal needs:
 When products serve universal needs, the need for local responsiveness falls, increasing
the attractiveness of concentrating manufacturing in a central location.
Advantages of Making or Buying a Product…
Should an international business make or buy the component parts to go into their final
product?
Make-or-buy decisions are important factors in many firms' manufacturing strategies.
Today, service firms also face make-or-buy decisions as they choose which activities to
outsource and which to keep in-house.
Make-or-buy decisions involving international markets are more complex than those
involving domestic markets.
The advantages of Make:
Vertical integration (making component parts in-house) can:
1. Lower costs - if a firm is more efficient at that production activity than any other enterprise, it
may pay the firm to continue manufacturing a product or component part in-house.
2. Facilitate investments in highly specialized assets - internal production makes sense when
substantial investments in specialized assets (assets whose value is contingent upon a particular
relationship persisting) are required to manufacture a component.
3. Protect proprietary technology - a firm might prefer to make component parts that contain
proprietary technology in-house in order to maintain control over the technology.
4. Facilitate the scheduling of adjacent processes - the weakest argument for vertical
integration is that the resulting production cost savings make planning, coordination, and
scheduling of adjacent processes easier.
The advantages of Buy:
Buying component parts from independent suppliers:
1. Gives the firm greater flexibility
 By buying component parts from independent suppliers, the firm can maintain its
flexibility, switching orders between suppliers as circumstances dictate
 This is particularly important when changes in exchange rates and trade barriers alter the
attractiveness of various supply sources over time
2. Helps drive down the firm's cost structure
Firms that buy components from independent suppliers avoid:
 The challenges involved with coordinating and controlling the additional subunits that
are associated with vertical integration.
 The lack of incentive associated with internal suppliers.
 The difficulties with setting appropriate transfer prices.
3. Helps the firm capture orders from international customers.
 Outsourcing can help firms capture more orders from suppliers’ countries.
Strategies regarding Distribution, Communication and Pricing:
Distribution strategy:
A firm’s distribution strategy (the means it chooses for delivering the product to the consumer) is
a critical element of the marketing mix.
How a product is delivered depends on the firm’s market entry strategy.
Firms that manufacturer the product locally can sell directly to the consumer, to the retailer, or to
the wholesaler.
Firms that manufacture outside the country have the same options plus the option of selling to an
import agent.
Differences between Countries:
There are four main differences in distribution systems:
1. Retail concentration
2. Channel length
3. Channel exclusivity
4. Channel quality
Choosing a Distribution Strategy:
 The choice of distribution strategy determines which channel the firm will use to
reach potential consumers.
 The optimal strategy depends on the relative costs and benefits of each alternative
 Since each intermediary in a channel adds its own markup to the products, there is
generally a critical link between channel length and the firm's profit margin.
 So, when price is important, a shorter channel is better.
 A long channel can be beneficial because it economizes on selling costs when the
retail sector is very fragmented, and can offer access to exclusive channels.
Communication Strategy:
Communicating product attributes to prospective customers is a critical element in the marketing
mix.
How a firm communicates with customers depends partly on the choice of channel.
Communication channels available to a firm include:
 direct selling
 sales promotion
 direct marketing
 advertising
Barriers to International Communication:
International communication occurs whenever a firm uses a marketing message to sell its
products in another country.
The effectiveness of a firm's international communication can be jeopardized by:
1. Cultural barriers
2. Source and country of origin effects
3. Noise levels
Pricing Strategy:
International pricing is an important element in the marketing mix
There are three issues to consider:
1. The case for price discrimination
2. Strategic pricing
3. Regulations that affect pricing decisions
 Price discrimination occurs when firms charge consumers in different countries different
prices for the same product.
 Strategic pricing has three aspects:
1. Predatory pricing
2. Multi-point pricing
3. Experience curve pricing
 A firm’s ability to set its own prices may be limited by:
1. Antidumping regulations
2. Competition policy
Staffing Policy:
 A firm’s staffing policy is concerned with the selection of employees who have the skills
required to perform a particular job.
 A staffing policy can be a tool for developing and promoting the firm’s corporate culture
(the organization’s norms and value system).
 A strong corporate culture can help the firm implement its strategy.
Types of Staffing Policy…
There are three main approaches to staffing policy within international businesses:
1. The ethnocentric approach
2. The polycentric approach
3. The geocentric approach
1. The ethnocentric approach to staffing policy fills key management positions with parentcountry nationals.
It makes sense for firms with an international strategy.
2. The polycentric staffing policy recruits host country nationals to manage subsidiaries in their
own country, and parent country nationals for positions at headquarters.
It makes sense for firms pursuing a localization strategy.
3. The geocentric staffing policy seeks the best people, regardless of nationality for key jobs.
It makes sense for firms pursuing either a global or transnational strategy.
Answer the Questions below as suggested:
Q.No.1: What are the four basic strategies to compete in the international environment?
No Explanation
Q.No.2: What do you mean by Strategic alliances? (1 or 2 Lines)
Q.No.3: What are the different modes to enter a foreign market?
Q.No.4: What are the potential gains and losses of Exporting? (Detail)
Q.No.5: There are _____ factors that determine where to manufacture, which are? Name them.
Q.No.6: What are the advantages of making a product by a firm itself rather than to buy it?
Shortly explain.
Q.No.7: Define Distribution strategy of a firm?
Q.No.8: Communication channels available for a firm include_______________?
Q.No.9: What are the three issues that a firm should consider for pricing strategies?
Q.No.10: What is staffing policy? Briefly explain the types of staffing policy?