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A company may normally desirous of competing in foreign country markets for any of the four major reasons which is to gain access to new customers, to achieve lower costs and enhances the firm’s competitiveness, to capitalize on its core competencies or to spread its business risk across a wider market base. Each of the factors explained in detail below
To gain access to new customers
A company which expand into foreign markets offers potential for an increased profit, increased revenues and also potential of long-term growth which becomes an attractive option when a company’s home markets are mature.
To achieve lower costs and enhance the firm’s competitiveness
Many companies are driven to sell in more than one country sales. This is because domestic sales volume is normally not large enough to fully capture manufacturing economies of scale or learning curve effects and thereby substantially improve the firm’s cost-competitiveness.
To capitalize on 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.
To spread its business risk across a wider market base
A company may spread its business risk by operating in a number of different foreign countries rather than depending entirely on operations in its domestic market.
Besides all the above factors attracts companies to venture into foreign country markets, companies also need to plan and also need to pay close attention to the advantages of cross-border of competencies and capabilities. 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. This is because cross-border differences in cultural, demographic and market conditions are strong. As such, regardless of a company’s motivation for expanding outside its domestic markets, the strategies it uses to compete in foreign markets must be situation driven.
Cultural, demographic, and market conditions vary significantly among the countries of the world. Cultures and lifestyles are the most obvious areas in which countries differ; market demographics are close behind.
Market growth varies from country to country. In emerging markets, market growth potential is far higher than in the more mature economies.
Aside from basic cultural and market differences among countries, a company also has to pay special attention to location advantages that stem from country-to-country variations in manufacturing and distribution costs, the risks of fluctuating exchange rates, and the economic and political demands of host governments. 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.
Besides that, fluctuating exchange rates also affect a company’s competitiveness. Competitiveness of a company’s operations partly depends on whether exchange rate changes affect costs favorably or unfavorably. When the exchange rates are fluctuating, exporters always gain in competitiveness when the currency of the country where goods are manufactured grows weaker. Exporters are disadvantaged when the currency of the country where goods are manufactured grows stronger.
Furthermore, the impact of host government policies on the local business climate also will have impact to the new venturing companies. Some of the host government policies affecting foreign-based companies are local content requirements on goods made inside their borders by foreign-based companies, policies that protect local companies from foreign competition, restrictions on exports because of national security concerns, price regulation of imported and locally produced goods, deliberately burdensome procedures and requirements for imported goods to pass custom inspection, tariffs or quotas on the import of certain goods and subsidies and low-interest loans for domestic companies competing against foreign rivals.
There are three ways in which a firm can gain competitive advantage by expanding outside its domestic markets:
Use location to lower costs or achieve greater product differentiation
Companies that compete multinationally 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:
Whether to concentrate each activity it performs in a few select countries or to disperse performance of the activity to many nations
In which countries to locate particular activities
When to Concentrate Activities in a Few Locations
When the costs of manufacturing or other activities are significantly lower in some geographic locations than in others
When there are significant scale economies
When there is a steep learning curve associated with performing an activity in a single location
When certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages
When to Disperse Internal Processes across Many Locations
In several instances, dispersing activities is more advantageous than concentrating them.
The classic reason for locating an activity in a particular country is low-cost.
Using Cross-Border Coordination to Build Competitive Advantage
Transferring competencies, capabilities, and resource strengths from country to country contributes to the development of broader and deeper competences and capabilities – ideally helping a company achieve dominating depth in some competitively valuable area. Dominating depth in a competitively valuable capability, resource, or value chain activity is a strong base for sustainable competitive advantage over multinational or global competitors and especially so over domestic-only competitors.
Using Cross-Border Coordination to Build Competitive Advantage
Multinational and global competitors are able to coordinate activities across different countries to build competitive advantage.
If a firm learns how to assemble its product more efficiently at one plant, the accumulated expertise and knowledge can be shared with assembly plants in other world locations.
Efficiencies can be achieved by shifting workloads from where they are unusually heavy to locations where personnel are underutilized.
Question 2: In creating a strategy-supportive reward structure, it is important to define jobs and assignments in terms of the results to be accomplished not just in terms of the duties to be performed. True or false? Explain and justify your answer.
Question 3: Can an industry be attractive to one company and unattractive to another company? Why or why not?
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