Evaluation of competitive strategies in foreign markets
Introduction
Evaluation of competitive strategies is critical to the success of firms in foreign markets. In
an era of globalization and stiff competition – intra- and internationally,
firms are constantly involved in carving out the best possible strategy that
can be utilized to beat the market and expand into foreign markets. Some of
these competitive strategies are: niche
market exporting, licensing and contract manufacturing, joint ventures and
wholly owned subsidiaries.
Niche Market Exporting
A niche is a market made up of a small group of customers
with common characteristics which are peculiar to them, thus making them quite unique
from other groupings of customers. And so in simple terms, niche market
exporting is basically exporting to a small group of customers with distinctive
characteristics. Parrish,
Cassill, Oxenham, Carolina, & Carolina (2004) hold that the smallness of the
niche is an advantage not a disadvantage, in that it allows the firm to get to
know its customer base much more easily, making it possible to easily satisfy
them. This then would translate into customer loyalty and repeat business for
the firm. Often times the product sold to the niche market is a specialized
product.
A model crafted by Parrish et al (2004) suggests that new
products companies introduce is essentially targeting niche markets, which may
later evolve into mass market.
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By this model, it stands to reason that exporting firms use
the niche strategy as a tactic of least resistance to prevent direct
confrontation with well-established competitor firms already doing business in that
foreign country. Using the niche market strategy exporting firms can "hide
and flourish" and slowly but steadily grow their market share. This
constitutes another key advantage of niche market exporting as it offers very
little or no threat to already established firms, thereby ensuring that the
niche market exporting firm thrives.
Despite the advantages of a niche market exporting strategy,
it does however also have some associated risks. Firstly, if and when the niche
becomes profitable other competitors may also want to enter this niche to have
“a piece of the action.” Secondly, there can be the incidence of what Linneman
& Stanton (1992) term as “cannibalization,” which is the situation in which
a new product introduced into a niche causes the loss of market share for an established
brand by the same company.
Niche market exporting is popular among firms in the fashion
and textile industry. A typical example is Lands' End, a US
based company that allows customers to customize their apparel according to
their size and style (Parrish et al., 2004). The ordered
garment then arrives not later than 2-3 weeks. This niche market exporting
strategy was adopted after the company discovered that its customers have a
distinct set of needs which were value, convenience and customization of
products. This has allowed the firm to gain competitive advantage in an otherwise
very competitive industry, even exceeding expectation.
Licensing and Contract Manufacturing
Under
this strategy, a firm gives another firm in a foreign country the patent
rights, trademark rights, copyrights or the technology behind its products and
processes (Twarowska &
Kakol, 2013).
Thus the foreign firm is able to produce its products and services via the
medium of the licensee firm, making it appear as if it was physically operating
in that country. This competitive strategy gives the licensing firm a physical
presence in the foreign country without it being physically operating there. In
return, the licensee firm pays the licensor firm certain fees and royalties
depending on the quantum of product sales.
Licensing
is used when very large number of product units is needed to meet high customer
demand, whereas in contract manufacturing, the firm contracts another firm to
produce a certain number of units of its products and pays cash upfront for
them. Despite the slight difference(s) between licensing and contract
manufacturing, the common thread running through them is the fact that a firm’s
products and services are produced by a foreign firm.
There are a number of reasons why foreign firms will choose
one competitive strategy over the other. In the case of licensing and contract
manufacturing, when cultural distance is high in a foreign country, foreign
firms may tend to opt for licensing (Arora & Fosfuri, 2000) as a competitive strategy in a
foreign country. They are also more likely to adopt this strategy when “economic,
financial and political risks and barriers on capital investments and
intermediate goods” are high (Arora & Fosfuri, 2000, p.572). In other words, a firm wanting to
reduce its exposure to risks in a foreign country would often choose this
strategy as it does not put a strain on its resources and commitment required
for such an arrangement is not high.
The risk associated with this strategy is that the Licensee
company may become a competitor of the licensing firm. This strategy is quite
popular in the pharmaceutical industries. In Ghana, for example, we have a
number of drugs that are not made here but in India – all products of either
licensing and or contract manufacturing.
Joint Ventures
Joint venture is a competitive strategy that lies midway
between wholly owned subsidiaries and licensing and contract manufacturing. Terjesen
(2010) defines joint venture
as "a formal arrangement between two or more firms to create a new
business for the purpose of carrying out some kind of mutually beneficial
activity, often related to business expansion, especially new product and/or
market development.” Arora & Fosfuri (2000) are of the view that
there are certain organizational knowledge that are so deeply seated within the
organization that the only way it can be transferred is through joint ventures
and not licensing. Joint ventures is usually characterised by a partnership
between a foreign firm and another firm in the host country. As opposed to
licensing, under this competitive strategy the foreign firm holds some equity
in the joint venture.
The disadvantage with this strategy is that
the foreign firm is exposed to the risks that licensing and contract
manufacturing strategy seeks to avoid. However, these risks are offsetted by
its partnership with a local firm which understands the local market. There is
the potential of conflict between the partners because of the differences in
their management philosophies (Stewart &
Maughn, 2011) as well as
culture.
It also gives the foreign firm the
opportunity to learn the characteristics of the local market from its local
partners.
An example of a successful Joint Venture is the New United
Motor Manufacturing Inc. (NUMMI) formed between General Motors (GM) and Toyota
in 1984. This venture was a win-win situation for both companies. General
Motors wanted to learn how to manufacture cars, using Toyota’s “lean”
production system, whilst Toyota had interest in testing its production methods
in an American setting. These cooperate interest resulted in the formation of
the NUMMI. And so in essence, joint ventures serve the interests that
partnering firms otherwise may and or would not be satisfy on their own.
Wholly Owned Subsidiaries
Firms
are considered wholly owned subsidiaries when the foreign partner firm holds
more than 95 % of the equity (Chang, Chung, &
Moon, 2013).
Under this strategy, the foreign firm
virtually takes all the risk. It does this with the understanding of having had
some prior experience in a foreign country. This is affirmed by (Arora & Fosfuri, 2000) who opined that wholly-owned
subsidiaries are preferred when a firm has a previous experience in a foreign
country. A study by Youssef
& Hoshino (2003) observed that the decision of a
firm to wholly own a subsidiary is influenced by the nationality of the
manager. They found that Japanese companies are wont to wholly own a subsidiary
in a foreign country if the manager is Japanese. This strategy gives the
foreign firm more or less complete control over the affairs of the organization.
Key Terms
Competitive strategies for firms in foreign markets
Strategies for emerging markets
Niche market exporting
Strategies for emerging markets ppt
Strategies for competing in global markets
Market entry strategy examples
Different strategies employed by businesses to enter emerging markets
International strategy
Conclusion
Which do you prefer?Key Terms
Competitive strategies for firms in foreign markets
Strategies for emerging markets
Niche market exporting
Strategies for emerging markets ppt
Strategies for competing in global markets
Market entry strategy examples
Different strategies employed by businesses to enter emerging markets
International strategy
References
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textile and apparel marketplace for niche markets. Journal of Fashion
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Stewart, M. R., & Maughn, R. D. (2011).
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There is no author and publication information. Its difficult to cite for academic writing
ReplyDeleteYou may kindly cite as: Danso, O. I. (2016). Evaluation of competitive strategies for firms in foreign markets. Available at https://thesisexamples.blogspot.com/2016/07/evaluation-of-competitive-strategies.html, date accessed 20/01/2017.
DeleteThanks for pointing this out.