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.

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 

Market entry strategy examples

Different strategies employed by businesses to enter emerging markets  

International strategy 

References

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Youssef, K. Ben, & Hoshino, Y. (2003). The Choice between joint ventures and wholly owned subsidiaries_the case of Japanese Direct Investment in Europe. Japanese Journal of Administrative Sciences, 17(1), 31–46.