Defending a Domestic Position against Global Entries
Yaron Timmor; Samuel Rabino; Jehiel Zif
The paper offers a systematic review of strategic options available to incumbents coping with threats and attacks by a global firm. The framework makes it possible to review and analyze action alternatives based on the entry stage, the attack focus and defense tactics. Even though the globalization process has exposed domestic incumbents to greater threats, incumbents’ options have also increased. The doors of trade liberalization swing both ways. Opportunities for collaboration increase while anti-globalization movements and national patriotism can be mobilized for effective defense.. The framework presented in this paper builds on existing strategic theories and concepts in addition to published case studies. It offers a flexible and dynamic approach for reviewing alternative strategies for implementation and research.
Key words: Defensive strategies, Incumbents, Global threats, Global opportunities, Globalization trends.
Defending a Domestic Position against Global Entries
Yaron Timmor; Samuel Rabino; Jehiel Zif
In the age of globalization, many domestic firms are threatened by the entry of global firms (Baker and Ballington 2002; Beardsley et al. 2002; Roberts Nelson and Morrison 2005; Thoumrungroje and Tansubaj 2004). Equipped with mega brands, know-how and economies of scales, global and multinational firms shove aside and even trample local players (Douglast, Quelch and Taylor 2004; Meyer and Tran 2006). However, in recent years, consumers, governments and domestic firms have been fighting back.
Nations, today, are more protective of their industries and products and concerned with foreign takeovers and acquisitions threatening the independence and identity of their domestic markets (Economist March 2006; Roberts, Nelson and Morrison 2005). Hence, even without legislation that limits such behavior by foreign firms, governments are acting to circumvent or limit their impact. The very vocal and aggressive anti-globalization movement has harshly criticized global firms for harming local cultures and traditions as well as for exploiting cheap labor in order to lower production costs (Douglas, Quelch and Taylor 2004; Economist February 2006).
In parallel, a growing segment of customers are finding it difficult to absorb and pay for continuous technological improvements as new technological features and capabilities are touted round the clock (Christensen and Raynor. 1997; Christensen, Raynor and Anthony 2003). Lower-priced products that provide the required performance even if they are technologically ‘inferior’ are ‘good enough’ for these consumers (China’s ‘good-enough’ market, The Wall Street Journal Asia, 9.05.06 by Orit Gadiesh and Till Vestring).
Global trade liberalization is now a two-way street. Domestic firms can defend their positions by going on the offensive and penetrating foreign markets. The experience of competing against the ‘big boys’ prepares the incumbent for the fight at home and vice versa. It also creates options for adopting expansion strategies. Successful global companies have begun emerging from developing countries.
The importance of defining and exploring defense strategies is clearly seen in the growing number of papers discussing how firms should defend their market positions (Abdul-Maguid Lotayif 2004; Gatignon, Robertson and Fein 1997; Roberts, Nelson and Morrison 2005; Robertson and Gatignon 1991, Robinson 1988). Kuester, Homburg and Robertson (1999) conceptualized the retaliation to a new product entry. Hauser and Shugan’s (1983) "Defender model" provides an analytical framework for how an established firm should adjust its marketing mix in response to a competitive entry. Other models, which also examined the defensive marketing mix, distinguished between dominant and non-dominant brands (Choi, De-Sarbo, Harker 1990; Gruca, Kumar and Sudharashan 1992). However, limited attention has been paid to the opportunities that recent global trends offer and their impact on the defense strategies of domestic incumbents.
This paper analyzes and presents a framework for the evaluation of import defense strategies and for action alternatives in cases where a domestic position is threatened by a global player.
The paper addresses three major competitive strategic properties that give global firms the advantage when entering new markets: (1) product advantage based on advanced technology; (2) cost advantage that leads to lower prices; and (3) a globally recognized brand name. These strategies are examined across four stages. Defense Strategy Options
Put Figure 1 about here
The framework in Figure 1 offers defensive strategies based on the strategic focus of the global entrant and its entry stage. Defensive strategies are classified into the typical categories of Fight, Flee or Join.
The First Stage: Lining Up. This stage takes place prior to any penetration activity. It consists of scanning relevant developments and actions, which can set the stage for entry, or sometimes dissuade the global competitor from entering. Early identification and preparation make it easier to for the domestic company to deal with a potential threat (Rabino and Zif 1987; Roberts, Nelson and Morrison 2005).
The Second Stage: Entry. This is a clearly defined stage that is marked by the visible actions of a global firm. A pilot entry can signal that a much bigger plan is being formulated. A strong response by a domestic company can sometimes force the global company to modify its entry plans (Huaser and Shugans 1983; Robinson 1988; Scherer 1980).
The Third Stage: Expansion. At this stage, the competitor entered the market, established operations, and gained a growing market share. The domestic firm must now work to inhibit the growth of the global company in the domestic market and explore avenues for future success under the new competitive conditions.
The Fourth Stage: Entrenchment. The foreign firm has gained a substantial position in the domestic market. The domestic firm may have lost a leading position, but wants to improve or at least maintain its relative market share and search for opportunities for survival and growth.
Classification of Defense Strategies
Fight: the domestic firm confronts its competitor. This could be a direct confrontation (counterattack) based on the same control variable used by the attacking firm i.e., product or price (Kuester, Homburg and Robertson 1999) or an indirect confrontation based on a different control variable. Alternatively, it can be a preemptive strategy, i.e., blocking access to distribution, or a flank move such as attacking in other markets (Porter 1980).
Flee: the defender accepts that it is going to lose the battle or that the cost of fighting is too high to justify the effort. The fleeing – withdrawal strategy (Gatignon 1990) could be limited to certain products; it could also be fleeing to a different segment or a less competitive market.
Join: is based on the idea that “if you can’t beat ’em, then join ’em”. One option is to team up with the attacker in one form or another, for example, by producing for its brand or co-opting it as an official partner. Another option is to join forces with another competitor.
The proposed framework is related to existing frameworks and theory. The classification of defense strategies as Fight, Flee, or Join is similar to the choices of Retaliation, Withdrawal, and Accommodation in the conceptualization of Kuenster et al. (1999), Gatignon (1990) and Porter (1980). The entry phases of Lining up, Entry, Expansion, and Entrenchment have been presented by Rabino and Zif (1987). Others have talked of entry deterrence and actual entry, or pre and post entry (Kuenster et al. 1999). The strategic focus of the global entry is based on key elements of the marketing mix and is discussed as part of entry deterrence options (Bunch and Smiley 1992). Theoretical concepts of product innovation and competitive response, including the notion of ’good enough‘, have been argued by Christensen and Raynor (2003). The notion of Direct versus Indirect fighting is similar to the notions of Reciprocal versus Non-reciprocal retaliation and the Domain of reaction (Kuenster et al. 1999)
Evaluating the Global Entrant’s Strategic Focus and Threat
Global firms use a variety of strategies when entering new markets. Some of the most damaging ones in terms of domestic market leaders are improved products or services, lower prices and relying on a global brand name (Gatignon, Weitz and Bansal 1990; Roberts et al. 2005; Robertson and Gatignon 1986; Timmor and Zif 2005; Zou and Cavusgil 2002).
Better Product versus Good Enough – “Firms innovate faster than our lives change to adopt those innovations” (Christensen and Raynor 1997). Management theories in, for example, industrial organizations (Porter 1980, 1985) and resource-based organizations (Barney 1991; Cooner 1991; Lado, Boyd and Wright 1992) contend that product or service innovations have a strategic advantage in a competitive environment (Cavusgil and Zou 1994; Gatignon, Robertson and Fein 1997; Gatignon, Weitz and Bansal 1990). During the past decade, product/service innovations and improvements have primarily been based on technologies that require substantial investments (Drennan and Kennedy 2003, Timmor and Rymon 2007; Varadarajan and Jayachandran 1999). Technological intensity facilitates the entry of new firms and increases the threat to incumbents (Gatignon, Robertson and Fein 1997; Scherer and Ross 1990; Von 1990). Hence, global firms such as Sony, Erikson and HP, which conduct extensive R&D, threaten many domestic leaders in several industries. Gatignon et al. (1997) found that many managers of domestic firms believed that a new market entrant’s innovativeness and technological intensity impact their defense strategies negatively. However, when a new product is the focus of a global entry, two distinct stages can be identified based on disruptive innovation theory (Christensen, Raynor and Anthony 2003):
The domestic product is not ‘good enough’ for many customers
The domestic product is ‘good enough’ for most customers.
At the early stages of new product introduction, the existing domestic product is frequently not good enough. Customers will expect product improvements and be prepared to pay for them. Accordingly, the competition will concentrate on product policy and technological improvements. Beyond this point, customers are reluctant to pay more for improvements they cannot absorb and utilize. As a result, the competition shifts from product policy issues to other issues such as pricing, promotion and distribution. At this junction, then, an important business opportunity for low cost disruption of the market by domestic leaders arises. This is the time to introduce ‘good enough’ products at lower prices.
Local culture and education can affect customers’ readiness to adopt improved or new products, especially technology-based products (Parasuraman 2000; Timmor and Rymon 2007). In many cases consumers’ income and existing norms could also slow adoption. If the potential adoption is slow, the domestic incumbent has time to find ways to upgrade to a ‘good enough’ level. In addition, customers’ switching costs due to different technologies and the time that they must spend on adopting a new brand can increase customer loyalty to the domestic brand. The domestic player that recognizes this should consider low price disruption and loyalty programs.
Economies of Scale versus Different Quality – The cost leadership strategy (Porter 1980) is identified with large and global firms (Baker and Ballington 2002; Cavusgil and Zou 1994; Timmor and Zif 2005; Zou and Cavusgil 2002). These firms have cost advantages due to numerous reasons: (1) Economies of scale and scope that result from manufacturing various products in high volumes in different markets; (2) Manufacturing in countries with cheaper labor and raw materials; (3) Reduction of inventory to sales ratios; and (4) Using standardized products and promotions in several markets (Johanson and Vahlne 1990; Walter and Toyne 1989; Zou and Cavusgil 2002). Such firms can use price as a very effective marketing tool to retaliate against any competitor’s counter measures (Ramaswamy, Gatignon and Reibstein 2001). When asked for their assessments of defense strategies when a new firm enters their domestic market with low prices, managers evaluated the likelihood of success in defending the incumbent position as low (Gatignon, Robertson and Fein 1997).
When threatened by a new entrant offering a lower priced product, domestic incumbents need to examine whether this advantage is due to economies of scale or is derived from producing in countries with cheaper or less skilled labor. When it is associated with exploiting people, the domestic company can use this negative feature in a public relations campaign that will decelerate customers’ responses and slow the newcomer’s entry.
When products differ in quality and perceived reliability, the effect on customers’ decision making can be used to the domestic firms’ advantage. This is particularly important when product safety and/or durability are critical considerations. Note, for example, the American “China Free” advertising campaign following quality problems with toys and food products in 2007. The perceived association between low price and low quality can be exploited when applicable.
When the global entry based on low prices has a negative impact on domestic employment, a firm may be able to activate government help or interference. In an August 1st, 2007 article titled “Economists against Protectionism,” which appeared in the Wall Street Journal, it was suggested that: “Over the past several months protectionism has reached a fever pitch with lawmakers in both US houses clamoring to attach their names to as many as 50 anti-trade bills.”
Global Image versus Tradition and Experience – “To firms, brands represent enormously valuable pieces of legal property that can influence consumer behavior...” (Kotler and Keller 2006). Hence, it is important to understand what sort of factors and values linked to a competitive brand may affect consumer utility and behavior.
Global brands enjoy cost savings by using the same brand across markets. Their international reputation is broadened by today’s great population mobility and international communication channels (Aaker and Joachimthaler 1999; Boze and Patton 1995; Hollensen 2001; Levitt 1983; Quelch 1999). A distinction can be made between consumer and industrial products. While for the former, global image and prestige can be highly influential, in B-to-B and industrial products, purchase decisions are more frequently affected by trust and experience with the supplier and long term relationships.
Some product categories require availability of support and service systems. This creates an opportunity for domestic firms to base their defense on their local infrastructure or to join forces with a global firm that needs a local partner (Kumar and Selavan 1997; Leonidou and Katsikeas 1996).
As globalization continues, nations are increasing their efforts to save their unique cultures and values (Naisbit 1994; Taylor 2000). Moreover, many studies have called for sustaining cultural and taste differences and stereotypes among countries, all of which affect consumer behavior (Lotz and Hu 2001; Papadopoulos and Heslop 1993; Sriramesh, Kim and Takasaki 1999; Whitelock and Pimblett 1997). Efes Turkish beer is an example of a local brand that is barely recognized globally, but is able to maintain a leading position at home.
The choice of strategy is influenced by the stage of competitive entry, the firm’s resources, the assessment of the competitor’s relative strengths, the opportunities for response and the competitor’s attractiveness to domestic customers. The discussion below follows the line of reasoning of the proposed framework. . In each cell of the framework there is more than one defense option; if one option fails a company might be more successful with another strategic option. An unsuccessful effort to deter a competitor in an early stage will usually require a modified strategy in a later stage.
Global Entrant Strategic Focus: Better Product
Phase I: Lining Up – Many studies have addressed the importance of a quick response to the threat of a new potential entrant before and along its entry into the market (Gatignon, Robertson and Fein 1997; Porter 1985; Rabino and Zif 1987; Roberts, Nelson and Morrison 2005). In this phase, the local company has to identify the potential threat. Market intelligence that includes analysis of the potential competitors’ moves is critical in this phase. A potential entry can be inferred, for example, from a global entry into countries with a similar profile.
The incumbent must determine whether its existing product is ‘good enough’ for most customers. If it is ‘not good enough’ for most customers, the potential threat of a better product is likely to be high. The best defense in this situation is to upgrade the existing product. This can be achieved by additional investment in R&D, if there is sufficient time prior to the expected global entry. A possible alliance with a potential global competitor is an option, although it may lead to sharing of control.
When introduction of a better product requires a major educational and promotional effort, the domestic company can convince customers to wait for a better solution by the reliable and well-known domestic supplier. A strategy of convincing customers to delay purchasing while the company is upgrading its product/s can be used (for example, see the Barco Projection Systems HBS cases)
The Chinese government recently decided to make its markets more competitive for both local and foreign companies. Anticipating substantial entry efforts by foreign competitors, Brilliant Auto, a subsidiary of China Brilliance Group, established alliances with foreign automotive companies such as BMW, Renault, Austin and Toyota (www.china.org.cn/english2002/May/33573.htm).
Market blocking may include expansion of market coverage, customer service and points of product availability. It could also include long-term supply contracts with retailers or distributors. For example, Aroma, a local Israeli café chain, opened many new attractive coffee shops just before Starbucks opened its first shop in Israel. Following market saturation by Aroma, Starbucks withdrew from the market after a relatively short period.
Domestic companies can also use the globalization movement as a trigger for changing their strategic scope. ‘The best defense is a strong offense.’ Instead of concentrating on the convenience of a domestic market, the potential growth and expansion opportunities in the global market become more appealing when the existing strategy in threatened. In recent years a number of companies from developing countries (e.g., Cemex of Mexico, Lenovo of China, Khanna and Palepu 2006) have become successful global companies. They have moved from a strong domestic position threatened by global competitors to being global players themselves.
Moreover, the expansion into foreign markets can be both a defensive as well as offensive move (Ayal and Zif 1979). A modest tactic such as an indirect defense against a competitor could, if successful, become an engine for growth. For example, the statement made by the management of Koc Holding of Turkey: “We thought we would learn a great deal by competing against the best in the world on their home turf and better prepare ourselves to defend our domestic market share against the likes of Bosch and Siemens” (Koc Holdings: Arcelik White Goods, HBS 9-598-033, p. 8.).
Phase II: Entry – The entry phase is either a continuation of the Lining Up Phase or the first stage if no preliminary signaling and other actions are taken by the global invader. The question now is not how to avoid or postpone the global firm’s entry into the market; rather it is how the domestic incumbent can block the foreign invader’s expansion. There are varieties of tactics and strategies that the local incumbent can adopt. However, if the new global player offers better products that appeal to most segments, a direct fighting defense strategy should be based on product/service improvement (Porter 1990; Robertson, Nelson and Morison 2005).
SAP, Europe’s biggest software company, is a German-based company. Its main rivals in Germany and elsewhere are the US-based PeopleSoft and Siebel Systems. SAP was able to successfully block the expansion of the American companies into its traditional markets by raising customer satisfaction and upgrading its technology. (http://ecition.cmm.com/2003/Business/o4/SAP/index.htmlCNN.com “SAP wins customer from rivals”).
An indirect defense could include market blocking by controlling distribution channels as well as price reductions. The Haier Group, a $12.8 billion Chinese white goods maker, developed a strategy to defend its domestic position from relatively low quality and cost imports. After mergers and consolidations, it engaged in contract manufacturing for major western retailers and learned the business along the way. As a result, it secured its market position and contributed to a worldwide price drop of 8%-12% for low-to mid-end refrigerators. A price war can also postpone customers’ decisions to switch products and delay an entrant’s expansion (Porter 1980). In 2003, Cadbury entered the Israeli market and threatened the domestic incumbent Elite’s hegemony in the chocolate market. Elite responded by blocking the market channels through exclusive agreements, clogging shelf space and reducing prices. After less than a year Cadbury withdrew from the market.
Phase III: Expansion – In this phase the foreign invaders expand their position within the domestic market. The foreign competition’s market share is increasing, sometimes at an accelerated pace. Incumbents face a critical strategic dilemma at this stage: do they continue the fight, flee to a different product or segment, or join forces with another firm?
Consider the response of Comerci, a Mexico City based retailer with 225 stores. After Wal-Mart had invested heavily and expanded in central Mexico, Comerci’s profits plunged. In response, Comerci launched its own version of everyday low prices, discarding the sales and contents it once used to lure shoppers (http://www.businessweek.com/content/o2 September 16, 2002.)
Another example, Ningo Bird Co., a Chinese manufacturer of cellular phones, went up against Motorola International. Ningo Bird boosted its production capacity by opening two new factories, achieved economies of scale, drove down the prices of low-end phones, and successfully stopped any further growth of Motorola’s sales in this segment (Einhorm, Decter and Roger 2003).
The liberalization of markets, global village conditions and modern communication channels make cooperation with foreign firms more feasible and attractive than before. The reality of losing an existing position is frequently a strong stimulant to search for partners. Although a joint venture or a strategic alliance means losing full control, in many situations the potential economic gain will justify the trade-off (for example, Elite of Israel, a leading food company, went into partnership with Lavazza and Pepsi/Frito-Lay).
Phase IV: Entrenchment – This is the phase when the global entrant competitor is well established in the local market and some domestic firms would have already exited their respective industries. Alternatively, some domestic incumbents will have already been merged into, or been bought by, the global invader. Survivors need new strategies. However, in developing markets, domestic firms, often owned by families used to controlling the market, find it hard to relinquish their identity and traditions. The best defense for such businesses is to concentrate on a specific niche where their knowledge and care of a select segment can be a competitive advantage. For example, an old leather goods company with eroding sales due to cheap imports from Latin America developed a successful baseball glove line and at present sells leather gloves to four U.S. Big League teams at a premium price with the slogan “Catch the Day” (Texas Monthly, “Letters from Nocana”, by S.C. Gwyne, March 2007).
Global Entrant’s Strategic Focus: Lower Price