Phase I: Lining up –. In many cases, a domestic incumbent can assess whether the potential global entry will price its product substantially lower than its own. If this happens, the incumbent can signal its intention to defend its position by lowering its prices (Kuester, Homburg and Robertson 1999; Kumar and Sudharshan 1992). However, a different strategy may be called for if the presumed price level is derived from economies of scales, efficient manufacturing, or is based on a penetration strategy aimed to gain a quick market share in order to expel the incumbent, even when it involves short and medium term losses for the global entrant
In preparation for a global entry, a sophisticated incumbent can do an in-depth analysis to predict consumers’ responses to the expected attack. A disaggregated analysis makes it possible to assess consumers’ responses to different elements, and potential changes in the marketing mix. A study of this kind was carried out for the dominant paint company in Israel, Tambour. The analysis made it possible to assess the potential damage in market share posed by a global entry and to explore preemptive moves to reduce the potential loss. John Roberts reported a similar effort on behalf of Telstra, the state-owned Australian telecommunication company (Roberts 2005). An interesting component of the reported strategy was the classification of customers based on the two parameters of Vulnerable and Valuable. Based on an economic analysis and segment identification, Telstra devised a general selective pricing plan that gave the knowledgeable “valuable and vulnerable” customers an attractive deal that the “valuable-not vulnerable customers” were not likely to take. The success of Telstra’s selective pricing, supported by heavy advertising, made it difficult for customers to determine which service was cheaper, following the global entry with average lower prices.
Another example of preparation for competitive entry by a Japanese firm with a cost advantage based on a highly automated factory was carried out by the American Connector Company in the early 1990s. The American company began by revamping its own manufacturing system; it placed more emphasis on customized designs and improved communication with customers and then initiated selective price cuts. The competitive entry was barely profitable four years later (Hayes and Upton 1998).
A firm’s determination and signaling of a commitment to its market is important in two respects. First, the signal indicates to the global firm that intends to enter the market that entering is not going to be easy (Robertson, Eliashberg, and Rymon 1995; Heil and Walters 1993). For some potential entrents, this may be a consideration in deciding to postpone entry or to ally itself with the domestic incumbent in order to avoid antagonism and government interference. Second, price reduction by the incumbent may also affect consumers and raise their loyalty and solidarity. However, the decision to reduce prices must recognize the possibility of a negative reaction by consumers who feel that they were previously deceived, and also the possible damage to the product’s perceived quality. A gradual move and special offers such as upgrading old products may be effective in countering negative responses.
If the competitive product is inferior, the domestic incumbent can defend its position by using quality- based differentiation. However, if the expected global entry is ‘good enough’, the domestic incumbent will need to offer a competitive ‘value for money’ product by reducing production costs, possibly by increased automation, outsourcing, or foreign production (Christensen , Raynor and Anthony 2003).
An important development related to the globalization of markets is the movement against globalization. Cultivating governmental preferential treatment can be an effective strategy if one can demonstrate the need to defend local industry’s independence and survival, as well as ensure local employment. The French government reacted with unbridled hostility to Mittal Steel’s bid for Arcelor, a steel producer formed by the merger of leading steelmakers from France, Luxemburg and Spain. The French government has no stake in Arcelor nor has it any regulatory role to play. Nevertheless, it still considered Arcelor a corporate jewel that had to be protected (Economist, 1st Mars 2006).
Phase II: Entry – Some of the defensive activities of the previous stage are likely to continue: price reduction, cultivating government intervention, and seeking production agreements. However, at this stage a more powerful response is required to defend market position and block the invader’s expansion. If the global entrant’s product or service is of lower quality, then attacking its weaknesses can be effective. A good example is the backlash against the poor quality of Chinese imports – real or alleged – that is encouraged by manufacturers in the US and Europe (“Testimony” of Franklin J. Vargo, Vice President International Economic Affairs, National Association of Manufacturers, on behalf of the National association of Manufacturers, before the Senate Committee on Commerce, Science and Transportation Subcommittee on Trade, Tourism and Economic Development, on “Piracy and Counterfeiting in China”, March 8, 2006).
Brand differentiation can be also advantageous to domestic incumbents in two regards. First, it increases the perceived quality gap between the domestic and the newly-launched product. Second, it can enhance brand loyalty and customer rationalization when paying more for the domestic product. An example of staving off the continuous decline of the textile industry is found among North Carolina textile manufacturers. The group, which has banded together for their own advantage, is developing a non-labor intensive, environmentally friendly, near-perfect textile to compete with cheap, lower quality imports. This is being achieved through nanotechnology production techniques. Quality and environmental protection are being used as selling points for this product (“Nano Technology & the North Carolina Textile Industry”, A White Paper, The Kenan-Flagler Business School (2005), pp. 1-10).
When the entrant’s product is lower priced but is also ‘good enough’, outsourcing production or possibly producing or importing a less expensive product could be useful. Enhancing service and increasing switching costs could also be effective, at least in the short term (Roberts, Nelson and Morrison 2003). El Al Airlines, confronting the massive entry of global freight companies to its domestic market following the new policy of ‘open skies,’ extended its preflight service as well as the extra bonuses and benefits to loyal customers.
Phase III: Expansion – When the new global player continues to gain market share, it is likely that its product is at least ‘good enough’ for a large number of customers. Direct fighting continues by price reductions by the incumbent and a vigorous effort to find ways to reduce cost. Joint efforts in production or moving production to other countries are more urgent at this stage. For this reason, Italians own about 1,500 textiles and clothing factories and 1000 footwear factories in Romania and employ around 200,000 people there (Economist 23rd Feb. 2006).
Since the impact of the global competitor is much greater and more visible in the expansion stage, efforts to slow the process are likely to get a more favorable hearing from government.
A market differentiation strategy can be implemented successfully when there is substantial heterogeneity among segments and their needs. Different product variations can be targeted to segments that are not served optimally by the global competitor. Consider the American men’s footwear market that currently is dominated by imports. Not so long ago, Florsheim Shoe Group Inc., a leading maker of men’s dress shoes, experienced a dramatic drop in its sales. Their differentiation strategy was to launch new models aimed at the casual shoe market and younger consumers, including its Frogs golf shoes (http://www.answers.com/topic/men-s-footwear?caat=biz-fine&print=type).
Phase IV: Entrenchment – This is a more stable stage, but with reduced market share and profits. The incumbent is not likely to be satisfied; therefore, a move to a niche strategy could be productive. Shoemaking companies in the Czech Republic have experienced the rapid growth and entrenchment of foreign competitors – many of them Chinese firms. Novesta, a Czech company, adopted a niche strategy in order to survive. Today they specialize in the production of rubber boots targeted at hunters and workers (Kuchar 2001). Whereas Italy’s traditional industries, such as clothing and footwear, are reeling in the face of global competition, Tod’s is an example of a company adopting a successful defense strategy. The secret of the firm’s success lies in two decisions: it has gone determinedly for the luxury end of the market, and it has invested heavily in its own brand (Economist 18th May 2006).
Global Entrant’s Strategic Focus: Global Brand
Phase I: Lining up – When a global firm with a known brand is about to enter a market, domestic incumbents have two major alternatives: develop or strengthen their own brands or get a license for a competing global brand. In all events, it is important that the firm signal its commitment to defend its market position. Anti-globalization and preservation of culture campaigns increase the domestic incumbents’ opportunities to develop their own brands, emphasizing tradition, originality and patriotism (Baker and Ballington 2002; Papadopoulus and Helsop 1993; Roberts 2005). Domestic firms can gain the support of local authorities using the argument that they are defending local industry and preventing unemployment, and even promoting local traditions. The ‘Australian Made’ campaign was re-launched in 1999 (after being used first in 1986) with the support of the Australian Chamber of Commerce and Industry and the Commonwealth Department of Industry. The aim was to encourage Australians to buy Australian-made consumer goods and to prevent import penetration. A survey conducted in 2000 by the campaign’s founders discovered that 60% of the respondents had the most confidence in the ‘Australian Made’ trademarks as compared with other symbols that signify the origin of products (Baker and Ballington 2002).
Brand Licensing is a different strategy that domestic incumbents can adopt, especially when the global firms’ brands stand for originality and special appeal (i.e., McDonald’s for Fast food, Godiva or Kinder for chocolate, Sony for electronics and Seiko for watches). Moreover, while globalization has increased the threats of new competitors for domestic markets, it has also opened up opportunities for joint ventures and brand licensing of international brands. In some cases, global firms, looking to expand their brands and sales, are waiting for a chance to enter new markets. In other cases, global firms attempt to maintain a competitive balance with a global entry by a competitor. These global firms view the potential of many developing countries, but come up against cultural and regulatory barriers. A local partner can open the doors for them. Carlsberg expanded their business in Asia and Eastern Europe by cooperating with local brewers and brands (Meyer and Tran 2006).
Phase II: Entry – When the global brand has entered the market, the domestic incumbent could highlight the uniqueness of the local brand, frequently basing it on domestic culture and tradition. Local brands enjoy high levels of recognition and awareness in their home markets. The argument could concentrate on the “best fit” to the needs of domestic customers. Efes, the leading Turkish beer, focused its positioning on its origins in and suitability for the local audience. Another example is American Eagle Outfitters, a clothing retailer that successfully developed a lifestyle apparel collection, aimed at the American 15 to 25 years old demographic groups. Their positioning approach to these groups can be described as preppy, athletic and casual (http://www.answers.com/to[oc/American-eacle-artf;Hers? cat=biz=firn&print-true).
The licensing of a different global brand (joining strategy) may become more feasible once a global competitor has entered the market. A global entry could highlight the opportunity and the competitive interest in entering the market in some form by other global firms.
Phase III: Expansion – If the global firm continues to expand, one strategic option is brand variation along with greater product assortment. By extending its product assortment, the domestic firm may cater to segments that are motivated by the need for distinctiveness (Timmor and Katz-Navon 2008). Following the expansion of the global brand Pantene by L’Oreal in the Israeli market, a leading domestic producer launched a new line of shampoo using international actors as endorsers in order to strengthen the global appeal of its brand among domestic consumers.
In a joint venture with other global brand producers, the incumbent can fortify its product lines with a greater variety and extend its brand utility by offering a global brand as an alternative to its local one. A global competitor, on the other hand, can benefit from an established and in-place marketing system, distribution channels, and experienced sales force that can reduce its costs and shorten its entry time.
Lion Nathan Ltd. is an Australian beer and wine group that was losing market share to foreign competitors. Its survival strategy was to establish a joint venture with one of the largest foreign competitors – Bacardi-Martini Ltd. The new joint venture markets and distributes a range of ready-to-drink and alcoholic beverages in Australia (“Australia’s Lion Nathan Sign JV with Bacardi-Martini”, Vitorovich and Newswire 2003).
A third strategy alternative is based on the premise that the firm opts out of engaging in an ongoing confrontation, and commences producing for the private labels of major store brands. The increase in the market share of private labels opens new opportunities, especially for firms that find it hard to make their own brands ‘good enough’ to compete with global ones (Dunn and Narasimhan 1999; Timmor 2007).
Phase IV: Entrenchment – In spite of the popularity of the global firm’s brand and large market share, the domestic firm may decide to stay in the business and in the market. The decision to do so is typically due to its tradition, producing experience and facilities. In such a case, the firm can manufacture for private labels, thereby reducing its promotional costs and gaining access to retail chains. It can even look for opportunities to manufacture for overseas private labels (Timmor 2007). An alternative way to stay in the market is by differentiating the brand from the global ones by focusing on specific segments and supplying specific utilities. Competing with international chains such as Wendy and McDonald’s, Mos Burger of Japan differentiated its product as well as brand perception. Thus, for example, Mos Burger focuses on themes such as ‘freshness’ and ‘speed’ of service. Its stores are decorated and styled as family restaurants. Menu boards as well as tables and chairs are made from wood, projecting a fashionable image http://indo.toenglish/netnihon/food/fast.ht.
The paper offers a systematic review of strategic options for incumbents coping with threats by a global firm. The proposed framework makes it possible to review action alternatives based on the entry stage, attack focus and defense tactics. The inertia of a convenient past must give way to the realization that the domestic market is changing and new initiatives are required. Researching, developing and perfecting a new strategy require investing time, effort and money. It is, therefore, better to take action at the earliest stage of lining-up. At this juncture, the company has more options and resources, since the negative impact on sales has not yet started.
It is important to assess the attractiveness of competitive products. The rapid introduction of new technologies into global markets can overshoot the ability of customers to absorb products containing innovations. The paper makes the point that incumbents do not always have to counter imports with similar superior products. Rather, they can successfully serve the home market with 'good enough' products with lower prices.
Rigorous analysis can be useful in development of a defense strategy. The qualitative analysis could consider the strategic focus of the anticipated attack, based on similar actions in other markets and the strengths and weaknesses of the potential global attacker. The quantitative analysis could estimate customers’ responses to possible strategies by the incumbent as well as by the attacker. Segmentation schemes could take into account the relative importance of current customers, their perceptions, and their switching likelihood. This kind of analysis could also prepare the incumbent for a realistic assessment of the potential losses in market share and profits when choosing different options.
A major contribution of this paper is the identification and articulation of the means of changing defensive moves in the various stages of competitive entry. The notions of ‘fight, flee or join’ take on different meanings based on the success of the initial foreign entry and the reassessment of future losses and opportunities.
The new global realities impact significantly on incumbents’ options. First, liberalization is being forced upon even the most reluctant markets and it must be remembered that its doors open both ways. Firms from developing countries are becoming global players and firms in developed markets are being forced into a defensive posture. Domestic firms are getting an opportunity to test the competition on their own turf as preparation for defending themselves at home. They can also cultivate strategic options for niche markets on a global scale. Second, globalization offers rich options for creative collaboration. Joining a global player, by licensing, joint venture or other forms could be a profitable defensive move. And, third, action generates reaction. Globalization generates anti-globalization moves. A domestic incumbent can take advantage of this phenomenon and utilize advertising, public relations and government support in developing a successful defense.
The rationality for employing a portfolio of strategies in order to enhance the firm’s competitive position has been discussed in previous studies (Brugel and Murray 2002; Morrison 1990). The discussion in the paper here concentrated on specific situations and related defensive moves; nevertheless, one needs to consider the effectiveness of combining strategies. Elite, the leading Israeli producer of coffee and chocolates, is an example of a company that successfully used defensive strategies based on adaptation and a combination of moves. Nestlé’s ‘Taster’s Choice’ coffee, a global competitor, was imported for many years by local importers. In 1995 Nestlé decided to enter the market by buying 10% of Osem, the leading domestic firm for staple products such as pasta, soups and snacks. A few years later Nestlé increased its share of Osem to 51%. By 2002 another global threat came from Cadbury.
Elite used several defensive strategies along the different phases of Nestlé’s entrance. First, it announced its commitment to maintaining its leading position in the market and its service to its customers. The company initiated aggressive spending on marketing advertising, sales and price promotion and emphasized domestic tradition, local taste and originality of its products. Nevertheless, Nestlé succeeded in increasing its sales, especially in the medium and high segments. In response, Elite accelerated its developing process, came out with a new line of freeze dried, and roasted coffee. New brands were launched and later on, the company consolidated all its premium products under the ‘Platinum’ brand label. Thus, the company promoted two brands: Elite coffee with the tradition and local appeal for the common market, and the Platinum brand with a global positioning for the higher end. The competition with Nestlé contributed to a substantial increase in Elite’s capabilities. Following a merger with a leading dairy company, Strauss, successful expansion to a number of foreign markets was undertaken.
In the chocolate category – threatened by Cadbury, Elite extended its traditional brands by introducing new varieties, and by aggressive sales promotions and control of distribution channels. Following Elite’s forceful response, Cadbury withdrew from the market.
The framework presented in this paper offers a flexible and dynamic approach to organizing and reviewing alternative strategies. It also shows the benefits of assessing and changing managerial strategies following developments over time. A follow-up empirical study to monitor defensive actions and the competitive outcomes associated with defensive moves in different countries is needed.
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