Four crucial generic strategic options for competing in foreign markets include export strategies, licensing strategies, franchising strategies, and strategic alliances. An export strategy uses the production facilities of the home country to create products which it then exports to the foreign market. The advantage of this approach is that the company maintains control of operations and quality control while not incurring the risk of investing in facilities abroad. A country can also gain experience curve and economies of scale benefits from keeping all production in one country. The main disadvantage is that the cost to produce the goods may be higher locally than it is abroad. This opens up the company to being outpriced by competitors.
Licensing gives a foreign firm the right to produce a product or use technical information in the scope of the license agreement. Licensing is used when businesses do not wish to invest in facilities in the foreign country, but they do want to sell their products in that country. This option is the riskiest approach, but it also yields the lowest returns because the company will only receive a fraction of the profits. However, the company loses control over operations when it licenses.
Franchising is used when operational control is necessary, but the company does not want to commit to creating its facilities abroad. Franchising is less risky than direct foreign investment, and more control is gained than through license agreements, but the gains from franchising are also lower than export or direct investment options. Franchisers also must make sure that all franchises are following the company’s standards to protect their brand name and reputation.
Strategic alliances are when a domestic and a foreign company team up to accomplish something. Strategic partnerships are used to share technology, capabilities, or business practices or to coordinate activities of different members within the supply chain. Strategic partnerships that begin for sharing are often temporary because both businesses become strong enough to compete on their own once these things are integrated into the companies. Supply chain alliances are longer lasting because as the companies continue to work together, they continue to see profits from collaboration and they may also see increased profits due to learning how to function better together. The strategic alliance members will not see an advantage to terminate the alliance so it will remain.