1. Market Opportunities
A firm may desire to expand internationally because market opportunities exist abroad. These opportunities include demand for a firm's product in foreign markets, trends changing to favor the product in foreign markets, or the absence of competition abroad which would give the firm the first mover advantage.
More specifically, these market opportunities can be broken down and explained with examples from existing companies:
Example: Sony selling consumer electronics in international markets. Sony was founded in Tokyo in 1946. One of its founders, Akio Morita, decided that Sony should not be restricted to Japan and viewed the whole world as a potential marketplace. The company now has major international markets on almost every continent and has expanded to many countries. Sony started out solely as an electronics company but expanded to include motion pictures, music entertainment and financial services, among others.
Example: Abercrombie & Fitch found that many customers were ordering online and by catalog from abroad. In 2007, the company took this as a signal to expand its stores, both Abercrombie & Fitch and its sister store Hollister overseas. The company first started in the US and then continued to expand across Europe and Asia. By 2013, the retailer opened stores in the Middle East and Australia.
Example: Ever heard of Cheng Loong Corp? You probably haven’t, but if you have an iPhone, iPod or Apple Mac, you’ve bought their products! Cheng Loong Corp are based in Taiwan, and they manufacture Apple product packaging. Although they have been producing similar packaging since 1959, they now find that the international market is the most profitable.
Example: Beiersdorf expanded its brand Nivea internationally to create appeal in the domestic market. Its ads had testimonials from customers of different ethnicities to give the sense of an international brand. Many consumers desire international products because they believe it makes them feel more sophisticated and cosmopolitan, so Beiersdorf used this to its advantage.
Another reason to go global is the willingness to diversify the risk of the company. Thus, firms are likely to avoid "putting all of their eggs in one basket". By doing that, companies become more immune to changing trends in consumption for each of the markets, and they are also less affected by external factors affecting consumer behavior and purchasing of their products, such as climate.
Example: IDE Technologies is a company that provides the service of "snowmaking" to ski resorts around the world. They operate in countries in both hemispheres (e.g. Switzerland and South Africa) in order to maintain a consistent revenue. When it is Summer in one part of the world and they are not able to operate, they focus on the part of the world where it is Winter and their business can thrive.
Example: H&M will open its first stores in India this year after Zara expanded to India in 2010 where it now has 13 stores. In 2 out of the 3 years since Zara has opened in India, it has gained profits. This was a signal for H&M that it could also be successful in India's market. Its aim is to take Zara's spot as the world's number one apparel retailer.
Another reason why firms may want to globalize their company is to achieve economies of scale. Economies of scale are advantageous because it allows a firm to economize the transport and distribution network. Additionally, they can allow firms to produce their products cheaper in some countries because of factors such as component costs, flexibility, supplier availability, wages and different legislations.
·To increase competitiveness against global companies of the industry | Example: Apple, began manufacturing iPhones in China to take advantage of the lower cost to produce and its flexibility. Apple's production volumes and unpredictable engineering changes require it to manufacture in a location that offers flexibility, which the US cannot offer. Factories in China can employ thousands of engineers that are able to respond to changes overnight if necessary. For example, Apple redesigned the iPhone screen last minute and within hours, the new screens arrived in the Chinese plant to be assembled with the phones. This would not have been possible in the domestic market. This easniess of adapting to changes gives Apple a competitive edge against companies that produce their products in the US. |
Question yourself: is it better for your firm to be ready for changes, or to anticipate to them?
Proactive Reasons
1. Profit Seeking: Price pressure is STRONG! Entering a market with lower prices than competitors grants your business a competitive edge. Also, manufacturing products in low-cost countries enables to increase profits. | |
- Customers are global and there’s a strong potential in expanding your business abroad rather than to concentrate on the domestic market.
- It is also a response to the seasonality of a domestic market.
- It depends on the life cycle of the product: if a product enters its last cycle in one country, it is essential for the firm to look for new markets to re-engage the whole process abroad.
- Expansion abroad is also a strategic decision in order to find new markets or prospects. It depends on the segments and niche of the company; a firm which is specialized (targets a niche, prestigious products etc.) has strong incentives to exploit several markets because of a small consumer segment.
3. Uniqueness and Exclusivity
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| 4. Resource Seeking Access to scare resources that can only be found in foreign markets (trained/skilled workforce, natural resources, low-cost labor, ideas & new concepts etc.) |
Reactive Reasons
- Some foreign markets form as part of emerging economies and therefore represent a strong potential. Some market opportunities may appear (i.e. new tastes, new consumption habits/occasions, new segments) and must be exploited.
- International markets may also have higher profitability than the domestic ones. Foreign markets can also be exploited because there is a similarity in tastes, habits or consumption occasions.
| 2. Overproduction, Declining Domestic Sales, or Excess Capacity If a domestic market is saturated or too little, offer may excess demand. Expansion abroad is a means of tackling this issue. |
3. Competitive strike
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- Governments can also give incentives to domestic companies to internationalize. The government can, for example, assist exports by offering financial helps.
- Another reason is because trade barriers have decreased or disappeared in a foreign country and gives opportunities to go abroad.
- Costs of production at home increase, forcing the company to find a cheaper place to produce.
- Tariff or non-tariff barriers: if an exporting company finds that the government in the recipient country starts to build tariff or non-tariff barriers to block the export, then it might be a reason for the exporter to set up a manufacturing operation overseas in order to avoid the tariffs.
- "Buy-Local" policies: exporting companies may find that "buy-local" policies may restrict their exports - which may cause the exporter to set up a local alliance or relationship.
- Environmental regulations or changes in work/safety regulations may cause the company to go overseas to a less restrictive location.
Conclusion: managers should always be aware of what is going on with their business to take decisions, try to forecast the future or be ready to react to changes, and potentially.. go abroad!