The Advantages of Global Expansion Essay
The Advantages of Global Expansion
Recent interviews of top international executives by the Myrddin Group in San Antonio have revealed they thought they could create value by transferring their business model and American style of product and marketing to foreign markets. Many initially treated foreign markets much like the United States but soon found that this was not the correct approach. Many American products drew big yawns in Europe and Asia where most of the successful products were local. These national differences in customer tastes and preferences require a change in approach to marketing. This requires a redefining of the actions managers can take to compete more effectively as an international business. The Advantages of Global Expansion
Expanding globally allows a business to increase its profitability in ways not available to purely domestic businesses. Companies that operate internationally are able to: Expand the market for their product offerings by selling those products in international markets. Achieve location economies of scale by distributing value creation activities around the globe to where they can be performed most efficiently. Earn a higher rate of return by leveraging any expertise developed in overseas operations and shifting it to other parts of the company’s global operations. While this sounds simple, it is constrained by the need to customize products, marketing, and business strategy to each of the different national locations. Most multinationals started out by taking their goods or services and selling them internationally. Companies like Toyota for example found out that the small vehicles that were popular in Japan were not as popular in the US as the larger sized autos. They adjusted their product strategy to the US market and enjoyed the ensuing growth in market share and profitability. McDonald’s adapted likewise in India where cattle are revered and the typical Big Mac was doomed as a product. Location Economies
The same principle holds true for location economies. Due to differences in feature costs, certain countries have a comparative advantage in the production of certain products. As an example, Japan might excel in the production of automobiles, the United States in the production of computer software, and China in the production of clothing. For a company attempting to prosper in a global market this might mean that it would benefit by basing every value creation activity it needs in the country where economic, political, and cost considerations are most conducive for that activity. For example, if the most productive labor force for assembly operations is in China then any assembly operations should be there. If the best marketers are in the US then the marketing plans should be developed in the US. Companies that use a strategy such as this can realize these location economies and in doing so they can lower the costs of value creation and arrive at a low-cost position.
Faster growth: Firms that have operate internationally tend to develop at a much quicker pace than those operating locally Access to cheaper inputs: Operating internationally may enable the firm to source raw materials or labor at lower prices Increased quality and efficiency: Exposure to foreign competition will encourage increased efficiency. Doing business in the international market allows firms to improve the quality of their product in order to gain a competitive advantage. New market opportunities: International business presents firms with new market opportunities. These new markets provide more opportunities for expansion, growth, and income. A bigger market means more customers, increased revenue, a larger profit margin, and allows the business to realize economies of scale. Diversification: As the firm diversifies its market, it becomes less vulnerable to changes in local demand. This reduces wild swings in a company’s sales and profits. Disadvantages
Increased costs: There are increased operating expenses including the establishment of facilities abroad, the hiring of additional staff, traveling of personnel, specialized transport networks, information and communication technology. Foreign regulations and standards: The firm may need to conform to new standards. This may require changes such as in the production process, inputs and packaging, incurring additional costs. Delays in payments: International trade may cause delays in payments, adversely affecting the firm’s cash flow. Complex organizational structure: International business usually requires changes to the firms operating structure. Training/retraining of management may be necessary to facilitate restructuring.