International Strategies and Diversification
The incentives that influence firms to use international strategies include; easier access to scarce resources and raw materials, more opportunity to integrate into global operations, the ability to extend product life cycle, more opportunities to use evolving technology, and extended access to more consumers in emerging economies. The three basic benefits firms gain from successfully implementing the international strategy include economies of scale with additional learning opportunities, lower cost, and strategic location advantages such as labor and energy and larger market access.
Companies choose international diversification to gain a competitive edge over their opponents. For example, businesses that expand in markets where their competitors do not operate often have a first-mover advantage, allowing them to build strong brand awareness with consumers before their competitors. International expansion can also help companies acquire access to new technologies and industry ecosystems, which may significantly improve their operations. For many companies, international expansion offers a chance to conquer new territories and reach more of these consumers, thus increasing sales. For example, U.S. firms like Nike and IBM maintain operations in the Netherlands because it offers direct access to 170 million European consumers within approximately 300 miles. International diversification facilitates innovation in a firm; it provides a larger market to gain more and faster returns from investments in innovation. International diversification may generate the resources necessary to sustain a large-scale R&D Program. International diversification is related to above-average returns, but this assumes that the diversification is implemented effectively and that the firm’s international operations will be well managed. Some firms choose not to expand internationally because there are several risks involved with managing multinational operations: political and economic risks. There are also limits to the ability to manage international expansion effectively. International diversification increases coordination and distribution costs and management problems like trade barriers, logistical costs, and cultural diversity.
The advantages of internationalization in areas where business regulation laws are lax include;
- Foreign investment opportunities- companies with multinational operations can also benefit from lucrative investment opportunities that may not exist in their home country. For example, many governments worldwide offer incentives for companies investing in their region. Thus, U.S. firms should always research before making an international expansion decision.
- Newmarket and consumers- international diversification in areas where regulation laws are lax help the company a chance to venture into new territories and reach more new consumers and markets, thus increasing sales.
- Diversification- businesses expand internationally to diversify their assets, which can protect a company’s bottom line against unforeseen events. For instance, companies with international operations can offset negative growth in one market by operating successfully in another. Companies also can utilize international markets to introduce unique products and services, which can help maintain a positive revenue stream—for example, coca-cola company.
The potential risks for internationalization include the following;
- Political risks-These are risks such as non-tariff trade barriers, central bank exchange regulations, or bans on the sale of certain products in specific countries. For instance, several countries have banned products obtained from threatened animal species.
- Foreign exchange risks- This usually concerns the accounts payable and receivable for contracts that are, or soon would be, in force. Foreign exchange rates are constantly in flux. Hence, businesses would be forced to convert the funds generated overseas at rates lower than budgeted.
- Ethical risks- Maintaining a high ethical standard when offering any product or service in a global market is vital. Companies may face certain questions about their values at any point while doing international trade. Social conditions and customs vary from country to country, so it is necessary to be especially vigilant. Businesses must ensure that their foreign suppliers and partners adhere to their values and rules regardless of where they operate.
- Shipping risks- Whether shipping goods abroad or locally, businesses face contamination, seizure, accident, vandalism, theft, loss, and breakage. Before shipping any goods to the buyers, you must have sufficient insurance.
Lower cost and strategic location advantages allow a company to manufacture and assemble the components in a country with a large market share for the product or where the labor is cheaply available in abundant quantities. The advantage of location can be achieved through internationalization. These advantages include access to low-cost labor, critical resources, or customers.
The international strategy allows a firm to produce in large volumes so that the per unit cost for the product goes down, allowing the company to have a large market share. Leveraging a technology beyond the home country allows for more units to be sold and initial investments to be quickly recovered. Rivals Airbus and Boeing have multiple manufacturing facilities and outsource some activities to gain scale advantages.
Larger and increased market access allows the firm to market and sell its products and services to many customers. Increased and large market size is achieved by expansion beyond the firm’s home country. The international expansion increases the number of potential customers a firm may serve. Starbucks is a firm that has increased its market size through international expansion (Opening Case). Other firms, such as Coca-Cola and Pepsi Co., have moved into international markets primarily because of limited growth opportunities in their domestic markets.
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- What incentives influence firms to use international strategies? What three basic benefits can firms gain by successfully implementing an international strategy? Why?
- Determine why some firms choose not to expand internationally, given the advantages of international diversification. Provide specific examples to support your response.
- As firms attempt to internationalize, they may be tempted to locate facilities where business regulation laws are lax. Discuss the advantages and potential risks of such an approach, using specific examples to support your response.
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