How to internationalize a company

This is the sixth in a compilation of stories drawn from my learnings on the Fundamentals of Business Strategy from the University of Virginia’s course.

Strategies while entering foreign markets

Exporting

Exports are goods and services that are produced in one country and sold to buyers in another. Exports, along with imports, make up international trade.

Companies export products and services for a variety of reasons. Exports can increase sales and profits if the goods create new markets or expand existing ones, and they may even present an opportunity to capture significant global market share. Companies that export spread business risk by diversifying into multiple markets.

Exporting into foreign markets can often reduce per-unit costs by expanding operations to meet increased demand. Finally, companies that export into foreign markets gain new knowledge and experience that may allow the discovery of new technologies, marketing practices and insights into foreign competitors.

As an internationalization strategy, exporting can be beneficial, because it doesn't have a local presence and the problems that generates opening a new market.

Licensing or Alliances

Alliances and partnerships are a key staple in business strategies for organizations large and small. But while many partnerships begin with big visions and aspirations, not all alliances turn out to be strategic.

This strategy allows the company to internationalize their efforts, by making local alliances or conceding licenses to companies in the foreign country, making it easier to introduce their products in that particular market. While it's better because of costs, and knowledge about the culture, the lack of control might be a problem while applying this strategy.

Foreign Direct Investment (FDI)

A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. However, FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.

Some important key takeaways about this strategy:

  • Foreign direct investments (FDI) are investments made by one company into another located in another country.
  • FDIs are actively utilized in open markets rather than closed markets for investors.
  • Horizontal, vertical, and conglomerate are types of FDI’s. Horizontal is establishing the same type of business in another country, while vertical is related but different, and conglomerate is an unrelated business venture.
  • The Bureau of Economic Analysis continuously tracks FDIs into the U.S.
  • Apple’s investment in China is an example of an FDI.

Greenfield

A greenfield investment starts with bare ground and builds up from there. Coca-Cola, McDonald’s and Starbucks are great examples of US firms that have invested in greenfield projects around the world.

Acquisition

This method may mean short-term cash, but it won’t necessarily guarantee future stability. Around 50% of merged businesses never achieve their projected financial and market goals. When you acquire a company, you also acquire its existing problems. And you will need to decide whether the acquisition should be financed by cash or stock.

Global business strategies for responding to cultural differences

A major concern for managers deciding on a global business strategy is the tradeoff between global integration and local responsiveness. Global integration is the degree to which the company is able to use the same products and methods in other countries. Local responsiveness is the degree to which the company must customize their products and methods to meet conditions in other countries. The two dimensions result in four basic global business strategies: export, standardization, multidomestic, and transnational. These are shown in the figure below.

Export Strategy

An export strategy is used when a company is primarily focused on its domestic operations. It does not intend to expand globally but does export some products to take advantage of international opportunities. It does not attempt to customize its products for international markets. It is not interested in either responding to unique conditions in other countries or in creating an integrated global strategy.

Standardization Strategy

A standardization strategy is used when a company treats the whole world as one market with little meaningful variation. The assumption is that one product can meet the needs of people everywhere. Many business-to-business companies can use a standardization strategy. Machines tools and equipment or information technologies are universal and need little customization for local conditions. CEMEX, the Mexico-based cement and building materials company, was able to expand globally using a standardization strategy. Apple uses a standardization strategy because its products do not have to be customized for local users. An iPod will look the same wherever you buy it. Domino’s Pizza also uses a standardization strategy. Although toppings may vary to meet local tastes, the basic recipes are the same and the store model of carryout or delivered pizza is the same everywhere. A standardization strategy produces efficiencies by centralizing many common activities, such as product design, gaining scale economies in manufacturing, simplifying the supply chain, and reducing marketing costs.

Multidomestic Strategy

A multidomestic strategy customizes products or processes to the specific conditions in each country. In the opening example, Lincoln Electric should have used a multidomestic strategy to customize its manufacturing methods to the conditions in each country where it built factories. Retailers often use multidomestic strategies because they must meet local customer tastes. 7-Eleven is an example of a company using a multidomestic strategy. It tailors the product selection, payment methods, and marketing to the values and regulations in each country where it operates. For example, in Japan, 7-Eleven allows customers to pay their utility bills at the store. In a company with a multidomestic strategy, overall management is centralized in the home country but country managers are given latitude to make adaptations. Companies sacrifice scale efficiencies for responsiveness to local conditions. Companies benefit from a multidomestic strategy because country managers understand local laws, customs, and tastes and can decide how to best meet them.

Transnational Strategy

A transnational strategy combines a standardization strategy and a multidomestic strategy. It is used when a company faces significant cost pressure from international competitors but must also offer products that meet local customer needs. A transnational strategy is very difficult to maintain because the company needs to achieve economies of scale through standardization but also be flexible to respond to local conditions. Ford Motor Company is adopting a transnational strategy. Ford is producing a “world car” that has many common platform elements that accommodate a range of add-ons. That way Ford benefits from the standardization of costly elements that the consumer does not see but can add custom elements to meet country laws, can customize marketing to local standards, and can provide unique products to meet local tastes.

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COO and Board Member @ Moove It, worldwide IT consulting firm with business in 4 countries. Blog in English. @gabrielfagundez-es in Spanish.

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Gabriel Fagundez

COO and Board Member @ Moove It, worldwide IT consulting firm with business in 4 countries. Blog in English. @gabrielfagundez-es in Spanish.