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“Mini lecture provides a high level overview of international strategy in particular. It. Gives guidance guidance on how managers can answer. Three critical questions when thinking about going global first should i expand internationally second where should i expand and third.
How do i expand but fundamental strategies do firms use by international strategy. We mean expanding your business to compete across national. Borders today more than 3. 4 of all sales revenue in the us.
Comes from multinational corporations either us firms that compete abroad or foreign firms selling in the united states in other words. Most successful firms end up expanding internationally obviously there must be benefits from international expansion of so many firms do it. But why should you expand internationally pause. Me and list at least three reasons.
Why you think companies decide to expand internationally if you listed to increase sales you would be right this is the first and most straightforward objective. But what if you increased cells. But didn t make any profit on those cells would you still want to do it research has shown that when companies expand to foreign markets. It is less profitable than their home market.
This has sometimes been referred to as a liability of foreignness think about it you think you would be as effective running a business in mexico or china. As you would in the united states probably not in fact smart companies expand internationally to achieve important strategic objectives that help them deliver unique value to their customers beyond increasing sales. These objectives. Include cutting costs.
Managing. Risk and learning new things. The second objective is to cut costs. Paradoxically some firms expand in order to cut their costs.
Even though operating in foreign markets increases..
Transportation and communication costs for instance. Some firms expand overseas to tap into cheap sources of critical resources. Such as moving production to china to access cheaper. Labour firms also look to cut their costs by selling in foreign markets.
By selling more units than you could in your home market. You can tap into economies of scale for example you can spread your research and development costs across more units. Thereby lowering your cost per unit. The third objective is to better manage financial and operational risks and firms with lower risk also have lower costs.
While the economies of the world s countries have become intertwined. There is still wide variation and how well countries do at any given time firms that have customers in more than one country can better weather economic storms. This helps keep the company s revenues and earnings more stable which lowers the costs of raising capital from banks and investors this also becomes critical. If a country undergoes severe economic hardships like the 1994 currency devaluation in mexico many mexicans cement manufacturers went out of business in those years at the same time however semak s a mexican based multinational cement manufacturer became the worldwide cement leader offsetting its losses in the mexican market with sells in other countries.
It isn t just economic storms that firms can better manage by expanding overseas. However but operational ones as well having operations in more than one country allows firms to continue production. Even if labor goes on strike in one country. Or if a natural or man.
Made disaster. Disrupts production. Like the 2011 fukushima. Daiichi nuclear.
Reactor meltdown. In japan. The fourth objective is to learn new things that can help companies differentiate their products customers in different countries. Often want different things which can lead to discovering different product features for instance ges healthcare division.
Developed in china..
An inexpensive portable ultrasound machine to service. The rural chinese market where they couldn t afford ges. Large expensive ones turns out that there is a market for an inexpensive portable ultrasound machine in europe and the us and ge is now selling this product in all of its markets being close to different types of customers helps firms innovate faster and makes it more likely that they will be at the forefront of the next big thing in their industry. Knowing why firms go global.
However is only part of the battle. You also need to know where to go imagine that you lead a company in the united states and are responsible for deciding. Which three countries to enter first what types of countries would you choose what criteria would you use to make that choice pause. Me and write down your answer.
The easiest answer to this question is to enter the country with the largest number of potential customers for your product countries like china and india. However wise leaders also think about how likely they are to succeed in a particular foreign market after all foreign means different and different can be difficult to deal with one way to think about differences is to measure the distance between countries. But not just geographic distance. Cultural administrative and economic distance as well the smaller the distance between your country in the target country.
The greater the likelihood of succeeding in other words. It often makes sense to enter the countries that are closest on all four types of distance first geographic distance. It literally means. How many miles separate two countries companies are more likely to succeed in nearby countries.
Because physical. Proximity lowers both transportation and communication costs. That s why most us companies expand first to canada and mexico second cultural distance refers to language and cultural differences meaning differences in the way people live. And think about the world.
Most us companies expand to canada before mexico because canadians speak english. And there are fewer cultural differences. When cultures are similar customers are more likely to want the same things when entering a new country you should ask are your customers going to want the same things or will you have to modify the product are they going to want them delivered in the same way for some industries like cement or semiconductor chips. There aren t large variations from country to country but for food clothing and even washers and dryers.
The differences can be large indeed third administrative distance is all about differences in regulations government policies and legal systems..
Countries can vary widely on these dimensions. And if a firm doesn t understand how to meet regulations and deal with a different type of legal system who can fail even if it has the best products in the market china s government and regulations are so different from those in the united states that many us companies refuse to enter even though it will soon become the world s largest market fourth. An important factor in economic distance is the average purchasing power of customers in different countries. And how elastic that power is meaning.
How much demand for a product changes as price goes up or down. This is a big deal for a lot of companies from industrialized nations who are used to selling products in markets. Where everyone is wealthy by worldwide standards. Nearly two thirds of the world s population.
However lives on less than 2. A day seventy five percent of india s over 1 billion. Population. Still doesn t even have a refrigerator naturally.
Economic differences like these have a major influence on what types of products will be demanded the bottom line is entering countries with fewer geographic cultural administrative and economic differences. Will dramatically increase your chances of success finally. Once you have an idea for why and where you are expanding internationally you can think about how to expand what fundamental strategies can you use the three fundamental types of international strategies are multi domestic global and arbitrage first a multi domestic strategy. Treats each country or region as a different market.
With different customer. Needs and different ways of doing business as a result. It requires adapting products and business operations to each country. That a firm enters for example home appliance.
Companies like ge and samsung design and sell different types of refrigerators in different regions in different parts of the world in asia. The refrigerators are smaller than in the us. But instead of two doors. They often have three to four doors to lower energy costs in korea.
Samsung..
Even designs a refrigerator with a special kimchi drawer designed to ceiling the powerful aroma that comes from the strong smelling cabbage. That koreans eat daily companies choosing a multi domestic strategy do so because they think that differentiation is a key to the unique value they want to offer in each country the downside to this approach is that it is costly because you need to design and manufacture a different product in each different country or region. Thus you need to make sure that customers are willing to pay for your differentiated offering second a global strategy treats the world as a single market where customers in different countries. Basically want similar things for example boeing pursues a global strategy as it sells standardized planes around the globe.
It does not tailor its planes to different markets. Everyone buys the same plane firms that employ this strategy try to standardize their products marketing and operations across countries no matter. How different those countries are this means. Fewer production facilities and centralized control over every aspect of the business in order to maximize economies of skill of course.
The downside to this strategy is that not all customers worldwide want the same thing. The greater the geographic cultural administrative and economic distance between countries the greater the likelihood that customers are going to want something different in these cases. Some companies try to localize some aspects of the business for example. Mcdonald s changes its menu depending on the country selling teriyaki burgers and green tea sundaes in japan and parmesan cheese.
Mcnuggets in italy. The third type of international strategy arbitrage involves exploiting differences in the cost or quality of resources between countries for example ibm found it could hire software programmers and call center employees far cheaper in india than in the us. So it expanded to india to access those resources. Hyundai expanded its car design operations to california in the united states to access creative auto designers that were not available in korea.
Similarly phillips set up r d centers in japan to take advantage of the large number of high quality electronics engineers produced each year other times it means using cultural arbitrage where you sell products from one country to another because of the cachet that comes from that country s name on the label like french wine. German engineering or american fast food indeed in china american fast food companies like kentucky fried chicken are considered upscale dining partly because of the positive high end reputation of us firms getting global strategy right can be very difficult it requires matching the right reason for going global with the right places. And the right strategy for your company. And you must do this while managing significant differences between countries and responding to intense rivalry from both global and local competitors.
However while the challenges are great companies that get it right ” ..
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