International Strategies and Diversification
Easier access to scarce resources and raw materials, more opportunities for integration into global operations, the ability to extend product life cycles, more opportunities to use developing technology, and expanded access to more consumers in emerging economies are some factors that encourage businesses to employ international strategies. Adopting an international strategy gives companies three main advantages: economies of scale with more learning opportunities, cheaper costs, strategic location advantages like labor and energy, and greater market access.
International diversification is a strategy used by businesses to outperform their rivals. As an illustration, companies that grow in markets where their rivals do not operate frequently benefit from the first-mover advantage, which enables them to develop significant brand awareness among consumers before their rivals. Additionally, access to emerging technologies and industry ecosystems can help businesses expand internationally, perhaps enhancing their operations greatly. Many businesses see international development as an opportunity to conquer new areas and connect with more customers, boosting revenue. For instance, American companies like Nike and IBM continue to operate in the Netherlands because it provides them with direct access to 170 million European consumers within a 300-mile radius. A company’s international diversification promotes innovation by giving it access to a bigger market, allowing greater and quicker returns on innovation efforts. International diversification might produce the funds required to support a significant R&D program. Above-average returns correlate with worldwide diversification, but this presupposes that the strategy will be successfully implemented and the company’s overseas operations will be handled. Due to the political and economic risks of managing multinational operations, several businesses have decided against expanding worldwide. Effectively managing foreign expansion has its limitations, too. The cost of coordination, distribution, and management issues like trade obstacles, logistical expenses, and cultural differences all rise with international diversification.
The benefits of globalization in regions with liberal corporate regulation laws include;
Opportunities for foreign investment: Businesses with international operations might profit from profitable investment opportunities that might not be available in their native country. For instance, numerous governments worldwide incentivize businesses that invest in their area. As a result, American businesses should always conduct a study before choosing to expand internationally.
New markets and consumers—International diversification in regions with permissive regulatory regulations allows the business to explore new frontiers and connect with new clients and customers, boosting sales.
Businesses diversify by expanding overseas to spread out their assets, which helps guard against unforeseen catastrophes and protect a company’s bottom line. For instance, businesses that operate internationally can counteract unfavorable growth in one area by doing well in another. Companies can also use international markets to launch distinctive goods and services, supporting the maintenance of a healthy revenue stream. Take the Coca-Cola Company as an example.
The following are some potential concerns associated with internationalization;
Political risks include dangers like non-tariff trade restrictions, exchange control policies set by central banks, or restrictions on the export of particular goods to certain nations. For instance, several nations have banned the sale of goods made from endangered animal species.
Foreign exchange risks Typically relate to the receivables and payables for contracts that will currently or soon be in force. The value of different currencies is continually changing. Businesses would be obliged to convert funds generated abroad at less favorable rates than anticipated.
Ethical risks: Upholding a high ethical standard when marketing any good or service worldwide is critical. While engaging in international trade, businesses may encounter specific issues relating to their beliefs at any time. Every culture has different social norms. Therefore it is important to exercise extra caution. Businesses must ensure that their international partners and suppliers uphold their values regardless of where they operate.
When delivering goods locally or internationally, a business faces contamination, seizure, accident, vandalism, theft, loss, and damage. You must have enough insurance before sending any items to the purchasers.
A corporation can produce and assemble the components in a nation with a sizable market share for the product or where labor is inexpensively and readily accessible in big quantities, thanks to lower costs and strategic location advantages. Internationalization can help you capitalize on locational advantages. These benefits include having access to cheap labor, necessary resources, or clients.
A corporation can produce in huge quantities thanks to the worldwide strategy, which lowers the cost of the product per unit and helps it get a sizable market share. Utilizing technology outside one’s nation enables the sale of additional units and a speedy return on investment. Rivals To take advantage of scale advantages, Airbus and Boeing operate several manufacturing facilities and outsource some tasks.
A wider and more expansive market access enables the company to market and sells its goods and services to many clients—expansion outside of the company’s home country results in a larger and more significant market size. An organization’s ability to service more potential clients grows as it expands internationally. Starbucks is a company that has expanded internationally to grow its market share (Opening Case). Other businesses, like Coca-Cola and Pepsi Co., have expanded into foreign countries solely due to their home markets’ lack of growth prospects.
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Rugman, A. M. (1976). Risk reduction by international diversification. Journal of International Business Studies, 7(2), 75-80.
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Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business. Pearson Australia.
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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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