3.9.3 Assessing internationalisation
Reasons for targeting, operating in, and trading with international markets
Internationalisation = this is the act of designing a product that is can be readily consumed across multiple countries
- It fits under the market development sector of Ansoff’s matrix
Methods of internationalisation:
- Exporting directly to international customers – collect orders from customers overseas and ship the goods/products directly to them (Example = e-commerce businesses especially)
- Selling via overseas agents or distributors – a contract is made with one or more intermediaries (Example = Coca-Cola)
- Opening an operation overseas – involves physically setting up one or more business locations in the target markets
- Joint venture or buying a business overseas – the firm acquires or invests in an existing business that operates in the target market (Example = airlines)
Factors influencing the attractiveness of international markets
Influences on the attraction of international markets:
- Size and growth of the market (e.g. population)
- Does the size of the target market justify the investment and risk involved with selling internationally?
- Which key market segments the business wants to target?
- How large are they and how fast are they growing?
- Economic growth and levels of disposable income
- Emerging economies have experienced faster rates of economic growth than developed economies – this has created a growing “middle class” with rising disposable incomes that have fuelled demand for the products and services of international and domestic businesses
- Ease of doing business/political environment
- How reliable are the legal systems in the target country?
- Can the intellectual property of the business be protected?
- How volatile is the political environment?
- Exchange rates
- Trading in international markets is very likely to result in greater exposure of a business to exchange rate fluctuations
- Domestic competition
- If an international market is attractive, chances are that a business will have to compete effectively against local or domestic competition
- What advantages do domestic competitors enjoy?
- Do they have control of, or better access to key distribution channels?
- How important is their more detailed understanding of customer needs and wants?
- This covers aspects such as the ease of transportation (into, out of and inside); strength and reliability of data systems (e.g. broadband)
Reasons for producing more and sourcing more resources abroad
Reshoring = this is the reverse of offshoring – it involves a business returning production or operations to the host country that had previously been moved to a different international location.
Reasons for reshoring:
- Greater certainty around delivery times (including shorter delivery times)
- Minimising risk of supply chain disruptions
- Reducing the complexity of the supply chain
- Making it easier to collaborate with home-based suppliers
- Getting greater certainty about the quality of inputs and components
- Recognising that the cost advantage of producing or sourcing overseas is not as significant as it used to be (particularly in China where unit labour costs have risen significantly in recent years)
Offshoring = this involves the relocation of business activities from the home country to a different international location – this is where the business is done! (Not who – this is outsourcing)
- It is the changed international location of where the business activity is performed that is key to understanding offshoring
- It has traditionally been associated with the relocation of manufacturing activities from a domestic economy overseas (e.g. from the US to China, or UK to Poland)
- However, offshoring is also increasingly common with business services (e.g. UK financial services using call centres based in India)
Reasons for offshoring:
- To access lower manufacturing costs (particularly in emerging markets which enjoy the advantage of lower labour costs)
- To access potentially better skilled & higher quality supply
- To make use of existing capacity overseas
- To take advantage of free trade areas and avoid protectionism
- To make it easier to supply target international markets (where it is important to be located in, or near to, those markets)
Disadvantages of offshoring:
- Longer lead times for supply & risks of poorer quality
- Implications for CSR (harder to control aspects of operating long distances away from the home country)
- Additional management costs (time, travel)
- Impact of exchange rates (potentially significant)
- Communication: language & time zones
Influences on buying, selling, and producing abroad
Attraction of internationalisation to businesses:
- Stronger economic growth job emerging economies (BRICs and MINT)
- Market saturation and maturity (slow or declining sales) in domestic markets
- Easier to reach international customers using e-commerce
- Greater government support for businesses wishing to expand overseas
Managing international business including pressures for local responsiveness and pressures for cost reduction
The Bartlett and Ghoshal Model of International Strategy = thus indicates the strategic options for businesses wanting to manage their international operations based on two pressures: local responsiveness & global integration
Force for local responsiveness (questions to consider):
- Do customers in each country expect the product to be adapted to meet local requirements?
- Do local (domestic competitors) have an advantage based on their ability to be more responsive?
- Example = McDonalds would have to change their menu depending on where they open up shop (usually to do with religions)
Force for global integration (questions to consider):
- How important is standardisation of the product in order to operate efficiently?
- Is consistent global branding required in order to achieve international success?
- Example = Mercedes have high pressure for global integration (produce identical products for different markets and therefore benefit from economies of scale)
- Low pressure for local responsiveness and high pressure for global integration
- Highly centralised
- Focus of efficiency (economies of scale)
- Little sharing of expertise locally
- Standardised product
- Example = CAT and Pfizer and Amazon
- High pressure for local responsiveness and high pressure for global integration
- Complex to achieve
- Aim is to maximise local responsiveness but also gain benefits from global integration
- Wide sharing of expertise (such as technology, staffing, etc)
- Example = Starbucks and Unilever
- Low pressure for local responsiveness and low pressure for global integration
- Aims to achieve efficiency by focusing on domestic activities
- International operations are largely managed centrally
- Relatively little adaptation of product to local needs
- Example = McDonalds (franchises) and UPS
- High pressure for local responsiveness and low pressure for global integration
- Aims to maximise benefits of meeting local market needs through extensive customisation
- Decision-making decentralised
- Local businesses treated as separate businesses
- Strategies for each country
- Example = Nestle and MTV and Walmart (own Asda)