Any venture into international markets by an organisation requires thorough investigation. Jurisdictions all differ in terms of their laws and regulations, taxes and consumer law around products. The video below examines several steps that should be followed when researching international markets. The video is US based but offers some useful tips.
An organisation can have several reasons for expanding into overseas markets and Thompson et al. (2022 p. 188) provides five of these:
- To gain access to new customers – foreign markets provide opportunities for more customers, sales, profits and long-term growth. Foreign markets can also extend the life of products that have become tired in their home markets.
- Achieve lower costs through economies of scale, experience and increased purchasing power – sometimes home markets do not achieve the economies of scale in full. Expanded size can improve purchasing power and provide the organisation with greater levels of experience in markets.
- Gain access to low-cost production inputs – organisations operating in markets that have a raw material input can find that operating close to those inputs can improve cost management and labour expenses.
- Further exploit core competencies – organisations can utilise their core skills to expand into other markets providing regional or global dominance through a replication of their business model.
- Gain access to resources and capabilities located in foreign markets – entry to foreign markets can provide access to resources and capabilities not available in an organisation’s home market. This could be achieved by way of acquisitions or alliances.
International business strategies and complexity
When developing strategy involving two or more countries, it can become quite a complex job. Numerous factors can come into play, including currency risks, regulations and other differences between the markets.
The Diamond Model of Competitive Advantage developed by Michael Porter demonstrates the four factors that provide an advantage to organisations in their home markets. This excellence and level of competence provide considerable assistance to organisations when establishing markets internationally.
Figure 1: Porter’s Diamond of Competitive Advantage
The four aspects of Porter’s model include:
Product or service demand in the home market is a valuable condition. Product may often be successful because of influences such as higher incomes or belief structures.
Availability and other production factors to do with raw materials can have a beneficial impact for a home advantage.
Related and Supporting Industries
Access to other organisations along the value chain can contribute to a home market advantage.
Firm Strategy, Structure and Rivalry
The competition in a market between players can assist them in building skills and competence in their market so all players excel in the industry.
According to Thompson et al. (2022, p. 196), five strategic options for international expansion exist:
- Maintain a home-country production base and export goods to foreign markets;
- License foreign firms to produce and distribute the organisation’s products abroad;
- Employ a franchising strategy in foreign markets;
- Establish a subsidiary in a foreign market through acquisition or internal development;
- Rely on strategic alliances or joint ventures with foreign companies.
Each of these strategic options needs to be explored together with the risks and benefits of each one. The decision to expand internationally will depend on many factors, and knowing everything you can about the country and market is critical. An organisation should consider if the expansion is in line with its strategic objectives and that it has the resources and capabilities to be successful.
Strategic approaches to international expansion
Three main strategic approaches exist for international expansion:
- Multi-domestic which, according to Thompson et al. (2022, p. 202) is a strategy where the organisation varies its product offering and competitive approach for country to country to be responsive to different buyer needs and to address divergent local-market conditions;
- Global strategy which Thompson et al. (2022, p. 203) defines as one in which a company employs the same basic competitive approach in all countries where it operates, sells standardised products globally, strives to build global brands and co-ordinates its actions worldwide with strong headquarters control;
- Transnational strategy, which Thompson et al. (2022, p. 204) describes as incorporating elements of both multidomestic and global strategies.
Competitive Advantage in International Markets
To build a competitive advantage, strategic planners should look at the organisation’s value chain and select the most ideal base for each element. If there are lower costs achievable in other countries, then moving operations there could improve performance. Cost however, is not the only consideration.
The transferring of an organisation’s valuable resources such as a brand or technology across borders is an additional way of building competitive advantage. Additionally, co-ordination of an organisation’s resources across border can also be a source of competitive advantage, particularly where input costs can be volatile. Through operations in a number of countries, the organisation can shift aspects of its value chain to suit the circumstances.
Competing in Developing Countries
Thompson et al. (2022, p. 212) suggests four options to consider when entering into the market in developing countries:
- Prepare to compete on the basis of low price.
- Modify aspects of the company’s business model or strategy to accommodate unique local circumstances.
- Try to change the local market to better match the way the company does business elsewhere.
- Stay away from developing markets where it is impractical or uneconomic to modify the company’s business model to accommodate local circumstances.
Strategies for local organisation to defend their market
Thompson et al. (2022, p. 214) then goes on to suggest the following five strategies for defending your local market against large players trying to enter:
- Develop business models that exploit shortcomings in local distribution.
- Utilise keen understanding of local customer needs and preferences.
- Take advantage of aspects of the local workforce (with which large international companies may be unfamiliar).
- Use acquisition and rapid-growth strategies.
- Transfer company expertise to cross-border markets and initiate actions to contend on an international level.
This module has focussed on the importance of due diligence when considering entering international markets, but also discussed several of the benefits of doing so. Porter’s Diamond of National Competitive Advantage was explored and how it provides home country advantage. Finally, strategies for entering international markets and defending home markets from large global players were discussed.