Chapter 9: Internal Analysis: Assessing Current State
9.3 Motivation for Going International
Expansion is a natural process for firms who wish to take their business to the next level. Expanding globally, however, was once only deemed to be achievable by large companies. However, declining trade barriers and increasing demand in developing countries have made the expansion process for companies of all sizes attainable. Many companies big and small, are taking advantage of this opportunity and expanding their business around the world.
The motivation for going international, however, can be different from company to company: some companies proactively work towards international expansion, while others expand internationally as a reaction to a domestic situation.
Proactive Reasons
Companies who proactively seek to expand internationally are known to have proactive reasons, and they are:
- Profit-seeking — entering a market where they can offer lower prices than those of the competition to gain a competitive advantage and increase their profit. Or manufacturing products in low-cost countries to reduce their cost and increase their profits.
- Risk diversification — another reason for a company to go global is to diversify its assets and reduce the risk. Many firms expand internationally to protect the company’s bottom line against unforeseen events. For example, companies that have operations in different countries can offset negative growth in one market by operating successfully in another. They can also become more immune to external factors that have an impact on consumer behaviour and purchasing of their products, such as climate.
- Economies of scale — economies of scale occur when the unit cost of a product or service is reduced due to an increase in the volume of production. By entering an international market, companies can increase their customer base and sell more units, which can lead to a high volume of production and, thus, economies of scale.
- Increased capabilities — finding increased capabilities is another top benefit of expanding internationally. International markets provide an opportunity to access new talent pools with a wide range of skills, diverse educational backgrounds, and language skills, increased productivity, innovation and more.
Did You Know? Apple Found Increased Capability in China
Apple’s decision to produce its iPhone in China is mainly related to the Chinese subcontractors’ quick response to changes. In a famous illustration of this capability, back in 2007, just a month before the first iPhone was to be released, Steve Jobs demanded that the glass screen on his prototype iPhone was scratched easily and that it needed to be replaced with un-scratchable glass screen. Making this last-minute change in the iPhone’s design put Apple’s market introduction date at risk. Apple had selected Corning to manufacture large panes of strengthened glass, but finding a manufacturer that could cut those panes into millions of iPhone screens was not easy. Then, a bid arrived from a Chinese company In Shenzhen. The plant’s owners had started constructing a new wing to cut the glass and were installing equipment when the Apple team visited the factory. The plant also had a warehouse full of glass samples for Apple to experiment with. The company engineers were housed in dormitories, so they were available 24 hours a day to meet Apple’s production demand. The Chinese company was hired. After a month of experimentation, the engineers figured out how to do it.
Three months later, Apple had sold 1 million iPhones. Four years later, Apple sold 200 million of them. Another critical advantage of China for Apple was that it was much easier to hire engineers there. Apple calculated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers involved in manufacturing the original iPhone. Finding that many engineers in the United States may have taken up to nine months, according to the company’s estimates. In China, it took 15 days.
Source: Blodget, 2012.
Reactive Reasons
Some companies expand internationally because they face a challenging situation in their domestic market which leads to erosion of profits and even termination of their operations if they do not react on time. Or there is an opportunity in the international market which the company cannot forgo. Reactive reasons for going to international markets include the following:
- Market opportunities and generation of new revenue stream — this occurs when there is a demand for the company’s products or there is the absence of competition abroad, which would give the firm the first mover advantage. (See Chapter 14.)
- For example, Sony, a Japanese firm making consumer electronics, expanded globally because one of its owners, Akio Morita, decided that Sony should not be restricted to Japan and viewed the whole world as a potential marketplace. The company expanded to many countries and now has a presence in almost every continent (“About Sony,” n.d.).
- Another example is Abercrombie & Fitch. Their expansion to the international market was due to unsolicited orders received from other countries. They found that many customers were ordering by catalogue and online from abroad. The company took that as a sign, and in 2007, they decided to expand overseas. The company first started to expand in the U.S. and then continued to expand to Europe and Asia. By 2013, they had stores in the Middle East and Australia (“About Us,” n.d.).
- Overproduction — this can be the result of declining domestic sales, or the company may have excess capacity and can produce more units, but its domestic market is not large enough for all units.
- Competitive strike — when a competitor enters the company’s domestic market and takes away the company’s share of the market, then the company expands their business to either competitor’s domestic market or attacks the competitor in a different international market.
- Political and economic changes in the domestic market — governments, from time to time, change their trade rules and regulations and assign tariffs to certain products entering the country. When that happens, the cost of the product entering the country increases and erodes the company’s profit. This reduction in profit forces companies to expand their production to those countries where they will not be subject to such tariffs or increased costs. In other situations, the government might introduce environmental regulations that increase the cost of production for companies. This will also encourage businesses to move their business to countries where environmental rules and regulations are not too strict.
Let’s Explore: Going International
Let’s Explore: Going International
To learn more about the decision to export, read the Step-by-Step Guide to Exporting – Step 1 – Getting started: assessing your export potential from the Canadian Trade Commissioner Service (TCS) and Global Affairs Canada.
References
About Sony (n.d.). Sony Corporation of America. https://www.sony.com/en/SonyInfo/CorporateInfo/History/SonyHistory/1-10.html
About us. (n.d.) Abercrombie & Fitch Co. https://corporate.abercrombie.com/about-us/
Blodget, H. (2012, January 22). Steve Jobs freaked out a month before first iPhone was released and demanded a new screen. Business Insider. https://www.businessinsider.com/steve-jobs-new-iphone-screen-2012-1
reduction in the long-run average cost of production that occurs as total output increases
a greater access to talent and diverse skills
fees imposed by governments at a give time on certain imported products or categories of products to protect domestic industries
