INTERNATIONAL EXPANSION
INTERNATIONAL EXPANSION
An organization can “go
international” by crossing domestic borders as it employs any of the strategies
discussed above. International expansion involves establishing significant
market interests and operations outside a company’s home country. Foreign
markets provide additional sales opportunities for a firm that may be constrained
by the relatively small size of its domestic market and also reduces the firm’s
dependence on a single national market. Firms expand globally to seek opportunity
to earn a return on large investments such as plant and capital equipment or
research and development, or enhance market share and achieve scale economies, and
also to enjoy advantages of locations. Other motives for international
expansion include extending the product life cycle, securing key resources and
using low-cost labour. However, to mold their firms into truly global
companies, managers must develop global mind-sets. Traditional means of
operating with little cultural diversity and without global competition are no
longer effective firms (Kedia and Mukherji, 1999).
International expansion
is fraught with various risks such as, political risks (e.g. instability of
host nations) and economic risks (e.g. fluctuations in the value of the country’s
currency). International expansions increases coordination and distribution costs,
and managing a global enterprise entails problems of overcoming trade barriers,
logistics costs, cultural diversity, etc.
There are several methods
for going international. Each method of entering an overseas market has its own
advantages and disadvantages that must be carefully assessed. Different
international entry modes involve a tradeoff between level of risk and the
amount of foreign control the organization’s managers are willing to allow. It is
common for a firm to begin with exporting, progress to licensing, then to franchising
finally leading to direct investment. As the firm achieves success at each stage,
it moves to the next. If it experiences problems at any of these stages, it may
not progress further. If adverse conditions prevail or if operations do not
yield the desired returns in a reasonable time period, the firm may withdraw
from the foreign market. The decision to enter a foreign market can have a
significant impact on a firm.
Expansion into foreign
markets can be achieved through:
- Exporting
- Licensing
- Joint Venture
- Direct Investment
Exporting: Exporting is marketing of domestically produced goods in a
foreign country and is a traditional and well-established method of entering
foreign markets. It does not entail new investment since exporting does not
require separate production facilities in the target country. Most of the costs
incurred for exporting products are marketing expenses.
Licensing: Licensing permits a company in the target country to use the
property of the licensor. Such property usually is intangible, such as
trademarks, patents, and production techniques. The licensee pays a fee in
exchange for the rights to use the intangible property and possible for
technical assistance. Licensing has the potential to provide a very large ROI
since this mode of foreign entry also does require additional investments.
However, since the licensee produces and markets the product, potential returns
from manufacturing and marketing activities may be lost.
Joint Venture: There are five common objectives in a joint venture: market
entry, risk/reward sharing, technology sharing and joint product development,
and conforming to government regulations. Other benefits include political
connections and distribution channel access that may depend on relationships.
Joint ventures are
favoured when:
- The partners’ strategic goals converge while their competitive goals diverge;
- The partners’ size, market power, and resources are small compared to the industry leaders; and
- Partners’ are able to learn from one another while limiting access to their own proprietary skills.
The critical issues to
consider in a joint venture are ownership, control, length of agreement,
pricing, technology transfer, local firm capabilities and resources, and government
intentions. Potential problems include, conflict over asymmetric investments,
mistrust over proprietary knowledge, performance ambiguity-how to share the
profits and losses, lack of parent firm support, cultural conflicts, and
finally, when and how when to terminate the relationship.
Joint ventures have
conflicting pressures to cooperate and compete:
- Strategic imperative; the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.
- The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.
- The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.
Direct Investment: Direct investment is the ownership of facilities in the target
country. It involves the transfer of resources including capital, technology, and
personnel. Direct investment may be made through the acquisition of an existing
entity or the establishment of a new enterprise. Direct ownership provides a
high degree of control in the operations and the ability to better know the
consumers and competitive environment. However, it requires a high degree of
commitment and substantial resources.
There are three major
strategy options for going international:
Multidomestic: The organization decentralizes operational decisions and
activities to each country in which it is operating and customizes its products
and services to each market. For years, U.S. auto manufacturers maintained
decentralized overseas units that produced cars adapted to different countries
and regions. General Motors produced Opel in Germany and Vauxhall in Great
Britain while Chrysler produced the Simca in France and Ford offered a Canadian
Ford.
Global: The organization offers standardized products and uses
integrated operations. Example: Ford is treating its Contour as a car for all
world markets- one that can be produced and sold in any industrialized nation.
Transnational: The organization seeks the best of both the multidomestic and
global strategies by globally integrating operations while tailoring products
and services to the local market. In other words a company ‘thinks globally but
acts locally’. Many authors refer to this concept as ‘Glocalization’. Global
electronic communications and connectivity can help integrate operations while
flexible manufacturing enables firms to produce multiple versions of products
from the same assembly line, tailoring them to different markets. This gives
more choice in locating facilities to take advantage of cheaper labor or to get
the best of other factors of production.
Managing Global Supply Chains to Enhance Competitiveness
Logistics capabilities
(the movement of supplies and goods) make or mar global operations. Global
operations involve highly coordinated international flow of goods, information,
cash, and work processes. Setting up a global supply chain to support producing
and selling products in many countries at the right cost and service levels is a
very difficult task. However the benefits of managing this difficult task has
many benefits, which include rationalization of global operations by setting up
right number of factories and distribution centres and integration of far-flung
operations under a unified command to better manage inventory and order filling
activities. Optimizing global supply chain operations can cut the delivery
times and costs drastically and improve global competitiveness. Smart supply
chain planning may result in locating facilities where they make the most
logistical sense, while saving on taxes. This is better than simply locating
where labor is cheapest, but where taxes and other cost may not be most
favourable (Refer case study below).
Ranbaxy – A Company with a Global Vision
The late Dr. Parvinder
Singh was one of the first Indian entrepreneurs to develop a global vision. He
expanded Ranbaxy’s operations to more than 40 countries. The company is today a
net forex earner, with exports to over 40 countries. It has JVs/ subsidiaries
in 14 countries, marketing offices in six other countries and a licensing arrangement
in Indonesia.
Ranbaxy’s exports, mainly
antibiotics, have grown at a compounded average growth rate of around 28 per
cent over the last five years. Although the bulk of exports are in
comparatively low-value bulk drugs, the proportion of formulations is expected
to rise significantly in the next few years. Cifran, for instance, has already
proved to be a leading product in China and Russia. Ranbaxy has acquired pharma
companies in New Jersey and Ireland to increase its penetration in the USA and
UK markets. Up until 1990-91 Ranbaxy was not known for its research. During
that year the company made headlines with the success of the complicated
synthesis of an antibiotic drug, Cefaclor. US drug major Eli Lily, impressed by
Ranbaxy’s ability to resynthesise the molecule, decided to enter into two joint
ventures (JVs) with Ranbaxy. These JVs opened the door for its overseas
expansion.
The company classified
the global markets into three categories-advanced, emerging, and developing
based on growth prospects for generic drugs. This led to focusing attention on
the emerging markets such as China, Ukraine and CIS with growth rates much
larger than those in advanced and developing markets. Ranbaxy’s international
operations have helped the company to cut cost of production by half in some of
the key bulk drugs—6APA, 7ADCA, fluoroquinolones and cephalexin. Because of
international operations in 40 odd countries, capacities are higher, which
reduces unit cost of production. The lower cost of production also helps
domestic operations. With 19 per cent growth in domestic sales in 1997-98, the
company has not neglected the Indian operations. With international operations
on the verge of giving decent returns the company is keen to shore up its
market share in the domestic market.
Obviously, shareholders
have been handsomely rewarded. The growth rate in the price of the scrip has
been very impressive in the past few years. The company today enjoys a unique
position of having a balanced mix of finance, marketing and R&D strengths
to start earning higher returns on all its assets.
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