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Wednesday, November 28, 2012

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: 
  1. Exporting
  2. Licensing
  3. Joint Venture
  4. 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:
 
  1. Strategic imperative; the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.
  2. The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.
  3. 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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