With rapid increase in revenue, a local business may expand its activities to international markets. Such expansions are important in embracing diversity, finding potential customers and exploring new environments of operations. Therefore, most business organisations will be motivated to venture into global markets in order to improve their revenue (Hynes 2010, p.87). Unilever, Sony and H&M may serve as examples of already established multinational enterprises. However, before initiating a venture such firms must consider risk factors involved in the upgrading of their activities to global markets. Some of these factors might include: taxation policies, political stability, market availability and legal regulation. By considering both the benefits and challenges of international trade, a firm may then evaluate its potential gains and need to exploit such opportunities (Kuivalainen, Saarenketo and Puumalainen 2012, pp.372-385). This essay discusses major factors that may influence a business to expand its operations beyond a country’s borders.
Motivations for Establishing Multinationals
A firm’s need for expansion may be motivated either by proactive or reactive factors. Companies that anticipate market trends and take necessary measures are said to be proactive (Ford and Leonidou 2013, pp.3-32). They are determined to improve their profitability, expand sales volume and seek more competent workforce. The major motivations for such businesses include market opportunities, risk diversification and economies of scale. However, some business situations make it too difficult to predict an outcome or take caution. In such case firms act on a reactive action to stabilise themselves from an event that has already occurred (Ford and Leonidou 2013, pp.3-32). Some of the reactive factors include measures to reduce overproduction when the local market is already saturated, strategies to combat foreign competition and imposition of government policies favouring internationalisation.
In terms of market opportunities, a business organisation may explore international markets having realised an increasing customer demand from abroad (Meyer, Mudambi and Narula 2011, pp.235-252). Also, companies can be motivated to set up their subsidiaries in places where there are no competitors. For example, various companies like Sony Incorporation, Abercrombie and Fitch, and Unilever have utilised similar strategies to occupy new markets. When Sony Corporation started operating in Japan, it only served the local market. However, due to its high quality electronics, consumers in the international market started enquiring and demanding for those products. Sony Incorporation had to expand its operations and set subsidiaries across Asia and Europe to serve the overwhelming orders. Similarly Abercrombie and Fitch performed an analysis and found that most of their customers were living overseas. Since the company is located in the USA, its management had to devise options for reaching the far located customers. As a result, the company had to establish its branches in various countries.
Another motive for expanding enterprises to multinational categories is the diversification of risks. Depending on the severity of risk factors that may befall a business, it becomes difficult to start all over again, in case of a catastrophe (Rugman and Oh 2010, pp.479-488). Small scale businesses and large corporations entirely located in a single space or country for their operations are at greater exposure to this phenomenon. Some of the uncertainties that can disrupt transactions in the whole country include: political instability, inflation, high taxation rates and natural calamities like earthquake or famine. In such situations, local enterprises are likely to close down as a result of unfavourable trading environment.
However, for companies that have diversified their operations abroad, only part of their ownership shall have perished while others in stable countries remain operational. For example, IDE Technologies is specialising in snowmaking to ensure the continuity of its operations during all seasons. The company has adopted a technology that enables it to operate both in the northern and southern hemispheres across summer and winter. Therefore, IDE Technologies has diversified the risk of disruption of business due to seasonal changes. Similarly, globalisation can be used to reduce the risk of competition. For a large company that is strategizing on how to maintain its financial position, it is recommended to closely follow on the tactics of a competitor just like in the case of H&M and Zara who are competing for the supremacy in apparels collection. When Zara established a subsidiary in India, H&M did not hesitate to perform a research and establish its store in the same country.
Internationalisation of enterprises can also be attributed to by economies of scale. When business organisations expand their presence, they gain privileges associated with large scale operations. For example, established companies do not incur higher costs in advertisement and distribution of their products (Rugman and Oh 2013, pp.463-479). Usually, their well-known brand is enough to convince potential customers to purchase the product. Furthermore, any other affiliate product of such company also gains buyers’ loyalty. For example, Apple Incorporation is generally known for its high quality iPhones, computers and other electronic devices. By expanding into the international market, the company has gained wider market with less costs on advertisement and publicity campaigns. As a result, its associated services like iBook Store, iCloud and App Store have also achieved an unprecedented demand amongst customers.
Economies of scale also arise when a local company has identified a more favourable business environment in another country. Due to differences in economic stability, labour flexibility and administration policies, trading abroad might be more profitable. In such situations, organisations can diversify their operations and establish subsidiaries in the target countries (Kontinen and Ojala 2010, pp.97-107). For example, while Apple Incorporation was founded and headquartered in the USA, the company confers most of its production activities to subsidiary located in China. Reason being the flexibility and competence of Chinese engineers requesting for lower wages as compared to the American labour force.
Other companies are motivated to expand their operations abroad in order to gain uniqueness and exclusivity of their products. Business organisations that are exploiting international markets are prepared to face outright competition in their ventures. Therefore, their products must be original and authentic to gain substantial revenue before other competing companies can start producing its close substitute (Oswick and Noon 201, pp.23-39). In case it is an improvement of an already existing product, then it must be designed in a unique way that has never been experienced in the market before. For example, when Beiersdorf established a Nivea product in international markets, the company had to use appealing advertisement strategies to convince potential customers who were already using cosmetics of other brands. Testimonials of customers acquired from different ethnic groups were used to justify that Nivea is an exclusive brand.
Before firms can decide to internationalise their operations, it is important to evaluate its nature and structural organisation. These factors influencing business operations can be explained using transaction cost theory. Having studied the market, Ronald Coase modelled a theory to explain effects of transaction cost on a firm’s development, that is, transaction cost theory. It elaborated that business organisations and economic markets can be incorporated to establish an enabling environment for international transactions (Brouthers 2013, pp.14-22).
The theory explained that, whenever external transactions costs are more than internal transactions costs, a company is likely to grow and expand into multinational category. If the company experiences lower external transaction costs, its overhead expenditures will increase thus hindering growth and expansion. Such organisations will then resolve to outsourcing of resources to manage its activities, which in turn adds to the already existing expenses (Hennart 2010, pp. 257-269). Therefore, a company needs to clearly define its internal and external transaction costs before considering expansion into global markets. Some of the most common internal transaction costs include hiring personnel and managing operations. On the other hand, external transaction costs involve market conditions like inflation, political stability and government regulations.
Some of the multinational companies to be viewed as examples of successful using of this theory are Unilever and Beiersdorf. Unilever imposed a regulation to reduce its internal transaction costs incurred in the coordination of subsidiaries. Each company could then manage its own operations according to the prevailing market situations in their locations even though the management retained all the rights to operations. Similarly, Beiersdorf adopted the strategy in overseeing its rapidly growing ventures. Many subsidiaries like Nivea were established specifically for producing commodities of higher demand in their areas of operation. The company realised a great reduction in its internal transaction costs thus making it prosper against high external transaction costs.
Conclusion
Therefore, it is evident that business organisations are motivated into international trade due to either proactive or reactive reasons. Proactive factors are useful in anticipating business opportunities and risks that affect business performance. They include: market opportunities, strategies for diversifying risks and economies of scale. On the other hand, reactive factors entail actions taken by a firm against uncertainties that could not be predicted initially. Most common reactive factors are overproduction, external competition and government policies. In order for a business to prosper in its internalisation strategies, managers are required to make appropriate decisions and forecast on potential changes that may improve performance. It is also important for small scale companies to consider various business models like theory of transaction cost when designing an operations strategy to avoid facing financial issues.
References
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