Are you looking forward to expanding your business in the international market? Domestically or internationally, growing your business horizons involves a lot of planning, organizing, and research. This is when international strategy comes into action. So, what is an international strategy and why is it important?
What Is International Strategy And Why Is It Important?
International strategy is a process of strategizing business expansion in the global market. It involves the business plan in detail on how the business will spread overseas. This starts with finding the appropriate region of expansion, understanding the region, researching the close competitors within the same market niche, defining the business’s goals, studying the resources available, the distribution channel, the pricing theory, and a lot more.
Why Is International Strategy Important?
International strategy is essential for a variety of reasons. Exploring a new market sounds liberating but simultaneously comes with an increased variety of risks. Here are clear reasons why international strategy is essential:
To Minimize Risks
An international market is a foreign market, i.e., where consumer behaviour is unknown. Expanding your business in the international market without a global strategy would be a clear gamble. International strategy is essential to invest, develop, and diversity with a sure shot. With the help of international strategy, the uncertainties and potential risks are also minimized to a certain extent.
Framing a proper international strategy also helps you know a lot about the foreign market. It encourages the growth of the company. The global strategy aims to explore the foreign market at different levels, which allows you to learn about the various aspects of marketing, competitors, channels, market behaviour, and more. This further helps you make an informed decision instead and enables you to test the depth of the water.
To Choose Between Exporting Or Establishing Units
International strategy is also important to take important decisions like whether the business should just export their products or establish their units within the region. Exporting products would just require finding a trusted distribution channel. This could be in the form of an eCommerce platform like Amazon.
On the other hand, establishing units would mean opening/launching their outlets in a foreign country. If your business has a good brand loyalty already established in a foreign country, going ahead with opening an outlet won’t turn out to be a bad idea.
What Are The Five Common International Entry Modes?
How do you enter an international market? Is there any specific way to do so? The international strategy also identifies the international entry mode suitable for your business. There is not one but five common international entry modes. Each of these modes has its advantages and disadvantages. No one size fits all when choosing the right international entry modes.
But first, let’s understand what each of these international entry modes is.
This is the easiest international entry mode and most suitable for start-ups and small businesses. This is also one of the modes most companies start their business expansion journey.
Exporting is the process of the sale of your products and services in a foreign country while operating/sourcing from the home country itself. This means the business does not have to establish its business operations (physical presence) in the new country. They only have to find trusted and reliable distribution channels to distribute their goods/services in such a country.
One of the most crucial elements in the case of exporting is packaging. The packaging, labeling, and price can make a huge difference when exporting a product/service. This includes translating the contents on labels in the native language of the country and providing a price offer that is suitable for the potential buyers there
- It enjoys the benefits of operating business at low risk and fast entry into the market
- The control over the market is limited
- Less possibility to understand the market better
- Negative impact on the environment with increased transportation
However, exporting in the current scenario is mainly preferred with the interference of global eCommerce platforms like Amazon. Getting your product registered on Amazon is flexible and easily allows you to enter a new market. It has become a marketplace for many budding sellers, otherwise impossible for small start-ups.
2. Licensing And Franchising
Licensing is another medium of entering a foreign market. There are two parties involved in licensing – the licensee and the licensor. The international licensing firm acts as a licensor, i.e., the form that provides the licensee. Licensee is a company that is granted the license. Such firms offer the licensee patent rights, trademark rights, and copyrights on products and processors. In return, the licensee produces the licensor’s products and markets these products in the assigned territory provided by the licensor. The licensee also has paid the fees and royalties to the licensor calculated based on the sales volume.
Franchising is another similar method of entering a foreign market. However, in the case of franchising, unlike licensing, the franchising organization (the organization providing the franchisee) is more deeply indulged in the development and marketing of products/services.
In short, in a franchising agreement, the franchisees (like a licensee) pay fees and royalties to the franchisor for granting market access, trademark, selling goods and services, and on special occasions for the right to use the business format as well.
In the case of franchising, the franchisor grants more benefits to the franchisee than licensing. It can offer big resources like equipment, sites, operation manual, managerial system, and other resources necessary for a business to run at a similar scale as the franchisor runs.
- Both licensing and franchising provides fast entry into the market
- They also work on low risk and keep costs of operation minimal
- Licensing fees in countries are high and vary
- Licensee can be the competitor as well
- Less control over the market
3. Partnering And Strategic Alliance
Strategic alliances or partnerships are another smooth way to enter a foreign market. Partnering with a local company of a foreign country is beneficial. A strategic alliance is a partnership where two or more companies sign a contractual agreement. Companies involved share each other’s resources and cooperate to reach a common goal.
Selecting the partner for a strategic alliance is a great deal. A strategic partnership is fruitful if the local firm chosen rightly compliments your venture. It should also bring in the value you are looking for, which could be in terms of both tangible and intangible assets. Further, it should be looked if the local firm has a better grip on the market in the local country. It better understands the region’s market needs, demands, and customer behavior.
Have you given due consideration to the country to which your probable strategic partner belongs? Getting started with a strategic alliance is a headache if the country’s process in issuing licenses, capital issue permits, granting import licenses are slow. This was one of the reasons why foreign firms struggled to be in a strategic alliance with Indian companies. The government approval on necessary documents is rather too slow in some countries that hampers the overall alliance between the two companies.
Strategic alliances are strategically crucial for small businesses that cannot afford to invest in the foreign market all by themselves. Furthermore, in some countries like Middle Eastern countries, a foreign business must tie up with a local company to enter into the local foreign market.
- Diversification of risks, costs with shared costing, and investment
- Customers view the company as a local entity
- Possible integration issues due to corporate culture differences
- Higher cost as compared to exporting, franchising, and licensing
Acquisitions are another way to enter a foreign country. However, this is predominant amongst well-established firms and businesses. In an acquisition, a powerful entity takes over a less powerful business. When taking over or gaining control, the less powerful company has to give up its stock, exchange the stock, or, in the case of the private firm, the purchase price is set that is paid by the more powerful company to another.
With the rise in FTA, cross-border acquisitions have become a common phenomenon. Amongst the business acquisitions carried throughout the world, 60% of them are cross-border acquisitions.
However, a developing or underdeveloped country company finds it challenging to make acquisitions when entering a new market. Acquisitions are expensive and out of reach of many companies from undeveloped nations. Also, the value of the currency plays an essential part in acquisitions. The price paid for acquiring a firm depends on the currency’s value in such a country. The weaker the country’s currency in which the acquired firm is, the more beneficial it would be for the acquiring firm.
Trade restrictions in the country are another factor that influences the acquisitions made. For instance, China has strict trade restrictions, especially for foreign ownership. Also, developed nations like the USA have stringent rules regarding investments. No foreign firms can acquire more than 25% of US airlines.
Acquisitions also have a higher risk of failure. In 40% to 60% of the cases, acquisitions failed to reap benefits over and above the firm’s price. It is still a good entry strategy for those looking to widen their scale of operations like the telecommunication industry.
- Fast-entry into the market
- Local customers adapt well to known and established operations
- The high purchasing cost of acquiring another firm
- Integration issue of establishing a business from a foreign place
5. Greenfield Venture
Greenfield venture is another popular but complex method of entering a new market. These ventures refer to the new wholly-owned subsidiaries. This form of business has great potential that is leveraged with complete control over the enterprise. The costs of establishing a wholly new company in a foreign country also fall heavy on such entry mode.
However, the risks and costs are subdued by complete control over the workings of the enterprise. If required, the firm also acquires knowledge and technical skill by hiring host country nationals from competitive firms or consulting agencies.
- Maximum control over the foreign market
- Have access to local market knowledge
- Termed as an insider as it employs local nationals
- Very high costs involved in setting up
- High risk involved with setting up in the foreign country
- Takes time to enter due to increase in set up time
Types Of International Business Strategy
Majorly, any business firm should know about four types of international business strategies. These include:
Multi-Domestic Business Strategy
A multi-domestic business strategy applies to companies that have their business operating in more than one offering country. Such companies follow the multi-domestic business strategy. Under this, companies offer similar products/services in different countries customized as per the needs and preferences of people there.
For instance, MTV shows in India differ from the USA due to preference differences. Similarly, an apparel company has to market its dresses differently in Middle Eastern countries than Eastern or Western countries.
A global strategy is the direct opposite of a multi-domestic business strategy. Companies following a global strategy treat all their markets similarly and sell their products the same in all the markets. This favors their efficiency and also enjoys high economies of scale. According to the culture and languages, there could be minor changes, but the primary market strategy stays the same.
For instance, Microsoft provides the same products throughout the world except for minor language changes. Similarly, Proctor and Gamble offer the same products in all their countries. Some consumer goods like shaving creams, razors, toothbrushes etc. are used uniformly in all countries.
A transactional strategy is a strategy that lies somewhere in the middle of global strategy and multi-domestic strategy. Under such a strategy, the core offering product of the company remains the same with few additions and features to suit the needs of the local market better.
This strategy works well for food joints like KFC and Mc Donald’s. The base product for these companies stays the same which some additions like the localized menu. For instance, in France, McDonald’s always offers an option to purchase wine with favorite food items like a burger. Similarly, burgers are most commonly accompanied by diet and French fries in India.
Also, Dominoes adds cottage cheese to its pizza for a localized menu for Indians.
The type of international strategy is better explained with the help of a 2×2 matrix. Under this, the strategy is put into practice with the help of graph:
Under this graph, on the y-axis is the global integration, and on the x-axis, there is local responsiveness.
In this case, a multi-domestic strategy has a low global integration but high local responsiveness. Similarly, a global strategy has a high global integration but low local responsiveness. A transactional approach is a balanced midpoint of both and enjoys the best of both worlds, i.e., high global integration and high local responsiveness.
This was all about international strategy and its importance. Global strategy is a key to expanding business abroad. There are several ways this can be done to form part of carefully framing your international strategy. Depending on your market niche and industry, stress should be given in choosing the strategy and method to enter the foreign market.
Weigh down the pros and cons of each strategy before going forward with it. Take the help of books like Blunders in International Business, journals, and other data to frame your international strategy.
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You might also enjoy these popular International Expansion related articles What It Takes To Expand A Business?, Globalization Strategy Definition And More and Strategic Alliance Vs Joint Venture Explained on a similar topic.
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