Pros of Expanding Abroad

Published on April 2017 | Categories: Documents | Downloads: 33 | Comments: 0 | Views: 174
of 10
Download PDF   Embed   Report

Comments

Content

1

Management 590 Weekly Theme: Pros and Cons of positioning and expanding the Company’s strategy and operational direction in the Global Markets. Linda Day Lozada Texas A&M-Commerce

In partial fulfillment of the requirements for MGT 590 Professor Lloyd M. Basham June 25, 2011

2

Table of Contents

Page

Abstract or Introduction The time is right for global expansion Demographics and continuous growth Diversify profit stream Choosing a country to invest Pros and Cons of working with local partners References Appendix

3 4-5 5-6 6 7 8 9 10

3

Abstract Our company must establish a presence on faster growing economies in order to remain competitive. Under the current conditions of the US market, we must attempt to diversify our profit stream. Pioneer into a new market tend to have higher rate of success than late comers. An expansion abroad will allow us to give new life to some of our product lines and the overabundance of capital in some evolving markets could provide us better access to capital. Our domestic operations will also benefit from expanding our global footprint; a larger scale of operations may increase domestic cost in the short term but it in the long term, it is expected to bring savings and more efficiency to our operations, as our company gains access to cheaper labor markets and suppliers. Additionally, our employees will have to acquire the new level of expertise required to function in a foreign market and, in time, this will allow us to turn our company into an experienced overseas operator. Although the prospect of faster growth, low competition and easier access to capital could be hard to pass on, this expansion will mean a large financial commitment for our company. Other considerations include the challenges inherent in navigating local laws and regulations, managing foreign exchange risks, challenges of managing local employees and partners, risks of weakening our brand or our intellectual property. The success of our global expansion effort, or lack thereof, could have a significant impact on the company’s domestic operations. Significant expenditures on market research will allow us to determine the segment in which we will be able to compete, which country or countries should we expand first and how much of the profits earned abroad should be reinvested abroad to avoid increased tax liability at home.

4

The time is right for global expansion Economic confidence levels in emerging markets are up, while U.S. and European confidence continues to drop, see appendix A (HSBC, 2011). The high unemployment and inability of the US Federal Reserve to stimulate the US economy has created a situation where “consumers, overextended with mountains of debt, once backed by over-inflated housing values were forced to put away their wallets and begin slowly paying down debts,” (Murray, 2010). According to HSBC’s International Business Survey, the portion of U.S. executives planning to increase their overseas sales targets rose in 2010 to a survey high 72%, “up from 49% in 2008 and 56% in 2009, underscoring the rapid globalization of the core of America’s economy” (Business Intelligence, 2010). The same HSBC’s survey also indicated that 56% of the Foreign

executives polled say their overseas sales are growing faster than domestic sales.

consumer’s appetite for western brands is growing and an expanding middle class, with higher spending power, is fueling higher consumption (Eghbal, 2008). Higher spending power is fueled by a significant increase in the middle class discretionary spending and lesser dependence on credit than western consumers (Eghbal, 2008). Economic growth is expected to continue and BRIC (Brazil, Russian, India and China) countries large foreign currency reserves will allow government to use public spending to to stimulate the economy, rapid growth will continue to flood the market with currency which in turn will continue to provide foreign businesses with access to investment capital. (Eghbal, 2008). The continuous growth of the company is crucial for maintaining our competitive edge, with lower revenues at home and a credit crunch limiting access to capital we must lower cost to

5

meet our earning goals. We will not be able to continue to create value for our investors by domestic cost cutting measures alone, instead, we must turn our focus to minimizing the use of resources, eliminating waste in our production lines (Meredith & Shaffer, 2010) and aggressively expanding our global footprint. Foreign competition is not only a factor in our foreign markets but it is increasingly impacting our domestic operations by forcing us to compete with global companies that are leveraging their access to low labor cost and economies of scale to lower their production costs. Demographics and continuous growth Seventy-five percent (75%) of the world’s population live in emerging economies, “40% of them lives in a BRIC (Brazil, Russia, India, China) country and half of the BRIC population is under the age of 30,” (Young, 2006). The BRIC countries continued to growth despite the global economic meltdown and growing consumer spending in these countries will continue to fuel GDP growth. If the current trend continues, the economies of the BRIC countries are scheduled to overtake the G6 by 2041, (Eghbal, 2008). This means that as our work force ages and becomes less productive; the developing economies will leverage their younger work force, continue to develop technologically and continue to experience growth that is unattainable in more mature markets. While median household incomes in developing economies continue to grow (Eghbal, 2008), 2009 American median household incomes had only manage to grow 3.1% since 1989 (US Census Bureau, 2010). Furthermore, American’s overreliance on credit and mortgage debt has made US consumer more susceptible to the current credit crunch and could limit their ability to spend for years to come. The aging population is significant because overall, the median

6

household income increases with age but it starts to decline when the members of the household reach retirement age (US Census Bureau, 2010). Diversify profit stream Under the current economic conditions and the slow pace of recovery, we must look to expand to economies that are currently experiencing GDP growth of 4% per year or more (Daley, 2011). American Corporations like McDonalds and Yum! Brands earned 60% and 65% respectively of their profits overseas in 2010 and that number is expected to rise to 75% by 2015 (Daley, 2011). The global economic downturn has affected everyone but emerging economies have continued to experience tremendous GDP growth. The current credit crunch in the US will halt most efforts for domestic expansion. In order to remain competitive our company must attempt to circumvent American’s financial problems. The risk inherent in this strategy is that an unsuccessful global expansion could bring down our domestic operations but the inherent risk of not going global is even higher. Global firms benefit from operating and coordinating their activities on a worldwide basis, this allows them to “capture R&D, production, logistical, marketing and financial advantages not available to domestic competitors,” (Kotler & Keller, 2009). As our competitors positioned themselves into emerging markets, they will be able to develop their brand in a leveled playing field and eventually expand their competitive advantage back to their home market. The importance of entering another market first cannot be overlooked by our company. Most studies show that companies that enter the market first normally gain the greatest advantage and have the highest rates of survival when compared to non-pioneer companies

7

(Kotler & Keller, 2009). Other advantages of being first include, imposing the attributes that product class should posses and producer advantages like economies of scale, technological leadership, patents, ownership of scarce assets, and other barriers to entry. (Kotler & Keller, 2009). The pioneers lead, once developed may offer competitors an insurmountable competitive advantage. Choosing a country to invest Several different factors must be considered before defining a global strategy. Significant market research will play a substantial role in that strategy and will dictate which countries would be better suited for our company to invest in. Drawing from monumental failures of great American companies abroad like Google and Ebay (Fielding, 2011), our company should consider the availability of viable partners (with a history of success integrating western companies) (Daley, 2011) before we consider investing in wholly owned foreign basedassembly or manufacturing facilities, (Kottler & Keller, 2009), this would allow us to quickly commit and penetrate the market with a strong local partner on our side. The initial stage of expansion should aim at deep commitment in fewer countries, enter countries that are low in market risk and ensure that our company will be able to leverage a competitive advantage over the existing competition. (Kottler & Keller, 2009). Another factors to consider would be political stability, existence of trade agreements and a legal system that protects intellectual property. Political stability is a growing concern in some of the emerging economies in the Middle-East and foreign investments in countries like Egypt, Tunisia and Libya have experienced significant losses since the beginning of the Arab spring. Egypt is a good example of a country that highly touted by financial experts as a great place for

8

foreign investment. After the fall of President Mubarak, the rule of law has virtually disappeared, the local currency has lost most of its value and there is no legitimate central government to turn to for help in enforcing any laws, much less intellectual property rights. Pros and Cons of partnering with local partners The importance of having a local partner, when first entering a foreign market, varies. Important factors to consider will include the “cultural distance” existing between our company and the market and availability of partners with experience in successfully developing western brands in that market. If we are expanding to a market like Canada, Australia or even Mexico, the need for a local partner would diminish. Despite the language difference with Mexico, its physical proximity and extensive array of bilateral trade agreements with the US (i.e. NAFTA) makes it easier to navigate, even without a local partner. Most developing economies are still lagging far behind the United States when it comes to enacting and/or enforcing intellectual property and trade secret laws; having a local partner could outweigh its benefits if they are able to use the partnership to duplicate our unique capabilities in products, operations and supply chain management (Rivette and Michael, 2004). Our company’s global strategy would be doom if our intellectual property ends up in the hands of potential competitors; we must exercise extreme care when negotiating joint venture agreements and limit to the greatest extent possible the information share with the local partner. Despite the dangers inherent to any global expansion strategy, the writer is convinced that not expanding abroad is not an option that our company can afford in the long run. A carefully plan global expansion strategy that protects our intellectual property will be at the center of any winning strategy and must remain our highest priority.

9

References Daley, J (2011). No Boundaries, Entrepreneur Magazine, retrieved from http://www.entrepreneur.com/article/printthis/219493.html Fielding, C (2011). Groupon in China, Ebay all Over Again? retrieved from http://gigaom.com/2011/06/19/groupon-in-china-ebay-all-over-again/ Business Intelligence (2011). More US Mid Size Companies Look at Expanding International Revenues, Business Intelligence Middle East, retrieved from http://www.bime.com/main.php?id=46771&t=1 HSBC (2011). Global Small Business Monitor, HSBC Commercial Banking Division retrieved from http://ebusiness.hsbcusa.com/1390492895.1992006.0.79154 Mehring, J. (2007, February 12). Expanding Abroad and Growing at Home. Business Week Magazine, retrieved from http://www.businessweek.com/magazine/content/07_07/b4021038.htm Meredith, J.R. & Shafer S.M. (2010). Operations Management for MBAs, (4th Ed),. John Wiley & Sons, Inc. Murray, A. (2010), The Wall Street Journal Essential Guide to Management, (1st Ed), Harper Business. Kotler, P. & Keller, K.L. (2009), Marketing Management, (13th Ed), Pearson Prentice Hall. (Division, 2011) Young, Victoria (2006), Macquarie Launches Australia’s First BRIC funds, Investor Daily, retrieved from http://www.investordaily.com/cps/rde/xchg/id/style/801.htm?rdeCOQ=SID3F579BCE-819F182C&rdeCOQ=SID-0A3D9632-D24758AE Eghbal, M. (2008), BRIC Economies Withstand Global Financial Crisis, Global Monitor, retrieved from http://www.euromonitor.com/bric-economies-withstand-global-financialcrisis/article Rivette, K. & Michael, D., (2004, July), Protecting trade secrets in China: how CEOs must build intellectual property strategies, The Chief Executive, retrieved from http://findarticles.com/p/articles/mi_m4070/is_200/ai_n6153307/

10

Appendix A

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close