Most companies would prefer to remain domestic if their domestic market were large enough. Managers would not need to learn other languages and laws, deal with volatile currencies, face political and legal uncertainties, or redesign their products to suit different customer needs and expectations. Business would be easier and safer. Yet several factors can draw companies into the international arena:
- Some international markets present better profit opportunities than the domestic market.
- The company needs a larger customer base to achieve economies of scale.
- The company wants to reduce its dependence on any one market.
- The company decides to counterattack global competitors in their home markets.
- Customers are going abroad and require international service.
As cultures blend across countries, another benefit of global expansion is the ability to transfer ideas and products or services from one market into another market. Cinnabon discovered that products it developed for Central and South America were finding success in the United States, too, given its large Hispanic population.10
Reflecting the power of these forces, exports accounted for roughly 14 percent of U.S. GDP in 2013, more than double the figure 40 years ago.11 Before making a decision to go abroad, the company must also weigh several risks:
- The company might not understand foreign preferences and could fail to offer a competitively attractive product.
- The company might not understand the foreign country’s business culture.
- The company might underestimate foreign regulations and incur unexpected costs.
- The company might lack managers with international experience.
- The foreign country might change its commercial laws, devalue its currency, or undergo a political revolution and expropriate foreign property.
Some companies don’t act until events thrust them into the international arena. The internationalization process typically has four stages:12
Stage 1: No regular export activities
Stage 2: Export via independent representatives (agents)
Stage 3: Establishment of one or more sales subsidiaries
Stage 4: Establishment of production facilities abroad
The first task is to move from stage 1 to stage 2. Most firms work with an independent agent and enter a nearby or similar country. Later, the firm establishes an export department to manage its agent relationships. Still later, it replaces agents with its own sales subsidiaries in its larger export markets. This increases investment and risk but also earning potential. Next, to manage subsidiaries, the company replaces the export department with an international department or division. If markets are large and stable or the host country requires local production, the company will locate production facilities there.
By this time, the firm is operating as a multinational and optimizing its sourcing, financing, manufacturing, and marketing as a global organization. According to some researchers, top management begins to focus on global opportunities when more than 15 percent of revenue comes from international markets.13
Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.