Business | Global markets and business expansion

Welcome to Global Business: Expanding Your Horizons!

Hello future business leaders! This chapter, Global Markets and Business Expansion, is incredibly exciting. It’s all about how and why companies decide to stop being local heroes and become global giants.
Don't worry if this seems tricky at first. We will break down complex ideas like licensing and foreign direct investment into simple, easy-to-understand steps. Understanding global expansion is vital because it explains how large companies operate and compete in the modern world.

Let's dive in and see what makes a business take the global leap!

Why Businesses Choose to Expand Globally

Why would a company leave the safety of its home market and face the challenges of a new country? The decision is usually driven by the desire for growth and survival.

Key Reasons for Global Expansion

• Accessing New Markets: When a company's home market becomes saturated (meaning almost everyone who wants the product already has it), growth slows down. Expanding internationally opens up millions of new potential customers.
• Seeking Higher Profits: Some emerging markets have lower competition or higher demand, allowing businesses to charge higher prices or sell larger volumes.
• Achieving Economies of Scale: By producing goods for a much larger global market, the company can increase its output significantly. This lowers the average cost per unit (cost savings), making the company more competitive globally.
• Diversification of Risk: If one country's economy suffers a downturn (like a recession), the business can rely on sales from its other international markets to cushion the blow. Spreading sales across multiple regions reduces reliance on a single market.
• Accessing Raw Materials or Labour: Businesses might move production closer to where raw materials are cheap (e.g., mining) or where labour costs are significantly lower (e.g., manufacturing in certain Asian countries).
• Responding to Competition: If a competitor enters a new market, a business might feel compelled to follow them to maintain its market share globally.

Quick Takeaway: Going global is essentially about finding new ways to grow, reduce costs, and protect the business from risks associated with relying on just one country.

Methods of Entering International Markets

Once a business decides to go global, it must choose the best way to enter that market. These methods involve different levels of risk and control. Generally, the more control a business wants, the higher the financial risk it must accept.

1. Exporting

This is the simplest and lowest-risk method.

• Definition: Selling domestically produced goods and services to customers in foreign countries.
• How it works: The business manufactures everything at home and simply ships the product abroad. This can be done directly (selling straight to foreign buyers) or indirectly (using export agents or distributors).
• Pros: Low financial commitment; minimal change to current operations; great way to test a market.
• Cons: High transport costs; tariffs (import taxes) can make the product expensive; loss of control once the product leaves the country.
• Example: A small UK craft brewery shipping its popular beers to bars in Germany.

2. Licensing and Franchising

These methods involve allowing a foreign company to use your intellectual property (like brand name, patents, or business model) in exchange for a fee (usually royalties).

Licensing:

• Definition: Granting permission to a foreign firm (the licensee) to manufacture or sell your product in their market using your patents, trademarks, or technology.
• Example: Coca-Cola licenses local bottlers around the world to mix and bottle their secret syrup.

Franchising:

• Definition: A comprehensive agreement where the franchisor sells the right to use their entire business format (brand, operations, training, marketing) to a franchisee in a foreign country.
• Pros (for Franchisor): Rapid expansion without huge investment; local knowledge provided by the franchisee.
• Cons (for Franchisor): Loss of control over quality and reputation if the franchisee doesn't follow the rules strictly.
• Example: McDonald's, Subway, and KFC all rely heavily on franchising to operate globally.

3. Joint Ventures (JVs)

A joint venture is like a temporary business partnership or "marriage."

• Definition: When two or more independent businesses from different countries pool their resources and expertise to create a new, separate business entity for a specific project or purpose.
• Pros: Shared risk and cost; access to the partner's local market knowledge, distribution channels, and political connections.
• Cons: Potential for disagreements over management style or strategy; difficult to merge different corporate cultures.
• Did you know? Many major car companies form JVs when entering countries like China, where the government requires a partnership with a local firm.

4. Foreign Direct Investment (FDI) / Setting up a Subsidiary

This represents the highest commitment, risk, and control.

• Definition: Investing directly in facilities (factories, offices, warehouses) in a foreign country. This results in the creation of a wholly owned subsidiary (a company completely owned by the parent company).
• Methods of FDI:
  

  a) Greenfield Investment: Building a brand new facility from scratch in the foreign country. (Highest cost/risk).

  b) Acquisition/Takeover: Buying an existing local company in the foreign country. (Faster entry).

• Pros: Full control over operations, quality, and strategy; often avoids tariffs; better reputation as a local employer.
• Cons: Extremely high financial and political risk; huge management challenge.

Memory Aid: Risk vs. Control Ladder

Think of the methods from lowest risk/control (bottom) to highest risk/control (top):
Top: FDI (Subsidiary)
| Joint Ventures
| Licensing / Franchising
Bottom: Exporting

Barriers to Global Trade and Expansion

Expanding globally isn't easy. Businesses face significant hurdles, which are usually categorised into trade barriers (government policies) and non-trade barriers (logistical/cultural issues).

A. Trade Barriers (Protectionism)

Governments often use these measures to protect domestic industries from foreign competition. This is called protectionism.

• Tariffs: These are taxes placed on imported goods and services. A tariff makes the imported product more expensive for the consumer, encouraging them to buy cheaper, locally produced alternatives.
• Quotas: These are physical limits set on the volume or value of a specific good that can be imported into a country over a specific time period.
• Non-Tariff Barriers (NTBs): These include regulations designed to slow down or block imports without using taxes or quotas. Examples include very strict product standards, complex customs procedures, or excessive red tape (bureaucracy).

Analogy: Imagine tariffs and quotas are like tolls and traffic limits on a bridge. They make it slower and more expensive for foreign goods to cross into your market.

B. Non-Trade Barriers (Challenges of Difference)

• Cultural Differences: Marketing strategies, product features, and even colours can be offensive or inappropriate in different cultures. Understanding local norms, religion, and social customs is essential.
• Language Differences: Beyond simply translating, idioms and slogans often fail to translate correctly, leading to major marketing errors.
• Legal and Political Differences: Every country has different laws regarding consumer rights, environmental protection, health and safety, and labour practices. Political instability (frequent changes in government or civil unrest) adds massive risk.
• Infrastructure Differences: The quality of roads, ports, communication networks, and electricity supply can vary dramatically. Poor infrastructure in emerging markets makes logistics (transporting goods) expensive and unreliable.

Quick Review: Barriers are why even highly successful businesses sometimes fail when they move abroad. They underestimate the hidden costs of dealing with trade policies and cultural gaps.

Global Strategies: Standardisation vs. Adaptation

When a business expands globally, it must decide how much to change its marketing mix (Product, Price, Place, Promotion) for each new market. There are two main approaches:

1. Standardisation Strategy (Think Globally, Act Uniformly)

This means using the same marketing mix in all markets worldwide, treating the entire world as one large, homogeneous market.

• Focus: Cost reduction.
• How it works: The product, brand image, and advertising campaigns are kept identical (or almost identical).
• Pros: Huge economies of scale in production and marketing; saves time and resources.
• Cons: Ignores unique consumer needs and cultural differences; risk of the product being irrelevant in certain markets.
• Example: The Apple iPhone uses an almost identical marketing and product strategy globally. Consumers worldwide generally expect the same quality and features.

2. Adaptation Strategy (Think Globally, Act Locally)

This involves adjusting the marketing mix to suit the specific needs, tastes, laws, and cultures of each foreign market.

• Focus: Maximising local relevance and sales.
• How it works: Products might be redesigned (e.g., smaller portions, different colours), pricing adjusted to local incomes, and promotions tailored to local media and language.
• Pros: Higher sales potential as the product exactly matches local demand; avoids cultural mistakes.
• Cons: Higher costs due to unique production runs and customised marketing campaigns; loses economies of scale.
• Example: McDonald's offers local menu items such as the McSpicy Paneer in India, or McRye in Finland, adapting its product to local culinary tastes.

The Reality Check:

Most businesses use a hybrid approach—a core product is standardised (the brand logo and basic function), but certain aspects (like packaging size or promotion language) are adapted locally.

Final Summary and Key Takeaways

Congratulations! You now have a solid foundation in how businesses navigate the global landscape. Keep these key points in mind:

• The Expansion Motive: Growth, diversification, and cost reduction via economies of scale are the core drivers.
• Entry Methods: Know the trade-off. Exporting is low risk/low control. FDI is high risk/high control.
• Barriers Matter: Governments use tariffs and quotas; businesses must overcome cultural and infrastructure differences.
• Strategy Choice: Standardisation saves money but risks irrelevance; Adaptation costs more but boosts local sales.

Keep practicing with real-world examples, and you'll master this topic in no time! Good luck with your studies!