In previous global strategy discussions, we tackled the questions of why and where. This week, we tackle the questions of how and when.
When
When answering the question of when, there are two potential dangers—too early or too late.
For companies internationalizing for the purpose of improving supply chain, the typical goals are chasing availability of inputs of the appropriate quality, or for managing costs. When a company chooses potential locations for supply chain reasons, they must choose between long-term commitments such as building a factory offshore or flexible solutions such as a global, multi-vendor buying strategy. For long-term commitments, the question of when is critical. It is important to avoid being too early. Consider deciding to locate a factory in a transition economy where many local institutions are not yet mature. The company may not be able to successfully contract for a steady supply of raw material or be able to successfully recruit appropriate labor. Companies can utilize the CAGE distance framework and careful analysis of resource and institutional differences for this assessment. On the other hand, as these economies mature and more companies expand production to that country, resources such as labor become scarcer and consequently, more expensive. The substantial capital expense involved in building manufacturing facilities typically requires significant time to recoup. It is imperative for companies to be able to operate their new facilities while cost advantages still exist. The ability to analyze trends and forecast critical factors of production become important for this assessment.
If the reason for internationalizing is for capturing fresh markets, and especially for developing countries, too early can mean many things. It could be so early that demand for the company’s product is not yet large enough either because buying power is still low or local tastes and preferences have not yet evolved. For example, in Asia, there has been an explosion of successful high-end coffee and French pastry shops, which would not have been possible a few decades ago. The economic and cultural elements of the CAGE distance framework can help with this. Much like expansion for supply chain purposes, questions concerning local capacity and institutions must also be asked when determining whether it is too early to enter a company for market purposes. The advantage of entering a new market early, of course, is to capture market share before competition becomes entrenched. And this is precisely the danger of entering a market too late. Entering a mature market means dealing with sophisticated consumers and entrenched competitors.
How
As to the how of internationalizing, there is both a macro component and a micro component.
First, let us deal with the macro component. Ghemawat proposes what he calls the triple-A approach to managing differences: adaptation, aggregation and arbitrage. Ghemawat explains that adaptation involves increasing a company’s ability to gain revenue and market share through increasing local relevance. He explains that this is often a company’s first approach to expansion beyond its local markets. At this point, it is important to understand that managing the international supply chain also requires some level of adaptation. The reason for this is we need to adapt to the local situation for such things as legal compliance and even employee motivation. Aggregation, by contrast, is aimed at achieving economies of scale by creating regional or global operations. Aggregation is often used when managing a supply chain, concentrating production or shared services in a few locations. Even marketing campaigns can be aggregated for certain products that have universal appeal or for which the core value proposition is essentially global. Arbitrage is about the exploitation of differences between markets by locating different parts of the supply chain in different places—for example, production in low-cost countries such as China and retail shops in affluent countries in Europe. With arbitration, it is important to remember that companies can utilize both static (long-term) such as for factories as well as dynamic (flexible) arbitrage such as for buying.
On a micro-level, companies need to make specific decisions concerning entry method either on a country by country basis or, more infrequently, when entering a new region.
The first important question is this: Why not just transact? When does it make sense to have physical operations in a country as opposed to simply transacting via import or export? One reason for going beyond simply transacting is market failure, e.g. there are no reliable organizations to transact with or the market is too undeveloped to be able to set prices or otherwise contract reliably. The other reason is to maintain control, either over quality of the product or process. Another reason is to protect trade secrets. Another reason is simply economic, perhaps the company has determined that it is able to capture more value if it invests directly.
Once a company has decided to invest directly as opposed to just transacting, it must answer two key questions: (a) starting from scratch or purchasing, and (b) ownership and partnering. The general rule for choosing an entry method has to do with whether companies are better off both short-term and long-term using one approach over the alternatives. For example, a company might decide to purchase in order to gain access to an existing base of customers, network of retail spaces or arrangements with distributors. If these resources are tough to build and can be gained at a reasonable price through purchase, then purchase is a viable option. Purchasing can jumpstart market entry. Companies partner for two general reasons: to address a constraint or to capture more value. In some countries, it is impossible to enter certain industries without a local partner. In still other countries, especially when there are high concentrations of power or control over resources, partnering helps companies gain access either to scarce resources, important relationships, or important assets.
In the partnering question, it is helpful to remember that companies entering new markets deal with both newness and foreignness. Newness means a company does not understand local ways of doing things and have not had sufficient opportunity to build access to resources. Foreignness means that the company itself is seen as new by local entities and therefore might not be welcomed as a business partner, supplier, or buyer. In certain cases, both newness and foreignness might create barriers in terms of dealing with local regulation and regulators.
So there we have it, the last in our global strategy discussion. The important thing to remember is that what works in our home countries won’t necessarily work on a global level and the best way to manage differences is to begin with seeing them.
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Reference: Ghemawat, P. (2007). Managing differences: The central challenge of global strategy. Harvard Business Review, 85(3), 58-68
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