What benefits are companies hoping to gain by internationalising their operations? Critically discuss using examples.

Answer

Introduction

The current global economy has encouraged many companies of various sizes to establish their operations in international markets. With the rapid advancement of technology in different areas including transportation and the media, there is a strong movement of international capital because corporations in various locations can easily trade their goods and services across the world. Many benefits result from internationalising operations (Autio 2017). The consumers as well as the companies that go global can enjoy the benefits. For the companies that internationalize their operations, the benefits often come in the later stages when the companies are able to establish, design, and implement new products and services in the new markets. Nevertheless, it is important to note that some industries in a given country are competitive globally while others are not. In the same line, local firms in the competitive industry will be competitive internationally while the others may not. Michael Porter’s Diamond Model proposes that the ability of a company to compete internationally is a function of mainly the interrelated combination of location advantages that industries in various countries hold.

Porter’s Diamond Model of National Competitiveness

Companies have the potential of benefiting significantly from international operations. However, before an organization seeks to internationalize its operations, it is essential to identify whether it is able to compete internationally to benefit from the operations or whether it lacks the capacity to compete internationally. As proposed by Michael Porter, the ability of a business to compete internationally is dependent on the location advantages that the company’s industry has in the country. The location advantages include the firm’s strategy, the firm’s structure and competition, the factor conditions, the demand conditions, and the related and supporting industries (Chung 2016). When the conditions are favourable for the firm, then it will continue to innovate and upgrade.

Firm Strategy, Structure, and Rivalry

The domestic environment within which business organizations operate has significant impact on how the firms are developed, organized, and managed. The environment affects the strategy and how the firms develop their structure. Besides, rivalry in the domestic compels the firms to create unique and sustainable capabilities and strengths that can enhance their global competitiveness (Riasi 2015). A company that operates in a domestic context with intense rivalry is likely to innovate and improve to remain competitive. The company is well positioned to compete in the international market. A typical example of intense rivalry in the domestic market is that of Japanese automobile industry. The industry has major players such as Toyota, Nissan, Honda, Mitsubishi, and Suzuki. Due to the intense domestic competition, the companies have found it easier to compete internationally compared to the firms in the same industry but from other countries. These firms have better chance of benefiting from internationalising their operations. On the other hand, firms in the automobile industry in other countries may find it more difficult to compete in the Japanese market.

Factor Conditions

The natural, human, and capital resources that are available in the domestic environment can enhance a firm’s chances of competing internationally and therefore gain the benefits of internationalising its operations. For instance, an oil company in oil rich country like Saudi Arabia has great chance of competing internationally because of the rich natural resource locally. Similarly, human resources, also known as created factor conditions, can propel a company to its international competitiveness. The conditions include good infrastructure, advanced scientific knowledge, and skilled labour force. They should be upgraded continually by generating new knowledge and skills.

Demand Conditions

A large market implies more challenges and opportunities for growth. A company that operates in sophisticated demand conditions offered by local customers can be pushed to grow, improve quality, and innovate. By striving to meet the demand, local markets can encourage a firm to enhance to new levels and possibly realize early insights into the future needs of customers beyond the current area of operation. Consumer demand puts pressure on companies to innovate faster and realize more sustainable competitive advantage over others in less demanding markets. Therefore, a company in more demanding conditions has better chances of competing internationally.

Related and Supporting Industries

A company that operates in a market with related and supporting industries has a great chance on excelling in the international market. This is because most companies need each other to form alliances and partnerships that help in creating additional value for their clients and create competitive advantage (Siqueira, Priem and Parente 2015). Particularly, suppliers can be instrumental in promoting innovation through provision of efficient and high quality inputs, effective lines of communication, and timely response. Silicon Valley is a typical region that has continued to attract major technology giants and technology start-ups (Chung 2016). The companies are clustered in the region where they share ideas and inspire innovation. A technology company from Silicon Valley is likely to compete favourably in the global arena.

Benefits of Internationalising Operations

International operations offer a wide range of advantages to firms that are able to compete in the global arena. The advantages that can be gained include the chance to diversify, greater market growth, and increased revenue (Autio 2017). The companies that are able to gain competitive advantage due to their business strategies, structures, and rivalry are well placed to benefit from internationalising their operations (Riasi 2015). Similarly, as argued by Michael Porter, firms with greater human and capital resources in their domestic markets have enhanced chances of competing in the international market hence benefit more from internationalising their operations (Autio and Zander 2016). The other conditions that would make a company compete favourably in the global market and benefit more from the operations include a demanding local market and presence of strong related and supporting industries. It is also necessary to acknowledge that government efforts and chance can make a business to benefit from its international business activities. The major benefits that a company can get from internationalising its operations are discussed below.

New Revenue Potential

By taking business operations international, the company gains access to a wider base of customers. In the event that the product or service that the company offers is a success, then the company will enjoy additional revenues from the new customers. The company will still be able to enjoy the increased revenues even if it had saturated the domestic market. Internationalising operations is one of the best strategies that a company may need to take its revenues to the next level. The opportunity to create new revenue potential is generated by access to new markets that happens when an organization internationalizes its operations (Kohl 2019). For example, according to the United States Small Business Administration, more than 96% of the world consumers reside outside the United States. This implies that any American firm that operates only within the country cuts it off this large population. Any American firm that starts operating beyond the country boundaries begin to access part of the wider population of consumers.

For many business organizations, internationalising operations gives the chance to conquer the new territories and gain access to a larger consume base to increase sales and revenues to the company. For instance, United States firms such as IBM and Nike have maintained their business operations in the Netherlands because the country gives them access to more than 170 million European consumers. Furthermore, UPS opened a new facility worth over $150 million in Netherlands because the country offers it access to the European markets (UPS 2017). From the access to larger market, the companies aim to increase their sales and generate more revenues. The company considered the central location of the country in the European logistics industry with excellent airports, modern roadways, and seaports that enable access to millions of consumers within 24 hours.

The Chance to Help More People

Through internationalising operations, an organization creates an opportunity for helping more people. The business creates value to more people by expensing its operations globally (Siqueira, Priem and Parente 2015). Admittedly, the solutions that an organization offers to the people have the potential of helping the people in some way to improve their lives. When the organization takes its operations globally, it will have the chance of helping more people because of the wider area of coverage. These people will be able to get solutions to the issues they wanted resolved or answers to the questions that the company address.

Greater Access to Talent

An organization that takes its operations beyond the national boundaries gets access to a new pool of potential human resource personnel with unique knowledge and skills (Khilji, Tarique and Schuler 2015). The persons may also have unique mindset that can help propel the company to further success. It is even possible for the company to get potential employees with skills that may not be easy to get in the company’s country of origin. This gives the organization an edge on the other organizations in the domestic market that have not gone international.

In most cases, access to talent in the international labour market offer organizations unique advantages in various ways including the diverse educational backgrounds, advanced language skills, and increased productivity (Khilji, Tarique and Schuler 2015). Companies that have internationalized their operations often praise their new environments for providing an opportunity to hire internationally minded and multilingual employees. The employees have the professional ability to understand consumers and cultures in various territories across the continent they operate. Furthermore, international talent has proved vital in improving innovation output for an organization. This can be one of the reasons why the markets that welcome international entrepreneurs and skilled labour usually have strong and more successful business environment.

Learning a New Culture

By going international, an organization would be able to learn a new culture. The firm will be better rounded by getting information about the new place. When an organization has an understanding of the people who are not from the company’s home country will provide a new perspective on how to relate with different customers. Other than gaining the ability to work with the employees and customers in the international markets, the company can develop better ways of working with the domestic business partners and customers. The company may learn better by hiring cultural consultant to help in guiding how to create marketing information that takes into account the cultural and linguistic aspects of the people in the new market.

Exposure to Foreign Investment Opportunities

When a business internationalizes its operations, it creates a better opportunity to learn about foreign investments opportunities and how such investments can be beneficial to the business (Kohl 2019). Many studies have shown that foreign investments can be very valuable for any business organization, especially for business that already understand how to utilize the chance to improve and expand its operations. This explains why many businesses have been seeking foreign investments over years and the surge in foreign investments.

A company that considers international presence should not underestimate the added investment opportunities that international markets offer. Many organizations get the chance of developing new business resources and create essential business connections when they begin to operate globally. It is through the resources and connections that these businesses get investment opportunities in the foreign markets. Additionally, a company with international operations can benefit from rewarding investment opportunities that may not be easy to get in the home country. This is brought about by the fact that many governments across the globe are offering incentives for firms that may want to invest in their territories. This is one other reason why a firm should conduct research before expanding internationally. Through research, it is possible to identify regions where there are lucrative investment opportunities due to government incentives and other beneficial factors.

Enhancing A Company’s Reputation

A business organization that is able to successfully internationalize and market its product and service offerings to different populations can get the prestige of calling itself an international organization. It is not a small achievement to become a successful international company and the prospects and potential business partners will perceive and think highly of the company by knowing that the company has an international presence.

Closely related to enhanced company reputation is the chance to develop competitive advantage. Some companies decide to internationalize their business operations in a bid to gain a competitive edge over the competitors. For instance, business organizations that enter global market where the competitors have not entered usually get the first-mover advantage. This move enables the business to establish strong brand awareness with the consumers in the market before the competitors do the same. Besides, expanding internationally can allow a company to gain access to industry ecosystems and new technologies that can significantly improve its operations beyond what is offered in the domestic market. In the same line, taking business operations global can improve the company’s perceived image because international operations often help in building brand recognition. This can enhance future business situations such as new marketing campaigns, contract negotiations, and further expansion efforts. Therefore, internationalising operations play an important role in helping develop competitive advantage.

Diversifying Company Markets

Taking business operations international can help a company diversify its markets. If a business operates only in one or two markets where it offers its products or services, the situation may be devastating when these markets experience a remarkable shift due to natural disasters or circumstances that are unforeseen. Internationalising business operations allow the company to diversify the markets to ensure that the sources of revenue are more stable. For instance, even if the domestic economy is experiencing slow activity, the business will not take a large hot because the international markets will make up the difference leaving the company in a better economic situation compared to the businesses that did not go international and focused only in the domestic market.

Many companies have found it necessary to internationalize their operations to diversify company assets. This action is always intended to protect the company’s bottom line against adverse unforeseen circumstances. Typically, a company that operates internationally can offset the effects of adverse business environment in a given market by ensuring success in another market without the adverse situations. Besides, a business can use the international markets for introducing unique products and services that help in maintaining positive revenue streams. For example, the Coca Cola Company is one of the international companies that have effectively diversified international operations. When the company reports increased sales in some countries, the resulting revenue benefits the company globally. The company has continued to increase its international presence through different methods to develop a more diverse and attractive business portfolio. The company bought the Mexican water brand Tope Chico to increase and diversify its portfolio (The Coca Cola Company 2017). This is an indication that the company can buy brands that are well known in the foreign markets as a strategy for ensuring successful international operations.

Recommendation

While internationalising business operations have shown significant benefits over the years, the rising level of competition in the global market and the increasing need for effective management has made it difficult for many firms to succeed. As such, there is the need for an effective business strategy that would ensure that a firm is in a position to attract more clients and ensure sustainability in the end to remain profitable. Besides, business strategy would ensure that a company remains profitable even when the performance of the industry is below average. The strategy must seek to take advantage of the company’s strengths while minimising the possible impacts of the firms’ weaknesses.

Considering Michael Porter’s generic strategies, a company has four options to choose from in terms of establishing business strategy. The four generic business strategies include the cost leadership strategy, differentiation strategy, cost focus strategy, and differentiation focus strategy (Tanwar 2013). Admittedly, a company can chose one of the strategies and apply it at the business level. Conversely, it is also possible for a firm to develop a hybrid form of business strategy that may include aspects of the four business strategies proposed by Michael Porter (Lapersonne 2018) even though a firm that uses the hybrid strategy is sometimes considered to be susceptible to being overtaken by firms with competitive advantage.

Differentiation business strategy has proved to be effective in the international market where competition is always on the increase. A business that has chosen to pursue differentiation strategy should be able to develop products and deliver service that comes with unique attributes with great value to the clients and that the clients perceive to be different from what is offered by other firms in the same industry. The feeling that the products and services are better than what is in the market brings about the perceived difference. This would encourage customers to seek what the company offers rather than taking any product or accepting any service in the market. Once customers believe that what the company offers is the best, they would consider it as the best value for their money.

The additional value introduced by the uniqueness of the product or the better service would allow a company to charge higher price for the products and services. Through premium price, the company is able to recover the additional costs that may be incurred to deliver unique products and services (Davcik, & Sharma 2015). In addition to covering the extra cost, it will ensure that the company remains with a significant portion as profit. In addition, when the suppliers in the international market decide to increase the prices of their products or supplies, the company is in position to pass along the additional cost to the customers due to the unique features of the products and service. This is because the customers may not find it easy to get substitute products and services.

Conclusion

Taking business operations international has many advantages even though the benefits do not come without some challenges. If the company can create an effective business strategy that can help it overcome the hurdles presented by internationalization, then the process can ensure many benefits for the company for a long period. By working with a firm that deals with translation and cultural consulting can help in ensuring that the process of internationalising business operations is lighter and more successful. The firm can help in developing authentic marketing content, SEO, localized landing pages, and transcreated homepage that is specific to the new international market that the company is seeking to gain entry. The company that is going international must understand the new cultures and things that resonate with the new markets because these play a significant role in the success of the company’s international expansion efforts.