In 2017, there were 3.5 billion consumers in the world, a number set to surge to 5.6 billion by 2030. Remarkably, 88% of the next billion consumers will be from Asia. Thus, for companies oriented towards growth and long-term success, seizing the opportunities presented by global markets is no longer just an option — it’s a must.
In this article, we explore why to expand business internationally, discover key challenges of global expansion, provide solutions to overcome these obstacles, and shed light on what strategy to choose to enter a new international market.
6 reasons to expand business internationally
In today’s interconnected world, the majority of consumers reside beyond domestic borders. For example, as reported by the International Trade Administration, American businesses have access to more than 95% of the world’s consumer base outside of the United States. With this vast global audience in mind, the advantages of global market entry are undeniable. They include:
- Global talent. The international expansion allows access to a large talent pool. Hiring employees with diverse skills and cultural backgrounds helps a business engage with a global customer base more effectively. Additionally, multilingual staff is also valuable in this regard.
- Cost reduction. International expansion can often be more cost-efficient than expanding locally. Lower labor and material costs in some countries make it beneficial to consider moving core operational functions or outsourcing back-office functions to new countries. Notably, labor costs are ranked as the most important site selection factor by corporate executives. However, it’s essential to consider taxation consequences when expanding globally.
- Risk diversification. Relying solely on one market makes a business vulnerable to economic downturns. Expanding internationally brings new revenue streams and spreads the risk across multiple locations, so a downturn in one country is balanced by growth in another. This enhances overall business stability.
- Global branding and positioning. Overseas expansion enhances a brand’s recognition and reputation on a global scale. By establishing a presence in foreign markets and gaining international customers, the brand becomes more credible and respected. This is crucial for a business, as, statistically, 60% of global online shoppers value trustworthiness and transparency most in brands.
- Competitive advantage. Being first or one of the early entrants in a new market helps establish a brand as an innovative leader. This competitive advantage is invaluable in gaining market share and building a strong presence before competitors catch up.
- Tax benefits. Countries like Ireland, Hungary, or Cyprus offer more competitive corporate tax rates for international businesses, attracting foreign investment and expansion. However, navigating international tax obligations can be complex, so it’s crucial to seek professional advice to ensure compliance and avoid tax implications.
Statistics from the Equinix Global Tech Trends Survey support these reasons, with 72% of 2,900 surveyed IT leaders indicating plans for expansion.
Assessing business global expansion readiness
How to prepare your business to expand internationally? First, assess its readiness for expansion. The process involves evaluating both internal factors within an organization and external factors related to the target markets.
Internal assessment is crucial during global expansion because it allows a company to evaluate its current capabilities, financial resources, and strategic goals. This assessment also helps identify areas where the company may have gaps, which need to be addressed before entering new markets.
For example, in the case of Skin Authority, this evaluation process led to a critical realization. Specifically, it became apparent that expanding domestically first, leveraging existing success, and then venturing into international markets was a more cost-effective and sustainable approach.
Here’s what a company planning expansion needs to assess first of all:
- Company objectives and strategy
Begin by clearly defining your global expansion goals and ensuring they align with your overall business strategy. Understand why you want to expand globally and what you hope to achieve.
- Financial readiness
Assess your financial health and determine the budget available for international expansion. Consider the cost of market entry, operational expenses, and potential currency exchange risks. Ensure you have access to adequate capital.
- Management team
Evaluate the capabilities and experience of your leadership team in managing international operations. Identify gaps in expertise and consider hiring or providing training to equip your team for global challenges.
- Legal and regulatory compliance
Ensure your business complies with all relevant local laws and regulations. Identify any legal barriers that impact your entry into specific markets.
- Intellectual property protection
Determine the status of your intellectual property rights (patents, trademarks) and how they apply internationally. Make sure the intellectual property protection strategy is carefully planned.
You might find this business valuation guide helpful in assessing your company’s readiness for global expansion.
The Starbucks example in Australia illustrates the consequences of inadequate market research: despite its global dominance, the company faced substantial losses due to overexpansion and a lack of alignment with local coffee preferences, leading to the closure of 61 out of 85 stores.
Market research includes:
- Market selection. Choose key markets based on factors like market size, growth potential, competitive landscape, and regulatory environment. Prioritize markets that align with your product or service offering and strategic objectives.
- Market demand. Conduct thorough market research to assess demand for your products or services in the target market. Analyze consumer behavior, preferences, and emerging trends to tailor your offerings.
- Competitive analysis. Analyze the competitive landscape in the target market. Identify key competitors, their strengths and weaknesses, and determine how your offerings can stand out.
- Market entry strategy. Determine the most suitable market entry strategy, considering options such as exporting, franchising, joint ventures, or acquisitions.
- Risk assessment. Identify potential risks and challenges specific to each target market, including political instability, currency fluctuations, cultural differences, and legal complexities. Develop comprehensive risk mitigation strategies.
- Cultural and consumer insights. Conduct cultural research to understand local customs, values, and consumer behavior. This knowledge helps you adapt your marketing and product strategies to resonate with the local audience.
- Market entry costs. Estimate the costs associated with market entry, including legal fees, licenses, permits, and marketing expenses, and make any necessary adjustments to your operations.
Choosing the right strategy for entering international markets
Here are seven key strategies to expand business internationally.
- What it is
Exporting involves selling products or services to foreign markets from your home market. It can be done directly to customers or through intermediaries like distributors and agents. Begin by identifying target markets, adapting products or services to meet local needs, and establishing distribution channels.
- Best for
Both small businesses and established companies can start with exporting. It’s particularly suitable for manufacturers, wholesalers, and businesses with tangible products.
- What it is
This global expansion strategy allows businesses to grant individuals or entities (franchisees) the right to operate under their brand and system in exchange for royalties. It offers a rapid and relatively low-cost way to expand while leveraging local expertise.
- Best for
Businesses with established and replicable concepts, such as retail, food, and service industries.
3. Joint ventures and partnerships
- What it is
Partnering with local companies provides access to their local resources and an established customer base. Joint ventures involve creating a new entity with shared ownership, while partnerships can be more flexible arrangements.
- Best for
Businesses seeking local expertise, distribution networks, or market knowledge. It’s often used in industries like manufacturing and technology.
4. Direct investment
- What it is
Another strategy to expand business internationally is direct investment. It involves establishing subsidiaries, branches, or offices in global markets. It provides complete control but also requires substantial financial and managerial commitment. Choose it when you aim for a significant presence and have a long-term growth strategy.
- Best for
Large corporations with substantial resources, such as multinational corporations. Industries like manufacturing, technology, and finance often employ direct investment.
5. E-commerce and online expansion
- What it is
E-commerce and online expansion involve leveraging digital platforms to reach new customers. Businesses optimize their websites for global audiences, address currency and language considerations, and establish efficient logistics and shipping solutions.
- Best for
Both established and smaller businesses with digital products, retail, and consumer goods.
6. Mergers and acquisitions
- What it is
This strategy involves purchasing or merging with existing businesses in the target market. This approach allows companies to gain immediate market share, access a customer base, or acquire specific technologies. However, M&A is complex, involving due diligence, legal and regulatory differences, and post-merger integration efforts.
- Best for
Businesses looking for rapid market entry and expansion. It’s common in industries like pharmaceuticals, finance, and technology.
Interested in financing business acquisition? Read our article for valuable insights.
7. Strategic alliances
- What it is
Expand your business internationally by forming partnerships or alliances with other businesses, either domestically or internationally. This allows businesses to pool resources, share expertise, and enter foreign markets collectively.
- Best for
Businesses looking to share resources, collaborate on projects, or access new markets. It’s suitable for various industries.
Adapting business products or services for international expansion
Product adaptation is a critical strategy for businesses seeking to enter foreign markets successfully. It involves tailoring products or services to align with local regulations, cultural differences, and consumer preferences.
Product adaptation takes various forms to cater to different aspects of the target market:
- Tangible adaptation
This involves physical changes to the product, such as altering its design, size, packaging, or ingredients to align with local preferences and standards. For example, menu items in restaurants may vary to suit local tastes.
Example: McDonald’s is known for adapting its menu to cater to local tastes in various countries. For instance, in India, where beef consumption is limited due to cultural and religious reasons, McDonald’s offers a range of vegetarian options. Also, people can enjoy McSpaghetti in the Philippines and macarons in France.
- Intangible adaptation
This involves changes in non-physical attributes, such as translations, slogans, or brand positioning, to ensure they are culturally appropriate and resonate with local consumers.
Example: Toyota has adapted car names for the European market to make them more appealing and culturally relevant. One notable example is the transformation of the Carina E into the Toyota Avensis. Another example is the Toyota Yaris, known in Japan as the Vitz.
- Promotional adaptation
Adaptation in marketing and advertising methods, where local culture influences the choice of platforms, imagery, or product representation to create more effective campaigns.
Example: Coca-Cola tailors its marketing and advertising campaigns to resonate with local cultures. In various countries, Coca-Cola commercials may feature local traditions, festivals, and celebrities to create a more culturally relevant message.
- Price adaptation
Another important element of adaptation is adjusting product pricing to local market expectations. This may involve altering product sizes, packaging, or quantities to meet acceptable price points for consumers in the target market.
Example: Netflix varies its subscription pricing across countries. In some markets, like Pakistan, India, and Egypt, they offer lower-priced plans to make the service more affordable for a broader audience, considering the local economic conditions.
Overcoming potential challenges
There are several global business risks, but there are also strategic solutions to address each one.
Language barriers and cultural considerations
Operating in different countries often means encountering diverse cultures and languages. Misunderstandings, miscommunication, and cultural differences hinder effective operations, marketing, and customer relations.
Providing cultural training for employees and hiring local talent who understand the culture and language.
Global supply chain management
Navigating global supply chains and cross-border trade can be challenging due to longer distances, customs, import and export procedures, and potential disruptions caused by geopolitical events, natural disasters, or labor strikes.
Diversify suppliers, leverage international trade agreements, and implement real-time supply chain monitoring to minimize disruptions.
Intellectual property risks
Protecting intellectual property in a foreign market can be complex and costly. For instance, IP theft and infringement may pose risks to a company’s innovations, brands, and proprietary information.
Register and protect intellectual property locally and enforce strict confidentiality agreements.
Products and services adaptation
Adapting products, services, marketing tactics, and strategies to suit local preferences and customs is time-consuming and may require product modifications or additional expenses.
Conduct extensive research to understand the target market preferences and seek local partnerships for better adaptation.
Tax and regulatory compliance
Each country has its own set of business regulations, tax codes, and legal requirements. Navigating and complying with these diverse regulations can be complex and costly, often requiring specialized legal and financial expertise.
Hire local legal experts well-versed in local regulations, international trade laws, and international business licenses.
Examples of successful and unsuccessful global expansion
Applecertainly knows how to expand business internationally, establishing a strong presence in key international markets. China, in particular, has become the largest consumer of iPhones. However, Apple’s global expansion extends beyond sales: its global supply chain involves components from 50+ countries. For example, while the final assembly of iPhones occurs in China, Germany manufactures components like accelerators.
Coca-Cola is another example of a successful business whose brand is recognized in over 200 countries. However, it had to deal with a number of challenges, including the growing health-conscious trend leading to declining sales of sugary drinks. To address this, Coca-Cola introduced healthier beverage options. Environmental concerns also posed challenges, prompting the company to invest in sustainable packaging and recycling initiatives.
Despite its global success, Walmart faced notable failures when expanding into certain countries. In Germany and Japan, its big-store, low-price strategy clashed with local preferences for smaller shops and deals, leading to substantial losses: $1 billion and $1.6 billion, respectively.
Telcos expansion into the United States was also challenging. Unlike in Germany and Japan, where consumers favored smaller shops, American shopping habits revolved around large stores for stocking up groceries for weeks. This misalignment, coupled with strategic missteps, resulted in substantial losses of nearly $2 billion and, ultimately, Tesco’s exit from the U.S. market.
Here are the key points to know about the global expansion process:
- International expansion offers several benefits, including growth opportunities, access to global talent, cost reduction, risk diversification, enhanced branding, competitive advantage, and potential tax benefits.
- Assess your business’s readiness for global expansion by evaluating internal factors like objectives, financial readiness, management team, legal compliance, and intellectual property protection. Also, conduct thorough market research to select the right target markets.
- To expand business internationally, consider various strategies, such as exporting, licensing, franchising, joint ventures, direct investment, e-commerce, mergers and acquisitions, and strategic alliances.
- Overcoming challenges in global expansion involves addressing language barriers, managing global supply chains, protecting intellectual property, adapting products and services, ensuring tax and regulatory compliance, navigating cultural etiquette, and dealing with different time zones.
- Successful examples of global expansion include Apple’s and Coca-Cola’s strong presence in key markets like China, while unsuccessful attempts, such as Walmart’s ventures in Germany and Japan and Tesco’s entry into the U.S. market, highlight the importance of aligning strategies with local preferences and market conditions.