Journey into the unknown

Internationalisation is being forced on companies attempting to survive in an increasingly competitive and overpopulated market. Michal Zuk explains how organisations can acquire market share through expansion

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As the global economic crisis rumbles on, firms searching for new sources of revenue must be prepared to step up the fight for control of precious market space. The IMF’s latest World Economic Outlook report downgraded predictions for global growth amid worries about the eurozone and gritty political battles over the US budget in Washington. In such circumstances, competition is fierce, and with businesses operating in an age of rising globalisation, the battle will often play itself out worldwide as companies expand internationally. Even firms operating in a single nation have begun to face cross-border rivals keen to lay claim to new consumers.

A report by Deloitte (Going Global: International Outlook for Private Companies) suggests that most firms recognise expansion and initiation of international activities as the key to survival. A total of 74 percent of businesses said they would begin or increase existing international sales, while 69 percent predicted a rise in purchases from foreign suppliers.

These figures were not solely confined to large corporations, but also included small and medium-size enterprises. It seems a wider audience and aggressive market muscling hold the key to success.

International expansion can be a daunting task for any company, regardless of resources or research. There are various logistical, financial, legal and regulatory pitfalls that require as much planning and foresight as possible. Consumer preferences and business cultures may also vary considerably from the domestic market and a successful business must be ready to adapt or face almost certain failure. Companies should be careful to properly assess target markets, avoid overstretching themselves and ensure the provision of adequate resources for their overseas operations.

Foreign market adaptation
There is already a vast graveyard littered with the tombstones of failed attempts at international expansion. UK supermarket chain Tesco’s recent withdrawal from the US market serves as a good example of the difficulties even a large company can have adapting to a foreign environment. The company had failed to understand the American consumer and ended up some £1bn poorer as a result. Conversely, American electronics retailer BestBuy was just as bad at understanding the British consumer, eventually being forced into a retreat from the UK market. Brazilian cosmetics brand Natura failed even in neighbouring countries Argentina and Chile. The company was unwilling to assign top managers to markets outside Brazil and it was little surprise that mediocre management and indifference to foreign markets at the highest level soon took their toll.

Tesco’s Fresh & Easy brand flopped after the company failed to understand US consumer values
Tesco’s Fresh & Easy brand flopped after the company failed to understand US consumer values

Still, the advantages gained from international expansion can be vast for a forward-looking and prudent company. A global business can generate increased revenues, global brand equity and greater income diversification in a time of economic crisis and uncertainty, among other benefits, when compared to its domestic rivals. The Deloitte report identifies three main objectives that can encourage a firm to seek a multinational presence: lower costs, market access and talent pools. Successful international strategies will often converge on all three, however. For instance, expansion into India has been found to lower labour and production costs, tap into emerging and less competitive talent pools, and provide a new market for a business at the same time.

Just as every company has its own particular goals and challenges when expanding abroad, they will develop a tailored strategy before entering the global arena. Crucially, this needs to be supported by an appropriate organisational arrangement. There are many ways in which companies can structure their operations abroad, each with their own benefits and challenges. Individual choices depend on a variety of factors including the degree of centralisation, company size and the importance of foreign business relative to domestic business. Over the last few years, expanding companies have tried with varying degrees of success to select the structure that will allow them to move as seamlessly as possible into the new market.

The international division
A common solution utilised by companies such as Walmart is the creation of a separate international division to deal with all business conducted in foreign markets. The retail powerhouse first used this strategy in the early 1990s and it continues to separate major operations between its US and international divisions.

A firm’s international division can be located at home or abroad and is directly responsible for overseas sales, supply and distribution relationships, marketing and logistics. It is usually headed by its own vice president, who reports directly to the chief executive concerning all its operations. This strategy can be very successful for a business seeking to expand into foreign markets because it centralises the management of all foreign operations. The division is also usually staffed with international business experts, as well as those with a local knowledge of target markets to increase efficiency and mitigate problems arising from cultural differences.

While this is an effective way to structure operations abroad, it is best for businesses at comparatively low levels of operational complexity and foreign presence. Even with an international department, the company essentially remains a domestic firm with operations abroad as opposed to a full-blown multinational firm. This can limit its growth prospects – especially when research and development (R&D) is chiefly carried out by the domestic division – because it fails to take advantage of the nuances of other markets.

Another risk is the potential power struggle over resources and direction between the foreign and domestic departments of the business.

Firms usually enter a foreign market by exporting or importing goods and services, often setting up an export/import department to define these operations in the process. Over time, however, they may find that tariffs, import restrictions, logistics or competition necessitate greater direct involvement in their foreign market to protect market share.
Management theories such as the Stopford and Wells model of multinational company organisation often see the international division as a stepping stone for a business with global ambition. It is a useful way to gain a foothold in new markets but becomes somewhat lacking as operations begin to expand. Walmart has used the structure to great effect.

Acknowledging borders
Companies that sell relatively uniform products across a number of markets involving narrow production lines – such as Coca-Cola – often organise part of their operations by region. The drinks giant has six strategic business units (SBU) in charge of large geographical areas such as North America or Europe. Each SBU is further sub-divided into regional divisions. The European SBU includes divisions for Iberia and the northwest of the continent, which are responsible for meeting targets in their respective markets.

In using this form of organisation – where the company structures its operations by region distributes in accordance with maximising overarching corporate goals – Coca-Cola has allowed itself to investigate national preferences and gauge reactions to marketing materials for a universally accepted brand and product.

The main advantage of this is no geographical area is given preference over the others: every division works individually towards a common global strategic vision. By eliminating the domestic-foreign distinction, the firm becomes truly multinational and is better able to ensure its operations are tailored to specific markets. Regional divisions will often find unique ways to sell their goods and conduct business in a specific part of the world by capitalising on the local focus and knowledge decentralisation brings.

There are certain drawbacks, however, as regional and sub-regional structures often involve tall hierarchies. This can lead to communication problems and a lack of clear direction. Certain initiatives are also too large to be left to any single geographical area.

Coca-Cola’s sponsorship of the FIFA World Cup was decided on and carried out at the corporate level rather than by regional SBUs. Football, it seems, helped the company transcend national boundaries and expand where the sport was more identifiable than the soft drink. Another advantage is the firm can address different geographical areas one at a time, addressing cultural preferences, while relying on original headquarters for guidance and building expertise in a highly structured manner.

The functional division
Companies involved in every stage of the supply chain of a product or service often opt to structure according to different functional competencies. This is common in firms engaging in natural resource extraction, such as BP. The company’s upstream operations are organised into three global divisions: exploration, developments and productions. Companies in other industries, such as airlines or cruise ship operators, where tasks such as bookings, operations and asset acquisition require different skill sets, may also find this
approach beneficial.

The functional division reduces many of the problems associated with tall hierarchies, while also eliminating the domestic-foreign distinction in business activities. The strong central control and worldwide standardisation allows a company a clear sense of direction for its global strategy. Employees also tend to work in their assigned profession or technical capacity, ensuring the production of a high value-added good or service goes smoothly. This allows the expanding firm to move established expertise into unknown territories. Some knowledge of the new geography will be required, so firms such as BP will invest heavily in local experts to provide research and insights into regional preferences.

This high level of functional specialisation has certain challenges. Individual departments may not be as in tune with the diverse needs of different geographical areas as they would be under a geographical division. The centralised company could have trouble properly marketing its products in culturally diverse areas. It could also struggle to find adequate suppliers or form beneficial partnerships due to differences in national business cultures and the lack of regional experts. Another problem may be an effective lack of proper communication between the departments, which can lead to inefficiencies and coordination issues.

Letting the brand talk
When a company produces a variety of unique goods and services, it can be sensible to expand each one separately. Microsoft’s core business, for example, is split into three major divisions: platform products and services, business, and entertainment and devices. Each division is then responsible for handing all activities related to that product, often including tasks such as its R&D, marketing, manufacturing and sales. Other industries that may choose to structure this way include automotive companies organised into car, truck, SUV and motorcycle divisions, and professional services firms with separate departments for tax, audit and strategic consulting.

The product division requires a high degree of global integration and coordination in order to lead to efficiency gains and economies of scale. The major advantage of this approach is that each division’s full resources are focused on creating and selling a superior product, providing it with a boost over that of its competitors. Also, the firm can recede unsuccessful foreign ventures and move inventory to more profitable places.

That said, while a company’s products may be in demand in all corners of the globe, they also need some degree of tailoring to various markets, which provides one challenge to the product division model. Tax codes, for instance, differ significantly across borders and a professional services firms must be ready to accommodate these differences when dealing with clients. Another issue in organising a global company in this way is that competencies may be duplicated across divisions, leading to inefficiency and higher costs. Microsoft has the resources to move a product into a new market and work through testing phases before hitting on the successful formula with each product, but few other firms do.

The matrix formula
The global matrix structure attempts to combine the geographical area and the functional and product division models into an overarching structure: one which can capitalise on the benefits of each while reducing their individual disadvantages. One example of a successful global business operating under a matrix structure is Unilever. The company has three regional, five functional and two product divisions working alongside each other.

Paul Polman, CEO of Unilever, gives a speech. The company is managed through a complex but effective ‘matrix’ structure
Paul Polman, CEO of Unilever, gives a speech. The company is managed through a complex but effective ‘matrix’ structure

Before unveiling products to the new market, Unilever has set up base, installed experts, and has a sound knowledge of what it can expect.

In the late 80s and early 90s, large corporations such as Dow Chemical, Shell and Citibank relied on ambitious matrix structures at home and in setting up abroad, but reverted back to a more straightforward approach, having realised that resources applied during set up were not necessarily required as foreign operations matured.

The key to this approach is responsibility as the set up is shared between product managers, regional mangers and functional divisions. Dual reporting, where an employee will report on progress to both the regional and product managers, is an important trait of this system. Mangers are typically required to achieve ‘cross-functionality’ by thinking along at least two of three structural dimensions. While this can be less efficient at the front end, managers have a full grasp of the organisation’s overall goals as it moves into the new market.

If implemented successfully, a firm can reap many simultaneous benefits. It can achieve worldwide product cooperation and control while attuning to the needs of regional
consumers. The interconnectedness of this approach helps maximise interdivisional learning and knowledge-sharing between managers, leading to potential increases in efficiency of business across multiple locations.

The complexity of the matrix structure often leads to trouble, however, with decision-making becoming much slower and more bureaucratic. The chain of command can become confused and overlapping responsibilities can spark conflict between managers in different divisions. These may need to be resolved by senior management or by committee, leading to further inefficiencies within the firm.

Employees are also in the precarious position of having to receive instructions from two or more managers located in different parts of the world, often with different cultural and
business backgrounds.