Globalization has increased international trade by easing trade restrictions. While it has increased competition at both local and international levels, it also presents valuable opportunities to companies to expand their market size. But international experiments do not always succeed and competitive strategies that work at home may fail miserably abroad due to numerous factors such as cultural differences, lifestyle differences, income differences, and political/legal differences. One of the common mistakes companies make that lead to global business failure is not taking into account the differences in customers’ preferences. Often companies overestimate the power of their brands and believe that customers will embrace their products everywhere due to brand perceptions. Even a company like Apple has been guilty of making this mistake when it introduced iPhone in China. On the other hand, BMW took the local preferences into account by offering extending legroom in its 5 Series line and is now a major player in China .
Another mistake companies make that lead to global business failure is not understanding local cultural perceptions. Different cultures have different value systems and definitions of success, happiness, and attractiveness etc. This lack of understanding may result in companies sending confusing messages to the local customers or sending messages or images that may even create negative goodwill. Some cultures like China prefer local elements while others like Japan may be more open to Western elements in certain products such as fashion accessories.
There are several strategies companies seeking international expansion may adopt to reduce the likelihood of a business failure in international markets. The first strategy may be to do comprehensive research on local market conditions and opportunities before entering the market. This will help the company build more effective competitive strategy by taking into account unique local characteristics. A company could achieve the research task on its own or may hire a research/consulting company with country expertise. A second strategy may be to enter on a small-scale and expand gradually as the company learns more about local conditions and learns from its mistakes. The benefit of this strategy is that it will ensure that any mistakes made do not turn out to be so expensive that they may threaten the entire operation in the country. The third strategy is to get into partnership with a local company. The benefit of this strategy is that the local company may already be familiar with local trends and conditions and in addition, it may also have valuable distribution network.
If things do not work out in one or more of the international markets, the companies can take several routes to exit those particular markets. One strategy may be to sell its local operations to another company as Regis did when it sold its European hair salons business Provalliance for $105 million . There are several benefits to this strategy of exiting an international market by selling local operations. First of all, this strategy takes little time and helps the company quickly shift focus on other remaining operations. This strategy also results in quick infusion of cash. Similarly, this strategy is also often less costly than other options such as simply wounding up operations and selling assets at loss.
There are several issues that may prompt the implementation of an exit strategy. One of the reasons may be limited expansion possibilities as was the case with Disney’s ESPN brand. Disney’s Chairman and CEO admitted to having limited international opportunities for ESPN . Similarly, companies have only so many resources and the management can exercise only so much effective control before diseconomies of scale enter the operations. Thus, some companies may exit international markets to reallocate resources to more profitable opportunities or focus more on core operations. The management may also believe that the company may have become too big to exercise effective control and it may want to scale back the size of operations. It is also possible that new political and legal requirements may have put the company at competitive disadvantage against local companies or make it harder for it to carry out its operations as was the case with Google in China.
An exit strategy may have significant impact on the strategic planning of a global organization. First of all, it may reduce the enthusiasm for international expansion due to fear of another failure. But one positive outcome may be more cautious approach towards international expansion which will increase the possibility of successful entry into other international markets. The exit may also face the organization to redesign its organizational structure to better accommodate the realities in international business. the result may be more decentralized and flexible organizational structure as is usually seen in some multinational companies like P&G, Coca Cola, and Nestle.
It is clear that international expansion often requires different business strategies due to the possible differences in trends, state of economy, local tastes, and demographic factors. The company can increase the probability of success by doing homework, opting for controlled expansion, or even partnering with a local company. If international ventures do not meet expectations, one of the exit strategy that could be employed is selling its local operations so the resources and attention could be shifted to other operations.
- Cosmetics Design. (2012, October 2). Regis continues to exit international markets with Provalliance sale. Retrieved April 21, 2013, from http://www.cosmeticsdesign.com/Business-Financial/Regis-continues-to-exit-international-markets-with-Provalliance-sale
- Digital TV Europe. (2012, May 9). ESPN Eyes International Exit. Retrieved April 21, 2013, from http://www.digitaltveurope.net/23914/espn-eyes-international-exit/
- Rein, S. (2009, December 1). Three Dumb Things Foreign Companies Do In China. Retrieved April 21, 2013, from http://www.forbes.com/2009/12/01/china-three-mistakes-leadership-managing-marketing.html