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In: Finance

Let's discuss why firms engage in international business and what methods are utilized to grow a...

Let's discuss why firms engage in international business and what methods are utilized to grow a firm to an international level. Discuss the pros and cons of these methods, and provide some examples of each method and if it has or has not been successful.

Solutions

Expert Solution

There are several reasons for a Company to get global like expansion of sales for profits, growth, to utilize the scarce resources etc. The companies get new markets and consumers for growing their business. The decline in sales in one area will not affect the total sales of the company if the company is a global company. Also, the resources are limited in home country and different types of resources are available in different countries which can be utilized for enhancing the business.

The various methods are used to grow the business at international level are:

  1. Direct export at international level

Under this strategy, the customer places the order and the order is shipped directly at the customer’s address.

The advantages of this method are that the profit margins are high, direct relationship with the customer and cost effectiveness.

The disadvantage includes the risk of non payment, difficulty in after sales service.

2.Sales through agents

The agents own the products and further provide them locally to the customers. They have direct contact with the customers.

The advantage of this method is that the knowledge of local area is availed from the agent.

The disadvantage includes the sharing of profits with the agents, and the customer relationship is with the agent.

3. Purchasing overseas business

The organisation invests in the existing business which operates in the target area.

The advantage of this method is that the business is well establishes already in the local area.

The disadvantage is that there is huge risk of investment in wrong business.

4. Opening of overseas operation

The organisation sets up a business locally in the target market.

The advantage is that there is direct contact with the customers and customer service quality is enhanced.

The disadvantage is that it involves higher costs and high risk.

Examples:

  1. McDonald’s is the successful example of globally operating organisation. The company uses method of opening stores in different areas for sales and successful also.
  2. Nike:The Company has successful sponsorships with the Manchester United for expansion of its business internationally.
  3. Home depot: Home depot failed in its expansion strategy by opening stores in China. The business didn’t worked well as Chinese people considered DIY products as a sign of poverty. This tells us that the study of local market, their culture, traditions is also important before the expansion.

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