Global Expansion and Its Advantages - Case Study Example

Global Expansion Task Introduction John Ferrer and his wife Deborah established their company on January 2002. The company deals in the manufacturing of custom-made furniture. Their business is located in Boston, MA. The company has achieved a significant growth since its inception and the year 2006. The growth in terms of the manufacturing facilities went up from five to ten. The increase in the production capacity led to an expansion of the local market. The increase in the market coverage could only result in more sales thus, increased profitability. The company created a good relationship with the customers based on the superior quality of their products and the exceptionally good customer service. However, the decline in the housing market sales between 2005 and 2006 negatively impacted the company’s sales levels thus, profitability. In addition, the stiff competition in the local market led to a significant loss of potential clients. The company has been successful and would like to continue experiencing an excellent performance. On that note, John Ferrer and Deborah think of expanding into the international market. The company chooses Malaysia to be the first foreign market in which to venture. However, the couple is not sure about the plan. On that note, this paper seeks to inform John and Deborah of the significance of the global expansion. Global expansion and its advantages The concept of global expansion, also referred to as the international expansion, is the process involving the exploitation of the foreign market by a local company (Jung, 2003). For instance, in this case, John and Deborah plan to move into the Malaysian market. Since the furniture manufacturing company was established in Boston, MA, it is a US based company. In addition, other companies such as the Hilton hotel, Starbucks, Intercontinental and five stars Hotel etc., have expanded into various foreign markets across the globe. The following are the significance of globalization: it offers market opportunities suitable for growth, it leads to the economies of scale, it leads to sharing of core competencies, it improves efficiency and quality, creates more time to focus on internal issues, it facilitates risk sharing and minimizes costs. Other reasons include; diversification, short and long-term security, education and to defend against fierce competition. First, expansion into the foreign market (Malaysia) presents the furniture manufacturing company with rare opportunities suitable for growth. If the local market is saturated with a particular product or is characterized by fierce competition, companies with somewhat weak marketing strategies or with insufficient funds to engage in active promotional activities risk losing customers to the stronger opponents. In the process, the incapable company loses customer base and market share, which leads to a significant loss of sales, thus, profitability. In such situations, it pays to venture into the foreign markets characterized by low competition and considerable market imperfections. The foreign markets characterized by less or no competition present lucrative opportunities for the local company to establish distribution centers and achieve a greater portion of the market share faster than the highly competitive markets. Consequently, the local firms have a better chance to create more wealth and grow (Jung, 2003). Second, global expansion leads to the economies of scale. Economies of scale refer to the minimization of the operating costs due to the enlargement of the company’s size or scope of operation. Global expansion is accompanied by the increase in various assets necessary for the company’s operation in the foreign market. In addition, global expansion leads to the increase in the geographical area within which a company operates. Therefore, by expanding globally, the company experiences cost differentiation advantages, strong bargaining power, the ability to obtain funds easily both in the local and the international market (Jung, 2003). Third, globalization leads to the sharing of core competencies. A company with a strong competitive advantage in the local markets is at liberty to spread its competency in the international market. That is because a core competence that is successful in the local market can also be successful in the international market. For instance, the same strategy the company has relied on to deliver quality products consistently to the customers in the local market can be implemented in the international market (Jung, 2003). Fourth, global expansion improves efficiency, effectiveness, and quality delivery. Business efficiency is a concept that refers to reducing the cost of the resources used in the company processes but maintain the quality levels high. The basis of the concept is the need to reduce the operating costs without interfering with the quality of the production. Therefore, the summary of efficiency is (no time wastage + no resource wastage + high quality of production = business efficiency). On the other hand, business effectiveness is a concept that refers to the ability of a company to use the most appropriate strategies, resources, tools and equipment to ensure the achievement of the goals and objectives. While operating in the international market, the company hires highly qualified employees to facilitate the running of the day-to-day activities. The employment of skilled employees is a key to quality production (Biggs, n.d.). Fifth, international expansion leads to outsourcing. While operating in the foreign market, the local market can contract other suppliers for delivery of specific raw materials or parts of the company’s products. Since the outsourced supplier is responsible for the manufacturing process of the products, the company finds more time to focus more resources toward increasing the effectiveness of the managerial functions (Jung, 2003). Sixth, international expansion facilitates risk sharing. Through outsourcing, the company transfer risks associated with manufacturing the products. The outsourced suppliers, being a specialist, assist the business with risk management strategies. Jointly, the two corporations manage the risks associated with the end product (Flatworld solution, 2015). Seventh, global expansion helps in reducing the operating costs. A stiff competition in the local market increases the demand for highly skilled employees. Companies tend to scramble for the best skills in the job market to secure a competitive edge, ensure the delivery of superior quality and continue to generate high sales, thus profitability. Based on the law of demand and supply, when the demand goes up, the price increases. Therefore, stiff competition leads to high demand for skilled employees, which result in the rise in the cost of labor. In economics, labor is one of the variables in the production. The cost of production is directly related to the cost of labor. That is, when the cost of labor increases, the cost of production also increases. Companies can reduce the cost of production by searching for cheap supply from the international market. The quickest and cheapest method of accessing the cheap labor is through global expansion. The cost of labor in the international market is considered cheaper due to the low demand for a specific line of skill. Besides the cost of labor, the company could assess the necessary resources for production and where to obtain them at the lowest cost (Importance of international business, n.d.). Eighth, global expansion enhances diversification. Diversification is a concept used to manage risk. It refers to investing in a variety of assets or markets. The risk management aspect of diversification originates from the fact that different assets or markets experience different levels of performance at a given time. Poor performing assets are offset by excellent performing assets. Therefore, on aggregate, the return on the portfolio of assets is bound to be higher than that of the individual assets. From a different perspective, securing market share in different markets has the same advantage as investing in different assets. Based on the case study, the company of John Ferrer and Deborah is reported to have experienced a decline in the sales levels, which led to the decrease of the enterprise’s profitability. There primary reasons behind the decline are the stiff competition and the decline in the housing market sales in the US between 2005 and 2006. If the company was operating in a diversity of markets (not only in the US), the decrease in sales in the US would not have affected the company’s performance to the degree experienced (Importance of international business, n.d.). The rationale behind the decision Based on the case study, the company should venture into the new market (Malaysia). In the local market, the company’s performance is negatively affected by stiff competition. The aggressive competition from the high-end brand and the creation of a widespread retail stores posse continued threat to the business’s performance. In addition, the decline in the performance of the US housing market also adversely affected the company’s performance. For these two reasons, the company should exploit the global market since they experience low or no competition. In addition, the housing market in the foreign country could be in high demand for the company’s products, thus, creating endless opportunities for value creation, wealth maximization, and growth. What geographic location should be a target for global expansion? The appropriate target location for global expansion is Malaysia. What background information can you provide to support this decision? Global expansion is pushed by the factors mentioned above. In addition, it is induced by the absence of a particular type of commodity in the foreign market. In that case, companies decide to venture into the foreign market primarily to meet the gap (provide the product that lacks in the international market). Malaysia is the appropriate for global expansion considerations due to the following reason: first, the country is on the road to improving the technological advancement and human capital. The Malaysian government has made considerable efforts to embrace the information, communication and technology standards set by the international authorities. The country is still making efforts to develop various aspects of its economy, which marks a crucial period to venture into the market and obtain the necessary resources while they are still cheap (Awang, 2004). Second, the government of Malaysia is also making significant efforts to develop the labor force. The educational standards are reviewed and improved to reflect the current level of development of the international community. The effort by the government has seen the creation of agile, flexible, skilled and mobile workforce with diverse knowledge. For that reason, the labor force in Malaysia is vibrant and relatively cheap. The skilled and cheaper source of labor should be exploited by the company. The strategy will see that the company’s production activities are run at a minimal cost (Awang, 2004). Third, the housing market is characterized by imperfections. Property management is poor in Malaysia (Cheng, 2013). For that reason, most potential buyers are driven away by the deteriorated appearance of the housing properties. The situation is perfect for US Company to demonstrate its ability to produce and manage real properties. In the process, the company will build a healthy rapport with the potential customers and create a good public relation. A health rapport and public relation are the keys to developing customer loyalty. The company would take the market by storm and achieve a significant market share (Cheng, 2013). How will this choice support the overall objective of growth and expansion? Growth is achieved when the company’s performance is fruitful and profitable. The size of the enterprise increases and so does the scope of operation. A high level of profitability increases the degree of a firm’s flexibility. That is; a company with sufficient funds is capable of pursuing secondary projects. If the company’s operations in the international market turn out to be fruitful and profitable, the investment will be termed as viable. Therefore, the additional assets and other equipment used to sustain operations in the international market increases the company’s capital base. Based on that perspective, the company would have achieved growth and expansion. How would you refute someone with the opposing perspective? My counter argument would be as follows: foreign market ventures are characterized by many risks due to variations in the cultural practices, different government policies, the overall economic performance in the foreign country, etc. Without proper management, the factors can negatively affect the performance of companies. However, with experience our company has in risk management and our responsiveness to the environmental factors influencing businesses, we have complete faith in our management team to ensuring the success of the proposed venture. In addition, provided that a market gap has been spotted, and our company is in a position to bridge the gap, the venture will be successful eventually (Halafoff, 2013). Conclusion Based on the causes of the decline in the financial performance (stiff competition, weak housing market performance), the company should proceed with the plan to venture into the foreign market (Malaysia). The company will enjoy the advantages of the global expansion such as diversification, etc. As mentioned above, global expansion has several advantages, which should be tapped to assist in improving the company’s performance. Last, the market imperfections experienced in the Malaysian property market can be a stepping stone towards establishing a successful company. References Awang, H. (2004). Human capital and technology development in Malaysia. Retrieved from http://files.eric.ed.gov/fulltext/EJ903851.pdf Biggs, R. (n.d.). 10 reasons to go international. Retrieved from http://choosewashingtonstate.com/wp-content/uploads/2013/06/10_Reasons_to_go_International.pdf Cheng, T., L. (2013). Hot property issues for consideration. Retrieved from http://www.starproperty.my/index.php/articles/property-news/hot-property-issues-for-consideration/ Flatworld solution. (2015). The Advantages and Disadvantages of Outsourcing. Retrieved from http://www.flatworldsolutions.com/articles/advantages-disadvantages-outsourcing.php Halafoff, A. (2013). The multifaith movement: Global risks and cosmopolitan solutions. Dordrecht: Springer. Importance of international business. (n.d.). Retrieved from http://www.dpcdsb.org/NR/rdonlyres/0535EFD9-639D-4D95-B7AA-461E34742340/63623/Chapter_221.pdf Jung, S. (2003). The relationship between international expansion and firm performance: An investigation of U.S.- based restaurants firms. Retrieved from http://digitalscholarship.unlv.edu/cgi/viewcontent.cgi?article=1608&context=thesesdissertations Read More