Identify Strategic Industry Drivers
The reason you started doing business in another country might have been chance. Maybe you met someone from another country in a plane or at a trade-fair, developed an instant liking and trust to this person and decided to pay him/her a visit to “see what develops”. And as long as “what develops” has a positive contribution to your business, this is just as good a reason as any other.
However trying to convince your boss or shareholders to commit resources to such a venture by saying “well, I met a great person on the plane, I like him and please give me a substantial budget so I can go there and see what develops” might be a bit thin. Not to say it would not work out great, with solid returns and a fantastic performance. It might even make you feel like one of those great explorers a couple of centuries ago who sailed into the horizon without knowing even if the world was flat or round.
And from a personal point of view, the need to explore, experience, learn has always been a main motivator for us to go international. It definitely has been rewarding personally to experience eating rats in Vietnam, sitting on crapy airplanes flying into Dhaka in a tropical storm, and driving through Roma villages in Central Europe.
Great dinner tables stories and to a smaller or larger extend experiences which have shaped my personality and opinions; however traveling is an expensive habit to support and without bringing in results fairly short-lived.
Many books and articles have been written by serious scientists in international business studies about the reasons on why companies decide to enter other markets. In this, and subsequent blogs, we will therefore list a number of reasons, without going too much into the theoretical frameworks which underpin those reasons or the research data on which they are based.
Furthermore we also do not believe that any of these reasons are “exclusive”, meaning that cost might be the main reason for establishing a new manufacturing base in one country, whilst setting up a sales office in one of the new EU-member countries might be an acceptable risk due to the changing political relationship between your country and the new member state, lowering entry barriers as a result.
This is not a debate about “right or wrong” from a theoretical point of view, but it is all about “good or bad” in the sense of decisions that are taken and the subsequent financial result or lack of it.
One of the issues we believe you need to consider is to identify your specific strategic industry drivers, or, in other words, the trends and developments which will shape the fundamental structure of your specific industry in the next 5-10 years or so.
Some of the issues listed will be more relevant to your business, however all need to be considered.
Proximity:
To primary production facilities
To the customer base
Result will be further concentration in terms of ownership due to costs in sourcing raw material, marketing and distribution, exchange rates, tariffs, multi-national trade agreements, country specific regulatory process, cross border financial investments and planning.
Strategic Alliances:
With customers
With rivals
With suppliers
As globalization gathers pace, how will the character of the international alliance network change? For example, will the current balance between technology alliances and market access alliances shift in response to the changing strategic imperatives? As firms struggle with capacity rationalization, will we see a pattern in which alliance partners seek to specialize in different areas, to provide sufficient scale to each in select domains, while collaborating where complementary skills are required? Since capacity rationalization will be difficult to accomplish without a firm contractual framework, we would expect to see changes in the organizational structures that make up the alliances—e.g., more formal joint ventures and cross-holdings of shares, rather than looser forms of alliance, more “asset exchange” agreements, etc.
Outsourcing:
Raw materials
Technology development and process equipment development
Distribution
Engineering work
Equipment fabrication
IT system design
In most ways, the traditional use of outsourcing has entry barriers, or to tie down critical technology via consortiums, or seek lower cost ways of doing certain corporate functions all have potential that needs exploration.
Acquisitions/Spin-Offs:
Purchase/investment in strategic assets globally
Which operations to spin-off
How do acquisitions contribute to market knowledge and technology knowledge.
At issue here in the global context is an even more troublesome set of synergy related issues and concerns. Here again, guidelines as to how to optimize synergy extraction from a global M&A initiative needs further research and assessment. In terms of spinouts – the value capture mechanism seems straightforward. This involves gaining a rational understanding of what core businesses and support elements are essential for success, and for which ones can any one firm truly add value. The problem is, that in a more complex competitive global business environment, seeking the answers to deal with the issue of spinouts is not nearly as straight forward.
Time:
Shrinking product cycles
JIT/global logistics
Internet/IT changes in supply management
Time is, of course, a critical factor in delivering value to your clients, but not just that. Shorter cycles have considerable impact also on the financial structure/requirements of your business operations.
