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Internationalization: 4 questions to answer before going for it

April 17, 2019 at 11:18 AM by Emanuel Gomes

In an increasingly global, dynamic and competitive market, internationalizing is not an option anymore, it is a necessary condition to survive and grow. With that said, organizations are feeling the pressure to do so and quotes like these are becoming commonplace in the business environment: “companies must take a chance and enter international markets” or “every company must become global”.

Author: Emanuel Gomes | Reading time: 4 minutes

Blog - Internacionalizaçãounsplash-logoJuliana Kozoski

However, one must ask the following questions before going beyond borders:

1. Does internationalization make sense for my company?

Internationalizing is not an end in itself, but a mean to reach certain goals. It is, therefore, necessary to clearly understand your reasons to internationalize.

Some companies internationalize in a proactive way, as they look for new markets to: increase their profits, become more efficient, reduce costs (e.g. access to cheaper labor) or even to have access to certain raw materials, technologies or know-how. Other companies internationalize in a reactive way, as they are driven out of the domestic market because it is saturated, stagnated or hypercompetitive. There are several examples of this case in the construction industry in Portugal, where companies were forced out of the market (some moved to Africa) during the last financial crisis.

One must also remember that internationalizing does not necessarily mean leaving the country. More and more Portuguese companies are integrating global value chains by developing certain activities for foreign organizations that are looking for competitive advantages. This is the case of the IT sector, where companies coming from several countries are outsourcing their computer engineering services because of their high quality and reduced costs.

If there is one thing to take from this question is that internationalization is not a trend or a general pressure, but a way to grow and get a competitive advantage in a market that is increasingly global and competitive.

2. Which markets do we enter?

The countries one chooses to enter must be in line with the reasons that led the company to go abroad. However, companies usually decide in an intuitive way, without taking in account several factors that help them understand the market potential and fit. The truth is that one’s network, the participation in fairs or international missions may condition the market choice. However, when considering the size of the investment, the opportunity costs and time involved in an internationalization process, it is clear that having a strategy that maximizes the probability of success is of the essence.

In this context, the process of choosing a market must be thorough and rigorous. It is, therefore, key to use tools that convey a complete and integrated picture of all the aspects of the market: economical, geographic, sociocultural, political, legal, competitive, logistical, financial, among other. Several techniques that range from clustering to ranking countries have been developed and perfected in order to increase the degree of rigor while choosing a market.

3. 3. How do we internationalize?

A successful internationalization does not depend solely on the right market choice, but also on the market entry strategy. In the first stage of the process, companies usually opt for exportation (direct or indirect). There are, however, several alternatives to choose from: mergers, acquisitions, joint-ventures, franchising, licensing, consortiums, sales, marketing or production subsidiaries, among others.

The method choice depends both on the company and the target market situation, as well as on factors such as control, flexibility, investment or the risk involved. With that said, companies are often choosing entry strategies that imply collaborating with strategic partners, due to the fast pace of change of technology and international competition. This reality shows up in the context of both SMEs (for having less resources) and multinationals that, despite having far more resources and international experience, are also looking to partner up with strategic players.

The choice of partners must take into consideration strategic and financial aspects, as well as legal ones, whether you are looking for a retailer or a joint-venture playmate. Consequently, the commercial and partnership contracts become integration tools of the different issues.

4. 4. Do we replicate or adapt?

Deciding the adequate product mix will depend on the market characteristics and specially on the needs and preferences of the target. In some cases, a couple changes on the product or packaging are enough, whereas developing new products or services is the way to go in other cases. Moreover, the pricing, communication strategy and distribution channels must be adapted to the specific market conditions. These changes lead to a greater or smaller redefinition of positioning and competitive strategy in the target market, depending on their magnitude.

Summing Up

Internationalization may leverage growth or sustain a competitive advantage. However, it comes with challenges that must be addressed and managed in a rigorous and diligent way, from planning to implementation. With that said, a thorough analysis about the questions raised in this article may be the beginning of a brand new and successful “internationalization adventure”.

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Topics: Opinion Articles, Strategy & Management

Emanuel Gomes

Published by: Emanuel Gomes

Associate Professor @ Nova SBE | Expertise: International Business, Strategic Management, Managing International Strategic Alliances and Mergers and Acquisitions

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