• Strategizing global expansion

    by  • November 13, 2013 • Business model, strategy

    We define six key factors which should be kept in mind while pursuing global expansion. Getting them ‘right’ is critical for for a successful internationalization strategy and they include:

    1. Strong rationale for global expansion and where to expand.
    2. Which activities to engage in when operating in a foreign country, in terms of value constellation (value web)
    3. Decision for the right entry model in a foreign country
    4. Organizational structure suited for the global company
    5. Tuning of right corporate values for the global company
    6. Not falling prey to cognitive biases in the decision-making process

    The rationale for global expansion is the starting point. It is critical since it defines the expansion route the company might opt for. It should seek answers to the question of why global expansion? A comprehensive answer to it should address the “domestic push” or “international pull” concern. However, along with this, it should also emphasise the growth aspect of it, including the corporate and financial goal of this and also the aspect of what is being internationalized i.e. is it technology roll-out or market roll-out. The where to expand aspect, is an analytical choice and it should be worked out as such e.g. with a PESTEL or other structured framework analysis of a country’s economic and institutional aspects.

    Which activities to engage in the value network and in which countries, should be guided by the above analysis but in addition to it, it should also examine the competences and capabilities of the company and the target market characteristics. A company should always try to be closer to (or move towards) high value-add activities, irrespective of the country choice.

    The entry mode is another critical factor for sustaining profitable business in a foreign country. It is also heavily based on the above two and also on a company’s past experiences and learning. It has been often observed that if a company experiences successful acquisitions then it gets comfortable and/or biased towards using the acquisition method as a international expansion option, although the conditions might have demanded alliances or other forms of expansion. E.g. Finnish companies Kone and Wartsila seem to be tilted more towards acquisition mode whereas Vaisala does it towards organic growth. Of course, the goals and speed of expansion also influence these choices.

    Critical decisions faced with the organisational structure of a company seeking or experiencing expansion is whether a global organisational structure should be centralised or decentralised and more networked between its subsidiaries and headquarters. Decentralised is generally more suited to achieve global responsiveness (to consumer and market needs) whereas centralisation runs for higher integration and efficiency. One emphasises the value side of the equation and the other the cost side. This needs to be balanced and the existing practices suggest that a networked/federated kind of structure is more prevalent in successful companies. A company can guide this decision through the use of e.g. an Integration-Responsive framework, by delineating industry characteristics.

    Having the right corporate values and identity is crucial for a global organisation to have a ‘distinctive competence’, in Selznick’s term, in the global market place. A distinctive competence implies a firm needs to have a vision and a mission and internal values (embodied as part of its structure) which should align with the external environment. A company needs an internal fit and as well as an external one. This gets more complicated in a global organisation, where achieving a consonance with the external environment is often difficult and when the firm needs to maintain a local environmental fit as well as a global one. From the outside, however, it should look as a whole, irrespective of its geographical dispersion. Companies using it effectively are truly networked global corporations, which provide autonomy to subsidiaries in terms of their policies but also retain control in terms of values and are therefore able to maintain one global identity. Important decisions to be made at this point also are of corporate language and location of headquarter.

    An important consideration in getting the above decisions right is the decision making process itself. This takes us to the analysis of cognition and making sure that the decision process has been free of managerial biases. Some commonly observed biases which a company should be wary of are: reasoning by analogy, illusion of control and escalating commitment. Their existence and influence on decision making should be acknowledged during the decision making process.