Entering & Operating Internationally (DP IB Business Management)

Factors to Consider Before Entering New Countries

• When businesses are considering new markets, they have to consider the attractiveness of the market

• This will involve businesses carrying out extensive market research, and using models such as the Boston Matrix  and PESTLE

Diagram: factors to consider when entering new international markets

Infrastructure

• Infrastructure considers factors such as roads, transportation and communication (mobile coverage/internet)

• Good infrastructure improves the production process and delivery of goods/services to the customer which reduces costs and increase sales

Ease of doing business

• Rules and regulations involved in establishing a business in a particular market may be relatively simple or extraordinarily hard

• Issues to consider include accessing credit, registering properties and enforcing contracts

• If businesses face significant challenges setting up a business, this may lead to delays in operations and the business generating sales

(Source: World Economic Forum)  

Levels of growth and disposable income

• Disposable income is the income individuals have left after paying direct taxes (e.g. income tax) and other deductions (e.g. pension contributions)

  • Selling products in a country with higher disposable income is likely to lead to more sales

  • Selling in a country with lower disposable income is likely to lead to slower sales growth

• Businesses should look at trends in income levels over time to see if there is potential growth in sales in the future 

Exchange rates

• An exchange rate is the price of one currency in terms of another e.g. £1 = $1.10

• Exchange rates can be subject to extreme fluctuations due to external factors

  • Businesses should look at the historical trends of the currency of the country

• Businesses moving to countries with stronger currencies can import raw materials and components for production at a lower price

  • Exports from this country will be more expensive to customers abroad

Political stability

• Businesses may be at risk of not gaining a return on their investment in a country with political instability

  • A country with political instability will be subject to corruption, lack of law enforcement and higher levels of crime

  • It is more likely to have disruption to trading

• An economy with a stable economy and government is seen as a less risky investment for a business

Opportunities of Entering and Operating Internationally

• Entering new international markets has proved attractive to many businesses

  • The internet makes it easier than ever to enter international markets

  • Financial systems are much more joined up and make it much easier for money to flow between countries

  • This is a natural part of growth once a successful business has saturated their market share for a particular product

Diagram: the benefits of entering international markets

Economies of scale

• Operating on a larger scale can reduce unit costs

• Potential for higher profit margins

• Flexibility to reduce prices to gain market share

Brand recognition

• Higher visibility of branding (e.g. product/brand names, packaging)

• Particularly relevant to the ethnocentric approach

• Improves brand loyalty/repeat sales

Spreading risk

• Less exposure to market change in one country

• May avoid localised economic downturns 

Increased volume of customers

• Potential to earn high level of revenue from more sales

• Access distribution economies of scale

Extends the product life cycle

• Avoids saturation/decline in domestic market

• May reduce the need for spending on research and development

Threats of Entering and Operating Internationally

• Global businesses must consider various cultural and social factors to effectively market their products/services in different countries and regions

Diagram: cultural considerations of new markets

• These are common errors that many businesses have made

  • These errors can damage the brand's reputation

  • These errors may be costly to correct resulting in lower profit margins

  • These errors may not be recoverable and may require a business to exit the market

An Explanation of the Cultural and Social Considerations