If we closely observe the history of most successful companies of the recent decades, we come to the conclusion that they have managed to expand internationally with utmost ease. However, deploying global strategies successfully becomes the hardest nut to crack for most companies even if they have enjoyed massive success at domestic level. The most important question is why these companies fail to replicate their domestic success at global stage.
The cost of doing business internationally is tremendously high. There are many companies that are extremely successful in their home country but failed to reproduce the same performance internationally, the Target being the typical example. Target is one of the largest retail store chains in United States earning billions of dollars every year. However, they have suffered a miserable fate in Canada despite the fact that economies of both nations are integrated, they have free trade agreements, adjacent transport system and similar cultures and language as well.
Target is now leaving the Canadian market for good just after two years. There are many factors that contributed to the company’s failure in Canada. For instance, Target never fully understood the Canadian market, falsely assumed that it is quite similar to that of United States’ and most importantly, completely misunderstood the competitive landscape and as a result, they had to face drastic consequences.
Target’s decision to leverage the “similar Canadian market” has turned out to be a huge blunder. It highlights the difficulties in global expansion even if the companies are trying to penetrate similar or local markets. As a matter of fact, global expansion often delivers results that are less than expected. The question is why?
There are significant obstacles to doing business internationally. That is why, multinationals mostly concentrate their activities at or near their home market. This is evident from the fact that United States has the largest number of multinationals in the world but 75% of their sales come from North America and only 15% and 6% from Europe and Asia respectively as depicted by the following illustration.
Above illustration indicates that a significant home bias exists all across the globe. This implies that the cost of doing business will increase tremendously once the companies move further away from their base or home region.
United States of America is a $17 Trillion economy whereas Canada and Mexico are $1.9 Trillion and $1.4 Trillion economies respectively. Similarly, the economy of entire Europe is worth $12.7 Trillion. It is quite obvious from these figures that United States would prefer to trade with Europe instead of either Canada or Mexico but this is not the case. In fact, Mexico receives 60% the amount of trade US does with Europe. Similarly, US does more trade with Canada than with all of Europe.
United States does more business with Canada and Mexico because of high cost of trading with Europe. Both Canada and Mexico are neighbors of United States. US has signed free trade agreements with both countries and it is free to transfer goods across the border. Most importantly, both Canada and United States share common language, culture and colonizer that is United Kingdom. All these factors make it feasible for United States to trade more profitably with Canada as compared to Europe.
Common language is another factor that can make trade between two countries or companies of two different countries a huge success. According to a recent article published in Financial Times, Dr. Walid Hejazi emphasizes on the importance of deploying English when two countries seek to establish long term and successful trade relationships. In fact, trade agreements, the official language of which is English, tend to be more successful and profitable as compared to agreements which use German, Spanish, Italian or French etc.
As discussed above, the cost of doing business internationally is just incredible. There are many reasons including but not limited to distance, difficulties in transporting goods across the border and cultural, language and religious differences that add to this cost. Similarly, different time zones and exchange rates are two of the most important reasons that make it difficult to manage an international organization or business. Legal problems, need to raise capital and compliance with local institutions and regulations also make it a cumbersome task to trade internationally.
There are many shortcomings in managers’ approach to identify new international markets for global expansion. Mostly they focus on similar markets, countries with similar cultures and languages, networks, family businesses and big markets such as China and India.
Similarly, managers asserts on the importance of venturing in the big markets, though falsely on most occasions. Companies often exaggerate the attractiveness of foreign markets but underestimate the costs associated with creating a presence in those markets. All these things lead to expensive errors and many missed opportunities.
Some companies decide to go global just because other companies have gain massive success internationally. One thing they forget is that a good strategy for one company may not produce similar results for the other. Similarly, they do not give due importance to analyzing why global companies are successful. They do not do due diligence and just want to follow suit. They have to realize that those companies are not successful because they are global but they are global because they are successful.
The globally successful firms first create huge market value for them at the domestic level before exploring the international markets. This simply means that companies which are most productive in domestic markets are more likely to succeed at global stage as compared to companies which are least productive in their home market.
Concluding, there is nothing wrong in saying that it is extremely difficult to deploy global strategies successfully. Previous experiences show that picking the most attractive foreign markets or selecting the right partners may not always work wonders for the company with global intentions. It takes substantial time, resources and most importantly, impeccable planning to establish a sustainable global presence.