Identify and briefly discuss the key reasons why a company may consider expanding outside its domestic market.

Question

What will be an ideal response?

Answer 1

A company may opt to expand outside its domestic market for any of five major reasons:

1. To gain access to new customers. Expanding into foreign markets offers potential for increased revenues, profits, and long-term growth; it becomes an especially attractive option when a company encounters dwindling growth opportunities in its home market. Companies often expand internationally to extend the life cycle of their products, as Honda has done with its classic 50-cc motorcycle, the Honda cub (which is still selling well in developing markets, more than 50 years after it was first introduced in Japan).
2. To achieve lower costs through economies of scale, experience, and increased purchasing power. Many companies are driven to sell in more than one country because domestic sales volume alone is not large enough to capture fully economies of scale in product development, manufacturing, or marketing. Similarly, firms expand internationally to increase the rate at which they accumulate experience and move down the learning curve. International expansion can also lower a company's input costs through greater pooled purchasing power.
3. To gain access to low-cost inputs of production. Companies in industries based on natural resources (e.g., oil and gas, minerals, rubber, and lumber) often find it necessary to operate in the international arena since raw-material supplies are located in different parts of the world and can be accessed more cost-effectively at the source. Other companies enter foreign markets to access low-cost human resources; this is particularly true of industries in which labor costs make up a high proportion of total production costs.
4. To further exploit its core competencies. A company may be able to extend a market-leading position in its domestic market into a position of regional or global market leadership by leveraging its core competencies further. Walmart is capitalizing on its considerable expertise in discount retailing to expand into the United Kingdom, Japan, China, and Latin America.
5. To gain access to resources and capabilities located in foreign markets. An increasingly important motive for entering foreign markets is to acquire resources and capabilities that may be unavailable in a company's home market. Companies often make acquisitions abroad or enter into cross-border alliances to gain access to capabilities that complement their own or to learn from their partners.
In addition, companies that are the suppliers of other companies often expand internationally when their major customers do so, to meet their customers' needs abroad and retain their position as a key supply chain partner. Automotive parts suppliers, for example, have followed automobile manufacturers abroad, and retail-goods suppliers, such as Newell-Rubbermaid, have followed their discount retailer customers, such as Walmart, into foreign markets.