When it comes to expanding your operations overseas and accessing new target markets, there are many different foreign market entry strategies to consider – all that come with their own pros and cons, risks and complexities, challenges and opportunities.
For companies looking to go multinational, there are many reasons for international expansion, besides market share and the market entry strategy you choose can impact how you reach your growth goals.
Perhaps you want to launch a back-office facility to reduce head office costs. You might be looking to offer 24-hour services to your customers and need a base in a different time zone, or maybe you’re looking to diversify through various routes to market. Maybe you’re wanting your own production centre to ease quality control monitoring. Or you might simply want to reduce supply chain issues by being nearer the source.
In this article, Claudia Nunes, our Director International Corporations, reviews four of the common foreign market mode of entry strategies you could consider for your global expansion.
Different types of international expansion strategies
Here we share the four common market entry strategies to consider for international expansion. Which one will you choose for your global business?
By multidomestic, we mean entering different markets within the same country. For example, New York and Honolulu, or Barcelona and Tenerife – both within the same country, but completely different markets, requiring different strategies.
The other major factor of a multidomestic model is that both units would be in control of their own separate strategic and operational decision-making – as these may very well need to be customised for the specific market. It essentially means giving your generals command and control of your full arsenal, so make sure you have trusted people in place.
Multidomestic expansion also gives you a portfolio of local subsidiaries that are scalable according to performance, gives you easy access to local competitive advantages (shipping, labour, resources), and gives you a stronger foothold in a local market — you can build from your reputation in the other locale. Going the multidomestic route not only increases your brand visibility but gives you a chance to refine your marketing approaches.
While success depends on the quality of your local resources, local knowledge and local expertise, the multidomestic route lets you quickly evaluate what works and what doesn’t.
Global expansion strategy
This strategy is centralised and controlled by head office, with the aim of maximising efficiency. Products are more likely to be standardized than tailored to local markets, and the subsidiary entities (or strategic business units) in each country are interdependent and integrated, producing economies of scale and rolling innovation out across all locations.
This strategy is often used by firms with ‘service units’ or back-office hubs and (thanks to the consistent products on offer) these can be located where most cost-effective. While good for the bottom line, though, this cost-effective strategy may affect brand reputation.
Often called the best of both worlds, the transnational expansion strategy is a common route to expansion. Transnational businesses operate with a head office in one country and local subsidiaries in international markets – providing one ‘umbrella’ brand to provide structure and operational processes, while international subsidiaries optimise their output for local markets as needed.
While the transnational route is the most variable, it can lead to specific difficulties – for example balancing corporate decisions and local requirements, or product range complexity derived from localizing products or services to local markets. While some companies choose to localise and follow a more multidomestic route, others opt for the standardisation of the global expansion route.
Foreign direct investment
Foreign direct investment (FDI) is made when a business takes controlling ownership in a company, sector, individual, or entity in another country. While an FDI may come via a merger or acquisition, it’s often not a full company purchase, just a controlling share.
This puts the foreign company in direct control of day-to-day tasks, resulting in a transfer of skills, experience and technology, alongside the financial investment. FDIs are most common in open economies with skilled workforces, providing all the essential keys for growth.
FDI gives firms the opportunity to properly analyse the new country, the market, the cultural differences and the business fabric, before making further decisions on extending ownership or branching out.