Key Issues For Overseas Expansion Essay

Question:

Discuss about the Key Issues for Overseas Expansion.

Answer:

Introduction:

In today’s cutthroat market scenario, expanding into an overseas market is an exciting as well as an intimidating task for any ambitious entrepreneur of a company. An overseas expansion is important because it lets the company grow and prosper in a new environment that is conducive for more growth and subsequently, profit. An international expansion plays a crucial role in the increase of revenue and tends to provide the business with better return on capital, an amplified reinvestment rate and greater security through additional diversified revenue streams. In an over competitive market, the need for overseas expansion is unequivocal. Since there is a varied market set up in an overseas market, the growth seems to be quicker. It helps a company to expand and develop the brand value and make the customer base wider (Banalieva and Dhanaraj 2013).

The need for expansion also arises from the demand of the consumers on a global platform. With the advent of globalization, the consumer choices worldwide are increased. Global financial crisis forced big companies to move out of their domestic area of operations and find a market in a global set-up that could contribute substantially to its revenue collection (Measham et al. 2013). Expanding globally becomes essentially important for small businesses as well as for the emerging ones. It becomes imperative for managers to weigh the risk and the profit of the investment before leaping into the expansion strategy (Twarowska and Kakol 2013). They should be able to analyze the risks, the benefits, and the overall impact before executing the plan of overseas expansion. A deep assessment of the targeted markets, current trends of the local market, and the competition is required to achieve a successful global expansion of a company. Strategically, the plan for expansion should be foolproof (Fletcher and Crawford 2013).

This report identifies and discusses five key issues that managers of companies and firms need to evaluate when the company is planning an overseas expansion. The report takes the example of two big Australian companies like BHP Billiton and Wesfarmers to discuss the above-mentioned points (Filapek-Vandyk 2016).

Advantages and Disadvantages of Overseas Expansion:

Overseas expansion is essential for companies to extend its operation to new branches and aim and achieve the desired growth. However, expanding a business comes with its own sets of advantages and disadvantages. Overseas expansion of a business is a risky proposition. If successful, it brings along an escalated revenue bracket and greater return on capital to the company (Ellis 2012). On the other hand, if the expansion does not give the expected return, then the venture of expanding the business incurs a huge loss to the company. The expansion should be made in a manner that proves to be beneficial for the company (Niesche 2014). There are many advantages, which should be considered by the management while contemplating about an expansion of the business. They are:

  • It enhances the domestic competitiveness
  • It increases profits and sales of the company
  • It helps to gain the share of the global market
  • It helps the company to reduce the dependence on the existing markets
  • It helps the business to exploit the technology of the international trade
  • It helps to extend the sales potential of the previously existing products
  • It helps to stabilize the fluctuations of the seasonal market
  • It maintains the cost competitiveness in the domestic market
  • It helps the company to sell the excess production capacity

Overseas expansion has a long list of disadvantages too. They are:

  • Waiting for gains in the longer term
  • Hiring new employees for launching international trading
  • Modifying the packaging of the product according to the taste of the local population
  • Developing new materials for promotion
  • Bearing the additional administrative costs
  • Hiring a staff for overseas travelling to monitor the operations
  • Waiting for payments
  • Dealing with new regulations and getting special licenses
  • Applying for additional finances for the expansion

Global expansion is an essential requirement if a company tries to achieve maximum profit and expand the brand value of a product. However, the socioeconomic circumstances of the target country may pose a challenge for the company because it might be completely different from the domestic country of the company (Dyster and Meredith 2012). This may imply a volatile exchange rate. The issue of compliance of the data protection and privacy laws is another factor, which is of concern during the overseas expansion of trade of a company. Another concern that the HR head of the company should keep in mind is that of the customs of local employment, practices and the laws. From a competitive point of view, companies that have international presence should have access to the understanding of the country in which the company is expanding.

BHP Billiton

BHP Billiton is the largest company dealing with mining, metals and petroleum. According to a 2015 survey, it is the fourth largest company of Australia. The company was established in the year 1860. Slowly and steadily, it expanded its operations. Shortly after, the company started smelting tin and lead in Netherlands followed by mining bauxite in Suriname and Indonesia. Gradually it expanded its operation to Arnhem and Phuket. During the 1990s and even after that, the company enjoyed considerable growth. Countries like South Africa, Mozambique, Colombia, Brazil, South America and Canada were there in its growth strategy as the company expanded its operations in all these countries (Bhpbilliton.com, 2017). In 1915, the company ventured into manufacturing steel. The company now has its operations spread over 25 countries. The principal operational units of the company are:

  • Coal
  • Copper
  • Iron ore
  • Petroleum
  • Potash

This giant company now has it operations in countries like Algeria, Australia, Brazil, Canada, Chile, Colombia, Mexico, Peru, Trinidad & Tobago, and the United States (BHP Billiton, 2017).

Wesfarmers:

Wesfarmers was established in 1914 as a co-operative to provide merchandise and services to the farmers of Western Australia. It debuted on the Australian Stock Exchange in 1984 and developed into a main retail conglomerate. Wesfarmers now is an Australian conglomerate that owns many departmental store chains over the world. It has its headquarters in Perth, Australia. It deals with chemicals, coal mining, fertilizers, safety and industrial products. In terms of revenue, it is the largest company of Australia. With around 205,000 employees, Wesfarmers is the largest employer in the public sector in Australia. It has acquired big departmental chains like Bunnings Warehouse, Target Homebase, Coles Express, Kmart, and Coles Supermarket among many others (Wesfarmers.com.au, 2017). The business of this giant company is spread out in countries like Ireland, New Zealand, United Kingdom and Australia. The main business of the company include supermarkets, departmental stores, office supplies, home improvement, production and export of coal, chemicals, fertilizers and energy. It is one of the largest employers of Australia. It has about 220,000 employees and about 530,000 shareholders. The revenue this year of the company was $66 billion. In the year 2016, Wesfarmers invested around 1.2 billion Australian dollars to expand into the hardware sector of Britain. The company has interest in other subsidiaries across countries like India, Hong Kong, Singapore, China and Indonesia. The overseas expansion of the company to various countries of the globe denotes the confidence that is gained by the company with the steady growth and profit.

Many key issues have to be considered by the management of the company while aiming for an overseas expansion. Few of them are:

Political and social climate of the target country

Legal set up

Cultural compatibility

Local workforce

Risk management

International companies like BHP Billiton and Wesfarmers, which have their roots in Australia, have had to keep all the above-mentioned points in consideration before leaping into expanding its operations overseas (Hubbard 2013).

Political and social climate of the target country:

The advent and advancement of globalization implies that companies have a wider market to sell their brand and product. Although it offers a wide scope to the company, it also brings along a fair share of challenges along with it. Before venturing out into the international arena, companies or businesses should be aware of the social and political climate of the country in which the company is expanding. It is important to assess the political scenario, as it is the most important factor while deciding the country. This is one of the most important deciding factors in overseas expansion of a company. The political stability of a country is an extremely important factor as without a stable political scenario, it becomes very difficult to set up and then prosper in business. Companies like BHP Billiton and Wesfarmers were very analytical about the political and social climate of the country before investing for overseas expansion. They had a detailed and thorough understanding of the political and social climate of the target country as without it, prospering and developing in a very different nation becomes impossible. The political and the social climate dictate the future prospect of a company as it reflects the situation, which helps the company to find a successful business scenario.

Legal set up:

The legal set-up of a country is important for assessing the scenario while contemplating expanding a business overseas. The company should be aware about the legal intricacies of the target country. They should be aware about all the rules and regulations, excise, and taxes of the country. Some countries are arguably more sensitive in a legal way, so there should be a sound legal process in place to minimize any commercial risk that is unnecessary. In some counties, government agencies have requirements that are strict and require proper legal documentation that have to be in place before starting to operate in a country. Having proper documentation and a clear legal front is necessary to reduce any avoidable risks and liabilities. The investing company has to review regulations that are specific to the industry to which the company belongs. It should look after meeting local commercial agreements. It should maintain a clean set of corporate records and should have an adequate and effective governance system. The company should have effective strategy for dispute resolution, customs, shipping and immigration. The tax laws, import restrictions and customs laws have to be taken into consideration (Quer, Claver and Rienda 2012). Companies which have had a hugely successful international expansion like BHP Billiton and Wesfarmers, had to be extremely aware about the legal set up of the country in which it is expanding. Without a thorough knowledge of the same, it would not have been possible for these companies to grow and develop in foreign countries. Knowledge about the laws of the country helped these giants understand and take careful and appropriate measures to abide by the rules, regulations and laws of the country.

Cultural Compatibility:

When planning for an overseas expansion, the cultural aspect of the target country has to be kept in mind. The domestic country of a company might be entirely different from the target country. In many cases it is seen that the companies that generally invest in the overseas expansion is based in developed countries. However, while expanding, the companies may target the developing countries, which may have a very different culture than the domestic country of the company. Some countries expect the investing companies to adjust to the local way of life. It means that the company should customize their products according to the local culture and taste of the local consumer (Adekola and Sergi 2016). The culture of the target country should dictate the way the behavior and the strategy of the company. The company should use the local dialect or the local language to put across the marketing message to the customers and be sure that meaning is translated correctly. Cultural implication of the target country on the sale process is very crucial in deciding whether the venture of overseas expansion of the company would be successful or not. It can take a considerable amount of time to decide whether the product of the company would be acceptable to the population of the country or not. In order to combat this problem, the company should review whether the population of the country has used similar products in the past or not (Ferraro and Brody 2015). Before expanding into other countries companies like BHP Billiton and Wesfarmers had a detailed understanding of the culture of the company. The mining giant, BHP Billiton has many branches in many countries across the globe. Therefore, the company must have had a detailed and thorough understanding of the cultural background, as without which the company would not be able to recruit talents in a particular country, which would mean a loss of time and resource for the company. It would also mean that the company would suffer immense losses, as not recruiting the right talent is not beneficial for any company.

Local workforce:

Any company, which is aiming for an overseas expansion, should keep in mind the local workforce before expanding its business. The company should assess the strength of the domestic market. The local workforce available in the target country should be taken into consideration before entering the market. Hiring local employees for governing the new branch might be a good and effectual strategy (Richard 2015). Expanding the business internationally means that the company should be hiring new local employees. Recruiting local employees means that the HR of the company should have a thorough understanding of the language, the dialect and the culture of the target country (Iyer et al. 2015). The company needs a skilled set of employees to prosper and earn profit in the new market scenario. Therefore, it is imperative for the company to take the help of a local resource company wherever it is available. Companies like BHP Billiton and Wesfarmers always look to find talented employees to work in their company. For that reason, these companies turn to local human resource company to source talents for the company. Schools, colleges and career programs are stable and reliable sources from where fresh talents could be sourced in. Recruiting the right kind of talent in the company is mandatory for any given company Vance and Paik 2015). It becomes much more crucial when it comes to big international companies like BHP Billiton and Wesfarmers. These multinational giants had to be extremely careful and aware of the local talents. During the initial stages of setting of the company, employees and managers were flown in from the domestic country. However, for a successful expansion it was required of these companies to recruit locally. Expansion of company means starting of different branches and departments of the business. Flying in workers of the domestic country of the company seems to be mandatory during the initial stage of the setting up (Verbeke 2013). However, once the initial set up is complete, new employees from the target country needs to be hired.

Risk management:

Expanding overseas brings with it many risks to a company. Countries, including developed and developing, have a varied range of political, economic and societal scenarios. The risks have to be evaluated before a company chooses to invest in a country or diversify its operations (Hsu, Backhouse and Silva 2014). To evaluate the risks, the management of the company must have a thorough understanding of the societal set-up of the country. The risks are divided in many groups. It includes political, environmental, health risks, and security risks.

  • Political risks: Political risks are mandatory to be identified and dealt with, as it is crucial to understand the local political structure and situation and foresee any unstable environment that might crop up during the initial period of the commencement of the company.
  • Environmental risks: A company should consider the environmental risks that the launch of the company is going to pose in the target country. If the production of goods has an ill effect on the environment of the target company, then the consumers of the country will not accept the product or the service, which the company offers. The company will slowly lose out on their consumer base as an effect of the harm that it might have on the environment (Hsu, Backhouse and Silva 2014).
  • Healthy risk: Companies looking for overseas expansion of the business should assess the health risk that might be posed by the new environment of the country on the workers. Similarly, the health risk also takes into account the hazardous effect that the production of goods and services might have on the workers.
  • Security risks: The security risks also have to be considered by the company. Security risks are the most important while deciding the future prospect of the company when there is an overseas expansion in the horizon. The security environment has to be understood and evaluated which includes the risk of political unrest, kidnapping, ransom and crime. The employees have to be informed about the security risks and any changes in the security risks (Green 2013).

Overseas expansion helps companies to explore new market opportunities. Australia or any other country provides very small scope for any company to grow and develop. It is so because the area, diversity and the demography of a country presents very little scope for growth for a company that is trying to reach the higher level. Overseas expansion brings in a new market scope for the company (Akehurst and Alexander 2013). It helps to explore and acquire new technology and new management skills along with a new consumer base. The overseas expansion also brings a new set of challenges and scopes (Hutzschenreuter and Horstkotte 2013).

The management of the company needs to appoint and set up a team for management of the new overseas operation. The management team needs to look after all the above-mentioned points in order to make the setting up of the company smooth and operational in a shorter amount of time. The team needs to supervise and organize the functions and the duties step by step in a manner so that the company does not face any major challenge during the initial stage.

Conclusion:

Overseas expansion of company means taking the operations of a company into a new overseas market. It is mandatory for any company to grow and develop fully. A planned expansion of the business activities of a company into various countries across the globe might be an important part of the strategy of a company to obtain preferred growth. In this competitive market scenario, companies need to explore new market opportunities to stay ahead of the race. A new market also means that it provides a scope to explore new consumer base in the new country, coming across with new technology, facing and overcoming new challenges and incorporating new cultures and traditions of the country into the goods and services of the company.

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