Doing business globally can be a lucrative idea and most big businesses aspire to market and sell to a global audience rather than remain limited to their domestic markets. Companies also need to sell to foreign customers for several more reasons like increased competition in their domestic markets, market saturation, need for growth and extra revenue, to grow customer base, and so on. Entering foreign markets can bring a large number of opportunities for businesses. However, while entering new markets is a lucrative idea on the one hand, on the other, there are several challenges related to doing business in a global environment. Hacking into a new market is not easy. Even if you are successful in your domestic market, it does not mean that your success is guaranteed overseas. Apart from the business environment in the foreign country, the purchasing power of customers, as well as government regulations are also some important considerations to be kept in mind before a company decides to go global or establish a supply chain and distribution network internationally.
While technology has helped address some of these challenges efficiently, still there are some hurdles that business managers should know well and develop an understanding of the market they are planning to enter before the actual launch in the targeted region. The ease of doing business is not the same in all the regions of the world and therefore business managers must evaluate a new market properly before entering it. Even if you know that a market is full of opportunities, you need to plan how to penetrate the market and do business there since the same business model may not be successful in all business markets. There is a lot of planning and adaptation involved in going global. Otherwise, you may end up spending more than your budget on customer acquisition in a new market without generating enough revenue. Local regulations and government policies can also make entering a new market challenging. For business managers, the key thing is to understand the challenges beforehand and form a plan accordingly.
Main Risks Involved in Operating an International Business
Entry Requirements in a Foreign Market:
Entry requirements in a foreign market often act as a barrier for new firms trying to enter the market. The governments of the host countries impose restrictions making it difficult for new firms to enter the market. Apart from ownership related restrictions, there are restrictions related to the employment of local nationals, wages, percentage of output that can be exported from the market or other restrictions which define what percentage of its profits can the company take outside the host country. Entering the Chinese market which is the second-largest market of the world can be difficult without a local partnership due to the restrictions the government has imposed. A large number of automobile businesses like BMW which wanted to sell their products in China entered it by forming partnerships with local brands. Other advanced countries like the US and Japan have quality criteria controlling the entry of new firms into the market. The Ease of Doing Business Index considers several factors including how conducive the regulatory environment of a country is for the entry and operations of a new business.
Exchange Rate Volatility:
The profitability of a business in a new market also depends upon the level of exchange rate volatility. A weak dollar will favor the export of American goods but a stronger dollar will affect the competitiveness and profitability of American firms in the Asian markets. It is true about the European firms operating in Asia or America as well. A stronger pound will not favor the exports of British goods. However, the European companies doing business in foreign countries inside Europe whose home countries are a part of The European Exchange Rate Mechanism (ERM) are immune from the exchange rate volatility. Due to the exchange rate mechanism, much of the uncertainty caused by the fluctuation of exchange rates is removed.
High Foreign Country Debt:
Other challenges that appear before you when you enter a new market are related to the local economic conditions. It is why business managers should study the local economy before taking their business to a new market. For example, high inflation, unemployment, and inflation have resulted in highly unstable governments and currencies. These can either hurt trade or put the company at many other risks. So, even if such countries are willing to purchase, they are unable to pay for the goods or services. Debt-laden or currency starved countries are often unable to pay even if they are willing to buy your products and services. In the case of many poorer countries in Eastern Europe, their inability to pay with cash becomes a serious barrier for the companies trying to sell their goods and services there.
Modifications in the Marketing Mix:
Companies that operate in the international environment gain from economies of scale. However, business managers need to weigh these benefits against the additional costs their companies incur like the costs related to product modification, distribution, and the expenditures related to marketing in foreign markets. For example, the traditional distribution system used in Japan is complex and multilayered. It becomes one of the main barriers coupled with the higher marketing expenses and product quality-related expectations before the companies trying to gain a foothold in Japan. So, companies must consider appropriate changes to their marketing mix before they decide to enter a foreign market.
Social and cultural issues:
Social and cultural issues can also become obstacles to market entry and doing business profitability. To an extent, they can hurt the company’s competitiveness in a new market. Domino’s Pizza tried to establish its business in several markets. However, apart from the US, the country where it saw the highest success or where its business model proved most effective was India. The reason lay in the social and cultural factors. Since the tastes and preferences of people vary from one country to another, you may need to modify your product and marketing strategy to adapt to the local taste and environment. Unless business managers develop an understanding of the local culture and the consumption patterns in a new market, their business will not see much success.
Other problems and challenges:
There are several more problems and challenges too before firms trying to move their business overseas into new markets. Apart from war and terrorism, corruption can also be a serious challenge before a business entering a new market. Based on the local conditions, businesses may also need to alter their operating models. Terrorism in the Middle East is one of the leading challenges for companies trying to do business there. Corruption is a major barrier before Western companies trying to find growth in the Asian markets. Businesses trying to operate in corruption hit countries should lay out clear guidelines before their employees in those markets. These guidelines will help their employees run the business efficiently and employees will know where to draw the line when making critical decisions.
Moreover, small and big challenges must not deter businesses from operating in an international environment. The managers should instead work on identifying these difficulties and challenges and plan accordingly. They can also find several resources that can help them build a better understanding of the foreign markets and operate there successfully. Chances of success grow when you anticipate the problems in advance.