Organizations go international for expanding global market space and to increase overall sales revenue and reduce operational costs, through attracting a larger customer base. In addition, through the help of technologies and the revolution of the internet, international business has become even more attractive, for micro and smaller businesses. Because of the subcontracting, outsourcing and various other forms of internationalization, they are able to reduce costs and improve their business management and operational efficiency.
Expansion through internationalisation benefits companies for achieving better economies of scale. When countries open up trade barriers and lowering tariffs across the world, internationalization allows companies to diversify their businesses enabling to ease the risk of slowing demand, across different countries. Operating in various countries also gives companies the opportunity to invest in innovation and develop different variations of their products and services, which shields them from declining interest in a particular product or service. It attracts FDI in country. Going international enables companies to have access to a broader talent pool. Many companies opt for internationalization to avoid saturation in home market. Following are different forms of Internationalization:
Exporting
Businesses that sell their goods and services to customers in other countries are exporting them: they are producing them in one country and shipping them to another. Exporting is one way that businesses can rapidly expand their potential market. India exports refined petroleum, rice, raw sugar and aluminium to other Asian countries, Japan, China etc.
Wholly owned subsidiary
A wholly owned subsidiary is a company whose entire stock is held by another company, called the parent company. The subsidiary usually operates independently of its parent company with its own senior management structure, products and clients. Tata Consumer Products owns wholly owned subsidiary such as Tetley, Tata Coffee and Tata Starbucks – a JV between Tata Global Beverages and Start bucks, UK.
Franchising
Franchising is a tool for expansion in new markets by organizations; it’s a strategy for business expansion. Where implemented, a franchisor licenses its know-how, procedures, intellectual property, use of its business model, brand, and rights to sell its branded products and services to a franchisee.
A franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business’s (franchisor) proprietary knowledge, processes, and trademarks in order to allow the party to sell a product or provide a service under the business’s name.
In order to qualify for a conventional franchise of McDonald, one needs to $250,000 (not borrowed). For acquiring franchise the individual or firm needs to pay an initial franchise fee of $45,000 directly to McDonald’s. The other costs go to suppliers, so this is the only upfront fee one pays to McDonald’s.
Licensing
Licence is an official permission or permit to do, use, or own something. A license can be granted by a party to another party as an element of an agreement between those parties. A shorthand definition of a license is “an authorization to use licensed material”.
Chota Bheem the cartoon series is being aired through Pogo TV for the past 10 years. Green Gold Animation, the owner of Chota Bheem has been licensing the Intellectual Property to different manufacturers and has been associating with retailers since 2010. Some successful licensing tie-ups are Chhota Bheem with Parle G biscuits, Chhota Bheem with Asian Paints, Chhota Bheem-Camlin and Chhota Bheem-Bikaji. One of the major challenges faced in this industry is that of piracy.
Joint Venture
A joint venture is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. It is usually time framed.
In a joint venture (JV), each of the participants is responsible for profits, losses, and costs associated with it. However, the venture has its own entity, separate from the participants’ other business interests.
Some examples of successful joint ventures are Vodafone & Telefónica agreed to share their mobile network. BMW and Toyota co-operate on research into hydrogen fuel cells, vehicle electrification and ultra- lightweight materials.
Merger and Acquisition
A merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company’s reach or gain market share in an attempt to create shareholder value.
Mergers and acquisitions take place for many strategic business reasons, but the most common reasons for any business combination are economic at their core. Organizations opt for mergers and acquisitions even for gaining a competitive advantage or larger market share. Companies may decide to merge into order to gain a better distribution or marketing network.
Corus was acquired by Tata Group in April 2007 and joined the Tata Steel family in a transaction that created one of the world’s largest steelmakers, with a major presence in Europe as well as Asia. Corus acquisition paved the way for the Tatas to enter the UK steel sector.
Zomato acquired Uber Eats India for ₹2492 crores. Such mergers are quite common in start-ups. The reason is that most of the Indian start-ups are backed by deep pockets and depend so much on investors. If the funding stops, start-ups end in the lurch. Some other deep pockets would go ahead and buy them. Zomato hence acquired its competition Uber Eats India, contesting another competitor ‘Swiggy’ in the bid.
This is similar to how Ola once bought ‘TaxiForSure.’ TaxiForSure ran out of money. It increased fares. Ola arrived in the market with fresh funding and hence offered cheap tickets. It later bought ‘TaxiForSure’ with only competition surviving in Uber.
Subcontracting
Subcontractors undertake a contract from the contractor. Subcontractors undertake work that a contractor cannot organize but for which the contractor is responsible. A subcontractor has a contract with the contractor for the services provided. An employee of the contractor cannot also be a subcontractor. A subcontractor is an individual or a business that signs a contract to perform part or all of the obligations of mentioned in the contract. A subcontractor is a company or person whom a general contractor hires to perform a specific task as part of an overall project and normally pays for services provided to the project.
In the garment industry, a subcontracting unit is a factory that mainly does garment stitching work. They don’t need to set-up other facilities and staffs for layer cutting, garment finishing, and packing activities. In apparel supply chain garment exporters receive original contract from apparel brands, international buyers or retailers. These export houses get their excess production done from subcontractors.
Subcontracting refers to the process of entering a contractual agreement with an outside person or company to perform a certain amount of work. While Outsourcing is a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.
Outsourcing
Outsourcing is a business practice in which services or job functions are given out to a third party. In information technology, an outsourcing initiative with a technology provider can involve a range of operations, from the entireness of the IT function to discrete, easily defined components, such as disaster recovery, network services, software development or QA testing (Quality Assurance) outsourcing is normal practice.
Some large organizations choose to outsource IT services onshore (within their own country), near shore (to a neighbouring country or one in the same time zone), or offshore (to a more distant country). Near shore and offshore outsourcing have traditionally been pursued to save costs.
In 2019, Samsung decided to relocate some of its supply chain to China. The South Korean electronics giant wants to lower production costs on its budget handsets. The firm reportedly wants to manufacture around 60 million of the 300 million devices it plans to ship in 2020. Outsourcing the production of 60 million phones to Chinese firms will also help Samsung to effectively compete with Chinese smartphone makers.
