Question

Describe and explain the reasons for companies to pursue a global market for their products and services.

Answer 1

There are various reasons a firm wants to pursue a global market while tending to extend its business. Though the actual reason depends on the corporate strategy or competitive strategy of a firm, the following reasons are commonly becoming the impetus for global expansion.

The first and foremost reason for pursuing a global market is the potential to increase the sales. In the domestic market, when the potential for growth seems grim due to saturation, global markets can provide the firm with the scope to find new market segment and customer base who are unexposed to the value delivered by the firm and are willing to spend for the firm's product.

This leads to the second reason for global expansion which is the increased profit. While intense competition is the domestic markets leads to a price war and loss of margin, a foreign market may be found which is still unexposed to the products similar to those produced by the firm. The customers in these markets may be willing to pay a premium price if the offering seems to be attractive to them. This can lead to a potential increase in profitability.

Another crucial reason for global expansion is the minimization of risk by diversifying the product and market portfolio. When a country finds several markets in different countries/ economies, failure in one country may be offset by the benefits gained in the other and the overall return remains less impacted. Moreover, a business finding its market only in the U.S. will be highly vulnerable to periodic fluctuations and downturns in the U.S. economy and marketplace compared to a firm which has diversified its portfolio in the global markets.

Another major advantage which comes directly from the increased sales is the economies of scale. Due to the expansion in sales, the fixed cost of operations reduces leading to economies of scale. This results in substantial cost savings and competitive advantages with respect to the competition.  In other cases, cost savings may be realized when a company may seek to exploit a unique and differentiating advantage (intellectual property), such as a brand, service model, or patented product.

There may also be some non-financial reasons for pursuing a global market. These include the education and information regarding the customer likes and dislikes, economy, environment, the culture of a foreign country, knowing the best practices of a foreign culture, and finding scope for product innovation by working with a diverse set of people from different cultural backgrounds.