By Adinah Brown
Cast your mind back to the story of the East India Tea Company. Sound familiar? It’s actually not a made up company, even if it sounds like something taken from a Sherlock Holmes novel. Its history is actually quite fascinating, and well worth googling, but for today’s thoughts, let’s focus on the intended outcome. Taking a highly desirable local product and exporting it to the world. In those times it was imperial powers taking land and produce by force and monopolising it, with the help of a favourable charter from the queen. But the general concept remains; that there is profit to be made if you can provide a desirable product to a broader clientele.
Fast forward to the present and this idea is being played out everywhere in the realm of the multinational. Today, much like the early examples, an overseas market is a desirable place to create profits by increasing your reach to potential new markets and customers. This is particularly true if the current market is becoming saturated. With these principles and the technological ability to achieve this, the multinational, in the last few decades, became a frequent and profitable occurrence.
But extension into new markets is not without its challenges. Whilst it may seem incredible, small cultural differences can impact a successful business model in a local market. Even Coca Cola was not immune.
Today, we sit at the nexus of multinational activity. For some industries, global scale has few inherent challenges. The most prominent examples of this are technological offerings, primarily companies that produce SAAS offerings. But in many other cases, the presence of a global multinational, is not any longer, more attractive than the local option. KFC and Mcdonalds, two of the largest multinationals, extended into China in the late 80’s early 90’s. For the 15 years until 2005, their combined sales rose 400%. Today, both companies have seen sales and their share prices slump, with KFC even spinning off its activities in China.
Whilst vertical and horizontal extension is a desirable option, there are two significant factors which can curtail these aspects. The first involves local economic conditions and the actual growth of the economy. Obviously this goes hand in hand with the new market’s need for the service or product. The other element is the cost of capital expenditure needed to extend into a new market. If these two factors are overestimated or the product adaptation is not performed well for local conditions, chances are the success of the endeavour will be low.
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Add in the impact of local wages, cultural and economic factors, currency and price fluctuations, local competition, taxation and the current anti-globalisation sentiment… and it is not difficult to see potential pitfalls in integrating your product in a new environment.
So, whilst many of the multinationals have achieved great success navigating these issues, and many have achieved moderate success, how many have failed? The Economist recently stated that of the 500 largest firms worldwide, “In eight out of ten sectors multinational firms have expanded their aggregate sales more slowly than their domestic peers”. This is not a failure by any stretch, but it does give pause to the success rate of expansion activities, and questions whether the investment justifies the return.
The risk benefit equation for a firm extending itself into a multinational status is complex, and recent results have dampened expectations for the prospect of a successful geo-expansion. Whilst this is not the end of the multinational, one hopes that it signals the beginning of the end for poorly planned expansion activities. The East India Tea company’s primary advantage over today’s multinational expansionists was that its expansion was into the markets where the company trades, rather than the other way around. Perhaps it is this old model provides a strong, sustainable method for future multinational activity to follow.
About the Author:
Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.