Diversification of Markets and the Financial Motive for Doing Business in Different Countries
Business owners may have various motivations for entering foreign markets with their businesses, one being to generate profit through sales in countries offering cheaper raw materials and labor costs.
Many businesses also set up subsidiaries in other countries to test out new ideas. For instance, a fertilizer maker could set up a shop selling ice cream products in an unfamiliar market.
Diversification of Markets
Diversification is a popular strategy among small and medium enterprises (SMEs). Diversifying allows SMEs to attract new customers without investing in a completely different business model, hiring additional staff, or installing any new systems. However, managers must carefully consider how diversifying will impact resources such as human resources, information technology, production, finance, logistics, and marketing. They should also assess its effect on the company’s capacity to deliver the product or service in the chosen market.
Diversifying markets through product development or acquisition is one way for a company to broaden its market presence. Businesses may also add products that appeal to different consumer demographics or adapt existing ones for new markets – for instance, as consumers become more environmentally aware, they may expand their green offerings.
Vertical diversification can also help companies expand their markets. Companies that pursue this strategy often benefit from using existing technologies and equipment but may be subject to higher start-up costs and competition from established players in their chosen industry.
Companies can expand their market with horizontal diversification, which involves adding products unrelated to the company’s core business and targeting new consumer segments. Unfortunately, this method often results in reduced focus and higher costs – and may not always prove successful.
Diversification can increase costs while also weakening core business strengths, diluting them to compete against discount retailers or retain customers and boost sales. A company focused on high-end fashion might delve into mass production for discount retailers; luxury car companies might introduce cheaper models aimed at budget consumers; alternatively, they might increase premium offerings to retain customer retention and boost sales. Businesses can increase profitability through price diversification, which involves offering multiple product sizes or packaging options at different price points.
Less Risky Business Decisions
Extending business internationally can help a firm mitigate fluctuations in sales. For instance, should one country’s fashions or trends change suddenly, having other countries as potential markets can give your firm time to adapt before becoming outdated – lessening the risk that an economic collapse in its home country leads to bankruptcy for your firm. Extending abroad also offers financial benefits by selecting locations with lower taxes or reduced environmental regulations.
Less Dependence on the Home Market
Financially speaking, the primary advantage of expanding into different countries is diversifying a company’s revenue streams. For instance, they may discover a product that does not perform well in its home market but would prove more successful elsewhere. Furthermore, being present in multiple locations decreases dependency on one country’s economic climate: If your sales depend solely on one region experiencing recession or political unrest, for example, sales could suffer dramatically, while multiple locations can help maintain steady sales while you reevaluate strategies as time goes on.
As economies can be unpredictable, operating multiple businesses in various countries can help companies to profit even during periods of economic instability. If one country experiences economic issues, having operations in another stable nation with stable economies can help ensure sales don’t decrease during times of low consumer spending.
Establishing a business in a foreign country also provides companies the chance to experiment with innovative new products and services. For instance, a based fertilizer producer could try making ice cream products in markets unfamiliar to them – something consumers of their original brand would likely resist trying themselves.
Businesses can gain greater profits by introducing something novel into the market before local competitors catch on and thus prevent the oversaturation of specific industries by businesses already established locally.