Expansion and diversification strategies

All posts Leave a comment   Published on par Jonatan Carbonell

When defining your company’s growth strategies, many managers and entrepreneurs pay close attention to the new performance indicators.Discover some of the strategies that can help your company in its expansion and diversification process in this article. Let’s get to it!

Others think it is necessary to use CRM (Customer Relationship Management) techniques to attract and retain new customers, and there are always those who do not find an obvious way out and start organizing a series of meetings in search of a growth strategy.

The company must define an overall strategy. To go in search of strategic choices that concern the company as a whole and that relate to the management of its portfolio of activities.

1. International expansion strategy

Many companies, at one point or another in their growth, consider expanding their business internationally.

Although, at first glance, expanding your market internationally seems like a good idea, it is ideal to ask the right questions at the outset and visualize the challenges associated with it.

Recently, we organized a half-day expert round table with some of our clients in which two of them shared with us their successful international experiences.

One has exported its products to more than 20 countries for more than 20 years. The other has successfully marketed its proprietary systems in North America, Asia and Europe.

The objective of this panel of experts was to highlight the “practical” side of the process of launching an international development initiative. According to our experts, you have to ask the right questions from the beginning.

Although it may seem obvious, it is essential for a company to ask itself the right questions. Some of them may be:

  • What is the exclusivity of my offer?

  • Who are my target customers?

  • Have I already exploited the full potential of my local market?

  • Is my business financially strong enough?

  • Do I have a lot of competition in this part of the world?

  • What is the most natural destination for my products or services? For example: will I export my design furniture to Australia (same language), Dubai (emerging market) or Canada (geographical proximity)?

International expansion seems risky, especially when the target countries have an unfamiliar linguistic and cultural environment. That said, there are some compelling reasons to start thinking about it.

And don’t forget, do you have a project in Spain? Our experts at Tas Consultancy will get back to you within 24 hours.

 

You may also be interested in: Spain, strategic location for international trade

 

2. Implementation of an internationalization strategy

The implementation of internationalization can be done at different scales depending on the size of the company, and the legal status must then be adapted to the desired internationalization.

It is important to seek advice or consult a specialist (tax specialist, company law expert, accountant, commercial lawyer, etc.) on the different legal statutes in order to choose the one that fits the business model and the overall strategy of the company.

Exporting is the most common form of internationalization, because it involves selling products from the country of origin abroad. It is an easy solution to implement, as it usually consists of selling surplus production abroad.

For large companies, setting up subsidiaries is the first step in creating a multinational. In partnership with local companies or through independent subsidiaries, the company sets up in a new country and creates new products specifically aimed at that local market.

Many factors are taken into account when deciding on the location that best fits the company’s internationalization strategy (country’s consumption structure, regulations, location, logistical capabilities, etc.).

Global companies, such as Apple, Michelin and Toyota, internationalize by choosing the relevant countries on the basis of production costs and, above all, labor, whether skilled or unskilled.

Product standardization enables the development of the manufacturing process on a global scale. R&D in France, garment factory in China, sales and international call center in Morocco. Each country of operation covers a need in the production chain with the best quality-price ratio.

Still have doubts about the benefits that international growth can bring you? Here are some of our favorites:

It is not necessary to “put all your eggs in one basket”.

International expansion is a form of “geographic arbitrage”; economic turbulence in one region can be offset by profitability in another country.

Decrease spending.

It is no secret that outsourcing operations to countries with lower labor and material costs can contribute significantly to company growth.

The talent of the people.

You may need to expand into another country to attract the talent your company needs.

Specific growth opportunities.

For example, you may have identified that a certain country does not have a product manufactured by your company and is looking to fill the gap in the market.

What should companies do to avoid global development failure?

When developing the business case for global expansion in a particular local environment, companies should consider the following:

SWOT Analysis

Strengths, weaknesses, opportunities and threats of such expansion. This includes assessing the specific cultural differences in the target country that could be relevant to your company’s offering.

Competitive analysis.

Look at your competitors in your target market and evaluate their offerings against those of your own company.

Market research.

Conduct market research with the destination country itself, to ensure that you have sufficient up-to-date information.

Develop your marketing strategy for the target country.

Does your current value proposition make sense in the new market? How will you position yourself in the new market?

 

You may also be interested in: Setting up a subsidiary in Spain, a good way to internationalize

 

3. Diversification strategy

The diversification strategy responds to several imperatives. It may be to increase the company’s growth and diversify its revenues by entering new markets and developing new competencies.

It can also be a matter of survival when the company’s traditional line of business is threatened by competition or changes in the market.

Strategy is at the heart of the company and determines its success. Therefore, in order to opt for an effective strategy, it is necessary to use the appropriate diagnostic tools: internal diagnosis and market diagnosis.

These tools can be gathered from the SWOT analysis we have already mentioned, the results of which allow us to know whether it is advisable to opt for a diversification strategy.

Why diversify your activities?

The diversification strategy seeks growth by distributing financial and industrial risks, competencies, strategic business areas (ASAs) and their scope.

The company’s objective is to achieve greater competitiveness and increase its profitability, and the desire to perpetuate the business activity makes it necessary to be attentive to rapid changes in the market and to place foresight at the heart of its overall strategy.

 

You may also be interested in: Managing Diversity : Interculturality in the Workplace

 

4. The different modes of diversification

There are three main types of diversification and we will show you what they are:

Horizontal or product diversification

This is the easiest diversification strategy to implement, as it consists of broadening the ASA and the competencies already possessed by the company: expanding the range, targeting a new type of customer, developing products related to those already offered, etc.

Geographic diversification

As its name suggests, the geographic diversification strategy aims to establish a lasting presence in a new area.

This type of diversification is possible for all companies, as it involves a local, national, continental or global presence, depending on the size of the company.

It also requires the development of new knowledge and skills in order, firstly, to know the new potential market and its particularities; then, to find outlets and, finally, to have the ability to adapt to the legislation and mentalities of that area.

Vertical diversification

When we talk about vertical diversification, we are talking about diversifying activities, either upstream or downstream.

For example, if it is upstream, it could be the case of a trader who would want to control the entire production chain and would go into the primary sector to produce, and then into the secondary sector to transform.

And if we refer to the downstream form, for example, a producer who would like to process his products himself and then sell them to avoid traditional distribution channels and the multiplication of intermediaries.

Of course, a company can mix and match these different types of diversification according to its specific needs.

Like any strategy, diversification has advantages, but also risks that must be carefully evaluated.

In terms of benefits, the main one is the distribution of financial risks, particularly those related to investments.

Profitability is achieved when the market research has been done seriously and the company gives itself the means to conquer new market shares. As turnover increases, so does the company’s competitive advantage.

Again, the risks are financial. The development of new products or the entry into new markets requires higher or lower investments that must be profitable.

Potential losses must be borne by the other activities of the company. The major drawback would be to prevent the smooth running of the sustainable and economically stable activities of the company.

Undoubtedly, we all want to see our businesses grow and, as you may have noticed, the process of diversification and expansion may sooner or later be an option for your company.

 

You may also be interested in: The most effective internationalization strategies for companies

 

However, in order to enter this world it is important to get the right people who can add positive aspects and make your company grow. Therefore, in TAS Consulting we offer you our team of experts to advise you in this type of business procedures in Spain.

 

Published on par Jonatan Carbonell

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