0264 · 3.3.7Entering new markets in other countries as a method of growth

Benefits of overseas expansion

0:00Cedar Clothing produces casual shirts. Its products sell well at home, and the owners see an opportunity to reach customers in another country. However, those customers may prefer different designs, speak another language and buy from established local suppliers. By the end of this video, you will understand why overseas expansion can support growth and what can make it difficult. A market is where buyers and sellers of a particular product come together.

0:23The country where a business is based is called its home market. Entering an overseas market means starting to sell to customers in another country, through exports or outlets abroad. It is one way of developing new markets, a method of internal growth from the video on why some businesses grow and others remain small. Revenue is the income a business receives from selling goods or services, and profit is total revenue minus total costs.

0:47Reaching extra customers creates chances to earn more income, while serving them adds costs. Expansion is worthwhile only when the extra demand is large enough to cover those costs. The main advantages for the business are increased sales, spread risk, a route beyond a saturated home market, economies of scale and higher profit. Increased sales become possible because the business gains access to additional buyers. Cedar Clothing may already sell to many customers at home, and overseas customers create another source of demand.

1:15If its shirts meet their needs at an acceptable price, sales revenue rises. Spreading risk means reducing dependence on a single market for sales. Suppose demand for Cedar Clothing falls at home while overseas orders remain steady. Income from the foreign market then supports the business during the decline. The protection works best when conditions in the two countries differ, since one fall in demand may not hit both markets.

1:38A saturated market is one where most potential customers already buy the product, so further sales growth is limited. Cedar Clothing may find it expensive to persuade more domestic customers to buy shirts. Another country could have many customers interested in its designs. Overseas expansion therefore gives the business a route to growth when the home market is saturated. Economies of scale are the factors that lower average costs as a business increases in size.

2:02Additional overseas orders might allow Cedar Clothing to buy fabric in larger quantities. A supplier could offer a bulk-buying discount, so the material cost of each shirt falls. These savings are explained in the video on economies and diseconomies of scale. Higher profit is possible when the additional revenue exceeds the additional costs of expansion. More orders and cheaper materials can both raise profit for Cedar Clothing. However, the business must also pay for transport and for adapting its packaging.

2:29The owners gain only if income remains after these extra costs have been covered.

Challenges of overseas expansion

2:34The main disadvantages are cultural differences, lack of market knowledge, legal requirements, transport costs, exchange rate changes and local competitors. Each one can reduce sales or increase costs for the expanding business. Cultural differences include differences in tastes, language, customs and religion. Amber Kitchen produces packaged snacks, and a flavour popular at home may not suit its intended overseas customers. Advertising wording also has to carry the intended message in another language.

3:01Amber Kitchen may therefore need to change its recipe or promotion before launch. These changes add costs, but without them the snacks may not sell. Cultural differences can therefore cut sales or raise costs for the business. Lack of knowledge is a separate problem, because managers may misunderstand how the overseas market operates. Amber Kitchen could misjudge customers’ incomes or the shops they normally use. A price set too high, or snacks placed in the wrong outlets, can leave inventory unsold.

3:26The business then spends money on an expansion that brings in too little revenue. Legal requirements can differ between countries, including rules on products, labelling and advertising. Amber Kitchen may need packaging that lists ingredients in the required language. Meeting these rules takes time and adds expenses. Products that break the destination’s rules can be delayed or banned, and the business may face penalties. Transport costs rise when products must travel longer distances to reach customers.

3:54Amber Kitchen may have to pay for freight and protective packaging. Passing these costs on to buyers makes its price less competitive. Absorbing them instead leaves less profit, so the business must check whether overseas sales remain worthwhile. An exchange rate is the price of one currency in terms of another currency. Changes affect how much home currency the business receives from overseas customers. If their currency buys fewer units of the business’s home currency, the same foreign payment converts into less revenue.

4:21This uncertainty is explored further in the video on exchange rates. Local competitors already understand their customers and have established links with retailers. Amber Kitchen must persuade buyers to choose its unfamiliar snacks over existing brands. Extra advertising or introductory offers may be needed to win attention. The expanding business therefore faces extra expenses before it has built a reliable customer base.

Reducing overseas market risks

4:43Three methods can reduce these problems: a joint venture, an agent and franchising. A joint venture is an arrangement where two or more businesses work together on a project and share its capital, risks and profits. A local partner contributes knowledge of customers, laws and suitable retailers, so the expanding business makes better decisions. In return, it receives only its agreed share of the profit. An agent sells products for a producer, often in another country, in return for commission.

5:12A local agent already has contacts with buyers and knows the market, so sales can start sooner. Finally, a franchise is an arrangement giving another business the right to use an established name, logo and trading methods for payment. With franchising, a local franchisee runs each overseas outlet and pays the franchisor fees and royalties. The franchisee knows local tastes and rules, and provides much of the capital. Agents and franchising are covered in more depth in the videos on place and on types of business organisation.

5:39Willow Tutors sells digital revision courses. Overseas schools have expressed interest, but their teaching language and course requirements differ from those in its home market. The interest from schools is evidence of potential demand, so there is a reason to investigate further. Digital delivery also avoids the freight costs of physical goods. However, the language difference means the courses must be translated. Different course requirements also mean some materials need adapting before schools can use them.

6:05The owners should estimate the income from interested schools and compare it with the cost of translation and adaptation. Willow Tutors should start with a small launch, so it can test demand before adapting every course.

Exam application and recap

6:17In Paper One Short Answer and Data Response and Paper Two Case Study, every question is built on business information. A question could ask you to explain one advantage and one disadvantage of entering an overseas market for Coral Cycles, which makes bicycles. Its home demand is falling, and established competitors operate in the overseas market. Explain means set out purposes or reasons, say why and how, supported with relevant evidence.

6:39Coral Cycles can spread risk by gaining customers overseas. If foreign demand remains steady while home sales fall, overseas revenue supports the business. On the other side, established competitors abroad already have loyal customers. Coral Cycles may need extra advertising to attract buyers, so entering that market raises its expenses. Keep increased revenue and higher profit separate in your answers. Extra sales raise revenue, while the effect on profit depends on the extra costs.

7:06Always link each advantage or disadvantage to the product, customers and barriers in the case. Entering overseas markets gives a business additional customers and another source of demand. Its advantages are increased sales, spread risk, a route beyond a saturated home market, economies of scale and higher profit. Against these, cultural differences, lack of knowledge, legal requirements, transport costs, exchange rate changes and local competitors can weaken the benefits. A joint venture, an agent or franchising can reduce those problems by adding local knowledge.