International Expansion … Research Paper
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Globalization has created a unique and challenging environment as it relates to domestically oriented firms. Traditionally, films focused primarily on their domestic market for numerous reasons. Aspects such as knowledge of the market, political certainty, economic stability, and overall consumer preference, created a market environment influenced by domestic needs. These same characteristics still prevail today; however, the need for international expansion has created unique opportunities for multinational firms. This is particularly true for a company as storied as Coca-Cola. Coca-Cola has a unique product that is desired irrespective of geographic preference. Humans, in general, have a basic need of thirst. Irrespective of location, humans want to quench their thirst, and consumer products that do so. Coca-Cola through its unique marketing is near or at the top of consumer's considerations set as it relates to their product offerings. The universal appeal of Coke products and its outstanding marketing approach make it very well suited for international operations. Furthermore, its ability to manufacture its product cheaply and efficiently creates opportunities for margin expansion within the soft drink industry. Although the company continues to have significant headwinds, its ability to consistently generate strong returns on capital makes it an ideal candidate for study in the field of international expansion.
To begin, a very critical aspect of companies looking to expand overseas is the ability to create a product with universal appeal. As documented extensively by academic journals, consumers have varying needs and product preferences. What may be desirable in one consumer environment may not be demanded in another. Aspects such as culture, political environment, economic environment, and demographics all play a role as it relates to international expansion. For instance, academic research has shown that Asian countries are more collectivistic in nature. They tend to save more, and are more oriented to the common well-being of the group rather than the individual. This is in stark contrast to western societies that influence individual accomplishing relative to the group. Western countries also tend to spend and consume more. As it relates to the macroeconomic environment this may explain why western countries such as America and Europe have high debt to GDP ratios as compared to other countries. With the exception of Japan, many western countries have some of the highest debt to GDP ratios in the world. Chart 1 indicates the overall debt to GDP ratio at the end of 2011. Notice, with the exception of Japan, that western country such Italy, Greece, Portugal, Ireland, Canada, and the United States are at the top. International firms must be aware of this macro environment as they do business internationally. This is particularly true if austerity measures are taken as is the case with Green, and Portugal. These austerity measures will directly impact international demand for Coke products worldwide.
In addition, the environmental assessment must look at consumer purchasing behavior. Many countries, although growing may not have the consumer base needed to support large scale operations. Discretionary income of international countries is very important as it relates to companies going international. Coke has a very inexpensive product that consumers all around the world can consume and enjoy. Therefore countries with little discretionary income can still afford to consume Coke products. It is through this means that coke consumption continues to expand both internationally and domestically.
The legal environment is very contentious as it relates to international expansion. Legal implications such as calories, sugar levels, soft drink contents, and health concerns all are potential headwinds for Coke products. Each country is different as it relates to these forms of regulations. Each country is unique in this regard. Coke, must therefore, navigate the legal environment can create a product that is tailored to the international market. All international companies must do this is some form or another. For example, McDonalds had to change its menu to accommodate customers in India who do need eat beef products. The company introduced items such as veggie and tofu burgers to appease their respective customer bases. Coke must do the same thing as it relates to health issues. Aspects such as 0 calorie coke or healthy beverages appeal to a wide array of health-conscious consumers (Turke, 2011).
Continuing the discussion on international factors that influence companies as they intend to go overseas, many benefits can be derived from international expansion. For one, it builds awareness of the company's products and brand. From a financial standpoint, knowledge of the company makes it easier for firms to raise equity and debt capital cheaply. For example, if Coke wanted to expand in the European market, it may be beneficial to raise capital in Euros as oppose to American dollars. Through awareness of the brand, its value proposition, and its product, consumers will be more apt to pay for the company's debt and equity capital. Through more demand, the Weighted Average Cost of Capital is lowered. If consumers didn't demand or were not aware of the products Coke offered, the cost of capital would be higher. This ultimately would lower profitability as Coke would need to pay a higher interest expense of its income statement. By lowering its cost of capital, Coke can now invest in products cheaply and efficiently, thus increasing profitability. Thus the benefits of international expansion for a financially stable company such as Coke, ultimately relates to lower costs of capital.
Second, international expansion, increases the overall demand for Coke products. According to the company's latest SEC filing, more than 1.86 billion 8 ounce serves of Coke have been purchased around the world. Roughly 30% of these servings have been consumed overseas. This overseas segment continues to grow for Coca-Cola as it continues its overseas expansion. By going international, emerging markets can now begin to consume Coke products. This ultimately allows the company to grow its revenue and profitability in the long run as more consumers demand its products relative to peers in the industry.
International expansion can potentially lower costs for companies that have high operating leverage. A large-scale business can buy an item in bulk, which saves money on a per unit basis. A small-scale business may not have the money or demand to order such quantity, which raises item costs. This is particularly true for manufacturing firms. Coke relies primarily on fixed assets which ultimately depend more heavily on economies of scale to reduce the unit cost of each unit produced. Due to globalization, it is not uncommon for fixed assets to be structured geographically in a multitude of countries. By having operations domiciled in various countries, companies can further their cost advantages through economies of scale. Global Coke manufactures use this technique extensively in the production of their products (Calderon, 2013). Coke manufactures rely heavily on fixed assets to produce and assemble vehicles. These assets irrespective of production will cost the company. As such large companies such as Coke have incentive to spread the fixed costs associated with production and assembly across as many soft drinks as possible (Silvestre, 1987). To accomplish economies of scale, the company has strategically placed production facilities around the world to further enhance its cost advantage. A classic example of this concept is with the auto industry. Toyota is will renowned for its international focus of cost reductions. For example, Mexico may assemble certain parts, while an Asian territory may assemble other parts. Through specialization of labor, and increasing production capacity around the world, large soft drink companies are better able to achieve economies of scale by reducing the per unit costs of their components. Many global firms around the world, which rely extensively on a high fixed cost structure, use this technique to achieve lower costs for consumers (Jones, 2010).
The soft drink industry overall is very competitive, as the barriers to entry are relatively low. It is very easy for an individual to create a soft drink. However, the regulatory hurdles related to production are moderate. The soft drink industry has become fragmented with many competitors within varying geographic regions. Coke is unique as it has a brand the consumers resonate with. It also is competitively prices relative to peers in the industry. Through economies of scale, even though the product is priced competitively, it is ultimately more profitable. Therefore Cokes main advantage is its strong brand, its marketing and expansion of the brand, and its economies of scale (Richbell, 2006).
Very strong brand
Strong Financial and Balance Sheet
Economies of Scale
Diversified Product Offerings
Fragmented market. Alternative drinks
Price, lower cost drinks
Small, more geographic centric companies
The marketing of an international firm is vital to establishing a brand that resonates with consumers. This is the main component in "How" Coke expands overseas. To begin, the marketing environment is everything a particular company must consider prior to engaging in a marketing plan or product offering. Many of the more common elements of the marketing environment include, changing consumer preferences,… [END OF PREVIEW]
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