Answered Essay: Explain the two opposing forces (cost reduction and adaptation to local markets) that a firm must

Explain the two opposing forces (cost reduction and adaptation to local markets) that a firm must deal with when they go global.

What are the results of these pressures and why?

Expert Answer

Answer

Cost reduction and adaption to the local markets are two opposing forces that must be dealt by an organization when they expand on a global scale in different parts of the world. When an organization first enters a new market they either want to reduce cost or want to increase differentiation of their products and services and achieve higher localization and pursue adoption to suit the tastes and requirements of local market in order to capture a larger share of the market. But any attempt to differentiate or pursue adaptation will only lead to increase in costs.

The result of these pressures is that conflicting demands is placed on the firm as they try and become competitive in the new market. Competitive pressure would require the organization to reduce the unit costs. This is necessary otherwise their product and service offerings will be perceived as expensive by consumers. This will propel the organization to think about starting local manufacturing facilities in which not only the cost of labor will be low but product development will become standardized. On the other hand responsiveness to local market is required to ensure that needs and requirements of local market and consumers are satisfied. This will require differentiation and hence is a contradiction to the goal of standardization.

The two opposing forces lead to four strategies that companies can use when expanding globally – international strategy, global strategy, multi-domestic strategy and transnational strategy. The selection of the strategy will depend on the quantum of pressure being faced by the organization.

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