5 strategic advantages of an international operation strategy

After having recently discovered Lovechock while grocery shopping at Bio Company in Berlin, I was inspired to write this blog post. Lovechock was the first company to launch a raw chocolate bar in the Netherlands in September 2009. After the first success, many other European countries followed. Lovechock’s consistent growing product portfolio combines health, enjoyment and sustainability in an exceptional way. Their points of sale are organic retail outlets and supermarkets, now in 17 countries all over Europe. One might assume that their success came through their strategic decision to launch their products globally, or at least Europe-wide. An international operation strategy (IOS) provides an edge over companies that operate merely in one country (Peng & Meyer, 2011). This blog post introduces five strategic advantages and presents Lovechock’s IOS through practical examples.

1. Global scale

One of the main advantages a global company has over a local company is the global scale, also known as economies of scale. Economies of scale are factors that cause the average cost of producing to fall as the volume of its output increases (Economies of scale and scope, 2008). Hence, it might cost Lovechock 100 Euros to produce 100 bars of raw chocolate but only 150 Euros to produce 200 bars. Essentially, the fixed costs of setting up the production line are distributed over a larger number of products. Large volume production thus reduces the cost of each bar. Lovechock does not sell in one specific country but Europe-wide and thus achieves economies of scale. The global scale advantages occurs as well at other stages of the value chain. Research & development (R&D) costs are also recouped faster through economies of scale.

2. Global sourcing

Another main advantage is global sourcing. A company can access resources from various suppliers and thus exploit comparative advantages (Competitive advantage, 2008). Lovechock sources its raw cacao from Ecuador but other global chocolate manufacturers could source its cacao from entire South America, depending where the lowest costs of resources are available. However, it is necessary to check transport costs because eventually the lowest costs for resources could be coupled with high transport costs.

3. Global knowledge and management

Then, global knowledge and management enhances innovation. Global companies that disperse their innovation laboratories throughout different locations yield more creative input – all ideas could be completely different due to the different environments and thus provide a higher innovation rate. Through dispersed, yet interconnected locations different customer expectations can be accessed when developing standardized products. For instance, Lovechock does not only access customer expectation in Amsterdam but also in Berlin, thus create a richer customer experience that incorporates the expectations from both city people. Furthermore, international operations allow companies to share and exploit knowledge better than businesses that operate merely in one specific country. Lovechock can bring knowledge workers from different capitals together that in turn will facilitate new innovations.

4. Global customers

Last but not least, global businesses can serve global customers and global customers can connect with global businesses. Global key accounts are served at multiple sites around the globe but companies negotiate with them centrally. So one contract serves multiple sites and therefore reduces overall costs because one does not need to negotiate multiple contracts for the different sites. Furthermore, for some companies such a global account might be responsible for the majority of the revenue and has to be treated specially. Love chock doesn not seem to serve one single global key account but many different local customers – such as Bio Company in Berlin.

5. Global operations

Lastly, global companies reduce risk through diversification by holding several different shares and/or assets (Diversification 2009). International operations reduce overall risk of the company. Like portfolio investment, sales revenue from a variety of sources reduce the overall risk profile as long as “they are less than perfectly positively correlated” and since it is rare that a recession hits every country at the same time, this diversification strategy can yield potential benefits when one country’s economy slips into deflation and its business becomes less profitable (Why deflation is bad, 2015). However, the Economist notes that diversification is currently not popular. Studies of diversifying corporate mergers showed that diversification often hurt the shareholders of the acquiring company. On the other hand, diversified companies that sold off non-core businesses units have often increased shareholders return on investment (ROI). Lovechock included 7 countries so far in their diversification strategy, including the U.K., Denmark, Finland, Sweden, Norway, Iceland and Italy. By doing so, Lovechock’s Europe-wide focus on sales could be shifted to locations that are doing relatively better if necessary.

In conclusion, the five above-mentioned strategic advantages of an international operation strategy can yield many benefits when incorporated and structured well. Companies, especially born-globals, should always consider implementing an international operation strategy because of the aforementioned advantages.

References

Competitive advantage. (2008). Retrieved May 25, 2015, from http://www.economist.com/node/11869910

Diversification. (2009). Retrieved May 25, 2015, from http://www.economist.com/node/14298922

Economies of scale and scope. (2008). Retrieved May 25, 2015, from http://www.economist.com/node/12446567

Lovechock Happiness Inside! – Lovechock Rocks ab sofort im Bio-Regal. (n.d.). Retrieved May 25, 2015, from http://www.lovechock.com/de/aktuelles/item/572-lovechock-rocks-ab-sofort-im-bio-regal.html

Peng, M. W., Meyer, K. (2011). International Business. Cengage Learning EMEA.

Why deflation is bad. (2015). Retrieved May 25, 2015, from http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-4

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