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5 strategic advantages of an international operation strategy

I decided to write this article, having having discovered the company Lovechock at Bio Company in Berlin. 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. This article 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. For example, 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. This is why a large volume production reduces the cost of each bar. Lovechock does not sell in one specific country but Europe-wide, which helps to produce a large amount to achieve 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. 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

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 standardised products. For instance, Lovechock does not only access customer expectation in Amsterdam but also in Berlin, which might lead to a richer customer experience. 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, which in turn can 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. This enables one contract to serve multiple sites, which can lead to cost reductions 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 with care.

5. Global operations

Lastly, global companies reduce risk through diversification by holding several different shares and/or assets. International operations reduce overall risk of the company. Such as with portfolio investments, 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. 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.

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 consider implementing an international operation strategy because of the aforementioned advantages.

Copyright © 2020 Claudio Marseglia. All rights reserved.

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