In part one, we explored the pressures that cause us as leaders to look at international expansion for our companies. We also discussed the importance of market research surrounding cultural differences and structure (distributor, joint venture, wholly owned subsidiary). In part two, I’ll share lessons learned over 30 years as a senior executive running international operations for Fortune 500 companies.
We will go in-depth to discuss the management of international operations. The focus should be on avoiding the common mistakes that cause you to have less market share and be less profitable outside of your home market. Assuming you have applied the subject matter discussed in part one correctly, you won’t choose a market for expansion only because potential customers speak the same language. Ask yourself why Target failed in Canada when its headquarters in the U.S. is so close to the Canadian border.
Let’s talk about the culture that elevates the most successful people in the home market to leadership roles in the international expansion effort. When culture, which is transmitted through language, is ignored due to a company culture where leadership reflects home market success, the effort is likely to fail.
Part one signaled that a decision needs to be made regarding alternative structures for market entry. When I see a company having to choose between a distribution organization, a joint venture or a wholly owned subsidiary company, I recommend that the answer should vary by country. You should consider a weighted matrix that includes these considerations at a minimum: return on investment, commonality of customer base, competition, barriers to entry, financing and logistics. Obviously, the decision made for country A would not necessarily be correct for country B. Also, the weighting of your matrix items needs to vary in relation to your product category and local regulations. Should a company merely mimic its home market success as its expands internationally, the odds of success are against it.
Why did I place return on investment first on my list of considerations? I know that focusing on ROI favors choosing a distributor network structure, with the drawback that selling wholesale produces a smaller gross margin. However, your objective is to consider the return on investment that is repatriated to the home company after taxes as a percentage of the investment in the foreign country, rather than in-country gross margin.
Commonality of the customer base influenced my decisions while running international operations for a major truck leasing and logistics company. The company’s international expansion was fueled by following customers in automotive logistics that the company served in the U.S. The key was to provide the same systems and experience that they were used to. Rather than invest heavily in assets, we chose to become a third-party logistics provider, supervising local logistics companies to help them provide an equal level of service as in the U.S. We chose to go the route of being a wholly owned third-party logistics provider with logistics design and systems, rather than operating trucks, warehouses and equipment.
For other clients, such as two major car rental companies, I’ve chosen to go in another direction since there was little commonality among customers. Outside of the U.S., it is very common to provide cars as a perk to management. As a result, the business of fleet management is much more important to car rental companies. Plus, taxation, environmental regulations and tourist preferences make airport locations outside of the U.S. less attractive. Certainly, we catered to members of frequent renter programs while keeping the focus mainly on fleet management.
Since local competition in most countries benefits from both obvious and not-so-obvious barriers to trade, do your homework. Among the obvious barriers are tariffs on imports, the need to meet standards that are different from country to country, exchange rate risk and government “buy local” policies. However, the lesser-known barriers need to be studied as well. Examples are controls on access to hard currency, protection of local distributors and dealers, and labeling requirements.
When Colombia faced a sudden shortage of hard currency in the early 1980s, the Xerox affiliate I was running couldn’t import spare parts to support our large customer base unless we could find a way to earn dollars by exporting something. Another company gained market share because it already had export divisions that generated hard currency.
Many countries protect local distributors and dealers of imported products by making it extremely difficult to terminate such relationships. Beware of the international buyer who appears in your home market and purchases your product for export to a foreign country. In that country they may pose as the distributor of your product. You may say that you never signed any such agreement. However, it will take time and money to get rid of them. I have seen cases where a foreign company takes over the distribution of a product in order to gain a competitive advantage for a competing product by purposely limiting the first product’s sales.
In part three, we will focus on international finance, logistics, labor and treasury functions.