International expansion: Is your company ready?

Pressure to expand your company internationally can come from many angles. The opportunity to grow, competition, an employee who is familiar with a foreign market or a buyer from another country are all among the reasons we entertain the idea. Perhaps, through a series of articles, I can share learning accumulated during my 40-year international business career.

Culture

During my time in the Peace Corps, I was headed to Venezuela and imagined that somehow, I would finally learn Spanish. Instead, the Peace Corps dedicated the better part of three months of training to cross-cultural experiences. Why? As in domestic business, trust is what motivates and sells. Without cross-cultural understanding to guide behavior, it is difficult to develop trust. Language ability is just table stakes.

Market entry

You have a high degree of product knowledge and know your competitors well enough to dominate your home market. Why not enjoy consistent market share and profitability around the world? Among the things to research thoroughly are cultural differences that affect buying habits or may require product modifications. Other concerns are barriers to entry, such as labeling requirements, tariffs, logistics and protection of local companies. Often, insufficient attention is given to currency issues, financing and labor.

Research and planning are mandatory. However, the selection of the team that does the research is a common stumbling block. The tendency is to rely on people and companies that are more like us: They speak the same language, have a good understanding of the product in its home market or are narrowly focused on product marketing, even if other business issues may have an even larger impact on bottom-line profitability.

Another major decision has to do with structure. Do you create an affiliate company in this market? Is it wholly owned, majority owned or minority owned? Or would it be better to name a master distributor who will build out a dealer network? Do you acquire a local company? What does your research tell you about the impact of these considerations on profitability, market share and repatriation of profits?

One of the choices may be to initially sell to a new foreign market through one or more distributors to learn about the market before investing heavily in another structure. This is a logical decision. However, attention must be placed on the selection of the distributor and the contract that describes the relationship. Some countries have protections for a local distributor that make it very difficult to end the relationship or to set up competition for the distributor. Often, criteria such as not reaching a certain volume of sales become disputes involving each party accusing the other. Be aware that in some cases, a distributor can gain the rights to sell your product if they at one time sold the product but your documentation is faulty. This is the case even if you have entered the market yourself or named another distributor. The courts will either favor the local company or tie you up for years. Obviously, you need a credible third party to do background and credit checks.

Joint ventures and acquisitions present alternatives to naming a distributor. If culture is always important, culture as a factor is extremely important in a joint venture no matter which party is in the majority. All too often, the partner coming in from another country ignores what made the local partner successful and attractive in the first place. The mandate to adopt home market policies and strategies leads to underperformance. Of course, the worst case is when the company coming from the outside names an executive with no international experience as their eyes and ears in the new market. If the idea is to make the joint venture a clone of the home country company, don’t do it.

That leads us to a wholly owned company. For some products, this is a great choice. It affords quality control, assures that multinational clients are treated as they would be treated in the home market and provides greater protection of intellectual property. In some cases, it may also provide opportunities for greater market access to regional markets and access to human resources. The main obstacles are the investment needed and the difficulty of adjusting to the local market.

In part two, we will have an in-depth discussion of the management of international operations, logistics, labor and treasury functions. Stay tuned.

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