Expanding Your Business Internationally? Make Sure You Do These Things First
Even for large and mature businesses, international expansion is always fraught with risk. Navigating different cultures, government regulations and market needs are challenging at the best of times. From the pandemic to supply chain issues to geopolitical upheaval, businesses have had to operate in an unpredictable environment and pivot to address several global challenges.
So how do you know if this is a good time to expand beyond your borders and what are the tools you’ll need to do so successfully? If you have succeeded in navigating these almost once-in-a-lifetime issues and are looking to expand beyond your domestic borders, there are several important areas you must first consider before you decide to go global.
Deciding if it is the right time to expand
Before thinking about expanding internationally, you’ll need to take a close look at two things: whether your business has hit a saturation point in your home market and whether you have a unique value proposition that can be exported to another country.
If growth in your home market has reached its peak and future growth prospects look flat, then international expansion might be the best option to further enhance top-line growth. Before doing so; however, your existing business must be profitable and mature. Expanding overseas can often incur significant costs, and it may be a while before the new venture starts delivering any fruit. You need to ensure that you’re well capitalized and have a strong enough balance sheet that’s capable of absorbing some of the early losses you’re likely to face when entering a new market.
When it comes to having a unique value proposition, you should ask yourself first: are you in the top five in your home market? Do you do something that’s difficult to replicate? Will your product or service be able to fill a particular need in the market that you’re about to enter? When launching in another country, there will be competitors that will look to replicate your business model; however, if you are the best at what you do or have enough brand equity that can translate across borders – this can give you the credibility and trust that you’ll need when entering a new market. You want to try and create as many barriers to entry as possible, in order to keep your competitors at bay.
Many companies that have expanded into new markets without a compelling enough value proposition quickly learned their lessons the hard way. They simply couldn’t get the necessary traction to justify the expansion. It is therefore critically important that your value proposition isn’t just something that appears self-explanatory to you, but that it is well understood and easily communicated with your target audience. Only then can you truly thrive in an unfamiliar environment and begin to capture new market share quickly.
Finally, before you decide whether international expansion is the right move for you, you’ll need to identify key strategic reasons for entering a particular market. There’s no point in expanding just for the sake of expanding. Look to countries that make sense for your business model and try to identify the tangible benefits of being located there.
For manufacturing, this can be China, where labor costs have traditionally been low. For finance, maybe it’s Japan, where the cost of borrowing is cheap. But be cautious. Not every market is amenable to every type of business. Some business leaders often find that a country which appears to offer significant advantages on paper may already be overcrowded, or simply lacks the necessary infrastructure to operate in. It’s important to do a thorough cost-benefit analysis before deciding on where you want to expand.
Overcoming hurdles in a new market
After you’ve done your research and selected a target market, it’s time to start operationalizing your expansion. This takes local expertise, robust finances, and a healthy risk appetite. In order to maximize your chances of success, be sure to take the following points into consideration:
- Tax planning and structuring.
Each country has its own advantages and disadvantages when it comes to tax liability. They have their own national tax codes, which sometimes vary across different localities and regions. Hidden costs such as import duties or value-added taxes are added on to distribution, sales, or manufacturing costs. Work with a local tax advisor in your targeted region to understand what the current laws are and whether any changes are expected on the horizon.
- Legal advice and due diligence.
In some areas, commercial disputes can come from unexpected places, especially for companies that are only used to dealing within their domestic markets. Partnering with a top-tier law firm that has a presence in your home and target markets can help you navigate local laws and regulations. Litigation, insolvency, cross-border issues, and regulatory requirements – these are just some of the areas to get advice on. It’s important for you to understand and evaluate what legal remedies are available to you in case you run into trouble when doing business overseas.
- Finance and banking.
Some industries are more capital-intensive than others. Depending on the type of business you’re in, you may require access to local financing in order to fund your expansion. Some countries, such as Japan, are difficult to raise money as a foreign entity. Others are more open. Make sure that you are aware of all the KYC and regulatory requirements that need to be satisfied in order to start new relationships with local banks and financial institutions.
- Economic stability and risk.
You’ll first need to assess whether the economic conditions in your target market are well suited to your expansion plans. For this, you can look to some key economic indicators such as the trajectory of growth, GDP per capita, demographics, inflation, employment trends, infrastructure spending, and recession risk. This will give you a good idea of whether it’s the right time to expand into a particular market. There’s little point in taking on new risks at a time when a country is in decline or is facing severe economic challenges. Another key area to think about is currency risk. Make sure that you have studied the exchange rate volatility between relevant currency pairs so that you can position yourself with appropriate hedging strategies in your home market.
- Create a comprehensive business plan.
This takes time and requires a deep understanding of the competitive landscape. It also highlights the importance of conducting thorough market research in advance. For example, who are the major players in your target market? Who are your competitors going to be? What mistakes did other companies make upon entering this space and why were they unsuccessful? This information is imperative to assess the total potential market size, as well as deciding how quickly you’ll need to move. For example, if you scale your business too quickly, your losses will accumulate just as fast and spiral out of control. Therefore, make sure that you work with a professional business consultant in your target market to develop a credible 5- to 10-year business plan. Major accounting firms such as Deloitte, KPMG and PWC all have international offices around the world, with local business development and M&A advisories. These firms have an abundance of market data that can assist you in constructing a detailed and comprehensive business plan. The key component of your plan will be the financial forecasts. Make sure that these are based on modest assumptions that are stress-tested under different scenarios. It is easy to fall into the trap of becoming overly optimistic just to satisfy yourself and others around you. Your forecasts should therefore always contain built-in buffers for revenues that may or may not materialize, as well as reserves for expenditures that are likely to run over budget. By doing this, you’ll always have a ‘bare-minimum’ outcome that you can expect to achieve with a high level of confidence.
- Have the right people.
When expanding, make sure you have the right people to execute your business plan. Start by sending some of your existing employees to head up the expansion. Then build out a robust HR infrastructure locally to ensure you have the right people to maintain the business in a run state. Eventually, you will need to hire a local CEO or manager – someone who has a deep understanding of the market and is capable of running the day-to-day operation. Whoever you choose to fill this position will probably be the most important hiring decision that you make. So be sure to take your time vetting potential candidates carefully, or retain a proven headhunter to find you the right fit. Your new CEO must be someone that you can trust and who shares a similar work ethic as you. Once you’ve made the hire, it’s important to develop lines of communication between you and the CEO but also with the heads of each department. This will allow you to gain a balanced picture of what’s happening on the ground, rather than getting all your information from one individual source.
- Keep it local.
During one of my earlier assignments, I was involved in helping a well-known jewelry brand enter the Japanese market. The brand had previously enjoyed a lot of success in Europe and the US, and assumed that this success could automatically be exported to Japan. However, they refused to customize their product offerings and marketing strategy to fit the needs of the Japanese consumer. The brand was eventually forced to retreat from the market and never truly recovered. These are just examples of what can go wrong if you’re stubborn and unwilling to adapt to new environments. Every plan, strategy, or spreadsheet can’t predict how a new market will react to your product or service. Listen to what your target audience and customer base are saying. Be agile so that you can pivot when needed. Always keep in mind why established competitors have been successful and try to learn from their successes.
Managing risk in an unknown market
There is always an element of risk when entering a new market, which could come from changing political environments, unexpected operational challenges, or even larger cultural shifts. As we’ve seen with recent events, numerous companies have had to abandon markets because of unforeseen circumstances. So how do you manage against these risks? It’s important for business leaders to remain nimble and operate on a lean expense structure. This will allow you to quickly downsize and exit the market if things start to become too overwhelming. You need to be ready to pull the plug when necessary. Otherwise, you can end up losing a lot more money than you initially anticipated.
Staying plugged into the local market, such as joining a local business or trade organization, is a good way to keep a pulse on what’s happening on the ground. During one of my previous engagements, I was working with a Japanese retailer that was a member of a local trade organization. This helped us to understand the most relevant and pressing issues of the day, how our competitors were managing similar challenges, and what was happening in the market.
Make sure you also maintain discipline with your supply chains, especially when it comes to importing and exporting internationally. This includes sticking to buying schedules, maintaining appropriate inventory levels, and building-in sufficient lead times. No matter how much advanced planning you do, there is always something that can snarl a supply chain—like a global pandemic—and you’ll need to be prepared for this type of unforeseen risk.
Think about the value of acquisition
Setting up a business internationally requires a tremendous amount of effort and patience for it to be successful. Sometimes, however, acquiring or partnering with an existing business in the target market could lower the barrier to entry and provide an established, knowledgeable base to grow from. This can create valuable synergies, but also carries a tremendous amount of risk. Acquiring any existing business needs adequate funding, a clear post-acquisition integration plan, and a team on the ground that is capable of implementing these initiatives on a micro-level. Your best bet would be to work with an investment bank or M&A advisory to help navigate these issues.
The future of international expansion may be more challenging
The globalization push of the late 20th and early 21st centuries is certainly running into some headwinds. After decades of companies looking to expand across borders and integrate their supply chains around the world, there has been a steady pullback and a concerted effort to re-establish domestic production and self-reliance. Central governments and policymakers have already begun imposing protectionist measures to safeguard key strategic industries and sectors. We are entering a period of de-globalization, which itself is inflationary by nature as countries are now being forced to compete in areas that they weren’t efficient or good at to begin with. Despite these conditions, however, many companies are still looking to expand globally, but are carefully taking into consideration the following four trends before taking any new risks over the next 5 to 10 years:
- Cost of doing business. Inflation, housing, taxes, and labor costs are increasing everywhere. What were low-cost centers before are now experiencing inflation across the board, making it difficult for businesses to meet their margins.
- Increasing regulations. Governments are tightening regulations to deal with everything from the environment to introducing stricter labor laws. More regulation means the higher the cost of doing business.
- Labor shortages. As securing visas and work permits becomes more difficult, it remains challenging to hire the right people because recruiters are sourcing from a scarce pool of skilled labor.
- Rising cost of capital. Inflation continues to rise, which is leading to higher interest rates across the world. This will inevitably make people more cautious, and capital more difficult/expensive to come by.
Even with these global challenges, expanding beyond your home market may well be the next logical step for your business. Especially if you possess the required risk appetite and have already exhausted all other avenues for further growth in your home market.
Starting from scratch or acquiring an existing business both have their advantages – but require careful planning, due diligence, and a healthy balance sheet to weather some of the initial storms. Remember to stay agile and lean, so that you can quickly adapt to new challenges and respond to ever-changing market dynamics.
Written by Kavan Choksi.
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