Thinking about expanding overseas? What you need to know.
In this 13-part series I am going to explore what you need to know if you are considering taking your business overseas.
Why might you consider expanding overseas?
Maybe you have outgrown your home market. Some markets are relatively small, take Singapore, a vibrant economy, but still less than 6 million people. There is limit to how big you can be serving a relatively small population. I believe Singapore ranks 36 on the list of GDP by country. But companies serving the largest economies move overseas so there must be other reasons.
Clearly one reason is to increase sales of your business. By making yourself available to a broader range of customers the potential for growth exists. You may find there is less price competition in overseas markets. Beers seem to be particularly prone to this. By entering a new geography you may be able to sell to early adopters at a price premium.
The lure of higher profits can be a driver, you would not plan to expand overseas and reduce your profitability, although this can be a short-term impact. Part of this can come from economies of scale. You may not need to duplicate back-office functions such as finance, HR, treasury etc. Thus, you can keep overheads low in your new market. You might be able to negotiate better discounts from suppliers, especially if your existing suppliers also supply to your target market. While you will want to reduce the number of changes you make to your product and service when entering a new market, it may not be prudent to assume that the new market behaves like your home market.
Walmart and Starbucks have learned these lessons the hard way For some reason, a few American businesses have this false belief that every western country has the same culture as theirs — but it’s simply not true. And this is not true of American businesses; Electrolux introducing their vacuum cleaners into the US used the slogan “Nothing sucks like an Electrolux,”. Enough said.
This is also one of the reasons why Starbucks failed in Australia. Starbucks saw coffee as a product, but that’s not how Aussies see it. For Australians, coffee is an experience. It’s not uncommon for people to know their local barista and stick to them – instead of spending their money on a foreign brand.
The Australian coffee culture is more about socializing and probably less about coffee. Most cafes are run by independent owners, therefore personal bond and familiarity is a crucial part of the coffee culture down under.
Walmart tried to bring their culture to Germany. In America, it’s not uncommon for retail assistants to get all chatty and friendly with the customers. Walmart decided to train its German employees to do the same. The cashiers were told to smile at customers during checkout.
Smiling at random strangers and acting like you know them isn’t in the German psyche. I mean, it might happen occasionally, but it’s certainly not an integral part of the German way of life People found these things strange; Germans just don’t behave that way.
Access to faster grow markets in emerging economies is an excellent reason for entering new markets. We are fortunate in Asia to have some of the fastest growing economies in the world. Some of our economies such as China and Vietnam managed growth even in the face of the covid pandemic. Although my aim in this series is to be relevant to your business wherever in the world you operate I must admit that I want to encourage companies to consider investing in Asia, particularly some of the less obvious economies. Quite rightly India and China with their huge populations are a draw to a company considering expanding into Asia. When I first came to Asia no CEO of an US based MNC could avoid the China question – how is your company going to grow in China? And they had better have a strategy. Even today if you are a larger MNC how can you ignore the number 2 and number 5 largest economies in the world.
But I am talking to entrepreneurs, and you can be more selective in where you expand. I am particularly bullish on Vietnam. A rapidly growing economy, a population of nearly 100 million and young demographic. If you have a pioneering spirit Cambodia and Laos could be interesting choices. And of course, there are the more obvious choices such as Thailand and Malaysia. Indonesia with its population approaching 300 million may be of interest. But the prevalence of corruption in Indonesia makes it difficult for companies who need to comply with anti-corruption laws, such as the US FCPA and the UK Anti Bribery Act, to operate effectively. Indonesia and the Philippines are also archipelago countries, made up of many islands which make logistics a challenge.
Broadening your business base is often a driver, while we do have global economic crises such the GFC in 2007/8 and Covid last year a broader geographic base helps spread the risks to your business. I was operating in Asia in 2007-8 and while our Asia Pac business did slow down a little the impact was minor compared to the impact on our European and American operations.
If successful, geographic expansion provides long term momentum for your company. It is more resilient to marketplace shocks and better placed to seize opportunities. By having operations in multiple countries, you provide a level of insurance against disruptions such as weather events.
Access to new technologies and ideas is expanded if you are operating in more than one country. No one country has exclusive access to good ideas. By operating in several countries you will broaden your knowledge base.
Let’s not forget government incentives. These can be considerable. India is offer $1 billion to any chip maker wanting to set up in India. Incentives may not only be financial, Malaysia makes it easy for companies who set up in Malaysia to hire foreign workers. This makes it easy to bring in your own expertise. Countries with growing populations are keen to encourage companies to invest in their economies. The higher up the value or technology chain you are the more encouragement you are likely to receive.
Some companies consider expanding in response to overseas competitors entering their home markets.
There can be many reasons for taking your company overseas and if successful it can transform your business but there are many things you need to consider before embarking on your international adventure and I will discuss them throughout this season.
In week two I will help you decide if overseas expansion is right for your company. And is right for you personally? Entering overseas markets requires investment both financially and of your time. How do you assess the risks versus the rewards? Managing a company that is in a different geography and maybe in a different time zone is not the same as managing an in-country business. You will need to hand off some decision making to your local employees. Can you do this?
In week three we will look at deciding if a country is a good fit for your business. Selecting where to expand requires an understanding of the economic, political, and cultural landscape. How do you find the information you need to understand the implications for your company? Are there cultural roadblocks for your business?
During week four we will look at how to assess if there is a demand for your product in your chosen country. Market data is not always readily available in developing countries. How can you determine if there is enough demand for your products or services to enter the country?
Week five will cover how to assess the competition. There will almost certainly be local businesses already serving your target market. Possibly international companies may be present who entered the market earlier. How do you assess their strengths and weaknesses? How will you compete? How will you win?
In week six the topic of whether to go it alone, or with an in-country partner will be discussed. In some countries and industries a local partner is legally required. If going with a partner how do you balance commitment with flexibility?
In week seven I will look at the pros and cons of entering a new geography via an acquisition.
Week eight will cover how to develop your distribution strategy. Getting your product to your customers is essential. What is the best way of achieving this aim? When should you consider changing strategies?
Week nine how do you select the location within the country for your venture? Proximity to customers, business infrastructure all need to be considered
Week ten – do you build a plant in country? Or supply from overseas. How to assess this decision. If building a new plant what do you need to understand about the approval processes.
For week eleven what is the right legal structure for your company. What options are available to you? What restrictions are there for foreign companies. How do you decide the optimum structure for you.
In week 12 we will look at taxes, incentives, and the all-important question of repatriation of profits.
Week 13 will bring it all together with your final decision. Are you ready to make the move into an overseas market?
There is a lot to consider when venturing into a foreign market. Getting it right can transform your business. Getting it wrong can be a costly mistake. By doing your research in advance you will greatly increase your chances of success.