Key Considerations When 'Going Global'
A no BS view on the risks and costs associated with international expansion
Business is hard, even in well-known, established markets. Competitors, customers, employees, new product demands, the list is endless. Winning on the international front is that much harder as every challenge you face domestically is amplified (often exponentially) when you cross the border. Pricing challenges in the US? Try India and China. Logistical issues getting product from east coast to west? Nothing compared to shipping containers to the African continent.
Yes, opportunities exist and there are many, many reasons to expand internationally (we’d be out of business if there weren’t). The US exported > $1.3 Trillion of merchandise last year, some of it was even profitable. That’s a lot of money. Despite the hype and daily deluge of attractive headlines, however, there are a few key reasons to potentially hold off on going "all in" on international expansion (at least not now).
International expansion is expensive. Companies often overlook - or underestimate - many of the direct costs of globalization, not to mention the difficulty of identifying and quantifying indirect costs. Every company naturally has a unique set of cost dynamics, but below is food for thought as you think about your business:
- Headcount – Simply adding additional tasks to already overloaded, domestically-focused staff is a recipe for failure; investing in resources with international business experience in key functional roles is critical, many of which will be incremental to current resource levels.
- Legal – Every new country entered will require some level of investment in legal activities, e.g, adjustments to standard distribution agreements, IP protection, legal entity formation, and country-specific employment agreements. These fees can pile up very quickly.
- Cost of Capital – Unseating incumbents in new markets often requires offering more aggressive terms and conditions than those offered in your home market. It’s important to understand the real cost of, say, moving to Net90 vs. Net30 in new markets and how that will scale with growth in overseas volume.
- Capital Costs – Success in new markets often requires modifications to localize your offering. Even if minor, what new equipment is required to make needed product modifications in new markets? Similarly, what is the cost of carrying specialized inventory for new markets?
- Travel – Transitioning to a true global company requires that from team members from the CEO down spend time in the field with employees, customers, suppliers, partners, etc. International travel is expensive, but often gets buried in general T&E.
- Lost efficiency – Line change overs, process adjustments, policy modifications, etc. – there are an incredible number of minor operational and procedural adjustments that ripple through organizations as the grow internationally. Even if nothing raises a red flag in isolation, in the aggregate, they can compound into a material loss of efficiency for the organization.
- Management Time – The executive team, across every function, needs to be fully committed to globalizing the company. This cannot be just one more “strategic initiative” that is added the monthly steering committee meetings. What will be taken off the list to make room? And what is the cost in terms of lost revenue or increased risk of doing so?
Cost alone shouldn’t preclude your organization from moving forward with global growth plans, but it is important to take a realistic and methodical view of the real costs involved and weigh that against margins resulting from various growth scenarios.
Doing business internationally increases an organization’s risk across several dimensions. Much of this risk can be mitigated with good planning and thoughtful execution. If your company’s not in the position to dedicate the time, money, or resource here, however, the risk could potentially more than offset the upside of success in new geographies. Risk management is an industry onto its own, but here are a few illustrative risks to consider as you weigh costs/benefits of growing your international business:
- FCPA/Compliance - Every company, of any size, doing business internationally absolutely needs a formalized compliance and risk management regime. The potential downside of an FCPA or UK Bribery Act violation is just way too high to ignore. See our Insight The FCPA Demystified for a little more detail here.
- Bad Debt – As mentioned above, growing into new markets usually requires taking a more aggressive approach to standard terms and conditions. Some companies can grow in a real way selling products cash in advance or under letter of credit, but most need to offer terms to drive customer conversion. Again, much can be done process-wise to minimize bad debt, but offering credit in foreign markets, particularly developing ones, will undoubtedly increase payment risk.
- Currency/Fx – Are you selling in $USD or local currency? Are overseas employees paid in local currency? Are you holding assets overseas? Even small businesses with a limited footprint outside the country can be significantly impacted by fluctuations in exchange rates. A strengthening dollar, for example, can quickly wipe out profits of sales commenced in local currency.
- Brand – A major misstep in the march toward globalization can have a lasting impact on your brand. With social media’s insatiable appetite for the next viral meme, the risk here is greater than ever. The American Dairy Association, for instance, replicated its "Got Milk?" campaign in Spanish-speaking countries where it was translated into "Are You Lactating?" Don’t make the same mistake.
- Distribution – in their rush to grow sales overseas, company’s often take an extremely US-centric view on how they do business with distributors (and other partners). For example, penalties for improper termination of distribution agreements can vary significantly from country to country: To illustrate, in Belgium a distributor can seek lost profits (goodwill indemnity) as well as a range of other costs and compensation if terminated in violation of local laws/procedures, whereas Mexican law does not provide specific indemnification rights for the distributor even if termination is not based on just cause.
As you likely already know (or now do after reading the above), international business is complex. There are literally hundreds of drivers/touch points/processes that must be developed or augmented to be successful overseas. What adjustments do we need to make to our customer service hours to address issues in Japan? Do we have anyone in the group that speaks Japanese? What marketing material needs to be translated into Japanese? How will we handle warranty claims? Do we need a Japanese-language website, and if so, what key words to we need to buy to drive traffic to the site?
While extensive and wide ranging, none of these issues are impossible to address. The key point is that the additional levels of complexity stemming from international business dynamics require thoughtful planning and a bias for action to be addressed in an effective and efficient manner. If your organization is not in a position to do that at this point in time, you may be better off waiting.
From finding and vetting distributors to getting products in hands of new customers (and everything in between), standard business practices typically take exponentially more time to execute overseas, as does realizing the ultimate financial benefits of international growth. An analysis of 20,000 companies in 30 countries by the Harvard Business Review, for example, found that companies selling abroad had an average Return on Assets (ROA) of minus 1 percent as long as five years after their move. It takes 10 years to reach a modest +1 percent and only 40 percent of companies turn in more than 3 percent.
What is your time horizon? Is yours a private equity owned business with a 3 year window before the next transaction? Or is it a public company that needs to manage expectations around the quarterly financial impact of international market activities? Are you a closely held family business that has the luxury of taking the long view on major strategic initiatives?
Whatever your situation, expect that things will take much longer than assumed. My recommendation here is to plan conservatively by tripling the time and halving the expected return on new international business.
To conclude, many companies never get beyond a toe in the water when it comes to real international growth. They may have a distributor or two overseas, but a bulk of their business is, and will remain domestic. The reason is usually that despite the allure of big new markets, international business is tough – it’s expensive to do right, risky, even on a small scale, extremely complex relative to the familiar territory of domestic markets. And, on top of all that, even if done “right,” real financial benefits can sit far off into the future.
The opportunities are out there, no doubt, but you need to go in with your eyes open: a thoughtful, data driven strategy, really deep executional planning, and the resources, management and shareholder commitment to tackle unforeseen challenges and see these plans through. Otherwise, the timing likely isn’t right for your business. The good news is coming to this realization now will likely save you a lot of time, money, energy and aggravation down the road.
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