Ten Hidden Drivers of International Growth
Finding real value in unlikely places
Winning in the international arena is tough; there are simply no shortcuts. Success requires good strategy, thoughtful planning, adept execution, perseverance, tolerance for risk, and some good old-fashioned luck. While the tendency is to focus on “big” issues to drive growth – product positioning, pricing, business development, partnerships - many more fly under the radar, but can potentially be equally as impactful. And while literally hundreds of variables come into play, here we focus on the ten unsung heroes of international growth (in no particular order!):
1. Credit Terms/Limits
Growing internationally will almost certainly increase the risk profile of your business, with collection risk being just one obvious example. Instead of taking an overly conservative approach here, which is the natural inclination, view this as an opportunity to potentially differentiate from domestic competitors you are confronting overseas (who likely share your same concerns around risk). Everything else being equal, offering more attractive terms than your competitor can be a major factor in converting customers, particularly in overseas markets and developing economies. This may be uncomfortable initially, but here are a few considerations to mitigate risk:
- Customer Validation – Do your diligence on new customers. Credit references, banking information, trade references are helpful, but someone from your organization needs to go there and see the business first-hand. Overseas fraudsters are getting more sophisticated with bogus financial statements, websites, credit references, etc. – you need to know who you’re dealing with, face to face. A really helpful resource here US Commercial Services’ International Partner Search (https://www.export.gov/International-Partner-Search).
- Credit Vehicles – Consider documentary collection as a way to provide ample credit while reducing risk. Somewhere between open credit and a letter of credit in terms of risk and complexity, a documentary collections transaction takes place between banks after goods are shipped but before the importer takes ownership.
- Increasing Bad Debt Reserves – Your CFO will likely be uncomfortable here, but budgeting for some increased risk can be a good way to manage everyone’s expectations about the benefits, and potential costs, of being more aggressive with international credit terms. A good way to offset the added potential cost here is with modest price increases for international customers.
2. Parallel Import Controls
Parallel imports (for this purpose defined as goods purchased by domestic customers/distributors and sold into international markets) can have a subtle but significant impact on international growth. There are many variations on the theme, but a common scenario is where a US channel partner enjoys a pricing advantage over international customers, usually due to higher local competition, longer standing relationships, or much higher volume. Even a small difference can open the door for domestic customers to sell into international markets through “unofficial” channels.
The problem is that while overall volume may not be impacted initially, margins most certainly are since, by definition, higher margin direct company sales are replaced with lower margin domestic volume. Additional risk is that customers in international markets lose motivation if they are selling against unappointed competitors that are likely benefiting from market development efforts of the official channel partner. The remedy here will depend on the business, but some low cost, relatively easy to implement steps, can help mitigate the risk of parallel import, such as:
- Including explicit and enforced language about territorial integrity in distribution agreements across regions (potentially with termination language or surcharges if violated)
- Working with local customs officials to provide alerts in the case of illegitimate imports (capability here varies greatly from country to country)
- Differentiating product labelling, modifying products, etc. to localize in key markets
- Advertising / promoting official channel partners and alerting the market that purchases made through other sellers will void warranty, not be covered by technical support, etc.
3. Market Development Fund (MDF) Programs
Allocating a portion of your marketing budget to in-country channel partners for local program management can be a very effective use of marketing dollars in several ways. If you’re in business with the right partner (distributor, retailer, etc.) they should be in a better position than HQ marketing to determine the best use of small, tactical budgets, including localized messaging, optimal platforms, and general tone of marketing activities. Tying these dollars to specific performance metrics (e.g., percent of sales, minimum volume requirements, etc.) can have the added benefit of incentivizing behaviors in line with your commercial objectives. MDF programs should be developed with strategic rigor and detailed policies and procedures, but there are some universal best practice considerations along key program steps:
- MDF Request – Design should help guide the partner with employment of the right tactics and marketing assets, together with specific objectives in terms of customer conversion, incremental revenue, etc.
- Review and Approval – Select programs for investments based on specific ROI metrics and strategic objectives; place your bets accordingly vs. taking a shotgun approach
- Execution – Employ centralized tools and templates, program management, oversight, and work process reporting procedures; facilitate knowledge sharing and best practices across geographies
- Review – Require partners to report results, validate return on investment; incorporate results into dashboard with key metrics for partner reviews and comparison across partner geographies for future investment decisions
4. Distribution Agreements
Generally speaking, distribution/channel partner agreements are a sound practice in any international business setting. While often under the purview of the legal department with a focus on key tactical elements (risk mitigation, warranty expectations, geographic coverage, etc.), agreements can also serve as an extremely effective platform to support key growth-oriented goals for the business, including:
- Partner Requirements - Clearly and specifically defining “distributor requirements” in detail from a commercial perspective – e.g., minimum inventory levels, number of dedicated sales resources, annual marketing spend – can set the right expectations up front and avoid conflict down the road.
- Term – Make periodic renewals dependent on meeting specific annual sales objectives that are agreed to at the beginning of the year. It doesn’t mean you will terminate if the partner falls short, but it should provide the right focus and incentive to work toward common objectives.
- Reporting – Use the agreement to define up-front what information you need and when to ensure your partner understands what’s expected (e.g., monthly sales forecasts, marketing expenditure). Again, setting the expectation in advance and in writing is much more effective than ad hoc report requests once the relationship is up and running.
Every business will have a unique set of commercial drivers, but the point here is to view the distribution agreement as more than just a legal document – it should define expectations around key commercial activities. You’ll rarely have more leverage than this point in the relationship, so lock in what you need now. See our Insight on International Distribution Agreements for a more detailed discussion.
5. Sales Incentives
This may seem like an obvious one, but we’ve seen a lot of organizations where incentives for sales leaders, as well as more junior “feet on the street,” are misaligned with the company’s objectives for international growth (or they just mirror domestic programs). If the current goal is market penetration in new geographies, for example, incentives should likely center around customer conversion. To take growth to the next level, volume or revenue should come into play. And as momentum slows to higher levels of penetration, transitioning to more profitable mix or incremental sales growth will likely be a more effective approach than overall volume. In any case, I’m a firm believer that incentive programs should adhere to some key principals and guidelines:
- Qualitative objectives should play a very minor role in the bonus formula (if at all!); bonus criteria should be specific and measurable.
- Senior sales leaders should have some allocation for overall company targets, e.g., company EBITDA so they “have some skin in the game” in terms of overall company performance.
- Sales bonuses should be paid on a relatively frequent basis so that incentives are tied to the actual results you’re trying to encourage.
6. Sales Concessions
Discounts and rebates are often a point of contention between the commercial and financial camps in the business. The finance group is not always wrong. Too often discounts and rebates spin out of control and end up being a margin giveaway without a corresponding benefit to the business. If structured strategically, however, discounts and rebates can be an effective tool to help drive growth in target markets. Consider:
- Allocating a discretionary budget to salespeople for spot trading to drive increases in volume
- Providing year-end volume rebates for customers in key regions based on incremental growth over prior year
- Implementing pricing tiers with stepped discounts off price list, based on order size on periodic volume targets
7. Project Funding
There are hundreds of NGOs and government agencies around the globe that provide financing and other support for projects to promote a particular mission – e.g., sustainable energy in Africa, economic development in priority countries, or export facilitation for domestic companies. Working with and through the right organization can support ongoing business development efforts and open the door into otherwise difficult to penetrate markets. The most relevant entity for your business to reach out to will depend on your particular market segment and target geography, but here are a few examples of US government entities that offer trade financing instruments to help exporters expand into new markets (and a good place to start). Trade Associations are also a great source of guidance on which development organizations are most relevant to your business.
- The Export-Import Bank of the United States (EXIM) – offers credit, finance, and insurance products to US exporters
- The Overseas Private Investment Corporation (OPIC) – provides loans, guarantees, and political risk insurance
- The US Trade and Development Agency (USTDA) – facilitates participation of US businesses in host country priority development projects
- The Millennium Challenge Corporation (MCC) – offers project assistance grants to countries committed to sustainable local economic development and good governance
8. IP Protection Rights (IPR)
Although exact figures are hard to determine, a private watchdog group recently estimated that counterfeits cost the US economy between $225 billion and $600 billion per year. A lot of this is unavoidable – it’s the nature of the world today – but developing and implementing a fundamentally sound IP protection program can go a long way toward ensuring sales of your products and services go to your company, and not a local counterfeiter. Working with experienced legal counsel to develop an overall IPR protection strategy is a must, but here are some basic, low-cost, steps just about every business should consider early on:
- Develop detailed IPR language in licensing, subcontracting, and distribution agreements
- Conduct sufficient due diligence on potential foreign partners (US Commercial Services International Partner Search mentioned above is a great resource here as well)
- Record US-registered trademarks and copyrights with Customs and Border Protection
- Secure and register patents, trademarks, and copyrights in key foreign markets, including defensively in particularly high-risk countries where you don’t yet have a local presence
For a more detailed discussion on IP protection, see our Insight Protecting the Crown Jewels.
9. Communication and Collaboration Tools
Anyone who’s worked for a domestic US company overseas will tell you one of the greatest challenges is daily communication with the mother ship. Not only are there logistical challenges such as time zone differences, but doing most of your communication via email or phone can have a significant impact on productivity and effectiveness – one that only amplifies over time. Customers are in the same boat, and almost always complain of too little (vs. too much) communication from US headquarters. There’s no replacement for sitting face-to-face across a conference room table, but implementing a thoughtful plan here can improve the bottom line by responding to opportunities and challenges in a more proactive and efficient manner. Here are some effective tools to get the ball rolling:
- Videoconferencing – Use video not just for one-on-one calls (Skype) but for working sessions between HQ and field teams (and customers). Video increases engagement, improves team dynamics, and facilitates buy-in from all parties.
- CRM – Tools like Salesforce.com can be a very effective way to automate and streamline key processes, workflows, approvals, as well as facilitate collaboration around commercial opportunities
- Social Media – A robust social media strategy should incorporate participation from internal constituents as well. For example, an internal Facebook page where employees in the field can post customer comments or pictures of completed projects can go a long way toward building excitement and facilitating collaboration with those actually out in the marketplace
10. Technical Training
Again, hard to quantify but technical product training can have a meaningful and lasting impact on the bottom line of your business. Engaging overseas partners in organized training sessions (ideally in person) generates enthusiasm for your products and services and can give channel partners tangible tools to outsell your competition. Similarly, employees who have been properly trained on your offering can address questions and troubleshoot in a more proactive manner.
A customer service rep who can answer a technical question without having to involve an engineer, for example, will feel more empowered and the engineer can continue to focus on more value-added activities without distraction. Most importantly, the customer issue is addressed sooner rather than later, and can go about the business of using, selling, or promoting your products.
As mentioned up front, this is not an exhaustive list, and none of these drivers in isolation is likely to be a game-changer for your organization (although you never know!). In the aggregate, however, they are “doable” relative to major strategic initiatives, and can have a significant impact on commercial objectives for your business overseas. If each of the 10 drivers above contributes just an incremental 2% in growth per year, the business will grow at 2X the rate it otherwise would have over a 3-4 year period. That’s great payback.
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