Plug and Play: How to Efficiently Scale Your Business When Expanding Abroad
This is part 16 of a 17-part series on global expansion. You can find the full list below this article.
“All we have to do is 10x our revenue and cut costs by 50%, and we’re done!” the business owner exclaimed.
Well, he’s right: for increasing his profit margin, there was no arguing with that!
His company was in the business services industry where they were making about $100 million per year in revenue. When deciding what to do to increase their revenue, they decided to buy an insurance company that would bring in an additional $50 million in revenue per year that could be added right onto their own profit and loss financial statement. Beyond revenue, a huge added benefit was that acquiring this company increased the overall value of their business to $1 billion. Even though it cost them money to acquire the insurance company, they did it in a way where the combined value of the business and assets was worth more. Cha-ching!
Beyond simply acquiring more revenue and profit through acquisition, there are other ways to increase profit and decrease cost. The good news is that business expansion leads to more revenue and profit potential, which in turn leads to more opportunities for international growth; but the challenge is knowing that you are set up to be profitable when you enter jurisdictions that are uncharted territory for your business.
There are two things you should consider before continuing your expansion: how to maximize profitability with your business now, and how to create a Success Formula to guide you when you do expand so that you reduce cost and inefficiencies. Read on for more!
How companies maximize their profits when building their foundation before continuing expansion
Increasing your profit margin comes down to either increasing your revenue, decreasing your costs, or some combination of the two. And when you expand your business internationally, the local markets could offer either opportunities or obstacles for you in terms of revenue and costs related to your business, so your profitability can depend on the jurisdictions you select. Based on the situation, some companies choose to focus more on revenue while others might focus more on cost savings.
Here are a few examples of how companies have approached maximizing their profit margins:
1. Enter markets with high revenue potential
One of our European clients makes a popular game app that individuals love to play when idle. When they did their market analysis, they discovered that Japan has one of the highest numbers of smartphones per capita. Plus, many people take public transportation to work instead of driving, they knew that potential users would have more idle time to use the game app especially with some people in Japan having 4-6 hour roundtrip commutes to work every day They decided to enter Japan and had an explosion of sales; currently, they make around 600,000 USD per day. This is an example of how entering a jurisdiction can increase your revenue which can fund further growth.
2. Enter jurisdictions with low-cost setup
A US electric vehicle company was looking to maximize its ROI by focusing on low-cost business operations. They decided to build an engineering team in Vietnam where they could pay considerably less for high-quality talent than they would in the US. Now, they have more money to work with because of their expansion and these cost savings, and they can put their profit into a new employee incentive plan and create more value to attract potential buyers in the future. By setting up in a low-cost jurisdiction as this company has, you can maximize your ROI to fund your business expansion.
Creating a formula to maximize efficiency when growing abroad
The second part to scaling efficiently is to have a plan or formula in place, and there are two elements to help you with that:
1. Understand Return on Capital Employed
Before you invest in expanding abroad, you’ll want to assess how your business is performing in relation to the capital you have already been using.
Return on Capital Employed (ROCE) is a financial equation that helps you understand how much profit your business has in relation to the money that is being put to use.
As you can see below, ROCE is the amount of earnings you have (before interest and tax) divided by the amount of capital that has been invested (total assets minus current liabilities):
Image from Investopedia.com
You can use this equation to calculate how your business is doing now and use the percentage both to give you an understanding of what is possible when expanding as well as using it as a north star financial target for when you enter a new jurisdiction.
2. Create a Plug and Play model to duplicate success across new markets
It’s helpful to analyze and take note of the process you used to set up your business and that led to a high-profit margin so that you can apply this approach to entering other jurisdictions.
Think of it like a franchise model; you can create a step-by-step process to follow that’s focused around business setup and operations. The process does not necessarily need to include duplicating jobs as some roles can be handled from centralized functions, but it can include all other elements from market analysis to setting up an office to transfer pricing, etc.
This plug-and-play concept can be a set model that you can use for each jurisdiction, but how much of it could apply will be anywhere from 5%-90% depending on how consumers act in that country.
For example, if you have a US-based company that expands into Australia, then perhaps 90% of your business formula could apply to that location as there is a similar culture and English is a common language. Alternatively, if you have a US company and want to expand into Japan, then only 5% of that model may be applicable due to cultural differences or differences in business setup and procedure.
But regardless of whether or not you can use part of or most of your formula, having a step-by-step process will help guide you in researching and analyzing what is needed for every stage of your plan based on that local jurisdiction, and also how that jurisdiction would fit into your commercial and tax strategy that you’ve set up in your headquarters. Ultimately, you’ll be better prepared and set up for success.
Think of companies like Starbucks. They have set up the same business concept across all locations even though each jurisdiction has a different set of regulations and culture. Starbucks has a tax and commercially efficient structure whereby they charge a franchise fee from a tax-efficient central location that holds all the IP and charges across all locations. Even though they may have less profitability in some areas than others, having a franchise model helps them increase franchise owners’ returns using a proven formula and approach which increases the revenue they receive from coffee supply orders to stock at each location.
McDonalds operates in a similar way where they have thousands of stores across nations that are owned by franchisers. Franchise owners have to pay a royalty cost to the company for marketing, branding, and strategy and there is a system in place in which McDonalds makes revenue off of selling their products to franchisers. Also, in many countries, they own the real estate their Franchise owners’ locations sit on and they earn lease income and build assets over time as so famously explained in the movie “The Founder”. If you need a set of eyes on your business and assistance with strategy, we’re happy to help – feel free to contact us here!
Special thanks to Sam Barrett from EY’s APAC Operating Model Effectiveness team for his inputs and insights in putting together this series of articles.
International Business Expansion Series
This article is part 16 of a 17-part series about International Business Expansion. Here’s a list of the full series to give you a well-rounded understanding of what to consider when expanding your business abroad, from strategy to execution to management:
- The #1 Thing that Companies Need for a Successful Expansion Abroad
- The 3 Components of a Market Analysis to Know if Your Product is Viable Abroad
- How to James Bond Your Profit Margin with Location Analysis
- How to WIN in a New Market with These 6 Models of Execution
- Lost in Translation: How Culture Can Impact Your Business Expansion
- Show me the money: How to Fund Your Business Expansion Abroad
- Risky Business: The 2 Key Layers of your Operating Model to Align with Your Growth Strategy
- Avoid Being Taxed: How Tweaking the Structure of Your Organization Can Protect Your Bottom Line
- Trash Talk: Why You Need to Analyze Your Processes Before Expanding Globally
- 5 Reasons Why You Should Customize Your Technology for Your International Expansion
- Setting Up a Business Abroad: The 4 Kinds of Structures & Legal Implications
- Landlocked: How your Transaction Flows can Impact Your Access to Funds
- 5 Industry-Specific Legal and Regulatory Obligations that can Impact Your Business Expansion Abroad
- “Health Checks”: Your Ticket to Building a Sustainable International Business
- How Much Is Your Business Worth? 4 Drivers that Increase the Value of Your International Business
- Plug and Play: How to Efficiently Scale Your Business When Expanding Abroad
- Beach, or Boardroom? Plan Your Exit Strategy Before You Expand Globally