The North Star: The #1 Thing that Companies Need for a Successful Expansion Abroad
This article is part 1 of a 17-part series on global expansion. You can find the full list below this article.
International expansion of your business needs to start with alignment. It should not happen by accident. Ambition is the first, and one of the most fundamental things business owners need to have amongst their partners, stakeholders, investors and colleagues before expanding their business overseas.
When we say alignment we mean having a clear mission, vision, and financial goal for expanding internationally. Think of these 3 goals as your north star; it’s what you aim to achieve by entering new markets, and it helps all people who are involved to get on the same page and commit with that goal in mind. If everyone on your team does not understand your north star intimately, you will be wasting time trying to keep everyone aligned as you expand and ramp up the complexity of your business.
“International business expansion” is a journey that you go on and live when entering new markets. “Market entry” itself is about how you set up your business operations in those new markets that enable getting your product to the end customer in those jurisdictions. The strategy and process involved completely depends on the needs of your business, its customers, tax and legal implications, selling and distribution models, and market needs that vary by country.
If you’re thinking about expanding your business abroad, what would you say is your underlying motivation? Most businesses expand internationally for two main reasons: to increase revenue potential and/or to get closer to an expanded customer base in the new markets.
We also find that the trigger for most companies to expand comes from either intentional or opportunistic reasons:
- Intentional: Market research has concluded that a product or service could do well in a new market so steps are taken to expand.
- Opportunistic: Actual demand is obvious or was identified by chance and steps are taken to expand and address that demand.
Whether the reason is intentional or opportunistic, the driving factor for nearly all companies is the anticipation of an increase in revenue by entering a new market (hint: your primary focus above revenue should be about your profit margin, though!). And to make that happen, you might require a local physical presence, to communicate with customers pre or post-sale, or to facilitate the import of products or delivery of services and distribute locally. Even if you enter a market to employ talent (e.g. set up an R&D center) this is done to support the growth of the business and increase profit margins.
We also find that 80%-90% of businesses already have a potential customer (an “anchor client”) as a reason to enter the market, and it usually helps businesses justify the costs of expansion as they can cover setup and ongoing costs with the anticipated revenue.
In any case, before you decide to expand, here are two stories to illustrate how ambition can make or break your success in a new market:
The Large Tech Company that Got Gypped due to Miss-Alignment
One of our clients – a large technology and video streaming company headquartered in Southeast Asia decided to aggressively expand to other countries within the region to boost their sales during an increase in demand due to COVID-19.
Instead of doing detailed market research and having a detailed business expansion plan, they put all of their trust into two local partners that brought local market and customer knowledge and established joint ventures with them in each country, with their HQ’s involvement being limited to receiving financial reports.
Initially, both joint ventures seemed to be very successful based on the financials being reported back to HQ, but unfortunately, in both cases, local partners had taken their local businesses in directions misaligned to the HQ’s strategy and also turned out to be fraudulent, taking funds out of the business funneling them into personal ventures, which led to large legal battles which are still ongoing.
Right now, the company is in the process of shutting down both joint ventures and transforming their business to establish themselves with a mix of expats from HQ and local talent, ensuring more links and business process integration with the HQ where they’ll have more authority and oversight in the local management. They are also focused on a strategy more driven by HQ, to reestablish the brand in these markets. They completely relied on their partners’ strategy and execution about how to grow the new ventures, when they really should have contributed more to the setup and running of the local ventures themselves to make them successful.
How one client went from losing money to making millions in profit
Or here’s another story: One of our clients – a mid to premium quality tool manufacturing company based in the midwestern US – learned the hard way about why having a North Star is so important.
They had entered the international market for the first time by opening a mini operation in Brazil, and while there was distribution and sales, there was a lack of clarity on what was happening with the financials.
Why did they pick Brazil? Well, they went to a trade show in Brazil and met someone who said they’d be happy to distribute the products.
Excited to take on a new venture, they hired two local contractors to assist with distribution. But when they realized they weren’t making any profit, they wound up having to ask tough questions about the viability of the operation including the landed costs of the product and high import costs in Brazil. (“Landed costs” are the total cost of a landed shipment including purchase price, freight, insurance, and other costs up to the port of destination. In some instances, it may also include the customs duties, value-added tax, brokerage fees, and other payments levied on the shipment.)
What they discovered was that their pricing wasn’t high enough to cover all the actual costs, and there was also an inefficient distribution model that was a contributing factor to the unprofitable situation throughout Brazil. They wound up having to pull out.
After they pulled out of Brazil, we introduced them to the European market. Europe had a direct comparison market to their customers in the US, including a more mature hand tool market with locals interested in mid to premium-grade products.
They ended up interviewing and meeting with 25-30 business partners, and because of that, they were able to have enough of a margin to make sense for them to compete in the market. A year into the process, they had 14-15 customers that had grown 20-40% and they were able to increase year over year.
Eventually, they had enough volume to justify establishing a local entity and setting up a warehouse that enabled them to be the importer of record which really improved their profit margins. This took their international business from being just a footnote in their company’s financials to a significant part of their total revenue.
Back when our client decided to enter Brazil, they never set any data-driven goals. But when we discussed their plan to enter Europe, they knew exactly how much revenue they planned to earn through factual calculations. All they had to do once their goal was decided was plan the execution (win!).
We feel alignment on the North Star was present but weak when they entered Brazil, but with renewed motivation to be successful in Europe, their alignment on their North Star was sky-high which turned a Brazil nightmare into a European success.
Key questions to ask before your expand
The moral of the stories? Having the right growth mindset and alignment on a North Star (mission, vision and financial goal) for leadership to aim towards are essential in setting up your business expansion for success. This along with the drive to grow sales and your business holistically, form the base elements of a successful international growth journey. If the technology company had a strong “North Star”, bought into by the joint venture partners and more integrated with the HQ’s operations, maybe it would have been fine to leave the partners to their own devices because the strategy and management would have been more aligned, integrated and direction would have been more clear. And if the tool manufacturer would have really been behind and excited about the direction of their growth together with a well-thought-out plan and market research, maybe they would have realized that entering Brazil was the wrong move.
When we meet with clients who are ready to think about expanding internationally, we ask them these questions:
- What is your goal as a business?
- What is your corporate strategy over the coming years?
- What are your customer goals?
- What are your financial goals?
- Do you believe all leadership, stakeholders and executives are 100% aligned? (usually not… but it’s so important, we cannot overstate it enough)
We’re happy to walk you through each of these questions and define your answers to develop your “North Star.” 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 1 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