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.
Expansion abroad needs to start with ambition. It should not happen by accident. Ambition is the first, and one of the most fundamental things business owners need to have before expanding their business overseas.
We define ambition as your clear mission, vision, and financial goal for an expansion abroad. Think of ambition 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.
“Expansion abroad” 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. It’ll enable getting your product to the end customer in those jurisdictions. The strategy and process involved completely depend 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 do an expansion abroad 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 reason:
- Intentional: Market research has concluded that a product or service could do well in a new market so they expand.
- Opportunistic: Actual demand is obvious or was identified by chance and they 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. Hint: your primary focus beyond 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.
We also find that 50%-60% of businesses already have a potential customer (an “anchor client”) as a reason to enter a particular market. Businesses justify the costs of expansion abroad 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 and finding your north star can make or break your success in a new market:
The Large Tech Company that Lost Big due to Misplaced Ambition
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. They also turned out to be fraudulent, taking funds out of the business funneling them into personal ventures, which led to large drawn out legal battles.
Right now, the company is in the process of shutting down both joint ventures and transforming their business. They aim 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. Because they completely relied on their partners’ ambitions (and execution) to grow the new ventures, they essentially misplaced their own ambition when they really should have contributed more to the setup and running of the local ventures themselves to build them up and make them a success.
How one client went from losing money to making millions in profit
Or here’s another story: one of our clients – a premium quality tool manufacturing company based in the midwestern US – learned about ambition the hard way.
They had entered the international market for the first time by opening a mini operation in Brazil. 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 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 with 20-40% growth, and they were able to increase each 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 them from earning a couple hundred thousand dollars a year in the region to a couple million, tracing towards 5 million within 6 years.
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 they aimed to make through calculations. All they had to do once their goal was decided was plan the execution (win!).
We feel ambition was present but weak when they entered Brazil. But with renewed motivation to be successful in Europe, their ambition to succeed was sky-high which turned a Brazil nightmare into a European success.
Key questions to ask before your expansion abroad
The moral of the stories? Having the right growth mindset and ambition are essential in setting up your business expansion for success. Having a vision and that “north star” for the business and its leaders to aim towards, together with the drive to grow sales and your business holistically, are the base elements of a successful international growth journey. If the technology company had a strong “North Star”, with buy-in from the joint venture partners and more integration 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 and direction would have been more clear. And if the tool manufacturer had 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 an expansion abroad, 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?
We’re happy to walk you through each of these questions and define your answers; feel free to contact us, here.
With 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