Tips Before You Expand Your Business
Expanding a thriving business overseas may sound like a necessary idea; however, the success of this endeavor depends greatly on the planning and execution. Oftentimes companies feel like expanding abroad is a natural step to take after competing fiercely in their national markets, and rightfully so; there are markets to be conquered all over the world. Proceed with caution – just because you keep hearing that a country is having an economic boom, it doesn’t mean that it’s the right move for your company. It’s easy to make bad decisions in today’s fast-paced business environment – strategies need to be made quickly and the competition is always closing in. However if you want a fruitful expansion overseas, you should always look before jumping. Here are the five things you need to consider.
1. Government Regulations
Although many things appear simple on paper, government restrictions can make your expansion extremely complicated – tax laws, customs laws, trademark registration, import restrictions, corporate organization and agency or liability laws may all prove to be significant stumbling blocks. You may find laws that might force you to change the business model that has proven to be successful in your national market. For example, according to the article “Expanding Abroad I: Strategic Issues“ posted on www.entrepreneurship.org, your original plan may be to include a master franchise but foreign investment laws may force you on a joint venture for instance. Trademarks and product registration can also be an issue. It’s not unheard of; businesses being forced to change their names or not being able to register a trademark in a certain country. “The name of a company and products can be similar to existing brands in a particular country, and even if they are in a completely different industry, conflicts may arise,” states Anna Pata, director of sales at PreGel AMERICA.
Import restrictions can also prove to be challenging. Paul Blackwelder, imports and exports coordinator at PreGel AMERICA, shares that “an example would be sending a product containing dry milk to India. Since this country is mostly Hindu, it has significant restrictions on dairy products.” Furthermore Blackwelder advises that, “too many times plans are made and set into action before checking the regulations.” You should always do a thorough analysis of your logistics needs and research how government regulations may affect them.
2. Logistics
This applies to many of the so-called developing countries. Yes, their economies may be covered by every news outlet you come across, but once you set foot on them, it quickly becomes evident how behind their infrastructure is in comparison to some developed countries. Do your homework and research if there are sufficient services in the area in which you plan to expand. Furthermore, are there ocean, air, truck and railroad services? How expensive and reliable are the transportation costs? Blackwelder indicates that “even today, the infrastructure in China is still sorely lacking. There are no roads between Shanghai and Hong Kong, for example. You would have to export from Shanghai on an ocean vessel and import into Hong Kong, where you would consolidate them before re-exporting to the destination, which is extremely costly, or pay for direct imports from each.” Expect similar issues in Latin America and other emerging economies. Additionally, countries may have different restrictions when importing some key ingredients and other consumables. Blackwelder also comments on the value of consulting a logistics expert: “A true education of the process and knowing the right partners in each segment saves time and money. One wrong turn can be extremely costly, so having a seasoned navigator on your side is crucial.”
Besides consulting a qualified expert; map out every potential need of your operations. Where will you source key ingredients such as water, milk and sugar? How will the quality and characteristics of these supplies affect the final outcome of your product? Furthermore, research every single detail that may be involved, especially when it comes to vendors. Latin America suppliers can be painfully vague when it comes to the important details involving deliveries, credit terms and processing orders, to name a few. Prevent surprises down the road – assume nothing and ask about everything.
Visiting the potential area of expansion is also critical. Besides the obvious needs for foot traffic, parking and key demographics, look into the small detail that may be unheeded. The facilities abroad may have limitations in space and temperature control. Ask your equipment supplier about the implications of operating the machines in unusual circumstances you may encounter, such as hot temperatures and high humidity.
3. Culture
Globalization has brought cultures closer than ever. If Hollywood celebrities are seen consuming a certain product, the whole world will want to do the same. Consumers around the world can quickly find out about trends via the Internet and social media. However, this doesn’t mean that products shouldn’t take into account regional preferences, and local traditions and ingredients with their offerings.
Moreover, culture plays a critical role in the expansion of a business, since personnel needs to be hired and trained abroad. Although finding the right personnel can be challenging, avoid cutting corners by not offering a commensurate pay. A slight willingness to invest more in qualified personnel in emerging economies can be extremely rewarding in the long run. The right employees are critical in bridging the gap between cultures by understanding your business model and the local needs.
The marketing employed in each country should also take into consideration the local culture. When approaching Latin America, don’t assume there are no language differences just because most countries speak Spanish. The language used in Argentina couldn’t be more different than Mexico’s, since certain verb conjugations and pronouns are different. Furthermore, expect a lot of countries abroad to be familiar with American traditions and the English language. Certain brands can sometimes get away with running their ads in English while others hit the sweet spot by merging cultures with design, copy and strategy. Study each market thoroughly to avoid a “one size fits
all” approach.
Most importantly, when it comes to culture and marketing, avoid skipping steps – doing so will be like running a race with your shoelaces undone. The research always comes before the strategy and the strategy always comes before the execution. You need a well-designed strategy before opening a shop, placing advertisements, launching social media, hosting events, and executing any other marketing initiatives. Avoid moving forward without the indispensable steps, since this is a formula for failure and frustration.
4. Corruption and Bribery
If you have followed the business news lately chances are you are aware of the issues some companies have faced when steering their operations in countries where corruption is common. Author of article “Risks of Doing Business Abroad,” J. More shares American companies’ need to abide by the Foreign Corrupt Practices Act (FCPA) amended in 1977. This act makes it unlawful for businesses to make payment to foreign officials to assist in obtaining or retaining business. This can be a conflict, since some countries may have government officials than more often than not require some type of bribery to issue anything from a land permit to a restaurant license. Circumventing the legalities while keeping government officials happy will require business ingenuity. However, there are regions within these countries that are more welcoming to foreign business and make an effort to reduce these bribery issues – identifying these regions is a priority.
5. Realistic Budget
Expect to navigate through hundreds of unlimited variables, therefore you’ll need to spend a considerable amount of time defining a realistic budget. Underestimating the necessary resources and time needed to launch overseas operations is one of the most common mistakes companies make. Be prepared by asking yourself tough questions – what would it mean for the expansion if we overrun our assigned budget by 50 percent? What about 100 percent? If these scenarios put too much stress on your operations, you may need to redefine your goals. Furthermore, according to The Seedcamp Team, an early stage micro seed investment fund and mentoring program, always be prepared for fluctuating exchange rates and different taxes.
Another aspect that can’t be overlooked is the credit terms involved. Is it a buyer’s or a seller’s market? You may be in different positions in each segment of your operations: you may find yourself with some leverage when it comes to renting space in a shopping center but none when it comes to negotiating credit terms with a key supplier, or vice versa. If you research your expected leverage in the negotiation beforehand, you’ll be more prepared to mitigate the damage or take advantage of your position. Expect to be part of different negotiating scenarios in each country and account for the different credit terms on your budget.
Expanding overseas can be a daunting task and should never be taken lightly. The overlooked details can make a difference between a successful expansion and a costly business mistake. Research and plan thoroughly before putting any plans into action.
Resources and Further Reads:
Sherman, A. Expanding Abroad I: Strategic Issues. Retrieved February 18, 2013 from http://www.entrepreneurship.org/en/resource-center/expanding-abroad-istrategic-issues.aspx.
More, J. Risks of Doing Business Abroad. Retrieved February 18, 2013 from http://www.ehow.com/info_7754303_risks-doing-business-abroad.html.
The Seedcamp Team. Five Points to Consider Before Expanding Internationally. Retreived August 10, 2007 from http://www.seedcamp.com/2007/08/five-points-to-consider-before.html.