Business Opportunities and Risks: Plan Before You Expand Overseas
Expanding internationally may be a great move for your middle market company as it seeks business opportunities. But it's essential to spend time to develop a granular understanding of opportunities overseas before building an export strategy. Entering a foreign market without a basic understanding courts disaster.
Unplanned costs, unanticipated legal liabilities, and unforeseen regulatory nightmares can haunt you and your business for years. To avoid the headaches of entry, consider these six factors:
1. Consumer need. The first and most important question you must answer is whether local consumers in the target market can afford to buy your products or services and if you can you sell them at a competitive price. It's irrelevant that you sell the highest quality products or services if target consumers simply don't have sufficient purchasing power to buy them. Just because Africa, for example, is home to six of the ten fastest-growing economies in the world doesn't mean it offers great business opportunities for makers of expensive consumer goods. Average personal incomes there remain low compared to developed markets. Analyze a market's consumers, demographics, and competitive landscape. Understand your own cost structures in the foreign markets.
2. Customization and localization. Consider tailoring your product to local demands or tastes. McDonald's, a company that has experienced breathtaking international success, is famous for customizing its menus to local demand: In seafood-loving Hong Kong, for example, McDonald's offers a "shrimp burger." This is just as important for midsize companies, who are typically quite adept at innovating deeply on fewer products or services, carefully tailoring their offerings to their customer's demands. You will need to be flexible and adaptable to seize the target market's business opportunities.
3. Mode of entry. Consider whether to enter the new market with a partner or not. Going it alone brings additional risks for the middle market company. Initiating a joint venture with a local partner who is deeply familiar with the target market is often the best alternative. Selecting the right partner is crucial, however, so take your time and think carefully before committing to any relationship. Since middle market companies tend to have less bargaining power compared to large enterprises, they may find themselves particularly at risk in dealing with unethical partners or intractable government agencies.
4. Barriers to entry: Research potential barriers to entry in the target market, including "soft barriers" such as language and culture, and more business-centric ones such as inadequate infrastructure (roads, ports, etc.) and expensive transport and logistics costs. In recently booming Brazil, for example, infrastructure is sub-par and transport costs are very high, especially in the north. As a recent Economist report noted, "Brazil's infrastructure is decrepit. The World Economic Forum ranks it at 114th out of 148 countries [in infrastructure quality]." In this case, your company would be wise to research the possibility of partnering with knowledgeable local partners and suppliers who better understand how to overcome this challenge while maximizing business opportunities.
5. Legal/regulatory structures. Gain a granular understanding of the target market's legal and regulatory structure, especially as it relates to your middle market company's products or services. You can find resources through the U.S. Department of Commerce or via global consultancies like PriceWaterhouseCooper. Are there taxes on exports and on moving goods across internal states/regions? What about labor/employee regulations? In Europe, for example, it's expensive to hire new workers and labor laws make it quite difficult to fire them. Leverage your research to plan ahead of time for additional costs.
6. Exchange rate and country risk. An additional layer of complexity presents itself in the form of exchange rate fluctuations with the local currency and monetary restrictions imposed by foreign governments. China, for example, imposes limits on capital flowing out of China, which could complicate financial benefits of your business opportunity. An additional concern is the protection of intellectual property in the target market and enforcement of contracts, which can be challenging in several developing markets. Finally, there may be risks related to political corruption and personal security, especially when doing business in unstable regions like the Middle East. Consider all of these factors before committing resources to a new market.
There are many questions that middle market companies looking overseas need to ask and answer. The best way forward is to develop your strategy, creating a careful, well-considered balance between identifying market opportunities and mitigating the risks of overseas expansion. Focusing on the six factors above is a good road map for doing just this.
Boston-based Chuck Leddy is an NCMM contributor and a freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+