If you work for or own a company that does a large portion of sales through exporting, it’s likely that you’ve asked yourself this question: When is the right time to start expanding a company internationally? There are many reasons why companies choose to expand internationally, and it can be done through setting up international operations in another market or acquiring a company in that market.
Some of the reasons for expanding internationally include:
- Your company has the opportunity to capture a greater share of the market (global or regional)
- Your company has achieved a critical mass of global/regional sales and there is a cost benefit to locating closer to clients and/or suppliers
- Your company needs to solidify its position in the local supply chain, otherwise further growth will be limited
- There is a need to tighten cycle times by improving lead time, customer service, etc.
If any of these scenarios apply to your company, now is the time to evaluate where your company lands in terms of preparedness on a macro level for international expansion.
In my time at Export Development Canada, I’ve worked with many Canadian businesses as they’ve prepared to expand internationally with EDC’s help, and I’ve found there are generally 3 conditions that will make their expansion a success.
When you begin developing a strategy for expansion, it’s important to start with a macro view. Start by putting together a good overview of the market and the growth opportunities by asking yourself these questions:
Is the competition in this market fierce or fragmented?
Does your competition, local or international, benefit from something you do not? For example, do they receive more favourable tax or credit terms? Do they have access to grants, subsidies or partnership agreements that give them a great advantage? Does their country of origin share a free trade agreement with the market that makes them more competitive? This may affect your choice to enter that market, if you can’t overcome these advantages.
Is there substitution risk?
Are there other local competitors whose product/service could act as a substitute for yours (or vice versa)? Take a 360° perspective on new technologies, services, or products that could swing your company’s growth potential.
What are the barriers to entry?
Think beyond the classic ECON 101 list, which usually covers off tariffs, visa restrictions or restriction on foreign owners. The barriers to entry are often much more dynamic in certain markets. It’s important to clear this hurdle as soon as possible in your planning process and to look at it from both a quantitative and qualitative perspective.
Arguably, the root cause of many companies’ challenges when expanding into a new country is that they cannot replicate their core home market strengths. Target’s logistics failure when they expanded into Canada is a good example of this. Make sure you identify what your home market strengths are, and list out the potential barriers to entry you may find when replicating those strengths. For example, if you have a great relationship with Canadian suppliers, a barrier to entry could be replicating those relationships with suppliers in a new market. Fostering a great relationship with a potential foreign supplier will give you a greater opportunity to negotiate better terms in order to preserve quality and margins.
After you list out each of the potential barriers to entry, identify how you will overcome those challenges or mitigate the potential risk.
Today, the qualitative matters just as much as the quantitative, and Canadian management should invest as much time evaluating the people upon whom they will be depending to execute the expansion plan as they would on the financial analysis. Ensuring that you have a competent, experienced team in place is a key driver to achieving success with your new (perhaps first) venture outside of Canada.
Begin by identifying which member from your Canadian management team will take charge of the new operations (at least until the new business is financially autonomous). This will increase the probability of success of your international investment. Extra bonus if this person speaks the local language! If you attempt to manage the expansion from a distance, until operations and appropriate controls are in place, this will prevent you from making timely and informed decisions.
Spend some time to evaluate how personally adaptable the Canadian representative will be to the local business culture, and to the exigencies of the move. Offer as much information as possible to any employees who do relocate, including considerations such as schools, accommodations, recreation and the like. Helping them (and their partners or families, if applicable) to know what to expect will help them to thrive in the new location, and increase the ability of your representative to excel at the business.
The next focus is ensuring that the Canadian management is integrated with, and invested in the future success of, the local management. Evaluations of managers and key employees should include an analysis of their technical, operational and other skills, including their local reputation.
When planning for future investment, try to anticipate all possible outcomes. Have a contingency for unexpected delays, costs, and failures, and validate their individual and combined impact on financial and operational timelines.
In my experience at EDC, I’ve observed that companies typically underestimate the need to retain flexibility to absorb these contingencies when undertaking an investment project abroad.
Look to do a sensitivity test on the resilience of your cash flow and your ability to service your financial commitments (i.e., interest and principal on debt, lease payments, government remittances).
The objective with the financial plan is to provide you with sufficient room to maneuver and therefore to adapt your financial plan accordingly. Some suggestions for contingency planning include:
- Losing an important client/contract
- Stress on your margins from commodity price or foreign exchange fluctuations
- Challenges with the integration of machinery/production lines
- Delays in your projects
Good financial planning for a future investment should enhance, diversify or improve the efficiency of your current operations. Prepare an investment plan for at least a three-year time horizon to ensure that your plan is feasible. The greater depth of planning you can demonstrate – particularly when it comes to the downside scenarios – the greater confidence you will build with your financial partner.
Stay tuned for my next blog post which you can use as a ‘How To’ guide on choosing the right partners to help you expand internationally.