International expansion is a pivotal growth strategy for businesses seeking to diversify their revenue streams and mitigate risks associated with operating solely in domestic markets. Emin Birsel, a seasoned executive with 30 years of experience in leading international operations, offers valuable insights into the complexities and rewards of global expansion. This article distills our comprehensive discussion on strategic international expansion, emphasizing the key factors that contribute to successful ventures into new markets.
Motivations for International Expansion
Sabit: Emin, last time we discussed strategies for companies going international. In my experience, there seems to be confusion between export and market development. Most firms typically start organically without much of a strategy. They simply fulfil demand and begin exporting to neighboring countries. From there, they may expand to other regions. This becomes a natural evolution, but it’s not a strategic process. There are many concepts to consider: going direct, indirect, targeting markets etc. So, what has been your experience in differentiating these concepts, and in your opinion, what would be the best strategy?
Emin: Sabit, thank you. In the first part of our conversation, we discussed a strategic approach to international expansion, particularly focusing on stakeholder commitments, readiness, financial health, unique selling points of the company, as well as leadership and talent within the company. This now leads us to delve deeper into various expansion models.
The spectrum of models for international expansion is quite broad, ranging from exporting, licensing, and franchising to joint ventures, and further to establishing a physical presence. The decision essentially hinges on aligning the company’s readiness, risk appetite, and vision for the target market or more broadly for the international markets.
Key Drivers for International Expansion:
Diversification of Revenue Streams:
Operating across multiple countries allows a company to distribute its revenue sources among various markets. This mitigates the risks associated with overreliance on a single economy's performance. A geographic spread of operations also reduces the potential impact of political instability, economic downturns, currency fluctuations and even unforeseen disasters in a particular region.
Access to Larger Customer Bases and Resources:
Next to mention is the eventual access to larger customer bases and resources. Entering new markets provides access to a broader customer base, revealing potentially untapped demand for existing products or services. This can have a significantly positive impact on leveraging the existing physical and intellectual assets of the company. On the flip side, different countries offer diverse resources, such as skilled labor, raw materials, and technology, potentially different from the company’s domestic market. These can significantly impact a company's operational capabilities and costs.
Cross-Fertilization of Ideas:
Another top reason among others is the opportunity for the cross-fertilization of ideas and practices. Operating internationally exposes companies to varying business practices, cultures, and customer preferences. This diversity often leads to enhanced innovation and problem solving, that can also find uses and synergies in the domestic market. While these benefits are substantial, it's important to acknowledge the associated risks in a new market.
Export Models: Indirect and Direct
As you mentioned, the most common and perhaps the most obvious model to start a business in markets outside the home market is the “export model”. Exporting can be a relatively low-cost method to test the compatibility of the company’s products and services for international markets and can be done incrementally. Starting exports will likely require adapting products or services to meet local regulations and preferences of the target market to be successful. However, there are also different stages for export models if you would like to talk about that.
Sabit: Exactly. Fulfilling inquiries to make decisions to expand to various export markets is what we see in companies. What do you see as the stages of export management?
Emin: Within the export model, probably the most straightforward route is what we can call the model of “indirect export”. That is using intermediaries like trading companies or export management companies to handle your sales in foreign markets. However, this will give the company only limited information and knowledge about the target markets and consumers, and that limits you in developing your business.
The next model to look at is a “direct export” model that brings the company closer to the target market and potentially to customers. It means selling the products directly to distributors, or potentially directly to resellers such as retailers in a foreign market. This dramatically increases the exposure to new customers and helps you understand the levers for success. The direct export model can be developed further by supporting the local distributor with resources in the target market. This can be in the form of support in trade marketing, brand marketing, or support in other commercial or technical areas, as well as with dedicated personnel on the ground.
It is also possible to work and partner with regional distributors to serve multiple markets and regions. There can even be opportunities to export to multiple customers within the same market. I used this model before, for example in Japan, where we reached different customers in different channels, while to some customers we offered a different portfolio and set of brands. Continuing that example, two distributors went to retail customers, another distributor went to B2B customers, while we were also supplying private labels to the same market through another agent.
In recent decades, the emergence of e-commerce and online marketplaces has created new channels that are by their nature borderless, such as eBay, Amazon, or Alibaba. These platforms give companies unique opportunities that just didn’t exist earlier. The models involving international e-commerce require lower upfront costs and offer the ability to reach resellers or customers very quickly in a highly scalable way. But setting up a successful e-commerce channel is not as easy as it sounds. For significant commercial success, there is a need to invest robustly in the “online presence”. Ensuring that the value chain remains sustainable and that there is ample value for the company remains a considerable challenge in these new channels. Additionally, companies often discover that maintaining local physical stocks may be essential to meet customer service level expectations. That requires different kinds of partnerships, but still, these are a bit at arm’s length.
Sabit: Thank you for bringing the online and ecommerce angle. Let's delve into that separately. You've mentioned importers or distributors or nonexclusive distributors in the target markets, let's call them “partners”. It is also sensitive for companies to cooperate successfully with local partners when winning in international markets because what starts small in one or two shipments, can become substantial as the volume grows. So how should companies choose local partners, or should they go solo if the opportunity is big?
Emin: I think that this is a stage where companies realize that they need to act more strategically, and that international expansion can take different forms. Let me start with a number of alternatives that companies I’ve known throughout my career used to enter markets in rather different ways.
International Franchising Model
Let's start with the “international franchising” model. It basically means allowing a foreign entity to operate under your brand name with ongoing support while the company receives royalties, potentially among other revenue streams. I used this model before in markets where the company did not want to enter directly at the given point in time, or the risks were too high.
In these cases, we found a franchising partner that would help us. That allows a rapid expansion with minimal capital investment on the part of the company and the franchisee bears most of the financial risk. This model requires a proven brand and a well-documented process. Everything should be carefully structured, and the intellectual assets must be protected.
Strategic Licensing Model
A model that is fairly close to this one is what I would call “strategic licensing”. This model allows a foreign company to use your intellectual property, such as trademarks, patents, and technology or software in their products or services in exchange for royalties and fees. As an example, we used this model in Algeria, where we brought technological know-how, in terms of formulations or R&D and sustained technical support over a period of time.
The advantage is a low-risk scenario but, of course, “intellectual property” must be very well protected. A common version of this is for international management contracts and turnkey projects. This is where you enter a partnership in which you provide your services and leave upon completion. I've seen this in construction, engineering, and other infrastructure projects. We also used this model when starting up factories with or for partners in different countries.
Strategic Alliances and Partnerships
Now let me continue with more challenging and more evolved models. I will start with “strategic alliances” and partnerships, which mean collaborating with local companies for mutual benefits, such as sharing resources, distribution channels, research, development, sales, or marketing. Depending on the arrangement, this can involve low to mid-level investment for the company, but you start potentially having access immediately to a customer base, local resources, and critical connections in the market. It also gives a realistic market test opportunity in the future. The selection of the partner is crucial here.
Joint Ventures
The next big step is “joint ventures”. The simplest way to design a joint venture is a “contractual joint venture”. It enables the company to partner with a local entity for a given project or a given term. I've seen this also in construction, engineering, services projects, and even in IT companies. The problem here is that the suitability of a contractual joint venture in a project, or market, must be well understood.
The next common form is the “equity joint venture” when you partner with another company, sharing ownership, risks, and investments. Accessing local partners, knowledge, and resources offers a potentially faster and more robust market entry. But this requires a lot more careful selection of the partner and there is a bigger potential for conflict of interest.
Wholly Owned Subsidiaries
We're stepping into the stage of wholly owned subsidiaries for companies. Naturally, one common way of establishing a presence in a foreign market is by acquiring an existing business in the targeted market or region, either partially or entirely. This allows a swift market entry with the potential to gain and establish supply and production infrastructure, customer base, distribution network, and an existing organization. Although the initial costs can be substantial, the success of mergers and acquisitions is by no means guaranteed, especially in the case of international M&A deals, where success rates are lower. If companies approach international M&A with careful planning, rigorous due diligence, and a clear integration strategy, they're significantly more likely to succeed. The challenges and how best to prepare and manage these transactions are a topic of a completely different discussion.
Suppose you make a greenfield investment in a country by creating a new fully-owned subsidiary from the ground up. This approach provides full control over your operations and the opportunity to build the business to suit the local market or regional needs. In this model, the total investment phase to reach breakeven and payback will take longer, while the increase in the risks for the company is also substantially higher versus the earlier models we discussed.
It's often very beneficial to consult with the experts, conduct proper market research and evaluate the pros and cons of each model.
Sabit: Exactly. There are different levels, from exporting to a single country, multi-country, targeting a region, internationally, or targeting to become a global company. Let's give some sense of the timing and milestones needed from export to regions to global.
Emin: This is a crucial point; how to advance through those models and through the evolution of the business cycles. Agree, it's quite common to see companies start their international journey with few targeted markets. This offers companies a first glimpse into the target market and exposes them to the realities of doing business
Conclusion
Successful international expansion hinges on internal readiness, strategic partnerships, and strong leadership. Companies must carefully choose their entry models based on market conditions, risk appetite, and long-term vision. By fostering a cohesive culture that embraces both local and international expertise, businesses can navigate the complexities of global markets and achieve sustainable growth. As Emin aptly summarizes, the essence of international success lies in a well-prepared leadership team, strategic market entry, and the ability to adapt and innovate in diverse environments.
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