In a conversation between Sabit Tapan, Partner at Pedersen & Partners, and Emin Birsel, a seasoned international business leader with three decades of experience, valuable insights emerge regarding crafting a successful strategy for global expansion. Let's delve into their discourse and distil key learnings and guidance on venturing into international markets.
Export Model: Testing the Waters
Emin: 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. 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?
Indirect export
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.
Direct export
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.
Examples
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, and we were also supplying private labels to the same market through another agent.
Embracing E-commerce: New Frontiers
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.
Choosing the Right Partners: Strategic Alliances and Joint Ventures
Sabit: 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: Let's start with the “international franchising” model. It 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
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.
Strategic alliances
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 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.
Equity Joint Ventures
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.
Beyond Borders: Wholly Owned Subsidiaries
For companies ready to take larger strides, establishing wholly owned subsidiaries or acquiring existing businesses in target markets can provide a swift entry with full control over operations. However, mergers and acquisitions entail substantial risks and require meticulous planning and integration strategies to succeed.
Navigating the Journey: Timing and Milestones
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 with international customers.
Export Model
Businesses that stay with the export model can continue their journey by expanding their customer portfolio and entering new markets for a very long time. Exports can grow fairly large and become a very substantial part of the company’s revenue. However, the rewards and the risks may still be limited versus not realized opportunities.
Multi-Unit Development
A potential step forward for international expansion is the “multi-unit development”, which means opening units or locations within a designated region or even a country. This is sometimes called a hub & spoke model which means establishing a central office or a location in a key market and surrounding it with smaller offices or operations in nearby markets.
Small region model
It's a “small region” model and it is often used in industries like retail, logistics, franchising, and even professional services.
This “hub & spoke” model provides a structured framework for businesses to expand while maintaining control. However, it requires careful planning and a robust communication and support system.
Regional expansion
The next level of expansion is what I call the “regional expansion”, targeting a specific geographic region, which may encompass multiple countries, generally sharing similar economic and political regulatory characteristics. The most obvious ones are the European Union and ASEAN which share common regulatory frameworks and some economic integration.
Multi-country expansion models
There are also “multi-country expansion” models slightly different than those described above. An example is the kind of strategy used by businesses to expand their operations in multiple countries simultaneously. Those models are used when being first in and preempting the market is so critical.
In such cases, companies establish a presence in several countries at the same time, often to capture a diverse range of markets which are beachheads or the most lucrative ones for a given service or product. Each market is then treated as a different business case, with its own levers and unique characteristics and regulatory frameworks. This is a lot more complicated, but with the advance of technology and some of the services and products, I've seen this model deployed more frequently.
In conclusion, The key to success lies in the leadership, the organization, and the culture of the company. International expansion requires a long-term commitment, it requires preparing the mindset and the organization for this journey and making sure that you are surrounded by experts and experienced and resilient managers who can lead and support the organization.
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