Looking before leaping: mitigating risk
THE ACADEMY OF BUSINESS STRATEGY
BUSINESS INTERNATIONALIZATION BLOG
Looking before leaping: mitigating risk in the entry to a new market
AUTHOR
Luis da Silva (CBS) MA BSc BA
Let’s be frank: not only is taking a step towards internationalisation daunting for most businesses, but it is also a minefield that could be fraught with financial disaster. On reading this, it might appear as if I question the soundness and validity of any and all international expansion. Quite the contrary. As with any business decision, understanding the risks is fundamental. What to one organisation may be a large investment, to another may not. What to one may appear daunting, to another may be a challenge to be overcome. What to one might be an option, to another might be an absolutely fundamental requirement. Clearly, no organisation ever considers internationalisation as simply a challenge (unless they are a company that provides adventure tours) but differing views of risk will influence the attitude that each organisation has towards taking this step. Ultimately, as with any important business decision, or one involving the need to commit significant (human and financial) resources, it is a question of risk management.
And for some organisations, taking the step alone and immediately, even after doing market studies, is not an option with which they are comfortable. But the underlying business requirement or pressure or aspiration to expand continues to exist. What to do? We will consider briefly some of the options.
Unless an organisation is willing to completely outsource its decision as to how, when and where to internationalise (which, frankly, I have never seen nor do I recommend) it will be important for one or more members of the senior management team (and by this I mean really senior, ideally Board level) to be personally committed to leading the initiative. Together with expert support, someone who understands what is involved in growing businesses internationally and better still has experience of the local market, is essential. A detailed market analysis will compulsorily analyse candidate partners with whom an alliance might be forged. It will also contemplate the possibility of an acquisition, and may even conclude that the company is best served through a looser arrangement such as a representative office or a sales/commercial alliance.
The option of a partnership is an approach which is particularly useful in the service industry, such as accountancy or consulting services, but may require a commitment by the party that is moving into the new market, not to compete or to unfairly exploit the market entry opportunity provided by the local partner. At an early stage of the expansion and investment decision, it may make sense to seek a partner that simultaneously offers a similar set of services and yet allows scope for the joining of complementary expertise. So, for example, if the local company is able to offer technology consulting and systems development, and the foreign company, strategy consulting and business process improvement, this may well be a good fit as long as both organisations are in agreement about their willingness to expand the breadth of their respective service offerings. Among the other challenges that two businesses contemplating this form of alliance will face, will be to manage any cultural or organisational conflict that might arise as a result of differing corporate approaches. At a later stage, the expanding business may well have to consider making an equity investment or taking a share in the local partner (or vice versa), to cement the relationship. However, such a commitment not only involves a major strategic decision but also a financial commitment and an estimation of the value of the business. In a service business, the calculation of goodwill is not a simple matter. On the other hand, investing into an established company with which the business can work, can be an extremely efficient way of fast-tracking entry into a foreign market.
A more aggressive process of entry into a foreign market, particularly if it involves a manufacturing business with a proven distribution channel, a financial institution with retail outlets, or a retail business with distributed points of sale, is the acquisition of all or part of an existing business. Every acquiring party needs to weigh up the benefit of a controlling interest against the likelihood of reduced contribution and motivation from the exiting party. For this reason, well-known structures such as earn-outs are common. Again, speed into the market is often an overwhelming consideration. In situations where physical facilities and premises are involved, the possibility of eliminating the need for the planning and licensing is often a key to opting for the acquisition route, as is the fact that any uncertainty associated with these processes is eliminated. The acquiring party is thus often buying certainty more than time. With any of the examples cited above, cultural conflict is also much less of an issue. Even though a new corporate owner will bring changes to processes and procedures, marketing and branding, and even some changes to certain key positions, the acquiring party is buying into an existing (hopefully successfully working) model and its potential. Thus, the colloquialism ‘if it ain’t broke, don’t fix it’ often applies to avoiding any tinkering which may not deliver bottom-line improvement.
Finally, a business may conclude, after an analysis of the market, that for reasons of difficulty in penetrating the market, the time and/or cost involved in establishing a presence, regulatory or legislative limitations, or any range of other reasons, it is not ready or is unwilling to make a direct investment into the new market. It will then have the possibility of structuring an alliance along the lines described above, without the intention of developing it beyond a contractual relationship. Even more commonly, many businesses find that their interests in a new territory would be best served via a set of commercial relationships limited to the representation and commercialisation of their products or services. So what may initially start as an investigation of the expansion into a new market, may turn into a definition of a channel strategy for a particular region. This aspect is dealt with in more detail in articles elsewhere.
A final word of warning: in my experience, the selection of the most suited individual(s) among the senior ranks of the business is fundamental for the success of any internationalisation initiative because it ensures that the key questions and decisions are taken ahead of any investment. It is very likely, in fact, almost guaranteed, that if the person has been correctly selected, they will wish to remain involved with the business expansion or internationalisation programme. Whether selected in-house or recruited from outside, the individual will stamp their individual approach and touch on the initiative. Unless it is concluded that the business is not in a position to follow through (an issue in itself as it could lead to demotivation of the person and their team) or that there are no obvious new markets into which to expand (unlikely in my experience), the person will almost certainly wish to remain involved. While involvement can vary from providing punctual hand-over support to wanting to run the business in the new region, planning the career progression and succession of any individual selected to lead this sort of initiative, is fundamental. Given that the candidates most likely to be presented with these opportunities are the successful and the talented, all businesses should ensure that the success of a new initiative does not come at the expense of the stability of an existing one. That, in my experience, will ultimately result in the downfall of not only both regions but possibly of the business as a whole.
ABOUT THE AUTHOR
Luis da Silva (CBS) MA BSc BA is an approved Certified Business Specialist (CBS) with the Academy of Business Strategy and his specialist subject is business internationalization. He has achieved an MA, and BA from UNISA and a BSc from the University of the Witwatersrand. He has been employed as a CEO and board member of a listed company with a turnover of €250 million and value of €1 billion and has experience within the Manufacturing, Electronics, Banking, Agribusiness, Travel/Airlines and real estate industries. His clients or employers have included Fractional Villas Inc, Invest CV Limited, BGR Ltd, API Undercliffe Ltd, DMS Lda, Emeritis, Quillion Ltd, Datanomic Ltd, E-business Partners, PLAUT and Andersen Consulting. He has geographical working experience in the USA, UK and Brazil. His language skills include English, Spanish and Portuguese. His service skills incorporate business management, business expansion or turnaround and people management. To contact Luis da Silva, please contact the Academy of Business Strategy by forwarding an email.
