Businesses are always looking for new opportunities to expand overseas, to access new markets and to pitch their product to a wider audience.
Though growth in your home country can be relatively easy, expanding internationally brings risks, complexities, and a multitude of different challenges which change based on your route to business expansion. And, international expansion strategies vary greatly depending on the route you take.
In this article, Claudia Nunes, our Director International Corporations, reviews the different entry modes to consider for your global expansion strategy.
Types of international business expansion entry modes
Let’s take a look at the different entry modes used by firms for international expansion.
Undeniably the most common route to business expansion in our age of e-commerce, direct export involves direct sales to a customer base outside your home country.
Direct exporting means that the producer or manufacturer handles the export process, without the use of an intermediary or agency. The term covers everything from micro-producers to multinationals, as sales through a foreign branch/subsidiary are also considered direct exports.
There are disadvantages, one of which is that direct export requires substantial investment in marketing strategies and publicity to achieve market coverage. If customers don’t know about your product, they can’t purchase your product. On the other hand, it’s entirely doable and, if you do it just right, exponential growth is achievable while keeping a large part of the final value chain.
Franchising can provide rapid growth (if you’re the franchisor), with minimal capital outlay – allowing expansion with little or no capital liability. While setting up as a franchisor will take time and money, the franchisee is usually the one providing all the capital for their own location, signing leases and so forth – greatly reducing your risk as franchisor. Once things are moving, you can watch the franchise fees and royalties roll in.
What’s more, your franchisees will be motivated business owners. Your franchisees are materially invested in their/your business, have made a long-term commitment, and will be working hard for profits. This also takes human resources headaches off your shoulders; franchisees do all their own hiring and firing, and are often better managers because they own their business.
It may sound like the perfect growth solution, but risks do remain – particularly for brand reputation. Any negative publicity your franchisee incurs will automatically be transferred to head office. You’ll also have to setup and manage a training and support network for your franchisees, setting up systems and procedures easily replicated ‘in the field’, and providing support when required.
Partnering and Strategic Alliance or Joint Ventures
A strategic alliance or joint venture is a common way of combining the resources and expertise of two unrelated companies. JVs enable growth without additional capital expenditure or sourcing outside investors. While arrangements can be highly complex, partnerships or joint ventures (JVs) can be highly advantageous for both parties.
A JV will give you immediate access to new international markets, access to new experts, and instantly increase your capacity. And, if the partner is local, they’ll have immediate knowledge of the local market and culture. You’ll quickly and easily grow your network, and you can also use your partner’s client lists to direct market (and they can use yours). The partnership may also provide purchasing power along with additional R&D capabilities.
But there are things to be aware of. Firstly, it’s essential that the venture’s objectives are transparent and clear communication is maintained between the parties. Both partners should also understand exactly what’s expected from the JV, including which decisions are to be shared and which aren’t. Expect to split profits and be sure to limit your liability within the JV. There may also be additional tax ramifications – you should include a tax professional in your planning process.
Mergers and Acquisitions
Mergers and acquisitions (M&A) can be one of the most direct routes to new target markets. Purchasing or merging with a ‘going concern’ brings an immediate client base in a new location, increasing market share and, depending on that location, possibly even provide reduced labour costs.
A merger or acquisition is an infinitely tricky transaction, though. Not only do you have to charm the Board of your target firm, but you must involve key experts – lawyers, financial professionals, compliance/auditors – government bodies could even become involved (e.g. the acquisition of Simon & Shuster by Bertlesmann, and ongoing Dept of Justice anti-trust case). This can be costly, and the process itself takes time, effort and patience. Rigorous planning and a well thought out post-deal integration strategy is essential to ensure the process is done successfully.
We talk more on the benefits and possible pitfalls of M&A in our Growing Global guide.
In global expansion terms, a brownfield venture is the search for a suitable existing property to base your overseas business. There are several different brownfield routes, from sub-letting or sharing an office, to turnkey facilities, to direct leasing. In our Growing Global guide we focus on brownfield ventures, as this is one of the most common ways for firms to expand into new locations – find an existing property that suits and buy or lease it.
A greenfield venture is where a parent company creates a subsidiary in a different country and starts building operations from the ground up.
Greenfield ventures require a high financial outlay, significant project management and can take years to complete – and return on investment may take even longer to realize.
If you’ve grown to the level that time and cost aren’t barriers, going greenfield offers businesses a chance to design their facilities from scratch, enhance brand reputation, increase community sentiment, and boost recruitment.
A legal agreement between two parties, the owner of the assets (the licensor) grants permission for another party (the licensee) to use their brand, patent or trademark. Licensees lease the rights to brands and other intellectual property for use with their own merchandise, but don’t share ownership in it.
Through licensing, a brand has the ability to enter new markets quickly, though this usually means loss of control of the product, promotion, the packaging, and even the selling process itself. Licensing helps to satisfy demand and helps the brand owner to unlock further latent value, like the value of products to boost the user experience of the original.
Take Apple, for instance, who produced the iPod themselves but licensed the production of accessories (docking stations, cradles, arm holders for jogging, etc.) to other firms. These firms gained access to all the positive benefits of the Apple brand and reputation, immediately boosting their offering simply by being associated.