Why Companies Fail in International Expansion Efforts

2018-04-17T10:48:27+00:00 02-02-2013|

Many U.S. companies who are facing revenue struggles at home are being lured by the bright lights of international expansion, by the drumbeat of globalization and by the vision of vast untapped markets of consumers or business buyers overseas. For many companies and the people who run them, this venture is their first foray into the great unknown. Unfortunately, many will make the same mistakes and suffer the same consequences as those who have gone before. International markets are strewn with the carcasses of global adventurers who have ventured and failed. So what are entrepreneurs to do to seize the lucrative opportunities before them?

One thing above all else will save them from a similar fate: learn from the lessons of others. Here are some of the reasons businesses have failed in their efforts to expand internationally. If you avoid these mistakes, you will be way ahead of the game and increase your chances of international business success.

Expansion for the Wrong Reason

The first mistake companies make is in choosing the wrong reason to expand internationally. Going abroad simply because the domestic market has little or no growth is a bad reason, according to Aneel Karnani, a professor of corporate strategy and international business at the University of Michigan. “Too many times,that kind of thinking results in adding a lot of new costs that don’t deliver new value,” he said.

According to a survey of 3,700 U.S. senior executives sponsored by SAP, one third said they planned to expand their customer base by exploring new international markets. Specific targets for this expansion are Brazil,China,India and Russia. As seen below,the allure is strong, but must be approached with caution.

U.S. Trade statistics from the Department of Commerce 2006:

  • In 2006, 239,000 U.S. companies made export sales, recording $1.4 trillion in sales abroad
  • More than 70% of the world’s purchasing power exists outside the US
  • 95% of the world’s consumers live outside the US
  • 96% of exporters are small and medium-sized firms, but as a group comprise less than one-third of the total value of U.S. goods exported fromthe U.S. to Europe

These statistics paint a picture of opportunity. Some companies have been very successful in exploiting these opportunities.

Crocs, the fast-growing maker of brightly hued plastic footwear, is one of those companies contributing to an impressive American record of international trade. It has reaped the benefits of the skyrocketing popularity of its odd-looking yet comfortable shoes. Crocs has steadily expanded the availability of its shoes internationally, adding Europe, China, India and Brazil as target markets.

In 2004, Crocs expanded their product line, added warehouses and shipping programs for quick assembly in North America and distribution throughout the world. Today, Crocs are sold through over 6,000 US store locations and in 40 different countries. Sales channels are through retail stores, the Internet and company-operated kiosks that promote their products and increase brand awareness

“Every day we learn more about our business, particularly overseas. Plus the geographic diversity of our company-operated and third party manufacturing facilities allows us to move efficiently and cost-effectively serve specific markets around the world” said Ron Snyder, President and CEO of Crocs, Inc.

Snyder recommends adopting a slow-build approach and gradually eroding rivals’ market share before taking over the competition. This could take years–even decades. Understand that “things” may take longer abroad. He advises companies to allocate the level of investment,strategy,adaptation and time needed to be successful. He says, “Plan for a long-term investment in the region,not a short-term win. Be Patient!”

The urgency of expansion plans is driven by the perennial American business driver to reap the first-mover advantage. This desire to be first in a market can blind otherwise cautious executives to the pitfalls and missteps that line the path of a global business strategy. Don’t rush in. “Impatience causes entrepreneurs to do some stupid things that can jeopardize key relationships, “says Joseph Monti,a partner at management consulting firm Grant Thornton LLP in Los Angeles. “It takes time to establish your company in an international market and form lasting business relationships. Although Americans prefer efficiency, much of the rest of the world moves at a slower pace. It all comes down to understanding cultural idiosyncrasies and realizing they play a vital role in all international relationships.”

Consider some of the most common mistakes:

False Assumptions About the Nature of the International Market

Companies who have products and services that are successful in the U.S. often assume that the appeal in international markets will be just as great and that this “under-served” market will be a bonanza requiring a small investment in sales and marketing. The painful lesson that many companies learn at great cost is that their product or service doesn’t fit the market, or even more commonly, that the pricing is way out of line with what customers are willing to pay. Adequate and objective market research can help avoid this pit fall.

An alternative approach that can achieve the same goal is a strategic acquisition of a company already established and operating in that market. This approach allows the leveraging of many advantages such as local contacts, existing business relationships, and legal requirements.

Yet another approach is to allow your customers’ global expansion to pull you into the internationalmarket. The risk is reduced because you will have a base of demand in advance of your investment in support and delivery infrastructure. It’s a “pay-as-you-go”  model.

However, all of these considerations maybe premature. Joseph Monti advises, “Identifying the primary characteristic that distinguishes your product or service from the competition is the smart entrepreneur’s first move. Is it a brand name?” Monti asks. “Does it establish critical mass? Does it provide access to existing distribution channels? Is it proprietary technology?” Unless you know these answers, you’re clearly not ready to take on any market outside the United States, he maintains.

Underestimating the Operating Costs in an International Market

Failure to account for all of the costs of operating in the new market can cripple an otherwise successful marketing and sales effort. Local expenses may include higher taxes such as a value-added tax (VAT), additional fees and assessments that are uncharacteristic of business overhead in the U.S. Many times these unaccounted-for expenses deplete the anticipated profit margins based on domestic sales and marketing models.

It is critical to engage the services of knowledgeable and experienced people in the local market who can help you understand the real cost of doing business locally and steer you past dangerous miscalculations about the true financial opportunity available.

Exporting your Domestic Operations to the Local Market

Don’t entrust the management of an international operation solely to U.S. expatriates. “In my opinion,it’s not the best strategy,” says Monti. “While they understand the company and the product, they don’t understand the local practices and culture and don’t have the relationships. The best strategy is to have a local general manager with a support staff that could be seeded with U.S. expatriates.”

In order to succeed in a local market, companies and products eventually must be accepted as their own. With the exception of products that thrive on being “imported” or whose brand is tied to an allure of the originating country, companies should strive toward acceptance as a local brand. Success in this effort depends upon a variety of “localization” efforts.

Assuming that marketing materials and collateral simply need to be translated into the local language is a serious mistake. Marketing and advertising campaigns are most successful if they originate in the local market and reflect local values, culture, language and marketing nuances that may not be understoodby domestic marketing resources.

Look into using local suppliers. Continuing to rely on your U.S. supply chain instead of a local one could be a major setback. You really miss out on the opportunity to take advantage of being local. And when you extend that supply chain across a border, not only do you increase the cost of maintaining it, but you also increase the cost of managing it.

Deciding to Become a Global Company Too Late

Companies are complex structures not unlike houses. The foundation is laid and the supporting infrastructure is built based on the expected character and intended use of the house. Additions to the house expand the square footage but are unlikely to change the character of the house. They are easily identified as additions to something existing. Companies are much the same way. A “purpose-built” global company has an infrastructure that more easily supports such operations. Companies with a “bolt-on” approach to global expansion will have a more difficult time appearing and behaving like a global company.

That being said, the earlier in their growth process a company establishes the strategic direction of a global company, the earlier they can take on the appearance and behavior of a company positioned and organized to support global operations.

Having this international expansion vision early sets the management expectation early and cascades through the organization from the start.This vision impacts organization, staffing and business strategies from the very beginning which is far more advantageous than having to retool the organization and dislodge entrenched interests in the status quo.

Planning early is about being committed to grow internationally from the start. This means understanding the implications of decisions made on future international business early. Having that thought process in planning growth early is a vital part of building a platformfor international success in the future, even if the plan is not to do something on an international basis immediately.

Failing to Get Expert Advice

Few entrepreneurs possess all of the knowledge and skills required to lead their companies into a global expansion. There are many experts who have been there before and can provide the advice and guidance to help avoid the many missteps and pitfalls awaiting the unacquainted. Expert advice is not cheap, but it pales in comparison to the costs, missed opportunities and damage to the corporate psyche and reputationcaused by failed first attempts or other errant initiatives.

Additionally, commit the internal resources required. Select an internal staff for which the international expansion is not just an extension of their current responsibility. Have this as their primary responsibility. Partner them with external experts and ensure a knowledge transfer so that you’re developing internal expertise while growing the business.

Most importantly, the company leadership must have a clear understanding of why they want to grow internationally. Their vision of global success must be tempered with the recognition that international business is not simply an expansion of their domestic operations beyond America’s shores. It is very much a different business with additional requirements, considerations and cautions than they have known before.

Be cautious, be clear, be patient.