taking the big leap

May 25, 2017

John Dunning described two reasons why companies expand overseas. They are, he says, either seeking new markets, or seeking new resources. Perhaps the domestic market is saturated and there is little further room for growth, or competitive conditions are growing tougher and the company decides to seek greener pastures elsewhere. Alternatively, the company needs to find cheap resources and labor if it is to continue to maintain its competitive position, and looks at off-shoring.

Dunning’s point is useful because it is important that the company is clear about its strategic reasons for expansion. During the 1990s, I watched many Western companies expand into China, simply because it was there. Seduced by the myth of a billion new potential customers, companies went to China with no clear plan and no real understanding of the barriers they faced. The same is true of Western companies moving into India, and I am seeing much the same with Indian and Chinese companies trying to establish themselves in the West.

key questions
Before expansion, the board and senior leadership team need to sit down and ask themselves the following key questions.
Why are we doing this? What is pushing the company towards international expansion? What is the imperative? Is it market seeking, resource seeking, or some combination of both? Is that imperative in line with the company’s own, already existing strategy? As above, expansion has to be for some strategic purpose, not just as the CEO’s vanity project.

What form will the expansion take? The answer depends in part on whether the company is resource seeking or market seeking, but there are some general principles that are valid in either case. The company has to consider whether it wants to partner with other organizations, or do it alone. It also has to consider scale; what proportion of resources will be committed to the new venture, and whether this is commensurate with the company’s own appetite for risk.

Where will the company expand to? This is a particularly vital decision. The company must expand to locations where market conditions are right and clear opportunities exist. Unfortunately, getting accurate information about these locations is not always easy.

When will the expansion take place? There is a tendency to rush into expansion, in the belief that opportunities may not come again. Sometimes that is true, sometimes not. My experience of watching other companies undertake international expansion suggests that playing the long game is usually best. Sound planning and adequate preparation are necessary.

Who will lead the expansion process? Sometimes, if the company is merely undertaking a toe-in-the-water exercise, the expansion program can be delegated to relatively junior managers. Any large-scale expansion, however, must have the full commitment and participation of the senior leadership team. That means those senior leaders must have the requisite knowledge of the international business environment.

barriers to international expansion
Even if all these questions have been asked and answered, formidable obstacles remain. It is easy to sit around a boardroom table or on a strategy away-day and talk about expanding into international markets. It is much harder to do it.

The first and most obvious barriers are legal and regulatory. What is the legal framework of the country in which you will be operating? How strong is the rule of law—does it exist at all? What are the prevailing attitudes to legal regulation, contracts, and the likes?

A common mistake is for companies to assume that the same legal frameworks will exist wherever they travel to do business. This is simply not the case. Different attitudes to law and its purpose prevail across different geographies. India, for example, is highly legalistic; it can take months to sort out and negotiate the necessary contracts and licenses to do business. In China the same can be true; but if you have a well-connected local business partner to intercede for you, the path suddenly becomes smooth. This is not because of bribery or corruption, but rather because Chinese business depends upon connections.

China has a strong legal framework and good enforcement, but the Chinese attitude to contract law is significantly different from that of, say, the USA. In America, contracts are an essential part of business, and are inviolate. In China, the contract is very much subordinate to personal relationships. How strongly Chinese companies keep to their contracts depends in large part on the strength of the relationships they have with their partners.

Other barriers include infrastructure, or its lack, and location. Once a country is chosen as a destination for expansion, where then should the company locate? Most companies expanding overseas tend to gravitate towards cities where other foreign companies are already established: Mumbai, Shanghai, New York, London, etc. But is that always the right decision? There can be advantages to going where the competition is not present—lower rents, cheaper labor, subsidies from local government, and so on. The barrier here is lack of knowledge. How do you find out what the best location is for your firm if you lack knowledge of the destination country?

Coordinating and managing an organization across national boundaries presents its own challenge. It can be very difficult for headquarters in Chennai or London to manage a subsidiary in Chongqing or Abu Dhabi. How much autonomy should the local subsidiary be given? Should it be free to adopt its own strategies, its own marketing campaigns, its own labor policies? Or should it conform to the rest of the company?

The biggest barrier of all, of course, is culture. The most obvious manifestation of the cultural barrier is language. There is a tendency among Western firms to think that it is not necessary to learn local languages; English is the lingua franca of the business world, and everyone speaks it. That is largely true, especially at senior levels (though it may be changing; I hear persistent rumors of Chinese companies insisting that negotiations on their home soil be conducted in Mandarin).

There are, however, many advantages to learning the local language where your firm is doing business. For one thing, information search becomes much easier. Secondly, contract negotiations are easier if you can read the contract without needing to have it translated; many contracts have gone wrong because of mistakes in translation, leaving the two parties with quite different ideas of what is expected of them. And thirdly, it is always useful to know what people are saying about you behind your back, not just to your face.

Even when speaking English, the same phrase often means different things in different cultures. For example, if a British business person says, “We must have lunch”, that does not mean he or she is inviting you to lunch. The real translation of this phrase is ‘I do not expect I will ever see you again’. All cultures have these nuances, and they can trip up the unwary.

I mentioned above the cultural differences regarding contracts. There is a host of others that come into play. American business people, for example, are often obsessive about time-keeping. If a conference call is scheduled for 10:00 and you have not joined by 10:02, you are likely to get an email asking rather sharply where you are. Other cultures are more relaxed, and delays of fifteen or twenty minutes are seen as normal and acceptable.

As human beings, we have many things in common, but culture is one of the key things that divide us. The organization theorist Geert Hofstede once defined culture as the ‘software of the mind’. We all have the same hardware, in the form of our bodies and our brains, but how we think is conditioned by our upbringing, education, and peer groups. There are distinct differences between Western and Eastern ways of thinking. One of the most important is the Western reliance on linear thinking, a cast of mind that goes back to René Descartes and, before him, to Plato. Westerners solve problems one step at a time, believing that there is one best way to reach a desired end. In Eastern, Confucian-influenced thinking on the other hand, there is a much more holistic attitude that takes all factors into account when making a decision, and is much more comfortable with notions such as paradox. Goalseeking, rather than problem-solving, is the dominant mindset. Both are important, and both have their uses. What we must always do is recognize the difference.

As an illustration of this, I once sat in on a meeting in China when a team of American consultants were pitching for business to Chinese company. The consultants came armed with a PowerPoint presentation that gave great detail on how they undertook their investigation and the steps by which they reached their conclusion. After a few minutes, one of the clients interrupted. Perhaps the consultants could skip over the detail, and just come to the conclusions; what did they think was the solution to the company’s problem. The consultants went into a brief huddle, and then solemnly informed the client this was impossible; they needed to work through every step of the presentation.
They did not get the contract.

overcoming the barriers
The first and most important requirement for overcoming these barriers is knowledge and experience. If the senior leadership team does not have personal knowledge of the country or countries where they plan to expand, it is very important that they recruit people who do before embarking on the expansion journey. Local knowledge is vital.

The process of expansion itself requires people with knowledge of how to manage issues such as legal barriers and coordination over long distances and across boundaries. These things get easier with time—the first expansion is usually the hardest. Even then, expansion into very different cultures still carries potential shocks.

Also essential is having trustworthy local partners. Whether these are formal business partners engaged in a joint venture, or locally based advisers, consultants, lawyers, advertizing agencies, and so on; they need to be people who can be relied upon to give good, accurate, and timely advice. Finding these partners and developing relationships with them is absolutely critical to success, and the company should be prepared to devote time and money to the process of seeking out partners and building relationships. Whatever the investment required is, it will be money well spent.

There are examples of companies jumping feet first into international expansion and making massive investments first time out—and everything working well. There are other examples, many of them, of colossal failure. Schwinn, the American bicycle maker, went into an off-shoring project with no previous experience of international markets, and ended up bankrupt. A better example to follow is that of Volkswagen, which invested in China soon after economic reforms began and built up its business slowly, developing relationships along the way. It took thirteen years for Shanghai Volkswagen to repatriate profits to the parent company. But the reward was a huge share of the rapidly growing Chinese car market, and today Volkswagen is still one of the best-known car brands in China.

Expanding internationally is never easy, and there are plenty of pitfalls waiting to swallow up the unwary. The keys to success are simple; gather requisite knowledge, build strong relationships with local partners, and play the long game. If a company can do all three of these things at once, its chances of success will vastly improve.