The most successful approach to international expansion requires strategic planning and execution through location analysis
James Bond doesn’t always take the most obvious approach to get the job done successfully; he takes the most effective or strategic approach.
When it comes to expanding abroad, you’ll want to think the same way. Because even if you’re set on a market where you could make a lot of revenue, you also need to assess what execution you’ll need to be profitable within that jurisdiction.
There are numerous costs that need to be calculated because the approach to selling your product in a new jurisdiction might require a different execution strategy compared to in your home country. Do you need a physical presence in the jurisdiction? Do you need employees on the ground to support distribution and sales or account management? Are you contracting with third-party distributors? Do you need to make adjustments to your product to fit the market?
Decisions, decisions…these can really get your head spinning!
In our other article on market analysis, we shared with you how performing a market analysis can help you understand if there is a demand for your product or solution, and whether or not your product or solution will meet the needs of that demand. The objective is to know if you can generate revenue in that new market.
But if you want to know if you’ll be profitable or how to increase your profit margin, then the next step in the process of international expansion is to perform a location analysis. Some companies will also perform a location analysis when they are trying to decide which market will yield them the most profit when they know they can generate revenue in multiple locations.
Location Analysis in a nutshell
The location analysis is undertaken when assessing which location could be most attractive to expand into, and the likely costs involved. There are 6 key criteria to analyze, and they include:
- Financial Costs (Both business and personal cost of living)
- Human Resources (Costs to hire local talent)
- Infrastructure (Quality and accessibility)
- Business Environment (Political stability, competition, etc.)
- Legal Aspects (Labor, Intellectual Property, etc.)
- Taxation (Corporate tax, indirect taxes, double tax treaty network, etc.)
There are numerous elements to consider within each criterion that we can walk you through – but to illustrate this clearly, here’s a story of how a location analysis can benefit your strategy for entering a new market:
When the most obvious path isn’t the most profitable
There’s a Chinese company that sells electric vehicles. Their north star goal was to expand into Europe and the United States.
But they had an obstacle: the high tariffs between China and both Europe and the U.S. would dramatically increase their total landed cost for these markets.
So if they know that there is demand in these target markets…but that they won’t achieve their target profit margin if they export to each unless they raise prices…should they just give up?
Not if they can strategize an alternative approach. (enters Bond)
When they performed a location analysis, they realized how they could increase their profit margin by establishing their manufacturing plant in countries within southeast asia that have favorable or free trade agreements with both Europe and the U.S. The analysis also included assessing the costs involved with setting up the plant, the costs of locally obtaining and availability of raw materials, and the costs of local labor.
By establishing a plant in a country like Thailand, Malaysia, Vietnam, or Indonesia, they’d be able to undertake substantial transformation in these markets and consequently obtain a certificate of origin to ensure their products originate from one of those countries (instead of China) and reduce the overall landed costs of the final product.
“Landed costs” are all of the costs involved with production and getting the product to your end customer based including shipping, customs and other charges. These costs impact what the customer pays as you may have to adjust your prices to ensure you achieve your target profit margin. In some cases, companies might choose to have a lower profit margin when entering a market to keep prices lower and then increase prices over time.
In other words, it would be less expensive for them to set up a manufacturing plant in southeast asia than it would be to export directly from China, thus increasing their profit margins.
The company that failed to do due diligence – and it cost them
Or here’s another story of a company that was blindsided for not doing their location analysis:
A popular media streaming platform in southeast asia was experiencing an explosion of growth and wanted to expand its digital platform. Since their method of delivering their services to customers was digital, it didn’t cross their minds to do location analysis even when they decided to set up a local rep office in Indonesia.
Little did they know, Indonesia is a challenging jurisdiction from tax, finance, legal and regulatory perspectives.
They started creating original media content by employing local directors, script writers, marketers, and sales agents which was out of the scope of what rep offices are permitted to do.
The relavant authorities showed up and asked them about what activities they were undertaking. When it was revealed they were not acting in accordance with local regulations, the company was shut down and their services were temporarily stopped. And in the market that had the biggest potential for them no less!
Not only did they get shut down, but they were faced with a bureaucratic and costly procedure of gaining approval that included seeing multiple people to resolve issues. They hadn’t performed detailed due diligence on what they needed to do to establish and operate legally in their industry. And once they had their rep office, they weren’t clear on what they were allowed or not allowed to do. It took them 6 months to reestablish themselves, costing them both time and money.
This was a case of a company where they were clear on their market analysis and revenue potential in Indonesia, but they hadn’t performed a location analysis. Companies that educate themselves of local laws can better set themselves up for success and how they approach execution.
And that is why location analysis can help you James Bond your profit margins. Cue *Skyfall*.
We’re happy to walk you through the location analysis process. Contact us here.
With special thanks to Sam Barrett from EY’s APAC Operating Model Effectiveness team for his inputs and insights in putting together this series of articles.
International Business Expansion Series
This article is part 3 of an 18-part series about International Business Expansion. Here’s a list of the full series to give you a well-rounded understanding of what to consider when expanding your business abroad:
- A North Star: The #1 Thing that Companies Need for a Successful Expansion Abroad
- The 3 Components of a Market Analysis to Know if Your Product is Viable Abroad
- How to James Bond Your Profit Margin with Location Analysis
- How to WIN in a New Market with These 6 Models of Execution
- Show me the money: How to Fund Your Business Expansion Abroad (Coming 8/24/2021)
- Lost in Translation: How Culture Can Impact Your Business Expansion (Coming 9/7/2021)
- Risky Business: The 2 Key Layers of your Operating Model to Align with Your Growth Strategy
- How the Way You Organize Your People Globally Can Save You on Taxes
- Trash Talk: Why You Need to Analyze Your Processes Before Expanding Globally (Coming 10/19/2021)
- 5 Reasons Why You Should Customize Your Technology for Your International Expansion (Coming 11/2/2021)
- Setting Up a Business Abroad: The 4 Kinds of Structures & Legal Implications (Coming 11/16/2021)