Choose the one that’ll help make your global expansion a success
Now that you have your north star and performed your market analysis and location analysis, your next step for global expansion is to select your model of execution. The model of execution is essentially the method you’ll use to get your product to your customer, and the one you select will depend on your needs within the jurisdiction you choose.
The model of execution will have a direct impact on your costs, return, and presence in the market, and you should weigh your profit margin against your delivery approach. Now, some of these might sound straightforward and comprehensive, but there is a strategy involved with why you may want to select one over the other. Also, your preferred execution strategy might not be the one you need to start with when you’re entering the market, but could be one you switch to as your business grows.
Here are the 6 models of execution and the pros and cons of each. They’re ordered from low to high cost as well as simple to complex in execution.
Exporting your product to a market is the lowest risk and lowest cost option for getting your product to a customer in a new market. You can sell your products without having to physically be present which will save you a lot of costs for setting up a physical location in the jurisdiction.
The downside to limiting your execution model to exporting though is that you are in charge of marketing and acquiring customers within that jurisdiction, which means it could be hard for you to scale without having someone on the ground to grow the business locally.
2. Local Distributor
Working with a local distributor or wholesaler means that you send your product or license your software/technology to a local company in the jurisdiction who will then market and sell it to customers. You can sell them a high volume amount of your product, and they will sell smaller individual amounts for a marked up price.
The pros of having a local distributor is that you don’t need to create a brand presence and deal with any hurdles of setting up a local office and language implications. You also don’t need to take on any costs associated with employing staff or building an infrastructure.
But the cons are that you will not have a footprint in the jurisdiction which makes it hard to assess the market on your own, and your revenue potential is out of your control which means that the performance depends on the capabilities of the distributor.
3. Licensing or Franchising
Another low-cost way of increasing your revenue while having a presence in a new market is to license your brand to a local company. What that means is the local company will pay you for the intellectual property rights to do business with your brand which means leveraging your intellectual property and selling your products in country but to the customer it looks like you entered the country yourself, and your revenue comes from selling them the rights (though not from any sales they make to the customer, usually).
4. Joint Venture: how 1+1=3
Sometimes it can be more strategic for your business to have a partnership with a local company, especially when you both have strengths to bring to the table.
Take, for example, a company that makes stainless steel sinks and homegoods that was looking to enter India. They had considered setting up a location themselves, but they discovered that the infrastructure in India would make it difficult to deliver to individual households. Plus, the retail industry is fragmented which means that developing relationships with as many stores as possible would be a decade long project.
What made the most sense for them was to form a joint venture with a business in India that already had a brand name locally. They could share their IP and technology and customers can gain access to the complementary product line. Since both parties could leverage their strengths and make money together, this is an example of how 1+1=3.
Another example was an Israeli software firm which had a platform for connecting social media influencers to big business.The Israeli software company created a joint venture with a local Japanese media company that staffed the venture and also brought initial capital to the table for marketing and product localization. The Israeli firm brought the fully built platform infrastructure.
Now, in some jurisdictions, it might be essential for the success of your business to have a joint venture so it’s always good to think about this based on the jurisdiction you’re looking to enter even if you haven’t been considering it. While there are benefits of having a local partner to help grow your business within the jurisdiction, it’ll create a ceiling on how much revenue you can make when you have to split earnings with the partner.
5. Set up a local office
Setting up a local office is great because you can retain all of the margins from sales to local customers, and you can also assess the market by being physically present. A big benefit of having a physical location is establishing your brand presence and interacting with locals as well as accepting payments into local bank accounts you control. The downside is that this is a high cost endeavor in which you’ll need capital to pay for overhead, staffing, compliance and other expenses.
6. Merger & Acquisition
There are a couple of reasons why companies acquire a local company when expanding abroad. The first is to acquire a company that complements your business so that you can vertically integrate their product into your supply chain and also take over other revenue streams that company is enjoying.. For example, a company that manufactures patties for a major fast food chain could acquire their vendor that makes dough.
The second is to acquire companies that were set up by locals which are more difficult for foreign investors to establish.
Here are a couple of examples:
A British bike manufacturer was looking to enter the Indonesian market. They found out that motorbikes are a government protected industry that requires a certain amount of local ownership. The law has been around for the past 40 years, which means that the bike manufacturer could acquire a 40-60 year foreign-owned local company to bypass this barrier to entry and enter the market.
Or another example is of the cryptocurrency industry. When Coincheck, a famous cryptocurrency exchange in Japan was hacked, the FSA in Japan made acquiring a cryptocurrency license nearly impossible for locals, let alone foreign investors. Loose unwritten rules were put in place like needing to have 20 people on staff with certain experience levels and licenses to even begin the application process.. In order for a company to operate any business that touched cryptocurrency in the Japan market, you’d need the license. To avoid the costs of hiring 20 staff to qualify for a license, a company could acquire an inactive company that received the license prior to the change which is a much less painless process than doing it from scratch yourself.
An acquisition can be a great strategy to help your company build more revenue or enter a market easier.
How your timeline can affect your model of execution for your global expansion
Keep in mind that you don’t have to stick to one model of execution throughout your global expansion into a foreign market. You can always switch models as your business grows and your needs change. For example, it’s common for companies to build a market presence through working with local distributors, and then switch to either establishing their own local office or acquiring the distributor once they’ve created a footprint and built capital.
We are happy to help you strategize your global expansion including honing in on your execution model. Feel free to 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 4 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)