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Going Global: Should You or Shouldn't You? By Brad Hosmer The following article was published in the 2002 edition of the "Handbook of Business Strategy." "Going global" -- the phrase itself suggests a company that is about to rise on the highest of all tides. It is a major next step, a presumably smart and profitable next step. And indeed most companies who make the attempt to go global have very good, considered reasons for doing so. Yet many such attempts, despite good intentions and much logic behind the actual go-global decision, end badly, in disappointing returns if not downright failure. Although the concept at first glance seems straightforward and simple, the devil on this one is definitely in the details. One manufacturing company, for example, had enjoyed much success in its home market by virtue of a superior home furnishings product that had proven for years to meet an important need. However, the firm's attempts to export the product failed because it could not locate a practical and economical distribution means in the foreign market. In this case, even though the company had almost everything going for it, "almost" wasn't quite enough. This example is a good one because the biggest mistake any U.S. company can make when considering going global is assuming that foreign markets are the same as its domestic one. The reality is it cannot be predicted that customers in other parts of the world will automatically respond to products and services in the same way they do here in America. A reverse example illustrates this point. A company NOT based in the U.S had been selling an industrial component product for a number of years through a direct sales force in his home market. This firm had built up an enviable base of OEM customers with a product that was novel both in design and in its use of high-tech materials. This non-US company figured it could pursue the same approach in the U.S. with which they'd succeeded in other markets, confident that U.S. customers would respond in the exactly same manner. The company discovered however that an unknown foreign component supplier, even armed with a "better" product, could not necessarily capture significant OEM business from U.S. companies. One obstacle was the globalizing firm's lack of reputation. As an unknown in this market, U.S. customers were unwilling to gamble on an unproven supplier. But an even bigger obstacle was the fact that most potential customers were well satisfied at that moment with their current supplier's products. In addition, replacing an existing component with a different design required a customer's investment of engineering and testing. Since nothing was wrong at all with the current component, there seemed little to be gained by switching suppliers. So the company next tried selling its product through industrial distributors though this approach also went bust when key distributors figured they stood to gain no particular advantage by offering the "better" product. Their customers too expressed satisfaction with the similar (if inferior) products they'd been obtaining through these distribution channels. So again, the U.S. market showed no movement toward an unknown, though superior, new product. In the end, despite investments of enormous sums of money, not to mention a great deal of time, the foreign firm abandoned all its efforts. Its managers had to admit their assumptions about how easy it would be to globalize their operations proved decidedly unrealistic. Underestimating the competition Most companies planning to globalize their operations also tend to misread the tenacity and skill of competitors in distant markets. I have encountered this propensity to underestimate the competition quite often while consulting with companies wishing to penetrate foreign markets. Again there's the unfounded assumption that foreign markets hold no difference from those at "home." These firms presume they will quickly build up a significant share of some foreign market to levels approaching (or surpassing) their U.S. performance. Take the case of a U.S. metalworks firm who for many years had owned a dominant position in the US market for a certain type of industrial equipment. This company also competed with three leading domestic suppliers but was larger than all of them combined. In terms of foreign producers, however, there had never been any outside competition whatsoever in the U.S. market, so this manufacturing powerhouse was largely ignorant of whom its serious foreign competitors might be. The company entered the European market and soon found out. Each major country, they learned, had its own entrenched local producer who dominated its home market. In every case, the U.S. company had to battle uphill to gain any kind of significant market share at all. Though in time they succeeded, it took many long, hard years to do so. Would a deeper understanding of the toughness of their dominant foreign competitors have made any difference? Possibly, or at least one could imagine so. Had they know, a more effective strategy, for example, might have been to acquire one of these established producers and use it as a base from which to build the new foreign business. This might have shortened their learning curve and more efficiently utilize valuable resources in campaigns to win over local customers. Staying power can be vital In the example just cited, the company, in the end, did manage to achieve a number of dominant foreign market positions. But this would not have been possible without deep financial resources at the company's disposal. It kept investing year after year, keeping the heat on its non-U.S. competitors, gradually increasing foreign sales volumes to profitable levels. Thus, when it comes to going global, staying power, in the form of money and resources, can be everything, keeping plans moving forward during the natural building process and helping also to overcome any unexpected setbacks, of which there might easily be many. Recently I spoke with a colleague who has been in the wine importing business from for several years. Her product is of excellent quality and its price very favorable. Naturally, this sounds like the basis for a great business, and for some while it has been exactly that. However, the success of this particular business depends greatly on a well-oiled distribution system. So last year, when a critical link in my colleague's distribution system broke down, trouble bubbled forth. One of my colleague's key affiliates ran smack into an unrelated business problem, causing it to abruptly end its distribution duties thereby terminating a heretofore highly effective system. By interrupting the flow of my colleague's product, of course, an avalanche resulted in lost sales. Though eventually the damage was repaired and another distribution network found, the wine company had to work very hard to convince many disappointed customers to resume doing business. This relationship-rebuilding process took well over a year to enable the business to regain its previous momentum. It's not unusual for a globalizing company to be dependent upon a fragile foreign distribution system that could break down along the lines of the one described above. Whether a company uses a single agent or a large distributor to cover its foreign markets, it always stands to risk potential business interruption should the established system fall apart. Thus, financial staying power may be called upon should such a catastrophe suddenly strike. Acquiring the needed know-how Another huge problem for U.S. companies seeking to go global is that of locating the right people to work with them in the new foreign market. Typically the way it works is that a new exporter seeks out an agent or large distributor to help out in the unfamiliar market area. However, finding the "right" such agent or distributor is another matter, one often both difficult and consuming a lot of time. For example, it's common for an unknown agent or distributor to exaggerate his/her ability to produce qualified new business. If faced with this possibility, I would recommend to my clients the following advice for properly investigating prospective agent/distributors with three critical criteria in mind: 1. Only engage agents or distributors with hard experience selling products similar to yours, and to those customers who are your prime prospects. Check this out very carefully. 2. Avoid agents/distributors who wish to employ your product to gain access to new markets for their own products. In most cases, such "agents" will neither currently possess the contacts you need nor the local credibility to build the business you seek. 3. Learn as much as possible on your own before you commit. How well do you understand these new markets, new competition, foreign distribution channels? Don't rely solely on information provided you by your potential agent or distributor. Learn how to talk a good game yourself, so you can ask intelligent questions and properly evaluate the answers. Otherwise, you can never really be sure who is the right agent to hire. Other questions to consider The above points are key when contemplating going global. Consider them first. Then, as your evaluation process proceeds, pose other questions to help you make your final decisions. The following are a few to keep in mind covering other significant issues. Use this list as a checklist to determine if going global is the right road for your firm. · Do you understand the unique characteristics of the target markets? Every market has its own special characteristics. Study them, become an expert before you begin. Take note of the implications of the differences. · What local trade practices could determine your success and failure? Use market research to uncover relevant facts about target markets that will clarify its attractiveness and potential for your firm. Use market research too to determine the best way to enter this new territory. Again, each market will be different and therefore must be intricately understood. · Are there trade barriers? What are they? The impact of tariffs, quotas, and other legal restrictions will affect your results. These must also be thoroughly investigated and understood. · How will you get paid? What are the currency risks? It's one thing to do business but yet another to actually get paid in full and on time. Trade practices vary widely country by country. Many established global companies have found that the best way to get paid is by letter of credit in U.S. dollars. This approach they say overcomes much of the financial risk associated with exporting goods to a foreign market. Make sure you understand what kind of payment system that will work best for you. · What product standards must be adhered to? These kinds of life-or-death details can be quite prosaic. Recently I had to remind a non-U.S. client of mine that the U.S. market for their products demanded everything in standard inch sizes. My client of course had been supplying its home market and most of Europe with products specified in the metric system for decades. Its entire production process was organized to produce goods in metric sizes, for example, and had never done so any other way. This naturally included the products themselves, all individual packaging and the shipping containers. In order to be accepted in the U.S. market, however, the firm's products, packaging and shipping boxes would all have to be re-engineered and re-sized to conform to U.S. measurements. Though this may sound like a simple conversion operation-just re-print a few boxes and product pamphlets, maybe-- the task proved much more daunting, in the end requiring a doubling of the company's stock keeping units as well as a dramatic upswing in manufacturing complexity. To sum up, every opportunity, every target market, when "going global" will call for a unique solution. Since each company is different and its products are different too, new markets will respond individually to the overall combination of incoming company and its "new" product. For this critical reason, companies desiring to go global need to carve out a large amount of time for the purpose of learning fully the challenges ahead. Without making such a commitment, a firm cannot adequately develop a global game plan that makes sense. With a practical plan in hand, however, chances of successfully expanding across borders increase and multiply. Bradley E. Hosmer, CMC, heads The Beta Consulting Group in Concord, NH, specializing in improved sales, marketing and new business development for generating profitable growth. For further information please contact Mr. Hosmer at Beta Consulting. |
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