Market expansion means different things to different audiences.
Do you need to seek a PEO/GEO?
Or do you need to seek other professionals for tailored advice?
In a previous article we outlined a checklist that senior leaders could use to create a business expansion strategy. This was aimed more for the business development side of things, notably B2B and high-tech verticals.
Typically what happens is that once a large enterprise or SME begins to work with a professional employer organization (PEO) or global employer organization (GEO) for “market expansion” services, the question becomes now what?
If you don’t know, PEOs and GEOs help to take care of the technical and legal aspects of expansion overseas, services which include HR, payroll services, benefit administration, tax risk and compliance services.
We want to clarify that we are speaking about Go-to-Market strategy and ground zero business development.
The other issue is that even if you attempt to find the right people to fulfill the business development side of things, your choices are left to the discretion of the GEO/PEO. They outsource the work, but you don't know if this third-party knows your industry or business well enough to help you succeed. Many high-tech fields are niche and require specialized negotiation skills to be successful in deals and agreements.
So rather than seeking a GEO/PEO, you may need to seek out tailored expert advice.
When it comes to international business expansion, we're tempted to look for examples outside of our country to emulate companies that have succeeded in their initiatives. Global high-performers like General Electric, IBM, Shell, or BMW are the usual suspects.
The problem is that these worldwide role models are far easier to appreciate than to follow. It's this confirmation bias and second-hand information that can distort some of the barriers to success abroad.
In an HBR article, the numbers were staggering and bothersome. In an analysis of 20,000 companies in 30 countries, researchers found that companies selling abroad had an average Return on Assets (ROA) of minus 1% as long as five years after their move. Furthermore, their research indicates that it takes on average 10 years for a company to earn a meager +1%. Out of all companies studied, only 40% made more than 3%.
The authors criticized Devon, a mid-size U.S. oil and gas producer, as an example of why international growth yields such low numbers for so many firms. In 1999, Devon acquired PenzEnergy and Santa Fe Snyder, gaining access to operations in West Africa, Brazil, Azerbaijan.
Devon eventually realized that it could not scale to absorb the risks that came with their future investments. They cited that when approvals for environmental permits were delayed in Brazil, the company was forced to incur rental costs on drilling equipment that it could not deploy to alternative fields and was forced to take a capital hit that a firm its size could ill afford.
In 2009, Devon sold all of its foreign assets and used the proceeds to invest in U.S.-based shale development.
In the 1990s, Boise Cascade, a large, vertically integrated wood-products manufacturer in the United States, decided to go into Brazil and buy timber and construct a new mill.
Despite being a booming country, operating in Brazil turned into a complete disaster due to various regulatory, political, and cultural disparities. Management spent an extensive amount of time ensuring the plant was running properly--far more time than we would've liked or expected. Although Boise eventually started making a profit after a few years, it wasn't nearly enough compared to what we put in or the added stress on top-level management.
In 2008 Boise sold the Brazilian operation to a local paper company for $47 million.
Walmart generated more than $587 billion in revenue last year around the world. It's no surprise that three-quarters of those sales came from the United States.
However, things did not go well for the American retail corporation in other nations, particularly in Japan.
Reports have surfaced that Walmart may be looking to abandon Japan, 17 years after first expanding into the market. The initial expansion included taking a minority stake in Seiyu, a Japanese grocery store, back in 2002. They then gradually turned this investment into a full-scale subsidiary back in 2008.
Like Walmart, Seiyu promotes the "Everyday Low Prices" motto to its clients. In the meantime, not much has gone right for Walmart in Japan. The Japanese market is divided among 45% Aeon and 12 percent Seiyu. Meanwhile, at 12%, Walmart's Seiyu sits between Aeon, which owns 45% of the market share, and Kobo (which owns 10%).
In comparison to another U.S. supermarket that has found more success in Japan, Costco, this does not sound great.
Although Costco has 26 stores in Japan while Seiyu boasts 331 locations, the former still brought in $3 billion dollars in 2017 to the latter's $7.1 billion.
This is because the low-cost strategy that both Walmart and Seiyu follow isn't nearly as effective in Japan as it is in the United States.
Consumers in the United States appreciate the convenience of being able to discover great offers at one single location, but Japanese consumers are less concerned with this convenience, making it a lesser differentiator in Japan.
Japanese consumers often hunt for the best deals while shopping, going to several stores before they make a purchase decision. Additionally, as this Bloomberg Businessweek article discusses, Japanese shoppers typically believe that low prices signal poor quality products.
In addition, when Walmart entered the market, Japan's retail industry was already clogged with everything from standard supermarkets to internet retailers and mom-and-pop shops.
Now, this does not imply that the barriers to entry were impenetrable. It just implies that in order to participate in that market, you must have a strong differentiator. Costco excelled at this, whereas Seiyu failed.
Japanese consumers are rarely accustomed to bulk purchasing, so going to Costco provides them something brand new. Seiyu, on the other hand, was no different than any other Japanese shopper's go-to store.
Furthermore, Walmart neglected to recognize that Japanese customers prefer fresh, home-grown produce — something Seiyu does not have much of. It is evident that the U.S. supermarket's lack of understanding for their Japanese consumers has caused them to fall behind significantly.
While some companies view international expansion as their only means of growth, this isn't always accurate. Diversification is difficult and often times requires more resources than what's available, especially for smaller businesses.
In addition, management capabilities can greatly impact a company's ability to succeed overseas. For smaller organizations it may be wiser--and more profitable--to focus on local opportunities first.
The above examples shouldn’t deter you from pursuing international expansion. This is a great strategy to build greater resiliency in our own business models. We want to reiterate that it takes local partnerships, business development, a go-to-market strategy, and ultimately, patience, to truly succeed.
And then finally, domestic success won't necessarily equal overseas success. One cannot simply emulate the global giants like Costco, GE, IBM, Shell, and BMW, who were undeniably high-performers, but certainly had circumstances that were unique to them. However, if you do have larger resources and capital, and you are convinced international expansion, you must consider having a full thorough strategy before making the leap.
Be aware of what Professional Employer Organizations or Global Employer Organizations can and cannot help you with.