smallbusiness.co.uk: Helping your business think big

SmallBusiness.co.uk investigates the steps to take when considering expansion into foreign markets.

By Terry Irwin, TCii Strategic and Management Consultants

Many successful businesses reach a point where they have cornered a decent share of the market in their home country and want to expand. At this point it is often a logical step to seek new markets abroad, rather than continue to compete over home ground held by well established rivals.

Taking the business abroad can open up many new opportunities, but is also not without its pitfalls. Before going global it is important to be sure that it is in the company’s best interests. Doing thorough research into the potential benefits that will be gained in overseas markets and weighing these against the estimated costs of doing so is essential.

It is also important that the company has the necessary resources and management skills to execute overseas market entry successfully. While the business may have the home market cornered, expanding overseas carries with it new challenges and, if not handled carefully, can do more harm than good.

Once the decision has been made to push forward into overseas markets, it is then crucial to consider the possible routes of entry and determine which is best for the company and its products. There are a number of different avenues to pursue, each with its own potential benefits and drawbacks.

Acquisition
Acquiring an already established overseas company is one method of rapidly breaking into fresh markets, but can also be a risky endeavour.

While the purchasing company benefits from gaining access to ‘ready-made’ customers, a skilled workforce, technology and branding, it also acquires the existing problems of the acquisition. The long-term goals and ideals of the two companies can come into conflict, while potential legal problems and surprises abound.

Greenfield investment
In contrast to an acquisition, greenfield investment is a far slower and more resource-intense entry to overseas markets, but offers a far greater degree of control. As the name suggests, greenfield investment involves starting with nothing and building up the business overseas from there, as with McDonald’s and Starbucks.

The control over the company and associated brands afforded by such an investment should be weighed against the high initial costs and barriers to success, such as competing against well established competition in the country in question.

Licensing
Licensing the distribution rights to the company’s products or services to an overseas licensee is a far less risky mode of entry than greenfield investment, but once again has the downside of minimal control. There is also the risk that the licensee itself may become a competitor, or that mismanagement by the licensee can damage the parent brand’s reputation. Licensing does, however, enable greater ease of entry into overseas markets and the potential for rapid return on investment.

Exporting
Exporting a product directly to foreign firms provides a low risk, low investment entry into overseas markets. However, it can have its own logistical problems. Extra expense is also incurred due to import/export tariffs and distribution costs. In some cases it may be advantageous to hire an overseas import agent to help the process go more smoothly.

The particular mode of entry the business takes should be carefully considered in light of the product and the potential market. Care should be taken, as a poorly executed overseas venture can soon become a lead weight around the organisation’s neck.

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