Tak­ing the big leap

For most growing com­pa­nies, there comes a time when they must con­tem­plate ex­pand­ing out­side their home mar­ket. Mak­ing the leap into for­eign mar­kets is, for most, ex­tremely chal­leng­ing—some­times the hard­est thing they have done since the com­pany was founde

The Smart Manager - - Gurumantra - MOR­GEN WITZEL IS A MAN­AGE­MENT HIS­TO­RIAN, AU­THOR OF 21 BOOKS, AND A FEL­LOW OF THE CEN­TRE FOR LEAD­ER­SHIP STUD­IES AT THE UNIVER­SITY OF EX­ETER BUSI­NESS SCHOOL.

John Dun­ning de­scribed two rea­sons why com­pa­nies ex­pand over­seas. They are, he says, either seek­ing new mar­kets, or seek­ing new re­sources. Per­haps the do­mes­tic mar­ket is sat­u­rated and there is lit­tle fur­ther room for growth, or com­pet­i­tive con­di­tions are growing tougher and the com­pany de­cides to seek greener pas­tures else­where. Al­ter­na­tively, the com­pany needs to find cheap re­sources and la­bor if it is to con­tinue to main­tain its com­pet­i­tive po­si­tion, and looks at off-shoring.

Dun­ning’s point is use­ful be­cause it is im­por­tant that the com­pany is clear about its strate­gic rea­sons for ex­pan­sion. Dur­ing the 1990s, I watched many Western com­pa­nies ex­pand into China, sim­ply be­cause it was there. Se­duced by the myth of a bil­lion new po­ten­tial cus­tomers, com­pa­nies went to China with no clear plan and no real

un­der­stand­ing of the bar­ri­ers they faced. The same is true of Western com­pa­nies mov­ing into In­dia, and I am see­ing much the same with In­dian and Chi­nese com­pa­nies try­ing to es­tab­lish them­selves in the West.

key ques­tions

Be­fore ex­pan­sion, the board and se­nior lead­er­ship team need to sit down and ask them­selves the fol­low­ing key ques­tions.

Why are we do­ing this? What is push­ing the com­pany to­wards in­ter­na­tional ex­pan­sion? What is the im­per­a­tive? Is it mar­ket seek­ing, re­source seek­ing, or some com­bi­na­tion of both? Is that im­per­a­tive in line with the com­pany’s own, al­ready ex­ist­ing strat­egy? As above, ex­pan­sion has to be for some strate­gic pur­pose, not just as the CEO’s van­ity project.

What form will the ex­pan­sion take? The an­swer de­pends in part on whether the com­pany is re­source seek­ing or mar­ket seek­ing, but there are some gen­eral prin­ci­ples that are valid in either case. The com­pany has to con­sider whether it wants to part­ner with other or­ga­ni­za­tions, or do it alone. It also has to con­sider scale; what pro­por­tion of re­sources will be com­mit­ted to the new ven­ture, and whether this is com­men­su­rate with the com­pany’s own ap­petite for risk.

Where will the com­pany ex­pand to? This is a par­tic­u­larly vi­tal de­ci­sion. The com­pany must ex­pand to lo­ca­tions where mar­ket con­di­tions are right and clear op­por­tu­ni­ties exist. Un­for­tu­nately, get­ting ac­cu­rate in­for­ma­tion about these lo­ca­tions is not al­ways easy.

When will the ex­pan­sion take place? There is a ten­dency to rush into ex­pan­sion, in the be­lief that op­por­tu­ni­ties may not come again. Some­times that is true, some­times not. My ex­pe­ri­ence of watch­ing other com­pa­nies un­der­take in­ter­na­tional ex­pan­sion sug­gests that play­ing the long game is usu­ally best. Sound plan­ning and ad­e­quate prepa­ra­tion are nec­es­sary.

Who will lead the ex­pan­sion process? Some­times, if the com­pany is merely un­der­tak­ing a toe-in-the-wa­ter ex­er­cise, the ex­pan­sion pro­gram can be del­e­gated to rel­a­tively ju­nior man­agers. Any large-scale ex­pan­sion, how­ever, must have the full com­mit­ment and par­tic­i­pa­tion of the se­nior lead­er­ship team. That means those se­nior lead­ers must have the req­ui­site knowl­edge of the in­ter­na­tional busi­ness en­vi­ron­ment.

bar­ri­ers to in­ter­na­tional ex­pan­sion

Even if all these ques­tions have been asked and an­swered, for­mi­da­ble ob­sta­cles re­main. It is easy to sit around a board­room ta­ble or on a strat­egy away-day and talk about ex­pand­ing into in­ter­na­tional mar­kets. It is much harder to do it.

The first and most ob­vi­ous bar­ri­ers are le­gal and reg­u­la­tory. What is the le­gal frame­work of the coun­try in which you will be oper­at­ing? How strong is the rule of law—does it exist at all? What are the pre­vail­ing at­ti­tudes to le­gal reg­u­la­tion, con­tracts, and the likes?

A com­mon mis­take is for com­pa­nies to as­sume that the same le­gal frame­works will exist wher­ever they travel to do busi­ness. This is sim­ply not the case. Dif­fer­ent at­ti­tudes to law and its pur­pose pre­vail across dif­fer­ent ge­ogra­phies. In­dia, for ex­am­ple, is highly le­gal­is­tic; it can take months to sort out and ne­go­ti­ate the nec­es­sary con­tracts and li­censes to do busi­ness. In China the same can be true; but if you have a well-con­nected lo­cal busi­ness part­ner to in­ter­cede for you, the path sud­denly be­comes smooth. This is not be­cause of bribery or cor­rup­tion, but rather be­cause Chi­nese busi­ness de­pends upon con­nec­tions.

China has a strong le­gal frame­work and good en­force­ment, but the Chi­nese at­ti­tude to con­tract law is sig­nif­i­cantly dif­fer­ent from that of, say, the USA. In Amer­ica, con­tracts are an es­sen­tial part of busi­ness, and are in­vi­o­late. In China, the con­tract is very much sub­or­di­nate to per­sonal re­la­tion­ships. How strongly Chi­nese com­pa­nies

A com­mon mis­take is for com­pa­nies to as­sume that the same le­gal frame­works will exist wher­ever they travel to do busi­ness.

keep to their con­tracts de­pends in large part on the strength of the re­la­tion­ships they have with their part­ners.

Other bar­ri­ers in­clude in­fra­struc­ture, or its lack, and lo­ca­tion. Once a coun­try is cho­sen as a des­ti­na­tion for ex­pan­sion, where then should the com­pany lo­cate? Most com­pa­nies ex­pand­ing over­seas tend to grav­i­tate to­wards cities where other for­eign com­pa­nies are al­ready es­tab­lished: Mum­bai, Shang­hai, New York, Lon­don, etc. But is that al­ways the right de­ci­sion? There can be ad­van­tages to go­ing where the com­pe­ti­tion is not present—lower rents, cheaper la­bor, sub­si­dies from lo­cal gov­ern­ment, and so on. The bar­rier here is lack of knowl­edge. How do you find out what the best lo­ca­tion is for your firm if you lack knowl­edge of the des­ti­na­tion coun­try?

Co­or­di­nat­ing and man­ag­ing an or­ga­ni­za­tion across na­tional bound­aries pre­sents its own chal­lenge. It can be very dif­fi­cult for head­quar­ters in Chen­nai or Lon­don to man­age a sub­sidiary in Chongqing or Abu Dhabi. How much au­ton­omy should the lo­cal sub­sidiary be given? Should it be free to adopt its own strate­gies, its own mar­ket­ing cam­paigns, its own la­bor poli­cies? Or should it con­form to the rest of the com­pany?

The big­gest bar­rier of all, of course, is cul­ture. The most ob­vi­ous man­i­fes­ta­tion of the cul­tural bar­rier is lan­guage. There is a ten­dency among Western firms to think that it is not nec­es­sary to learn lo­cal lan­guages; English is the lin­gua franca of the busi­ness world, and ev­ery­one speaks it. That is largely true, es­pe­cially at se­nior lev­els (though it may be chang­ing; I hear per­sis­tent ru­mors of Chi­nese com­pa­nies in­sist­ing that ne­go­ti­a­tions on their home soil be con­ducted in Man­darin).

There are, how­ever, many ad­van­tages to learn­ing the lo­cal lan­guage where your firm is do­ing busi­ness. For one thing, in­for­ma­tion search be­comes much eas­ier. Se­condly, con­tract ne­go­ti­a­tions are eas­ier if you can read the con­tract with­out need­ing to have it trans­lated; many con­tracts have

There are many ad­van­tages to learn­ing the lo­cal lan­guage... for one thing, in­for­ma­tion search be­comes much eas­ier.

gone wrong be­cause of mis­takes in trans­la­tion, leav­ing the two par­ties with quite dif­fer­ent ideas of what is ex­pected of them. And thirdly, it is al­ways use­ful to know what peo­ple are say­ing about you be­hind your back, not just to your face.

Even when speak­ing English, the same phrase of­ten means dif­fer­ent things in dif­fer­ent cul­tures. For ex­am­ple, if a Bri­tish busi­ness per­son says, “We must have lunch”, that does not mean he or she is invit­ing you to lunch. The real trans­la­tion of this phrase is ‘I do not ex­pect I will ever see you again’. All cul­tures have these nu­ances, and they can trip up the un­wary.

I men­tioned above the cul­tural dif­fer­ences re­gard­ing con­tracts. There is a host of oth­ers that come into play. Amer­i­can busi­ness peo­ple, for ex­am­ple, are of­ten ob­ses­sive about time-keep­ing. If a con­fer­ence call is sched­uled for 10:00 and you have not joined by 10:02, you are likely to get an email ask­ing rather sharply where you are. Other cul­tures are more re­laxed, and de­lays of fif­teen or twenty min­utes are seen as nor­mal and ac­cept­able.

As hu­man be­ings, we have many things in com­mon, but cul­ture is one of the key things that di­vide us. The or­ga­ni­za­tion the­o­rist Geert Hof­st­ede once de­fined cul­ture as the ‘soft­ware of the mind’. We all have the same hard­ware, in the form of our bod­ies and our brains, but how we think is con­di­tioned by our up­bring­ing, education, and peer groups. There are dis­tinct dif­fer­ences be­tween Western and East­ern ways of think­ing. One of the most im­por­tant is the Western re­liance on lin­ear think­ing, a cast of mind that goes back to René Descartes and, be­fore him, to Plato. West­ern­ers solve prob­lems one step at a time, be­liev­ing that there is one best way to reach a de­sired end. In East­ern, Con­fu­cian-in­flu­enced think­ing on the other hand, there is a much more holis­tic at­ti­tude that takes all fac­tors into ac­count when mak­ing a de­ci­sion, and is much more com­fort­able with no­tions such as para­dox. Goalseek­ing, rather than prob­lem-solv­ing, is the dom­i­nant mind­set. Both are im­por­tant, and both have their uses. What we must al­ways do is rec­og­nize the dif­fer­ence.

As an il­lus­tra­tion of this, I once sat in on a meet­ing in China when a team of Amer­i­can con­sul­tants were pitch­ing for busi­ness to Chi­nese com­pany. The con­sul­tants came armed with a Pow­erPoint pre­sen­ta­tion that gave great de­tail on how they un­der­took their in­ves­ti­ga­tion and the steps by which they reached their con­clu­sion. Af­ter a few min­utes, one of the clients in­ter­rupted. Per­haps the con­sul­tants could skip over the de­tail, and just come to the con­clu­sions; what did they think was the so­lu­tion to the com­pany’s prob­lem. The con­sul­tants went into a brief hud­dle, and then solemnly in­formed the client this was im­pos­si­ble; they needed to work through ev­ery step of the pre­sen­ta­tion.

They did not get the con­tract.

over­com­ing the bar­ri­ers

The first and most im­por­tant re­quire­ment for over­com­ing these bar­ri­ers is knowl­edge and ex­pe­ri­ence. If the se­nior lead­er­ship team does not have per­sonal knowl­edge of the coun­try or coun­tries where they plan to ex­pand, it is very im­por­tant that they re­cruit peo­ple who do be­fore em­bark­ing on the ex­pan­sion jour­ney. Lo­cal knowl­edge is vi­tal.

The process of ex­pan­sion it­self re­quires peo­ple with knowl­edge of how to man­age is­sues such as le­gal bar­ri­ers and co­or­di­na­tion over long dis­tances and across bound­aries. These things get eas­ier with time—the first ex­pan­sion is usu­ally the hard­est. Even then, ex­pan­sion into very dif­fer­ent cul­tures still car­ries po­ten­tial shocks.

Also es­sen­tial is hav­ing trust­wor­thy lo­cal part­ners. Whether these are for­mal busi­ness part­ners en­gaged in a joint ven­ture, or lo­cally based ad­vis­ers, con­sul­tants, lawyers, ad­ver­tiz­ing agen­cies, and so on; they need to be peo­ple who can be re­lied upon to give good, ac­cu­rate,

As hu­man be­ings, we have many things in com­mon, but cul­ture is one of the key things that di­vide us.

and timely ad­vice. Find­ing these part­ners and de­vel­op­ing re­la­tion­ships with them is ab­so­lutely crit­i­cal to suc­cess, and the com­pany should be pre­pared to de­vote time and money to the process of seek­ing out part­ners and build­ing re­la­tion­ships. What­ever the in­vest­ment re­quired is, it will be money well spent.

There are ex­am­ples of com­pa­nies jump­ing feet first into in­ter­na­tional ex­pan­sion and mak­ing mas­sive in­vest­ments first time out—and ev­ery­thing work­ing well. There are other ex­am­ples, many of them, of colos­sal fail­ure. Sch­winn, the Amer­i­can bi­cy­cle maker, went into an off-shoring project with no pre­vi­ous ex­pe­ri­ence of in­ter­na­tional mar­kets, and ended up bank­rupt. A bet­ter ex­am­ple to fol­low is that of Volk­swa­gen, which in­vested in China soon af­ter eco­nomic re­forms be­gan and built up its busi­ness slowly, de­vel­op­ing re­la­tion­ships along the way. It took thir­teen years for Shang­hai Volk­swa­gen to repa­tri­ate profits to the par­ent com­pany. But the re­ward was a huge share of the rapidly growing Chi­nese car mar­ket, and to­day Volk­swa­gen is still one of the best-known car brands in China.

Ex­pand­ing in­ter­na­tion­ally is never easy, and there are plenty of pit­falls wait­ing to swal­low up the un­wary. The keys to suc­cess are sim­ple; gather req­ui­site knowl­edge, build strong re­la­tion­ships with lo­cal part­ners, and play the long game. If a com­pany can do all three of these things at once, its chances of suc­cess will vastly im­prove. ■

The com­pany should be pre­pared to de­vote time and money to the process of seek­ing out lo­cal part­ners and build­ing re­la­tion­ships.

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