Top Considerations for International Expansion
Companies expanding internationally generally take one of two overarching approaches—organic or inorganic—each of which introduces a number of important and unique business decisions that leaders should consider as they plan for global growth.
Business success is rarely an accident. Strong sales and growth stem from careful analysis, methodical planning, and strategies that account for the full spectrum of business considerations. These things are particularly important when expanding internationally—but having a clear understanding of the challenges and opportunities that lie abroad can help company leaders realize the growth and revenue they seek.
When it comes to international expansion, companies generally utilize one of two main growth methods—organic growth or growth via mergers and acquisition.
Expansion Through Organic Growth
For some companies, the most lucrative and effective approach for international expansion may be through organic growth and the creation of an entirely new production or sales entity in an entirely new market. There are, generally, three primary models for this type of growth:
- Selling products or services in the new market: This requires the company to acquire new customers in that market and develop payment methods tailored to that local customer base. As such, the company must refine its sales strategy to take into account cultural differences and local practices; for example, communicating in the primary language in the region or understanding best practices for brand awareness and advertising.
- Creating a production entity in the new market: This raises considerations like satisfying requisite licenses and securing access to local infrastructure. With a new point of production, the company must integrate the new entity into its existing supply chain; it must also assess the advantages and challenges of human capital and technology that are unique to the local market.
- Constructing a near-self-sufficient entity in the new market: Producing and selling to the new customer base requires an end-to-end understanding of the local market, as well as focused quality control and supply chain strategies.
Each model raises numerous interdependent factors, with cascading implications that can be grouped into the challenges and advantages of operating in a new market.
If your business is growing organically, you must first decide the level of local autonomy for your new entity. Depending on the results of that assessment, your company must decide whether your existing business strategy suits this new entity or whether you need an amended strategy tailored to the specific market.
Any entity in a new market also needs to identify how it sources goods and determine whether to work with local, regional, international or even intercompany suppliers. These decisions include the currency in which suppliers will be paid, as well as implications for days payable outstanding (DPO) and order-to-pay cycle.
In line with these concerns are possible changes to the cash management structure. Companies should weigh the following questions:
- Can your centralized treasury function serve the new entity?
- Can your domestic bank support your international operations?
- What technology will be used to communicate between your domestic and international treasury operations?
Technology use is a key consideration when growing organically. When it comes to visibility, reporting and supply chain management, your new entity may be able to rely on the technology used by the rest of your business—but it may not. In some cases, you may need to make technology investments that optimize operations in your new market and then align reporting channels and technology platforms with HQ.
Finally, it will be vital to assess how tax and legal requirements will impact both your new entity and the larger organization. In some markets, additional reporting may be required, and local regulations can dictate the need for local funds retention and/or restrictions on international transfers and loans.
Local Challenges and Opportunities
International expansion requires thoughtful consideration on a number of fronts. For example, how can your new entity reach and serve your new customer base? Which credit terms and payment methods will you offer local customers? Company leaders should determine whether local sales strategy should be aligned with the global brand or tailored to the local customer. This will then guide your strategy for growing brand awareness.
Employment laws also vary across the globe, raising implications for the ease and cost of hiring and firing. Other varying regulations, such as those related to health and safety, may require added costs for legal advice. However, while a new environment can bring new costs, it can also offer new cost-reduction opportunities. Some governments, for example, may provide incentives for locating operations in areas where there are ongoing efforts to regenerate or grow the local economy.
Expansion Through Mergers and Acquisitions (M&A)
For some companies, international expansion may be better achieved by acquiring an existing entity and integrating it within the originating company. This inorganic approach raises considerations related to integrating and harmonizing strategies and tools for the larger organization. Factors like supply chain optimization, cross-border payment terms, cash visibility, access to liquidity, and bank payment and credit terms must be aligned so that the entire entity can realize the greatest benefits.
There are four main M&A models:
- A vertical merger: This reshapes the organization to align with the acquired firm while managing sales to existing customers and integrating the supply chain.
- A horizontal merger: This reshapes the acquired company to avoid duplication and to create efficiencies, streamlining the brands, processing, production and other supply chain functions. This also brings in new suppliers and customers while deepening the acquired firm’s relationships.
- A concentric merger: This reorients the sales strategy to target all customers and suppliers, thereby increasing production and sales efficiencies.
- A conglomerate merger: This integrates new processes into the company overall, operating in all markets in ways unlike the premerger entities.
Considerations for M&A Growth
Any inorganic model can bring your business new opportunities for improved efficiency and cost savings. By leveraging the power of a larger organization, the company can find efficiencies, optimize procure-to-pay cycles and realize better payment terms. As a part of this approach, harmonizing electronic payment methods can create vital improvements for working capital and risk management.
The new, larger organization can potentially reduce costs by improving the international coordination of credit agreements and trade financing solutions. Likewise, harmonized technologies can yield the kind of inventory and manufacturing process visibility and management capabilities that allow headquarters and local managers to capitalize on new opportunities.
Inorganic growth also has the potential for significant impact on the sales strategy, raising considerations for increasing efficiency and data management, and ensuring that all sales channels are linked to the same enterprise resource planning (ERP) system. At the same time, customer loyalty programs should be streamlined to appeal to the expanded customer base. Centralizing distribution channels should form a part of the revised sales strategy—this includes credit terms and payment channels for customers and growing the customer base through greater brand awareness and customer outreach.
Technology impacts all of the above. An enlarged organization may lead to fragmented technology systems; while system differences may not be burdensome in the short term, it's important to consider the hard (versus intangible) cost implications of labor-intensive processing—both now and in the future.
Crosscutting Growth Considerations
In addition to these considerations, businesses must weigh a range of crosscutting factors that emerge regardless of the type of growth strategy used.
One primary business decision should be whether your company sells or receives payment in foreign currencies. A key consideration should be how your company plans to satisfy discrepancies between payments and revenue. Does it make more fiscal and strategic sense to sell and receive in the local currency, or to convert currencies—perhaps relying on a third party to manage those conversions?
As businesses cross borders, they must also consider payments-on-behalf-of (POBO) or receipt-on-behalf-of (ROBO) structures. Centralizing functions can make payment and collection processes more efficient, creating economies of scale and reducing the number of bank accounts and associated costs. There are also implications and questions regarding liquidity structures. It may be that your company does not require a liquidity structure immediately, but it's important to consider creating a stand-alone account structure that can grow into a liquidity structure if the need arises in the future.
Perhaps one of the greatest challenges a company can encounter when expanding beyond their home market is adapting to local culture. Calculating foreign currency exposure and counterparty risk can be straightforward for most treasurers and chief financial officers; it’s more difficult to understand the impact that cultural differences can have on operations, sales and opportunity. Particularly in the case of M&A, companies may encounter resistance to change, raising questions such as: How does your company manage resistance to new ownership? How does your company establish effective processes for sending and receiving documents in various languages?
International expansion is at once challenging and exciting, and deciding on whether organic or inorganic growth is the best approach for your business hinges on multiple important factors. But growing businesses can find support and insight by working with organizations that have global reach and local expertise—and by doing their research to become deeply versed in these multifaceted challenges and the rewards they can bring.