The World Bank reports that 60 percent of the world’s GDP comes from imports and exports. Clearly, today’s economy thrives on a global scale. Such vast economic activity, coupled with innovation that has improved both communication and transportation, has made it easier and more appealing than ever for domestic companies to expand into international markets.
However, even with increased opportunity and expanded capabilities, international expansion is not without its challenges. Knowing why a company should expand, when to do it, where to start, who should lead the way, and what else they need to consider takes time and deliberation. Chris Harrington, CEO of Xant, successfully led both Domo and Omniture – hundred-million-dollar companies – into international markets. Here’s what he has to say.
Understanding why a company should expand is the perfect starting point. Without a compelling reason, honestly answering the rest of Harrington’s questions would be difficult. A company that has decided to expand for the wrong reason will likely find themselves underprepared and unsuccessful when they do. So, what’s the wrong reason? According to Harrington, “sometimes companies just want to expand because their competition is there.” To those who may be thinking this, he adds: “Please, do yourself a favor and don’t do that.”
Just after Omniture’s IPO, they made their first move into Europe with an acquisition in Denmark and their second move shortly thereafter with an acquisition in the UK. The reason for these acquisitions was so that Omniture could expand their footprint through inorganic growth. Using mergers, acquisitions, or joint ventures can be a smart and successful method for not only expanding a company geographically, but also expanding the product and service offerings. Harrington believes that inorganic growth is a good reason to expand across borders.
Organic growth is also a great reason for global expansion. Growth is organic when a company is capable of expanding their market share across borders with added sales and marketing. Organic growth starts internally. By slowly increasing the outreach current employees have, the new market can be tested and analyzed before major investments are made. Doing so will ensure product-market fit and allow the company to slowly increase sales and profits. Harrington believes that organic growth is also a good reason to expand internationally.
Knowing when to expand is critical for expansion success. Move too early and management may become overwhelmed and crash; move too late and the opportunity may already be taken by competitors. To help decide when the time is right, Harrington presents four questions to consider: Are you operationally sound domestically? Is the market ready for you? Does your product fit the new market? Do you have access to the needed funding?
Are You Operationally Sound Domestically?
Any domestic company knows the importance of rapid communication. If a customer service rep needs to speak to a manager to help solve a client’s issue, the sooner the manager can respond, the better. Sometimes people within a company won’t respond for a day or even more. In a global company, that can’t happen. According to Harrington, “in the international world, every day is 2 – at a minimum.” To determine if a company is sound domestically, look at their communication response time. Is the company willing to overcommunicate to make sure things get done? Are there backup plans in place when a decision needs to be made but a communication line is broken? Are customer issues resolved quickly?
Is the Market Ready?
Sometimes it’s easy to tell if the market is ready for a company or product. It will almost feel like the market is pulling the company in. In contrast, some companies will move too early and find themselves having to build a market for their product or service. If the market is pulling, it’s probably the right time. If not, the company may need to wait for the market to develop.
Does Your Product Fit?
Harrington states that “localization is a very complex process.” For software as a service (SAAS) companies, like Domo, Omniture, and Xant, the product may be customized to meet the new market’s needs but not customized to meet the local laws and regulations. Data housing rights are different in various countries and may prohibit using the same methods and codes that companies headquartered in the United States prefer. Likewise, if data centers remain in the United States, a company must prepare to handle the lag times caused by data transfers and increased demand. Localization is also complex for non-SAAS companies; although, the focus there may be primarily on product branding, tastes, and preferences. If the product isn’t built for localization, it’s probably not the right time to expand.
Is Funding Available?
Harrington suggests that funding an expansion is like converting from Celsius to Fahrenheit; “you need to double and add 30 to everything.” International expansion can be expensive. The costs of building the right infrastructure, finding and hiring the right employees, and testing and developing the right sales and marketing strategies will quickly add up. Even if everything else points to now being the right time, if funding isn’t available, it’s not. So, don’t leave finding funding until the end. It can take a long time to get and may delay the whole process.
When considering where to expand to, Harrington introduces three areas to consider: employees, regulations, and culture.
Expanding abroad is difficult without hiring new employees. Ensuring there is a solid talent pool in the desired location is imperative for successful international growth. Additionally, labor laws and employee protection rights differ in each country. According to Harrington, if there isn’t a pool of skilled individuals to choose from but you must hire someone to fill a role, “before you know it you may have an employee that doesn’t work, and you may have to pay them up to a year after termination.” Even with a good, local talent pool, building a solid work force is time consuming and expensive. Don’t go where there isn’t talent; the time and expenses will be even more burdensome.
The list of governmental and regulatory considerations is long – involving issues like taxes, entity formation, accounting standards, auditing regulations, and currency exchange, to name a few. Being able to tackle these issues domestically usually requires a large team. The monetary and time constraints become even larger as such issues change from country to country. What should be the driving factor, however, isn’t necessarily what the regulations look like, but how accessible local counsel is. Harrington emphasizes, “it is worth the extra money. Do not try to do this with domestic counsel.” When deciding where to go, go somewhere with accessible local counsel.
Speaking of cultures in other countries, Harrington purports, “differences exist, and you do need to know them.” One of the biggest cultural issues he has faced deals with sales and negotiation styles. Some countries are very partner-sales driven – only purchasing things through individuals that interact with multiple vendors and suppliers. Other countries are more direct-sales driven – purchasing from the company itself. Understanding the natures and customs of an area before expanding will add great value to the decision of where to go.
Who to Expand With
Although all the decisions involved in global expansion are important, Harrington claims that “the most critical decision you can make is who.” Because it takes years to build a market, choosing someone who is in it for the long run matters. Bringing trustworthy people on board matters. Finding someone who knows how to lead matters. Harrington suggests, “do a gut check, it’s usually right.”
There are a few methods for choosing a leader for the new market initiative. Domestic drop ins – when the company sends a local executive into the foreign country – have only been effective around 25 percent of the time for Harrington. He warns to be careful with this decision. On the other hand, working for a US company is an acquired taste; it can be hard for a foreigner to adjust. A hybrid role is probably best. No matter the route chosen, it is essential to find someone who has both a solid marketing and sales base and strong technical consulting skills. That type of individual will know how to both lead a team and do the groundwork necessary for success.
Many important considerations have been discussed, but Harrington adds two more. What is the business model going to look like and how ready is the executive board for the change? Business model considerations involve everything from leveraging partners to offering discounts. It will be important to decide which parts of the company’s current procedures will be used in the new market and which ones will need to be modified. Many of these issues will be solved as the company learns about the new target market and maintains focus on the customers’ needs.
As far as executive preparedness goes, Harrington invites those leaders to ask themselves, “do you do what you say?” Execution is huge when the business operates on an international level. People across borders become tethered to the company by a lifeline, and leaders really need to be able to deliver.
The process of global expansion is long and arduous. But Harrington reassures that “it is absolutely worth the drive. If you can do this right, there is nothing more valuable than being in front of customers that are brand new to the market.” It gives a company the opportunity and potential for intellectual and monetary growth. Company leaders asking why they are expanding, when and where to go, who to take with, and what the expansion will look like leads to successful decision making for their organization.
To learn more from Chris Harrington about how to expand, listen to his 2020 Global Perspectives Summit presentation here.