Doing business internationally. Expanding widely

By Rocio Summers

---

In 2011, Frits Van Paasschen,  at the time President and CEO of Starwood Hotels and Resorts moved himself and his whole senior leadership team to China for a month. When he was asked the reason behind it, he explained that in the past, when he had run business overseas and brought people from the Head Office for a week to show them the operations, the picture was never complete. As Starwood was establishing a new business in China, he felt if he could move there for a whole year he would learn so much, but that didn’t seem to be practical for the CEO of the company. It was his wife who suggested he went for a month. Then he decided that he would go with his team to show them the importance of markets outside of the home office and how being a global company meant to have a global mindset in which people understood the international markets as part of the whole project. He wanted his team to experience the specific peculiarities of this new operation and come out with ideas. He expected them to have downtime to buy groceries and observe people, feel their needs and expectations. In other words, he wanted his team to understand the culture in China, the market dynamics and the reasons behind it.
In the last decades, we have seen corporations strategizing around international expansion and diversification, growing in new markets, exploring emerging economies and establishing operations in remote geographies and different cultures. Most of the time, these adventures have served them well and they have been able to increase their demand and grow their business exponentially. But in some other cases, the unforeseen problems and complications associated with the new venture have turned the dream into a nightmare, the costs have exceeded by far the initial projections and the break-even has arrived much later than expected, making the project much less attractive from an economic and strategic point of view.
Of course, not everybody can afford to transfer the whole executive team for a month to a remote geography, among other reasons, because not everybody owns a hotel in those geographies, but there are a lot of things that can and should be considered before expanding internationally, before becoming global.
As in my prior posts, the very first question I would ask the Board of Directors of an organization expanding operations in different countries is “Why”. How is this choice consistent with the mission and long-term vision of the organization?  But I would also ask “Why not”! “There’s a big world out there” and as someone said once “I don’t think that there is any one idea that won’t work somewhere”.
Establishing operations abroad has some obvious advantages:

• You may improve your logistics by for instance establishing manufacturing operations closer to your market.
• You may have access to cheaper resources: labor, strategic raw materials.
• You may offset seasonal changes and demand cycles in your market of origin.
• You can, simply put, multiply your demand by accessing new populations and avoid an excessive dependence on your market of origin.

So all of these are good reasons to consider this decision, now the second question is how to do it!
Obviously, before any sensible group of leaders starts such a significant project, they should do their due diligence and this needs to cover different perspectives.

1. First and most obvious: Market analysis. What is the potential demand for your products or services in this new market? Are they going to work exactly the same way they work at home, or do they need to be adjusted somehow? In other words, do people want the same kind of products/services and in the same amount in this new geography?
2. At the same time, is your organization ready to supply to this potential new market? Do you have the capacity to manufacture or produce as much as the market may demand? If not, how are you going to approach that? Are you going to focus on a particular niche sector?
3. In the same sense, you will need to learn about the logistics and distribution channel in this particular country: Roads, railway infrastructure, port access, etc.
4. Another apparently obvious aspect is regulation. You will need to get familiar with local business laws, International Trade Agreements that may affect your ability (and cost!) to import key component of your products, excise taxes, import duties, regulatory compliance, etc.
5. Financial implications of being abroad:
   • The banking system in the new country: From opening bank accounts, to operate with your parent company at home, to finance your operations, getting familiar with the banking system in the new country may be one of the challenges of the new entity abroad.
   • Global taxation and differences in the tax system for local and foreign entities…and, for your employees and expatriates.
   • Currency fluctuations and how to manage the risks associated both from the perspective of cash flow and financial implications in your cost structure (if some of your supplies are acquired in a currency different than that of your revenues).
   • Financial reporting standards and regulation and compliance with local regulations both in origin and in the new country.
6. The geopolitical environment of the country you are moving in! The stability of the economy, the solvency of democracy, elections coming up, potential changes in regulation and protectionism. These are not anecdotes. They need to be considered seriously as they may affect your plans significantly and in an unexpected manner, provoking the undesired effects mentioned above in your strategy. On the same page, you will need to evaluate the reliability of the institutions and be very clear about your Code of Ethics including anti-bribery and anti-corruption policies and how to handle potential situations of this kind.
7. Finally, perhaps the most often overlooked factor is culture. In her book, #“The culture map” #Erin Meyer explains in a very down to earth manner, 8 aspects of cultural differences in different geographies. She describes her own experience as an American consultant working in France and makes us giggle sometimes remembering situations we have lived where cultural factors got in the way of negotiations. She addresses differences in:
   1. Communicating: Low vs High Context.
   2. Evaluating: Direct vs Indirect negative feedback.
   3. Persuading: Principles first vs Application first.
   4. Leading: Egalitarian vs. Hierarchical.
   5. Deciding: Consensual vs. Top-down.
   6. Trusting: Task-based vs. Relationship-based.
   7. Disagreeing: Confrontational vs. avoids confrontation.
   8. Scheduling: Linear-time vs. Flexible time.

 
This is not the only study about different cultures. What is shocking is that around a 70% of the international transactions fail because of cultural mismatches and yet, most of the organizations ignore the importance of the cultural issues and tend to think that the principles and values that are valid at home are universal and the only valid ones. This is the first mindset that needs to be changed before going international, and then go backward and analyze the rest.
 
In my experience, most of the business and organizations check the boxes above more or less in the order I have enunciated them, and even though they spend a lot of time and resources evaluating the market, the supply chain and the regulations, they tend to ignore socio-political and geostrategic environment of the country they are moving in and the cultural differences. This could be a consequence of a simplistic mindset or even worse, an arrogant one, but whatever the reason for this procrastination is, the reality is that it will be a recipe for failure.
 
If you’re aiming for an international strategy, pay attention to the culture and behavior of the people in the market you are moving to. Because those are now your stakeholders.
 
 
At RSIBC our passion is helping organizations develop their business and operations globally and we partner with experts in different fields to provide the best service and advice in different regions of the world.