Overseas Business Expansion: The Promise and the Pitfalls

Overseas Business Expansion

This is a guest post from Archie Ward.

For most business owners, the dream is to one day expand beyond the original market. Whether a large corporation or an SME, many look for ways to scale and develop additional revenue streams. One of the most popular options is to expand overseas, where they can tap into additional groups of consumers that want their product or service. However, while expanding overseas may not sound any more complicated than adding additional cities to your network, there are many cultural, political and economic factors to consider when expanding internationally.

Before attempting to begin an overseas expansion, it might be wise to outline clear and realistic expectations about the new markets in question. Sometimes even the best-laid plans can go awry because of some oversight or cultural ignorance.

Timelines have proved to get drawn out, which can lead to delays like those experienced by Xiamoi Corp in starting operations in a foreign nation.

Another area that should not be overlooked is the money needed for the expansion. Because overseas expansion involves dealing in foreign currencies, it’s always smart to collect as much payment as possible in advance to avoid any potential pitfalls regarding currency values or other misunderstandings. A mismatching between currencies can turn transactions unprofitable overnight, or even land you in the red.

Language barriers often present problems with an overseas business. Many companies in the past, those entering Brazil and China in particular, have had issues regarding how a popular product’s name translated in the native language, resulting in marketing plans having to be drastically altered or scrapped altogether. Before doing a business expansion overseas, make sure the country’s humor and use of slang language meets your own, and be prepared to adjust accordingly if necessary. A top priority should involve hiring someone who works as a translator, who is also versed in common sense of both countries involved, as well as a good ear for marketing.

Perhaps more so than any other aspect of how to expand business overseas, legal barriers must be taken care of well in advance. Obtaining a business visa as early as possible will get things off to a good start, and researching tax laws, import restrictions, liability laws and customs law will help to avoid any embarrassing or costly issues from arising. If the expansion will involve hiring employees within the new nation, a thorough knowledge of the country’s labor laws will be needed to make sure all policies are followed.

While expansion may seem like a natural fit with some countries, others may present a challenge when it comes to gaining access to raw materials or skilled labor. If these areas present any problems, expansion may need to take place elsewhere. In some cases, too many changes to a product will be needed in order to overcome these challenges, resulting in too great a sacrifice of the business format.

Whenever a move is made into a new country, questions may arise surrounding intellectual property laws and quality control issues. When operating abroad, being able to protect a trademark or trade name is vital to a company’s success. This can greatly affect the ability of a company to grow, so strategies should be in place to not only protect intellectual property rights, but also to go after those who violate those rights.

When deciding on market penetration, one area that is at the forefront of those discussions is government regulations. A process that is difficult enough at the best of times, and in many overseas situations it can become a nightmare if not properly researched in advance. While many foreign governments are quite receptive to expansion from western companies, others may object to the idea based on past experiences or disagreements regarding political philosophy. This is where having the services of a local liaison can make all the difference. A liaison, in addition to understanding cultural differences and local laws, can also explain differences in protocol, etiquette, and customs to a company seeking expansion, allowing it to have a better understanding of the proper approach to take with government officials.

Finally, the success or failure of most products or services in foreign nations will usually be determined by the marketing strategy. A great example of this is fast food chains, which while serving food that has proven to be popular with foreign customers, have found themselves needing to de-emphasise their focus on speed in some countries due to a cultural emphasis on leisure and being able to relax during a meal rather than eating on the go. In fact, consuming fast food may be seen as a status symbol of wealth in certain developing markets, and so the whole idea of getting in quickly and leaving with a bundle of cheap calories may need to go out the window. McDonald’s, in particular, has shown to be an innovator in the fast food stakes abroad, with food offerings which respect local dietary laws, varying tastes and seasonal changes. Another example is coupon advertising, which while widely accepted in the West, is viewed as offensive in some nations that have fixed pricing. For success to occur, a marketing strategy needs to be put to the test to ensure plans contain elements of flexibility so that any changes which need to be made, can be made, and at short notice to boot.

While expanding a business overseas might entail extremely precise planning and will almost certainly involve many unexpected surprises along the way, those companies that take the time to plan the smallest of details will often find that the process results in growth which would have been unimaginable by simply trying to penetrate further into current markets.

Archie Ward is a business consultant and social media strategist. Archie splits his time each year between Asia and Australia. While he is hard at work helping other people make their businesses successful, he hopes to launch his own by year end.

Product/Market Expansion Matrix

A framework to help executives, senior managers and marketers devise strategies for future growth

Ansoff Matrix

1. Background

THE Ansoff Matrix (referred to by some commentators as the Product/Market Expansion Grid) was developed by a Russian-American mathematician named Igor Ansoff, and first explained in his 1957 Harvard Business Review article entitled Strategies for Diversification.

2. Benefits of the Ansoff Matrix

The Ansoff Matrix is particularly useful for strategic planning because it provides a framework to help executives, senior managers and marketers devise strategies for future growth.

By aiding clear thinking about growth strategy, the Ansoff Matrix can help an organisation avoid key risks such as:

  1. Overlooking available growth strategies;
  2. Misunderstanding the implications of pursuing a particular strategy; or
  3. Selecting an inappropriate strategy given the firm’s diversification objectives.

3. The Ansoff Matrix Explained

The Ansoff Matrix can help a firm devise a product-market growth strategy by focusing on four growth alternatives: Market Penetration, Market Development, Product Development, and Diversification.

Ansoff Matrix

What is a Product-Market Growth Strategy?

A product-market strategy is a description of a firm’s products and target markets. While this may sound straightforward, it can be difficult to clearly delineate a target market since it can be defined very broadly (e.g. the transport market) or very narrowly (e.g. domestic air transport in America for cost-conscious business travellers).

In general, a market should not be defined too broadly (or too narrowly) since a key purpose of market definition is to allow a firm to develop strategy and make decisions.

In his 1957 paper, Ansoff defined a product-market strategy as “a joint statement of a product line and the corresponding set of missions which the products are designed to fulfil.” For example, one of Apple’s product missions might be to provide consumers with easy-to-use digital technology, and another mission might be to provide fashion accessories for Yuppies and young people.

The Four Growth Alternatives

The four alternative growth strategies are:

  1. Market Penetration: a strategy to increase sales without departing from the original product-market strategy. This involves increasing sales to existing customers and finding new customers for existing products.
  2. Market Development: a strategy to sell existing products to new markets (normally with some modifications). Ansoff described this as a strategy “to adapt [the] present product line … to new missions.” For example, Boeing might adapt an existing model of passenger aircraft and sell it for cargo transportation.
  3. Product Development: a strategy to sell new products, with new or altered features, to existing markets. Ansoff described this as a strategy to develop products with “new and different characteristics such as will improve the performance of the [existing] mission.” For example, Boeing might develop a new aircraft design which offers improved fuel economy.
  4. Diversification: a strategy to develop new products for new markets, which can either be related to the current business (e.g. vertical integration or horizontal diversification) or unrelated (e.g. lateral diversification).

Each of the above strategies represents a different path that a firm can take to pursue growth. However, in practice, a firm will often implement more than one strategy at the same time. As Ansoff notes, “a simultaneous pursuit of market penetration, market development, and product development is usually a sign of a progressive, well-run business and may be essential to survival in the face of economic competition.”

4. Selecting a Strategy

Selecting a growth strategy is a three-step process. Firstly, set out all of the available strategies. Secondly, apply qualitative criteria to short list the most favourable few alternatives. And finally, apply a return on investment hurdle to narrow the options still further.

Consider the discussion below for a summary of the issues and various situations in which it may make sense for a firm to select a particular growth strategy.

4.1 Selecting Market Penetration

Market Penetration carries the least implementation risk since a firm is focusing on its existing products and existing markets, and so should be able to leverage its existing resources and capabilities.

Pursuing this strategy is likely to make sense if the firm has a strong competitive advantage, or if the overall size of the market is growing or can be induced to grow.

4.2 Selecting Market Development

Market Development carries more implementation risk than Market Penetration because a firm is expanding into new markets.

Market Development

Companies that have successfully pursued this strategy include Coca-Cola and McDonalds, and it may make sense where:

  • the firm’s core competencies relate to its existing products and it has a strong marketing team;
  • the firm can identify opportunities for market development including chances to reposition the brand, exploit new uses for the product, or expand into new geographical regions; and
  • the firm’s resources are organised to produce particular products and changing the production technology would be costly.

4.3 Selecting Product Development

Product Development carries more implementation risk than Market Penetration because the firm is developing new products.

Companies that have successfully pursued this strategy include 3M, P&G and Unilever, and it may make sense where:

  • the firm understands the needs of its customers, and identifies an opportunity to sell new products to satisfy changing needs;
  • the firm operates in a competitive market where continuous product innovation is necessary to prevent product obsolescence or commoditisation;
  • the firm has large market share and a strong brand;
  • the firm’s products benefit from network effects, and new products can gain a significant edge by being first to market;
  • the firm operates in a market with strong growth potential;
  • the firm identifies opportunities to commercialise new technology; and
  • the firm has a strong R&D team.

4.4 Selecting Diversification

Diversification carries the most implementation risk since a firm is simultaneously developing new products and entering new markets, and may be operating entirely outside its circle of competence.

Diversification can enable a firm to achieve three main objectives: growth, stability, and flexibility. And the specific strategies that a firm employs will differ depending on which of these goals the firm is pursuing.

There are three primary kinds of diversification that a firm might undertake:

  1. Vertical Integration: the firm expands its business to different points in the supply chain;
  2. Horizontal Diversification: the firm adds new products that may be unrelated to existing products but are likely to appeal to existing customers. For example, Amazon sells clothes, jewellery and various other products through its online bookstore. Since the new products can be sold through existing distribution channels, Amazon benefits from revenue and cost synergies; and
  3. Lateral Diversification: the firm adds new products that are unrelated to existing products and are likely to appeal to completely different customers. While lateral diversification has little relationship with the firm’s current business, the firm might adopt this strategy in order to:
    • improve profitability by entering a lucrative industry;
    • develop resources and capabilities in a potential new “growth industry”;
    • poach top management or key talent;
    • compensate for technological obsolescence;
    • expand the firm’s revenue base so as to improve its perception in the capital markets and make it easier to borrow money;
    • increase strategic flexibility in an uncertain business environment; or
    • reduce risk by spreading the firm’s activities across multiple products and markets, and thereby decrease its vulnerability to negative Black Swans and unfavourable events like economic downturns, increased competitive rivalry, improved supplier or buyer bargaining power, better-quality substitutes, or reduced barriers to entry.

5. Implementing a Strategy

Consider the suggestions below on how to implement each growth strategy.

5.1 Implementing Market Penetration

Market Penetration involves increasing sales of existing products to existing markets, and could be pursued in the following ways:

  • Increasing advertising to promote the product or reposition the brand;
  • Offering special promotions (e.g. 2 for 1, or Buy One Get One Free);
  • Introducing customer loyalty schemes;
  • Improving the quality or size of the sales force;
  • Modifying the products or product packaging in order to broaden their appeal;
  • Improving the distribution channels in order to reach more customers within existing markets;
  • Targeting a market niche in order to grow sales and build overall market share (this approach makes sense if the firm is small compared to its competitors);
  • Acquiring a competitor (this approach makes sense in mature markets where the size of the overall market is not growing);
  • Changing product pricing; if demand is relatively inelastic, then it might be possible to raise prices without a big drop in sales. Alternatively, prices can be lowered to increase the quantity sold; and
  • Improving operational efficiency so that increased sales can be achieved without a proportional increase in costs (this could be attained through economies of scale and product rationalisation).

5.2 Implementing Market Development

Market Development involves selling existing products to new markets, or new market segments, and could be pursued in the following ways:

  • Marketing products in new locations in order to expand regionally, nationally or internationally;
  • Advertising through different media in order to reach different customers;
  • Utilising new distribution channels to reach new market segments, for example building an online store; and
  • Modifying the pricing policy, products or product packaging in order to appeal to different customer demographics.

5.3 Implementing Product Development 

Product Development involves selling new products to existing markets, and could be pursued in the following ways:

  • Developing new products through R&D;
  • Acquiring a competitor;
  • Forming a joint venture or strategic alliance with a complementary firm;
  • Licensing new technologies;
  • Distributing products manufactured by other firms;
  • Extending an existing product by producing different versions; for example, Apple has recently released the iPhone 5C and 5S;
  • Packaging existing products in new ways; for example, Apple has recently re-released the iPhone 5 in a range of colourful cases and called it the iPhone 5C; and
  • Finding new products that can be sold to existing customers; for example, an online bookstore might develop an e-reader (let’s called it the Kindle) and add a long list of unrelated products to the online bookstore. After all, if customers are willing to buy books on the Internet then they are probably willing to buy other things as well.

5.4 Implementing Diversification

Diversification involves selling new products to new markets, and can be pursued by simultaneously adopting the tactics suggested above for Market Development and Product Development.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Economies of Scope

Economies of scope exist where a firm can produce two products at a lower per unit cost than would be possible if it produced only the one

ECONOMIES OF SCOPE is an idea that was first explored by John Panzar and Robert Willig in an article published in 1977 in the Quarterly Journal of Economics entitled “Economies of Scale in Multi-Output Production”.

1. Relevance

The title of that landmark article may not sound very appealing, but it does make clear that economies of scope and economies of scale are closely related concepts.

Economies of scale is a fairly well known concept relevant to big producers like Intel, Boeing and Toyota.

In contrast, economies of scope is a lesser known concept particularly relevant to small and medium sized enterprises (SMEs) that may not have access to large markets or the ability to produce at scale. SMEs represent the overwhelming majority of global business activity, and are the world’s main source of job creation and economic growth. For example, SMEs currently account for more than 99% of businesses in Europe (Economist Intelligence Unit 2011).

With the Euro-zone at the brink of collapse, governments and business leaders may be well advised to revisit basic concepts like ‘economies of scope’.  If properly understood, economies of scope could be used by SMEs to drive profit growth and reduce the risk associated with product failure.

2. Importance

Economies of scope provide firms with two key benefits:

  1. Lower average costs: If a company diversifies its product offering it may be able to lower the average cost of production. For example, McDonalds offers a range of different products (e.g. burgers, fries, sundaes and salads). As a result, it can achieve lower per unit costs by spreading its large overhead costs across a broad range of products. Lower per unit costs allow a company to do one of three things: (1) enjoy higher profit margin on each unit sold; (2) lower the price it charges customers and thereby increase market share; or (3) a combination of 1 and 2.
  2. Diversified revenue streams: By producing multiple products, a firm can diversify its revenue sources, which reduces the risk associated with product failure.

3. Economies of Scope

Economies of scope exist where a firm can produce two products together (joint production) at a lower average per unit cost of production than would be possible if it produced only one of those products (OECD glossary). Economies of scope have been found to exist in a range of industries including banking, publishing, distribution, and telecommunications.

Economies of scope and economies of scale are related concepts. The distinction is that ‘economies of scale’ refers to where the average cost of producing a unit of output decreases as output increases, whereas ‘economies of scope’ refers to where the average cost of producing a unit of output decreases as the number of different products increases.

3.1 Sources of economies of scope

There are 7 potential sources of economies of scope:

  1. Common inputs – Using more of the same inputs will increase bargaining power with suppliers. For example, Kleenex manufactures a range of products which use the same raw materials: tissues, napkins, paper towels, facial tissues, incontinence products and Huggies nappies.
  2. Joint production facilities – Plant and equipment can be more fully utilised. For example, a dairy manufacturer may be able to use its existing dairy production facilities to produce a range of different dairy based products: e.g. milk, butter, cheese and yoghurt.
  3. Shared overhead costs –The cost of certain fixed overhead costs can be shared across products. For example, McDonalds can produce hamburgers, French fries and salads at a lower average cost than it would cost to produce any of these goods separately. Each product shares overhead costs such as food storage, preparation facilities, restaurant space, toilets, car parks and play equipment.
  4. Marketing – The cost of advertising can be shared across products. For example, Proctor & Gamble produces hundreds of products from Gillette razors to Old Spice aftershave, and can therefore afford to hire expensive graphic designers and marketing experts and spread that cost across a broad range of products.
  5. Sales – Selling products is easier when salesmen can provide customers with a range of value options, as well as upsell and cross promote … “Would you like fries with that?”
  6. Distribution – Shipping a range of products is more efficient than shipping a single product. For example, Amazon sells an extremely broad range of products. As a result, it can negotiate favourable deals with freight companies.
  7. Diversified revenue streams – A firm that sells multiple products will have lower revenue risk because it is less dependent on any one product to sustain sales. More stable cash flows are attractive for three reasons. Firstly, they can be used to negotiate more favourable credit terms with banks. Secondly, a strong cash position can also be used to extend credit to customers and thereby increase sales. Thirdly, more stable cash flows can allow a firm to be more innovative with new product launches because the failure of any one product will have less impact on total revenues.

4. Diseconomies of scope

A firm that offers too many products may actually incur an increase in average per unit costs when it offers additional products. Reasons for diseconomies of scope may include:

  1. diluted competitive focus;
  2. lack of management expertise;
  3. higher raw material costs due to bottlenecks or shortages; or
  4. increased overhead costs.

Rule of Three – five final thoughts

Successful businesses use the Rule of Three to help them drive sales or raise awareness 

PREVIOUS posts looked at the Rule of Three, how you can improve your speeches with the Rule of Three, and a few amusing examples of where the Rule of Three has been used in comedy, storytelling, and the movies.

This post provides five final thoughts on the Rule of Three (think of it as three final thoughts, plus a bonus two).

Please find below examples of the Rule of Three used in marketing, politics, religion, science and sports.

1. Marketing

People like to be presented with three choices rather than say, two or five. Successful businesses use this innate human preference to help them drive sales or raise awareness.  Here are three examples:

  1. McDonalds offers three value meals: small, medium or large.
  2. Heinz baked beans uses the slogan: “Beanz Meanz Heinz” (three words).
  3. The Cancer Council of Victoria ran an effective skin cancer prevention campaign: “Slip, Slop, Slap – Slip on a shirt, Slop on some sunscreen, Slap on a hat.”

2. Politics

The power embedded in the Rule of Three has been used by governments and rulers since ancient times.  Here are three examples:

  1. Julius Caesar: “Veni, Vidi, Vici” – “I came, I saw, I conquered.”
  2. National motto of France: “Liberté, Égalité, Fraternité.”
  3. Nazi slogan: “Ein Volk, Ein Reich, Ein Führer!” – “One People, One Nation, One Leader!”

3. Religion

The major religions understand how to communicate effectively and often use the Rule of Three to great effect.  Here are three examples from the Christian faith:

  1. Birth and death of Jesus: The baby Jesus received three gifts from the wise men: gold, frankincense and myrrh. Jesus rose from dead on the third day.
  2. New Testament, Corinthians 13:13: “Meanwhile these three remain: faith, hope and love; and the greatest of these is love.”
  3. The nature of God: Christian theology identifies God as the Holy Trinity, one God in three persons – Father, Son, and the Holy Spirit.

Bonus

1. Science

The Rule of Three is also used in science:

  1. Solid, Liquid and Gas.
  2. Electron, Proton and Neutron.
  3. Negative, Positive and Zero.

2. Sports

And even in sports:

  1. Olympic medals: Gold, Silver and Bronze.
  2. Olympic motto: “Citius, Altius, Fortius” – “Faster, Higher, Stronger”.
  3. On Your Marks, Get Set, Go.

3. Adieu, adieu

To you and you and you!

The Three-Question Rule

“I Can’t Stand to Be Asked the Same Question Three Times” ~ Mustafa

Part 1: The Rule of Three
Part 2: Improve Your Speech Writing with The Rule of Three
Part 3: The Three Question-Rule

THE PREVIOUS two parts looked at The Rule of Three and how you can improve your speeches with The Rule of Three.

You can use the Rule of Three not just to improve your speech writing, and report writing, but in pretty much every aspect of your life.

For your amusement and edification, please find below examples of the Rule of Three used in comedy, storytelling, and the movies.

1. Comedy

The Rule of Three is used to great effect in comedy because it fits the classic joke structure of set-up, anticipation and punchline. A “triple” is a joke consisting of three statements in which the first two statements follow the same pattern, and the third statement provides an unexpected twist. The amusement results from the mismatch between what we expected and what we get. 
Here are three examples:

  1. French joke: “I know three French words: Bonjour, merci, and surrender.”;
  2. Jon Stewart from The Daily Show: “I celebrated Thanksgiving in an old-fashioned way. I invited everyone in my neighborhood to my house, we had an enormous feast, and then I killed them and took their land.”; and
  3. Benjamin Disraeli: “There are three kinds of lies: lies, damned lies, and statistics.”

2. Storytelling

The Rule of Three is commonly used in storytelling, so much so that it is unusual to find a fairy tale that does not incorporate the Rule of Three: Three Little Pigs, Three Billy Goats Gruff, and Goldilocks and the Three Bears. Here are 3 more examples:

  1. Charles Dickens´ A Christmas Carol: Scrooge receives a visit from three spirits: The Ghost of Christmas Past, The Ghost of Christmas Present, and The Ghost of Christmas Yet to Come;
  2. Rumpelstiltskin: An impish creature spins gold from straw three times and gives the queen three days to guess his name; and
  3. Aladdin: The genie of the lamp grants three wishes to an impoverished young street dweller.

3. Movies

You also see the Rule of Three used in the movies. The three act structure is widely used in screenwriting because it is a proven formula. Stephen J. Cannell, an American writer, producer and director, is quoted as having said that, “Every great movie, book or play that has stood the test of time has a solid Three-Act structure.”

The Rule of Three has also been used to create memorable movie titles:

  1. Sex, Lies and Videotape (1989);
  2. Lock, Stock and Two Smoking Barrels (1998); and
  3. The Good, The Bad, and the Ugly (1966).