What is your strategy for going global?
Creating Your Global Business Strategy
As we have discussed, strategic motives must drive the decisions to conduct business globally. But what is your action plan? Where do you begin? How do you begin? Which markets should be entered first? What would be the optimal mode of entry? How rapidly should you expand globally?
There are five steps to your action plan for going global:
- Conduct an internal analysis to examine how well you are prepared to approach the global markets
- Conduct a market analysis for your products
- Formulate a business strategy
- Choose the mode of entry
- Finance your selected strategy
Step 1. Conducting an Internal Analysis
An internal analysis can lead to three findings. You are proactive, reactive, or defensive. SAP, the German enterprise software company, is a great example of being proactive. The company is fourth in the software world behind Microsoft, Oracle, and Computer Associates. SAP earns more than 80 percent of its revenues from outside of Germany.
Hasso Plattner, CEO and co-founder of SAP, advises that “companies that wish to expand internationally have to think like missionaries and first establish small advance groups to learn the language, business climate, and culture. You cannot just arrive and preach about your product.”
However, most small and medium-size businesses are reactive. They respond to the tide of global pressures by simply “preaching” about their products. A defensive approach is designed to deny growth and profitability to competitors by, for example, attempting to market and sell before competitors are established, or by attempting to capture critical capital resources (suppliers, supplies, and partnerships) and denying them to any competitors.
Step 2. Conducting a Market Analysis
The new country market analysis process includes the following steps: conducting a preliminary screening, checking fit with strategy and resources; in-depth screening; final selection; forecasting country sales; and predicting competitors’ moves which includes existing local, potential new entrants, and competitors in domestic markets. There are some recent works by Michael Porter that offer a good place to start thinking about which countries offer the best advantages.
The key factors you should research are GDP per capita, economic freedom, ICT investments, access to local capital markets, and industry specific information. For looking at economic freedom, examines the Fraser Institute’s excellent publications. Their comprehensive studies provide in-depth coverage of 123 nations. The Institute tracks free countries, changes in their economic freedom, and freedom for entrepreneurs to enter and compete in their markets. The reports from the Milken Institute can help you monitor ICT investments on a global basis, including ICT investments per capita. Finally, you should review Milken’s Global Capital Access Index (CAI) reports which ranks countries by the ability of its entrepreneurs to gain access to capital.
Consider the fact that each business has industry specific issues and questions to answer.
– For example, look at customers and competitors, what are they doing?
– What is the penetration of technology in the sector?
– How about the adoption rates of innovations?
– What about regulatory openness and the ability to start and run entrepreneurial ventures in particularly the legal practices established by the country?
– What is the professional service infrastructure like?
– How easy is it to get a banking account and find professional service providers?
Finally, we follow the money.
– What is the investment activity in the local venture capital community?
– Are there mechanisms for harvesting in place?
Step 3. Formulating a Global Business Strategy
Today, the relevant question is no longer “Should we be global?” but rather “Which global strategy is appropriate for our company?” Unfortunately, there is no specific strategy or approach that is suitable for all ventures, all markets, or all industries because no two are exactly the same.
A global business strategy should be based on differences in customer tastes and preferences, differences in infrastructure and traditional practices, differences in distribution channels, local governmental demands, and localization of products needs, which means developing, manufacturing, and marketing products best suited to the demands of local customers. A venture’s orientation to global markets can be characterized as one of the five business strategies profiled here.
A. Exporting Strategy
There are two types. First, indirect exporting which involves the selling to domestic customers who then in turn sell the products globally. And direct exporting is selling directly to customers in overseas markets. Exporting makes sense if a company is not actively seeking global business and cares to make little investment to get involved in global trade.
B. International Strategy
The foreign markets are viewed as extensions of the domestic markets and likewise, the domestic products are offered, as is, to foreign buyers. Basically it is foreign involvement without investment, leveraging critical capital resources of partners in host countries. Makes sense if the venture has a valuable core competence that indigenous competitors in foreign markets lack, to establish distribution channels and/or production facilities, and if the venture faces relatively weak pressures for local responsiveness and cost reductions.
C. Multi-domestic Strategy
Each country market is viewed as being culturally unique and involves creating a customized product for each market. Makes sense most when there are high pressures for local responsiveness and low pressures for cost reductions.
D. Global Strategy
Views the world as a set of markets and sources of supply. Wherever cost and culturally effective, a standardized product is developed for the entire set of leading country markets. Takes advantage of the experience curve, reaping the maximum benefits from the economies of scale that underlie the experience curve. Makes sense where there are strong pressures for cost reductions and where demands for local responsiveness are minimal.
E. Transnational Strategy
Uses local thinking, knowledge and local assets. The venture develops core competencies locally, paying close attention for local responsiveness. It involves detailed foreign investment, establishing management and/or production facilities in host countries. Makes sense when a venture faces high pressures for cost reductions and high pressures for local responsiveness.
Step 4. Choosing Your Mode of Market Entry
The tactics for implementing a multinational business strategy is a most complicated task even for the experienced professionals. We can only briefly review them here. There are two very broad choices for your modes of entry into new country markets: nonequity and equity routes.
A. Nonequity Route
Nonequity includes exporting, indirect or direct, and contractual agreements like licensing and franchising. As discussed above, exporting is a relatively conservative approach to test foreign markets and foreign competition inexpensively without investing locally. It is a popular strategy with entrepreneurs. We found that 77 percent of United States exporters have fewer than 100 employees, and almost half of the ventures in the United States with revenues under $100 million said they exported products from the United States.
Licensing involves granting the rights to intangible property for a specified period of time. Management contracts are similar to licensing as they provide some cash flow from a foreign source without significant investment or exposure. Global consulting and engineering firms have traditionally conducted their foreign business on the basis of a management contract.
Partnering involves distribution agreements, contract manufacturing, R&D, joint ventures, and “piggy-back” co-marketing agreements. Franchising is similar to licensing, although franchising tends to involve longer-term commitments than licensing and includes not just product or intangible property like a trademark, but also rules on how to run and manage the business and business models.
B. Equity Route
The equity route includes creating joint ventures, strategic alliances, mergers and acquisitions, and greenfield start-ups. Ventures merge with or acquire an established foreign firm and use that footprint to launch and to promote their products into that country’s marketplace. A greenfield start-up, or wholly owned subsidiary, is an approach to establish new foreign subsidiaries, and to set up a new operation from scratch. It is expensive, but it can be tailored to exactly fit your needs.
Step 5. Special Issues in Multinational Financing
Although foreign operations may be similar to domestic operations, when expanding your venture globally you must also consider the many complexities that do not exist at home. Therefore you will need to communicate your global business activities to your stakeholders and investors. For example, in your business plan, you will need to add the appropriate attachments to the financials, and incorporate explanations in your assumptions that support your financials.
There are five key financial activities that are particular to conducting multinational business, and need to be discussed, regardless of the strategic approach you choose to go global. They are listed here.
A. Capital budgeting decisions
Involves the analysis of investment opportunities, looking for entering new markets, for sourcing raw materials, for production efficiencies, for gaining access to local expertise. These decisions are about what activities to finance, capital budgeting for new projects and analyzing parent cash flows, and adjusting for political and economic risk.
B. Financing decisions
Looking long-term at how to finance those activities including in what currency, sources of financing and short-term issues like how to finance trade activities and to offset foreign receivables.
C. Capital structure decisions
What proportions of debt and equity are necessary for the global operations. Looks at who owns what and for how much. Important to conform to the local norm where the subsidiary operates or vary to take advantage on opportunities to lower taxes and take advantage of other market imperfections.
D. Cash management decisions
Focuses on how to optimize cross-border cash flows. Includes decisions about how to manage the venture’s financial resources most efficiently, how to minimize cash balances, reducing transaction costs and tax management. Examines the moving of money across borders for attaining efficiencies and reducing taxes, the investment of excess cash balances and how to minimize tax exposure on cash flows.
E. Working capital management decisions
Establishing invoicing policies (which currency), pricing strategies (how much) cash flow networks, accelerating cash flow repatriation and funds positioning. In essence, how to bring money earned overseas through distributed earnings, royalties and license fees, net interest on loans, and distributed charges for services.