5 Terrible Assumptions That Can Sink Your Business When You Expand Overseas
If you are an executive at a successful company, then you have probably expanded into new locations within your country numerous times. Each new location required you to confront local red tape and consumer sentiment, but with a little hard work, your new location was up and running and bringing home additional profits. It’s easy to assume that expanding into a new country will be just as simple. Sure, a few things will be different, but you’ve overcome obstacles before…right? So many corporations have fallen into the trap of expanding into countries based on assumptions that have no basis in reality. I have seen it happen again and again, and oftentimes corporations lose big when they build on bad assumptions. Here are the five most dangerous assumptions a company can make when it expands overseas:
1. A Stable Political Climate
Companies from the United States and Europe are used to operating in an environment of political stability and safety. Citizens may not always agree with their governments, but that’s what peaceful protests and Internet forums are for. Not every country fares so well. Many countries in Africa have long histories of government coups, while a majority of countries in the Middle East are home to large and angry minority populations that feel they are not represented in the government. Even the political ruling parties in certain South American countries are weak and popular dissatisfaction simmers close to the surface. If you open up shop in a country with a weak government, you may have trouble getting the licenses you need or may be at the whim of radical rule changes or broken contracts.
2. A Fair Legal System
A stable and reliable legal system is at the heart of corporate innovation. Companies must be able to trust that contracts will be honored and that their patents and trademarks will be protected. That is the only way they can make the significant investments required to create new and innovative products. In certain countries, these protections are weak or non-existent. Additionally, in a country like India, a simple court case may languish for 20 years before it is finally decided by the country’s highest court! Make sure you understand the state of the country’s legal system before jumping in.
3. Customers Are at the Same Technological Level
Too many businesses assume that if consumers in their country of origin love their products and services, so will consumers all around the world. This ignores the significant fact that people around the world may be at different stages in their adoption of technology. Some countries have actually leapfrogged certain innovations that we take for granted. For example, computer adoption is relatively low in Africa, but smart phone usage is skyrocketing. In other parts of the world, power outages are a daily occurrence. I have even been to countries where all the cellular networks go down when it rains. If your business relies on a technology that is not consistently available or is not widely used in the country, then you may be in big trouble.
4. Consumers are Brand Driven/Price Driven
In a country like the United States or Britain, companies can easily compete on brand or on price. There are plenty of consumers who are prepared to pay extra to get the brands they admire while a considerable portion of the population is also highly price conscious. Whether you are a company that competes on brand or price, you may assume that the same rules apply across the world. As you should be learning by now, this is not true. Many consumers in other countries couldn’t care less about branding. They will always pick the cheapest option every time. If you try to compete on brand, you may waste millions on marketing that just won’t work. The same goes for businesses competing on price. In other cultures, the upper class is highly sensitive to brand and won’t consider something without perceived prestige. You absolutely must understand the consumer trends in a country you want to enter. What appeals to consumers? What appeals to business customers? What do they want in the products and services they buy?
5. Consumers Will Want What You Have to Offer
I’ve used this example before, but one of the biggest international expansion catastrophes of recent times was Home Depot’s attempt to expand into China. In the United States and many countries around the world, the “Do It Yourself” attitude is a mantel worn with pride. Not in China where consumers regularly hire workers to complete home projects for them. A Chinese citizen who builds his own bookshelf or paints her own walls is a person without enough money to hire a professional. Walking into a Home Depot would be considered a march of shame for many Chinese, which is exactly why all those big, beautiful, brand new, and expensive Home Depot stores in China sat almost empty until Home Depot gave up and went home after taking a $160 million after-tax charge.
I know it sounds simple, but you absolutely must ensure that your product or service is something that consumers or businesses in a new country want and have the means to purchase. Don’t just assume. Be prepared to educate them if your product or service is a new concept and be careful if cultural norms are against you. It takes generations to change deeply held customs, not a few spiffy billboards!
Michael Marquardt serves as a global business advisor to corporations in Asia, Europe, and the United States. He works closely with the CEO and members of the senior leadership team on issues strategic to the enterprise and advises Audit Committees and Boards of Directors on effective risk management measures, corporate governance, and emerging technology issues.