Within our strategy consulting firm, nearly all our clients distribute internationally or procure something overseas. For many, export has been a vital element of their growth strategies, given the tepid growth and inflation in the U.S.
Currency risks, socio-economic instability and shifts in U.S. trade policy are forcing many companies to reevaluate their ambitions to grow internationally.
We have observed that our clients who are successful overseas are also highly targeted. A product may perform well in Germany but poorly in the U.K. or France. Further, one strategy cannot apply to all; each market is worthy of its own business plan and careful consideration of variables.
The following global entry strategies provide varying degrees of control and risk. To maintain greater control, a global company needs to invest more in a local area. One approach is to begin with the least risky of these strategies, and increase risk over time once the brand has been established.
Exporting- As exporting requires that production occur in one region and ship to another, it is costly and exposes the exporter to a number of risks. In addition to cost of transportation, the exporter must manage logistics and other costs such as tariffs. Exporting is most feasible when economies of scale are not necessary to be profitable.
Franchising- Franchising is popular among B2C brands such as restaurants and retailers. As the burden of operating location is shifted to a local franchisee through a franchise agreement, operating risks are lower for the franchisor.
Joint Venture- Joint ventures are legal entities often created by companies wishing to participate in new markets while utilizing the capabilities of another company that understands the local operating climate. With larger companies, joint ventures may cover a vast geographic territory (such as South America). In regions like China, joint ventures are often necessary to comply with legal requirements regarding foreign ownership.
Strategic Alliance- Alliances are popular as low-risk investments. The distinction between an alliance and a joint venture is that the participants do not take an ownership stake in a new entity or in each other.
Direct Investment- Direct investment is the highest-risk entry strategy with potential for the greatest return. As many regions of the world are far more volatile than the U.S., with lack of government control and force of law, such investments can result in loss of capital.
Other marketing considerations such as targeting, positioning and segmentation can be challenging for U.S.-based businesses. Consumers behave differently in other parts of the world, and marketers must adapt to regional tastes, languages and cultures. For example, in many low-income regions, consumers shop more frequently and buy in smaller quantities.
Relative to the rest of the world, the U.S. has sophisticated systems for distribution and logistics. In Asia, many products are distributed through an unstructured web of locals, middlemen and village peddlers.
Regulation can dramatically affect global strategies. Many countries employ complex tariffs, taxes and price supports. European countries like Italy, Spain and France require that businesses only put select products on sale twice per year. Other countries such as Mexico and Germany have vastly different labor laws than the U.S., and failure to understand such operating conditions can be risky.
U.S. providers are advised to choose specific strategies for each market, and enter that market only when all variables have been considered.