Maximize Your International Sales with the Right Expansion Model
Once you’ve decided to enter a new foreign market, you’ll need to choose the best way or ways to tap into customers in that market.
There are seven basic approaches to do this: (1) ecommerce; (2) distributors; (3) referral partners/strategic alliances; (4) licensing; (5) new sales office; (6) joint ventures; and (7) acquisitions.
Each of these models offer tradeoffs. The best choice depends on your market, your expectations, and company objectives.
In selecting the best entry model, companies should ask themselves the following five key questions:
Investment. How much are we willing to commit? Companies must realistically assess not only the capital outlay, but the internal resources and skillsets that will be needed. Companies with little international expansion experience are often unrealistic about the amount of investment needed.
Generally, the fewer the resources (i.e., money, time, and expertise) the company wants (or can afford) to devote, the better it is for the company to enter the foreign market on a contractual basis—through e-commerce, distributors, alliances, or licensing.
Control. How much control do we want? Control comes in many forms. It may include control over branding and the customer experience, which will vary depending on the expansion approach chosen. For example, a company that establishes its own local subsidiary in a country has control over advertising campaigns, how inventory is stocked and managed, and how its products are positioned in the local market. A business that uses a local distributor must depend on that partner to manage these things well.
Control can also come in the form of knowing which people are hired, whether and how local laws are followed, including how financial transactions are booked, and whether local corruption is tolerated.
The more control a company wants, the establishing their own local office or buying a local company is likely to be.
Risk. How much risk are we comfortable with? Like control, risk in international markets comes in many forms. There are financial risks – the likelihood of return on investment, foreign exchange risks, and credit risks. There are also opportunity costs, because you have alternative ways to invest your money and time.
There are also market risks when entering a country where the ways of doing business are not fully understood. In some cases, there are significant political risks, where the overall business climate could change very quickly.
Ease of exit is also a risk factor to consider. For example, it is relatively easy to stop selling via e-commerce on short notice if a market becomes unprofitable or too difficult to manage. In contrast, winding up a joint venture or local subsidiary can be expensive and take months.
Speed to Market. How quickly do we want to see significant sales in this market? Speed to market is a key consideration for many companies who are under pressure to show sales and sales growth after investing significant resources. The faster that company can start making sales, the more quickly their investment can be recouped. Speed to market, however, must not only be balanced against the initial investment, but also against the ongoing support costs needed.
Potential for Growth. What time horizon do we care about? Generally, international markets—if chosen wisely—represent excellent long-term growth potential. Some models, as will be shown below, require low investment, but long-term growth potential is often limited. However, some companies simply need or want short-term sales growth and are less concerned about the longer term.
The key in selecting the best international expansion model is to be realistic and honest about each of these questions, and to rank order the importance of each. Companies new to global expansion naïvely think they will invest only a little and take few risks, yet still get fast, sustainable growth. This is unlikely, so balance these tradeoffs to select the approach that is most likely to meet your specific needs.
In the next article, we’ll look at the ecommerce model, which is rapidly growing in popularity as a model for tapping into new foreign customers.
Doris Nagel is CEO of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Check out Globalocity’s free infographic summarizing the 7 international expansion models discussed in this series .