Successful International Expansion: Should You Set Up a New Local Office?
Successful international expansion offers promising opportunities but requires preparation and planning. How to enter those markets is key to your success.
There are seven basic approaches to reaching new foreign customers, each offering advantages and disadvantages: ecommerce, distributors, strategic alliances, licensing, new foreign office, joint venture, and acquisition.
In this article, we look at setting up your own foreign office.
Many companies set up an office in key countries to sell to customers locally (sometimes called a “greenfield site,” since you are starting from the ground up). To do this, you generally need to establish a local legal company, have an office of some sort, and some local “feet on the street.”
Greenfield offices provide maximum control
You have complete freedom to decide how to structure the office, who to hire, and how your products will be marketed, sold, and serviced. You build direct relationships with local customers, and get immediate, unfiltered market feedback. Every dollar invested builds your brand, and you recognize 100 percent of the sales revenue. As a local company, you may get preference in bids and tenders, or experience better, faster product acceptance.
There are often economical options to get started. Your can often start with a Regis-style office with people mostly working from home. There are also companies that will payroll your first employees or provide back-office support services, allowing you to create a virtual office. The right logistics providers can also help with many operational aspects.
Greenfield site disadvantages
This strategy is high-risk because there is no partner with whom to risk-share or pool resources. Unanticipated complexities are common, even with in-depth investigation and planning. It may take longer, or cost more than originally planned, both to get started and to recoup your investment. It is difficult to truly understand how to be successful in a new foreign market before diving in.
The initial costs with setting up a new foreign office are many. Finding the right people is pivotal to your success and speed to market, so you may need to pay a premium to hire away from a competitor or send over someone from the home office temporarily. Employment and benefit laws are often complicated and costly, and certainly will differ from those in your home country.
A high level of parent company commitment is needed to properly support the new office. This model provides maximum control, but that is only effective if you can clearly and consistently articulate the decisions you want made locally vs. headquarters. Most companies underestimate the cultural differences, requiring frequent and effective communication. Failure to do this often results in disappointing results, or worse — local business practices can get parent companies in trouble.
You will need to find and continually manage a good network of outsourced providers to provide functional support. These might include finance (accounting standards differ by country), payroll, tax, IT, human resources, warehousing/supply chain, and customer service. You will want clear operational guidelines in place across all these functions. You may need to even add experienced staff at headquarters to support these activities.
Expenses can mount quickly, and since your customer base is typically small or non-existent, local offices take time – sometimes years — to become profitable. Your new outpost is essentially a foreign startup company, not a branch of the home office, and needs to be supported and managed accordingly.
Does a new foreign office make sense for you?
You should consider setting up your own local office if you (a) desire full control over all the decisions; (b) choose markets with excellent long-term growth potential; (c) have carefully assessed all the costs and likely payback, and (d) are willing and able to fully support the new office with both internal and external resources; and (e) can afford to wait (sometimes years) for long-term growth and return on your investment.
Setting up a new foreign office—when done carefully—can provide opportunities for substantial long-term growth. And while there’s a very steep learning curve, your processes can be replicated in other countries.
Next, we’ll look at joint ventures to reach new international 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 seven international expansion models discussed in this series.
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