In today’s competitive corporate world, international expansion is an obvious solution to organizational growth. But, with so much planning and risk taking involved, it is imperative to have a solid plan of action and there are many factors involved. For expert advice, take a look at our latest “thought piece” by Monica Foster, National Managing Partner of Talent Management for Tatum, a company that serves to help resolve the challenges of today’s CFOs. A key leader at Tatum with more than 10 years of recruiting and placement expertise, Monica oversees the company’s innovative talent acquisition strategies, analyzes national market trends and challenges, and works with her team to implement solutions.
Going Global And Preparing For International Expansion by Monica Foster
Amid today’s fierce competition for market share, many U.S. companies are looking at globalization as the key to profitable and sustainable growth.
For CFOs seeking new strategies and initiatives to stay viable, exploring expansion beyond domestic markets can be an effective way to maintain long-term growth opportunities. However, perhaps more than any other growth initiative, international expansion requires in-depth planning and risk-evaluation well ahead of implementation.
Follow the advice of Benjamin Franklin
The famous quote by Benjamin Franklin, “by failing to prepare, you are preparing to fail” illustrates just how important the planning process is to global expansion. There are many strategies and tools that CFOs can implement to drive better corporate outcomes and success, all of them with varying degrees of potential risk and complexities. Therefore, as you embark on considering global market expansion, it’s vital to deliberate the following:
– Buy it, build it, or partner?
If you’re looking for the route with the fewest barriers to entry, partnering can be an ideal solution to expansion. However, successful partnerships are those that are complementary, not competing, to the business; a good cultural fit; the ability to speed up time to market; and overall less costly than the alternatives of building or buying.
On the other hand, if you have identified a market opportunity that is more closely aligned to your core service or product offering, then building or buying may be the best approach. Building makes sense only if the organization has the proper resources, time, industry expertise and in-depth knowledge of the potential market. If any of these don’t exist, it may be time to look at acquiring. Acquisitions, particularly in a new market, are arguably the most risky and must be thoroughly vetted as an option. However, the idea of expanding internationally through mergers and acquisitions has become increasingly popular in recent years, with 2016 being the third most active year for mergers since 2007.1
In order to minimize risk and maximize successful outcomes, an extensive business case should be made that takes into considerations such as, identifying the ideal potential targets, how the combined entity will be integrated, how the new product or service portfolio will work together, and what the go-to-market strategy will look like.
– Look for ways to minimize risk.
Companies that have successfully leveraged globalization opportunities have considered potential risks and mitigated them with careful market research and planning. The first step to address potential risk is to assess both the political and business landscape of the potential market you are targeting. Even the most stable, wealthy countries aren’t immune to sudden surprises or seismic changes, as evidenced by the recent Brexit vote in the UK. Changes such as these can mean new degrees of uncertainty and risk, including import/export strategies and global currency. In addition, among developing nations the risk of political turmoil can be even higher where changes in regimes can dramatically alter the environment.
Another big area of potential risk with global expansion lies in new and expanding accounting regulations, including revenue recognition which has greater attention by regulators. According to the COSO Report which studied U.S. Public Companies from 1998-2007, 61 percent of 347 financial statement fraud cases were related to revenue recognition.2 Even beyond the potentially significant financial implications, CFOs need to consider the reputational impact a revenue recognition issue can have on investors’ and other stakeholders’ confidence in the organization.
Two key factors in mitigating the risk of revenue recognition issues include establishing more effective internal controls and ensuring adequate training of local staff. If significant global expansion is in your future, consider the potential for greater decentralization of your operations which can lead to internal control gaps and put your company at greater risk. In addition, many companies overlook the training of employees as a means of preventing revenue recognition issues. CFOs will need to ensure that all implementation of U.S. GAAP and other accounting regulations is consistent among newly-acquired companies and aligned with those used by the U.S. parent company. Foreign entities often lack the exposure and insight into U.S. GAAP which can lead to mistakes or inappropriate decisions.
– Leverage a common IT platform.
A large contributing factor to global expansion success is the ability to maintain control once you’ve become a global operation. Don’t underestimate the impact of your back office and the IT infrastructure on your ability to maintain that control. In today’s digital world, companies must have a common IT platform that affords you the ability to uphold operational efficiency and processes.
If your organization isn’t currently on a common IT platform, consolidating before you embark on global expansion is a must. Having that foundation delivers invaluable benefits including, compliance, adherence to regulatory reporting, taxes to standardizing processes and transparency.
– Don’t forget that people run businesses.
Hiring experienced, local talent to manage and run the new business can alleviate much of the cultural, language and brand issues you can encounter with global expansion. Even large, successful companies have stumbled as a result of cultural or language mistakes, including Mercedes-Benz who entered the Chinese market under the brand name “bensi” which means “rush to die”.
Consider hiring local teams even to assist with the due diligence and planning process of international expansion. These teams can provide insight into the local demand for your product or service, or the basic needs of the target market customers. In addition, CFOs need to have a precise understanding of the brand recognition and perception among potential markets. For example, in the United States Google is a leading and reputable brand, but in Europe it is viewed less favorably because of privacy issues.
– Always have a back-out plan.
Even if you believe you’ve done everything right in terms of due diligence and planning for global expansion, consider the worst case scenario and how to mitigate it. Even companies such as Target have made colossal mistakes in expansion. In 2015, Target recorded a $5.4 billion loss on its failed expansion into Canada due to huge supply chain problems, poor communication with headquarters and the use of inexperienced staff.3
As you build your business case and model for international expansion, be sure to factor in potential losses if it fails and strategies to implement to minimize the loss. Have an exit strategy if needed, and monitor key metrics that can help you determine if, and when, you need to exit.
Despite challenges, most CFOs see an upside
Overall, most CFOs see an upside to global expansion with many aggressively pursuing such strategies to drive sales and win new customers. According to a recent CFO Research survey, 95 percent of CFO respondents expect to have customers in at least two foreign countries by this year. And, two-thirds expect international markets to be among their company’s top priorities this year.4 The bottom line is global expansion may be a necessity for many CFOs looking to grow their company’s business. Either way, the degree of meticulous consideration, planning and preparation will likely determine the success or failure of entries into new international markets.
1 Source: “2016 Global M&A Report Press Release”, www.mergermarket.com (January 4, 2017)
2 COSO (the Committee of Sponsoring Organizations of the Treadway Commission) study, Fraudulent Financial Reporting: 1998-2007
4 CFO Research survey, “Pushing the Boundaries of Overseas Expansion,” 2014