Let’s face it: International expansion is both a blessing and a curse.
Expanding your business to a new country offers a ton of opportunities, of course. Increased revenue. A bigger labor pool. Being an early mover in your industry. Diversification. Global expansion lets you pursue an aggressive growth strategy with international talent and sets your company up to have an edge over your competitors.
But there can be a downside to international expansion, too. The process can be cumbersome, even sluggish. It requires mastering often byzantine local laws and regulations, not to mention managing an unending number of challenges and tactical decisions, each of which can determine your success or failure.
Examples abound of companies that have succeeded wildly when expanding into markets X and Y but fell flat when they moved into Z. China is notoriously challenging and has stumped market leaders from Google and Amazon to Nike and Uber. Another example of an unsuccessful business expansion strategy is Starbucks, which failed spectacularly in coffee-loving Australia.
Beginning in 2000, the Seattle-based chain expanded rapidly, opening nearly 90 Australian locations in eight years. But Starbucks didn’t account for challenges that ultimately sank the company in Australia, from pricing strategy to flavor preferences to café culture. With $105 million in losses, Starbucks was forced to shutter more than 70% of its underperforming stores. Turns out Starbucks lattes were too expensive and too sweet, and the brand simply didn’t mesh with Australia’s localized café culture. Starbucks eventually tried again, this time focusing on cultivating the tourist trade, and worked its way up to 39 stores by 2018.
Given the complexity involved in global expansion, how can you figure out what you need to tackle in order to thrive in overseas markets? It’s not enough to determine which markets to enter, understand the cultural differences, develop a distribution model, and create a pricing strategy.
There are a number of other factors you need to include in your global expansion strategy and business model so that your company is positioned not just to avoid failure, but also to prosper—preferably at great cost to the competition.
Trade wars with China. A potential recession. The growing workforce shortage. No matter where you’re planning to expand, big changes in one part of the world inevitably affect the business climate elsewhere. Staying on top of them is key. In order to prepare for Brexit, for example, U.S. companies like AIG and Discovery opened new offices outside the U.K. Other companies have created Brexit-specific positions or job responsibilities. Designate an individual or department with evaluating major geopolitical shifts and be prepared to face challenges and adapt your international expansion strategy as needed.
When Home Depot entered China, the company learned the hard way that the Chinese weren’t into DIY; they’d rather hire others to do the work for them. Just like Starbucks, Home Depot failed to consider how cultural attitudes could affect its success. Don’t make the same mistake—understand the local market landscape and be humble enough to adjust to it, rather than hope it will adjust to you.
International labor laws differ vastly from U.S. laws. They often make more complex distinctions between types of employees, and noncompliance carries huge penalties. In France, for example, not only will you pay stiff fines if you treat permanent staff more favorably than contractors, but you can also be banned from hiring contractors for up to 10 years—or even go to jail. Partnering with an expert on local employment laws when hiring international talent is the best way to ensure compliance.
Here again, the regulation of intellectual property differs from market to market. Rights that are protected in the U.S. don’t necessarily extend to other countries. To whit: Apple shelled out $60 million to buy back the iPad trademark from a Chinese firm called Proview. How you hire in-country can affect IP as well. In some markets, using independent contractors (rather than employees) makes it more difficult to enforce IP contracts or regulations. Conversely, when companies are able to retain IP, they may be unwittingly admitting that their contractors are performing employee duties, which could mean fines and other penalties for employee misclassification. Register trademarks and apply for patents for IP in every market you enter, making sure to match your need for IP rights to employment regulations.
Established companies can find it hard to swallow product or positioning changes that run counter to their brand identity. But adjustments may be necessary in order to succeed locally. Take furniture giant IKEA. While being known for low prices was a boon in most markets, it didn’t work in China. There, western products are considered aspirational, and so IKEA had to change its positioning to appeal to Chinese consumers. Be willing to tweak your brand based on your target market and conduct research to understand what resonates.
Data compliance regulations
Business leaders rank data protection and data privacy laws first among their legal and compliance concerns when expanding internationally. GDPR compliance is considered one of the strictest privacy laws in the world, but more and more countries are adopting stringent new compliance laws. For example, Russia, Kazakhstan, China and Indonesia now require multinational corporations to have local databases and servers in-country. A framework for keeping up with changing regulations might include hiring a compliance officer or seeking outside expertise.
Maintaining company culture as you expand internationally can be difficult. How do you honor local corporate culture in a dozen new markets while staying faithful to what you’ve built back at HQ? There’s no one way to do it. Airbnb, which is often recognized for its great company culture, has an employee experience team that oversees everything from celebrations and events to the workplace environment. However you do it, make sure your multicultural strategy respects local traditions and reinforces your values everywhere you operate.
If you think entity establishment is the biggest hurdle you’ll face, logistically speaking, you’re right. The process can take six to 12 months, and your to-do list will include licensing, bank account setup, paperwork and more—all with a healthy dose of bureaucracy on top. In India, you’ll need 100 or more approvals before you can start your business. You’ll have to figure out how to classify your new entity, and you may also have to change the tax structure of your U.S.-based entity to avoid PE risk. Where will your overseas revenues sit and who will tax them? A single mistake at any point in the process can negate all the work you’ve done, forcing you to start over from scratch. (Ouch.) A great way to minimize your risk is to test a new market before you commit to a permanent entity. This gives you the opportunity to evaluate how viable, say, India is for meeting your business goals, and it gets you in-market ahead of your competition.
A perfect partner for your international expansion strategy strategic planning
If your role is to guide your company through global expansion, the hard part isn’t determining the “why”; it’s figuring out the “how.” The good news is that you don't have to go it alone when figuring out your international expansion strategy. Trusted employment partnerships, particularly with a global employer of record, sometimes called a global or international PEO, can help you avoid both frustration and costly missteps.
Contact us today to speak with one of our global solutions advisors to learn more about the "how" of international expansion.