By Ramez Naguib, P.E., LEED AP, CEM, engineering sales & marketing director, McQuay International
Globalization is here to stay. Remember when rock-and-roll band Sha-Na-Na sang s couple of decades ago, “I don't care what people say, rock 'n roll is here to stay”? Well, they proved right. And it’s the same thing with globalization. No matter what some nay-sayers within your organization proclaim, the marketplace is going (already is?) global for your market segments. With the exception of very few security-related applications, practically all other projects, services, and systems now can come from, or go to, any country. In our building services sphere, maybe there aren’t screw compressors manufactured in Beijing for an office building in Houston, nor is there a chilled water system being completely designed in Bangalore for a district cooling plants in Chicago, but it won’t be long before these also become everyday realities. It should be clear to the executives within your organization that the writing is on the wall. If you don’t go to the international markets, they will be coming to your domestic market, and they will come very soon.
Some within your organization may also say that “we have already tried before and it didn’t work.” Though this may be the case, more often than not, such failures are the results of bad planning, not lack of markets or customers in the target international market.
Why Go International?
Firms pursue internationalization strategies for a variety of reasons. Some motives are strategic in nature, while others are reactive. An example of a strategic, or proactive, motive is to tap foreign market opportunities or acquire new knowledge. An example of a reactive motive is the need to serve a key customer that has expanded abroad. Nine specific motives include:
- Seek opportunities for growth through market diversification;
- Earn higher margins and profits;
- Gain new ideas about products, services, and business methods;
- Better serve key customers that have relocated abroad;
- Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products;
- Gain access to lower-cost or better-value factors of production;
- Develop economies of scale in sourcing, production, marketing, and R&D;
- Confront international competitors more effectively or thwart the growth of competition in the home market;
- Invest in a potentially rewarding relationship with a foreign partner.
At the broadest level, companies internationalize to enhance competitive advantage and to seek growth and profit opportunities.
From Export to International
Exporting is a popular entry strategy; however, before moving further, I’d like to clarify what I mean by “going international.” There is a difference between companies that get an “export order” every once in a while from this country or that overseas customer, versus organizations that have it clearly in their strategy and deployment plans to penetrate certain international markets.
The vast majority of the companies can tell stories about how, out of the blue, they were contacted by a customer in an overseas location who then placed an order with them. They may then think that by doing so, they have become an “international” company with customers around the globe. Well, they aren’t. They are merely an opportunistic exporting company. There is nothing wrong with that approach, especially for relatively small companies with limited resources. However, once such companies start growing, they should have a formal and detailed plan for penetrating targeted international markets to secure consistent and progressive market shares in such locations. Note that the key words here are “consistent” and “progressive.” An opportunistic exporting company has no plan to consistently secure orders from international markets or to progressively increase its share and profitability in such markets. An international company has. So what does it take to go international? Here are some tips:
Test the Waters
The first step is doing a basic market analysis to determine if the product or service is needed in the target market. Talk to other companies that worked there, or trade organizations involved in such locations. Trade shows and trade missions are also very helpful in this regard.
Another resource is the U.S. Commercial Service, which offers a variety of market research and due diligence products through its National Export Initiative. Through such a resource, your company will be in a better position to assess the market size, standards followed in the market, major players, and any related regulations that may help or hider your sales efforts. For equipment manufacturers, one such helpful regulation that is frequently present in developing countries is a beneficial tax treatment for export-related industries, which lessens the price difference between locally manufactured equipment and the imported one from your company.
To get started, you’ll have to put some investments upfront—investments in the form of time commitment, money, and marketing efforts. Before setting up your strategy, you will have to interview local clients, industry experts, and even direct competitors whenever possible. Your aim from this exercise should notbe to promote your products or services, but rather to gain insight about the market: its needs and requirements, competitors and influencers, price levels and payment methods, already established relations and alliances, etc. Throughout this phase, always try to ask and remind yourself: What does this specific market need? What’s missing in the picture that my products or services can potentially fill? During this phase, try to listen more than you talk. The history of mistakes and solutions in any market is available to anyone who chooses to take the time to study the market.
So, be prepared to have these upfront investments, but don’t throw good money after bad money. What this means is you must continuously monitor your performance and assess how the market picture you are trying to capture is developing. Always keep in mind that the reason for you to enter into a new international market is not just to add another dot on the world map in your main conference room, but to generate positive cash flow for your organization. So if after following this exploratory phase you realize this is not an interesting or profitable market for your organization, you must have the courage to step up and say so.
Expect and Respect the Differences
Don't overestimate the attractiveness of the foreign markets. You have to balance the potential sales against the costs and risks of doing business in the new markets. Not only are the cultures and languages different, but even technical aspects may be so, as well: certifications, standards, measurement systems, materials, regulations, etc., can vary widely from country to country and even from location to another within the same country.
Some differences may not be very convenient, such as the lack of intellectual property protection. In such cases, you have to be creative in dealing with these new types of differences that you may have never have encountered while operating in your domestic market. One possible caveat in such cases is to bundle your products or services differently or to target some niche markets initially. One of the safest bets for companies trying to break into such international territories is to start with their current domestic customers first. The long-term repeat customer that a company has long known, who now is expanding internationally and looking to work for the same suppliers he is used to is a safe route. This option mitigates payment problems. It also may lessen any cultural or language issues as typically the supplier still will be dealing with the same headquarters engineers and purchasing managers.
Make sure not to attack local competitors’ strongholds head-on; instead, initially target niches that may be in the blind spot of the locals. Then as you gain experience, local reputation, and market share, you can start wandering around for the other domains where the local suppliers previously have resided.
Keep in mind also that quite often, the support level and skills set needed for international operations may not be what you already have readily available in your company for the domestic operations. This may be translated into forming a separate “international department” to cater for the special needs of your global customers’ base. This brings about another important point as you prepare for your market invasion: Who should lead this invasion?
When I started my career in international operations, I lost a multimillion dollar contract in Qatar, but I never forgot the lesson I learned from the client that day over the phone. He told me “You can’t run an overseas business over the phone.” Don’t wait to lose your contract to learn that lesson. Don’t try to run your international business over the phone, by e-mail, or even with video conferencing. Despite all the wonders of modern communications, there is nothing like being there in your client’s office, shaking his hand, and having dinner with his team.
Very important aspect in the success of your international expansion is who you appoint to head this expansion. Such individual should be culturally conscious and willing to listen and learn knowing she or he hasn’t “seen it all.” This individual should be competent in technical, financial, and operational aspects, but also willing to take risks, go on adventures, and be away from home for extended periods.
Putting people in foreign settings doesn’t automatically imbue new attitudes, and it is attitudes rather than experiences that make a culture global. Recruiting people with the “right” education or with foreign language skills doesn’t guarantee people have the right attitude either. We have all met people who speak three or four languages yet still have a narrow view of the world. At the same time, we also have come across people who speak only English but have a real passion and curiosity about the world and who are very effective in different cultures (1).
The spearhead person should pay attention to belief and custom, but avoid stereotyping individuals. Different groups and places have different customs and beliefs. This person should know and respect them, but also should beware of making assumptions about individuals. The attitudes, interests, and other characteristics of an individual are often quite different from those of a group to which they may belong (2).
Not only should this spearhead person be open-minded to different cultures, but equally important, that person should be open-minded to different market requirements.
Crown Jewels and Sacred Cows
One of the most important lessons for companies aspiring to go internationally is to be ready to “let go.” As in rearing children, parents eventfully learn to let go of their children as they grow so they are able to develop their own personalities. Unless the parents admit they don’t possess all the wisdom nor do they already have the answers to all possible challenges their kids are facing, both the parents and the children will be frustrated.
Same goes for companies. The experience, product knowledge, success and failure stories in the local market may, or may not, be of any relevance or use in the new international market. The flagship product or service back home may be utterly irrelevant in the new export market. Companies must be ready and open to drop such crown jewel product or service should it prove unsuitable in the new international marketplace. Companies instead should learn to listento the voice of the market, not to the organization’s own legends and history back home.
Companies also should be aware of the sacred cows in their headquarters. Things they tended to do (or not to do) in the domestic markets that may need minor or major adaptations in the international market place they are targeting. Once again, here you must keep open eyes, ears, and, most importantly, an open mind to grasp what are the needs in each and every of these new and unique international markets. Once you get to know these needs, you then can address them with your offerings for the individual marketplace, as well as decide what would be your most appropriate and effective go-to-market strategy.
Don’t get caught up in the Not-Invented-Here-Syndrome. When you go to foreign international markets, keep your eyes open on the customers and keep your ears to the ground. Try to be open to new perspectives, ways of doing business, new specifications or enhancements, etc. These can prove invaluable not only in the foreign markets you are trying to penetrate, but even to the domestic market you have been serving for decades.
The key point here is that you need to understand that when it comes to international operations there is no one-size-fits-all solution. You have to learn to juggle more balls and keep them all in the air. There have to be sacrifices, as well as new inventions. Companies frequently must choose between commitment to competing in a particular way, or with a certain product portfolio, and the flexibility to compete effectively in a variety of ways when it comes to their global operations (3). So, evaluate the market and if you need to “let go,” well, then just let go of some of your company’s legacies if you want to succeed in entering the new international market. Try to build new legacies rather than just feeding on the old ones.
Build vs. Buy vs. Ally: Chose Partnerships Wisely
Organizationally, companies can choose a number of ways to grow internationally. They can grow organically, or they can purchase assets or capabilities in the international markets they are targeting. Alternatively, they can form an alliance or partnership with compatible local companies. Alliances continue to be a vital part of corporate strategy—particularly in markets with high uncertainty or where there are potentially promising growth opportunities a company does not want to pursue on its own. Alliances can be an effective way to spread investment cost in new technologies, manage the risks associated with emerging markets, and maintain flexibility by simultaneously pursuing diverging strategic paths.
Companies considering international expansions should evaluate the costs benefits of partnering with local companies versus doing it alone. One of the most important items they should take into consideration when evaluating such alliances is the potential conflicting interests of their partners. A reoccurring conflict of interest I have seen in similar cases was that the local entity may want to partner with a foreign company to go global, while the aim of the foreign company is the opposite: focus on the local market. So be aware and clear on what your interests are, as well as your partner’s from the beginning to avoid such misalignments in business objectives.
If you decide to enter into partnerships with local entities, make sure you understand the different decision-makers in each situation. Understanding who decides what is crucial in international operations. What applies at home may be irrelevant overseas. Governance structures for domestic companies also may have little relevance in other international markets. Having majority ownership in Germany doesn’t give you the power to change anything without the consensus of the labor representatives on the board. In China, even in nominally “private” companies, you need the local Party representatives’ approval for major changes in the company. In Japan this may be the keiretsu, the closely intertwined industrial groups.
Another important tip to consider is that if you intend to appoint independent local representatives or work through distributors, make sure they don’t handle a zillion other business lines but rather will focus on promoting your product. However, they should be able to make “good money” working with you. Don’t try to squeeze every dime out of their margins; you bothshould be able to make money in this relationship if you want it to grow and be prosperous. If you appoint such independent representatives, make sure you don’t judge them with your home office matrices. The time frame to develop a market in Southern Indiana may take a year, but in Southern India may take two or three or five. You have to select them wisely, but trust their judgment after that, which takes me to the next important point:
A study a few years ago examined the impact of three alternative forms of governance between export manufacturers and their international partners. The three forms were: trust, knowledge sharing, and contract-based relationship. Findings suggest that all three governance mechanisms contribute to enhancing the manufacturer's competence to exploit local market opportunity. However, of the three, trust seems to be the only effective way to curtail distributor opportunism (4).
You have to do all your due diligence before shaking hands with your local partner, but once you do, you have to nourish mutual trust between both organizations. Note that local companies, especially in developing countries, sometimes get a bit sensitive over the issue of trust. Putting them too much under the microscope with progress reports, forecasts, market surveys, etc., may be interpreted by them as though you are looking down upon them or distrusting their business judgment. So be extra cautious there.
Having said that, I also must caution you that many local individuals and companies will claim they have the right “connections” in the market and that they have access to this or that organization. Don’t fall for this one! Even if they have high connections, the simple rules of good and sound business apply universally: Have a good productat a competitive price(not necessary the cheapest) that satisfies some market needsand then work on a path to the marketwith this product and you will be in business anywhere. If you have a local partner who is a reputable and with good business line fit with what you do, this will give you a much better chance of success than teaming up with the guy who plays golf with a National Party representative, a cabinet minister, or a member of the Royal Family. Teaming with the latter may give you an edge in one or two initial projects, but teaming with former will give you an enduring market success.
Enjoy the Trip!
There still remains much more to think about in your international journey. How to organize your international operations? Do you go by function or by business? How can you arbitrage, aggregate, and adapt to the differences in the diverse markets? Which markets to target? What are the potential tax implications and finance options? How to avoid branding and segmentation conflicts between the domestic and international markets? How to deal with multinational clients that are present in different markets? What contingency plans should you have in your pocket? How to make sure that by globalizing your operations you are not increasing your risk exposure rather than hedging such risks? How to develop global accounts and make them profitable?
Norwegian-American sociologist and economist Thorstein Bunde Veblen (1857-1929) once said the outcome of any serious research can only be to make two questions grow where only one grew before. If this article gave you more questions, then it has achieved its goal as now you know what questions to ask if you were to succeed in taking your company internationally.
Ramez Naguib, P.E., is the engineering sales and marketing director with McQuay International, a member of Daikin group, in Minneapolis, MN. He has lived, worked and studied in all six continents… Antarctica not included.
Bartlett, C., S. Ghoshal. 1992. “What Is a Global Manager?” Harvard Business Review(5) 124-132.
Ghemawat, P. 2003. “The Forgotten Strategy.”Harvard Business Review(11) 76-84.
Ghemawat, P. 2007. “Why the World Isn't Flat.”Foreign Policy(2) 54-60.
Green, P. 2007. “Stepping Up” Global Finance(6) 18-20.
Hall, E. 1960. “The Silent Language in Overseas Business.” Harvard Business Review(3) 87-96.
Khanna, T., Palepu, K. 2010. “Winning in Emerging Markets: A Road Map for Strategy and Execution.” HBR Press.
Sebenius, J. 2002. “The Hidden Challenge of Cross-Border Negotiations.” Harvard Business Review(3) 76-85.
Strategic Alliances Conference. 2007. “Building and Managing Successful Alliances for Growth and Innovation.” The Conference Board Inc.(New York City, NY).
The following Website provides a lot of useful information and statistics that can help you assess country-level attractiveness to do business in: http://globaledge.msu.edu/