Geographic Expansion - How to Make it Work and Not Lose Your ShirtBy: Steven Hacking
33% of geographic expansions are not in existence two years later and only 31% are profitable. Successful attempts require commitment: profitable expansions take up large amounts of senior management time, on average 28% of it. This sounds like a major investment to make something work, until you realise that unsuccessful expansions took up even more time, on average 39%; i.e. the senior management of these businesses spent 2 days of every week creating either a loss-making international presence or one that would close within 48 months. (Source: Latitude study of 74 international expansions).
Successful expansions we identified followed four stages, which are essentially a series of steps to stack the odds in the company's favour, and are summarised below. There were exceptions, but this is the rule:
1. Prepare the company for geographic expansion
Create a clear replicable business model that can adopted easily by the new country team and can serve cross-geography teams.
Ensure that there is a clear agreed accountability and decision making process between head office and any potential new country or region teams, i.e. who is responsible for what.
Develop a consistent global review and evaluation process with no differences between offices.
2. Select the right country or region to enter
"Follow the money" - set up to serve existing clients with significant budget over a long time frame AND where the market offers long term possibilities, i.e. follow your best long term clients but don't follow them into a backwater.
Choose a location where you have knowledge, experience and contacts.
3. Prepare the market for entry
Warm up the market with existing relationships where head office can give introductions to buyers - never go into any market cold.
Recruit, or ideally transfer, local sales people and nationals who have local budget-holder relationships and know the local language and culture. The ideal person is a country national who has worked for you for years, the next best is recruiting that same national several months in advance of opening in the new country.
4. Commit to the chosen geography
Take one country at a time and make each successful before moving onto the next.
Have conviction - commit to the geography only if you know you want to be there long term. Don't dabble in markets.
Bed in the business by taking time to integrate new recruits properly into the company.
We'll expand on each one of these stages in the sections below, and give good and bad examples of each.
To give some perspective on the benefits of investing in such a deliberate approach and following these stages, clients of ours that have taken this approach have on average grown local sales by 25% annually, all have been profitable within 12 months, and new offices have supported international growth by an average 10% annually.
Step 1: Prepare the Company Internally
The first step is to create a clear, replicable business model, if one doesn't exist already. An employee from head office should be able to go to the new office and know exactly what to do without changing work habits. Without this, the new office will be at best completely autonomous and at worst in constant conflict with head office, either failing to second guess or having to constantly check on every step it takes. Chaotic environments that thrive by winging it, or companies that change tack rapidly at the whim of their current CEO, create chaos-squared when they expand. In the words of a now-global business consultancy: "If our existing model wasn't easily definable, then the new one certainly wouldn't be either - it would have caused complete confusion."
Second is to make sure that there is clear accountability and agreed decision-making processes in place. In most cases, this means having one person with the remit and decision-making power for the new office, before any decisions have been made. If that person can project manage, then all the better.
Third step is to introduce a consistent review and evaluation process that can be applied in the same way to the same standards across all offices, with head office being able to crack the whip to make sure the process remains standardised.
Example: Bain & Company
Bain & Company is a classic example of this disciplined approach. Bain is considered a cult within the consulting sector, with an intensive standardised induction programme where new recruits become "Bainies" before being let loose inside the company. Read a Bain presentation or review a Bain project plan anywhere in the world and it looks the same, because everyone goes through the same training programmes. Every Bain office uses the same set of 6 month performance benchmarks in a consistent global review process. With consistent processes and performance standards worldwide, clients have the same experience whichever office they work with. This tightly-managed simple business model has enabled Bain to grow into a genuinely global consultancy, attracting some of the world's top talent and serving some of the world's largest companies year-on-year.
Step 2: Choose the Right Location
We have a mantra for this step; and if we want people to remember one thing from all our findings about geographic expansion it is this mantra: "follow the money". Follow the money means two things. First, it means following demand from existing clients that have major budgets that you expect to be spent on you over a period of years. Second, it means moving into locations that have strong latent demand for your services. These factors both need to be in place. It's just as bad to follow a single client into a backwater as it is to set up in a major corporate centre with no established ongoing client to support you.
"Follow the money" is the demand-side of selecting the right location, but we should also look from the supply-side perspective. That is to choose from locations where you have knowledge, experience and contacts. Failed and loss-making geographic expansions are littered with examples of talented, energetic people starting from scratch in a new location, to abandon the project with few leads and no sales six months later. Even if you are following an existing client, a new location needs this broader base of contacts and internal local knowledge to grow and thrive.
Example - Monitor Company
Monitor Company's geographic expansion was based at its core on following the need of long term clients. But if you look at Monitor's network, these client locations are also all major corporate centres. With each of its new offices, Monitor was deliberate in using the knowledge and contacts of nationals of the new location that already worked at the company. At the time of writing, Monitor had established profitable offices in more that 25 locations world-wide. We can contrast Monitor with a supply chain consultancy (which we won't name for obvious reasons) that took the more usual approach to geographic expansion: an enthusaistic individual opened an office on the basis of a one-off client project, but had no knowledge, contacts or experience of the location. After the six-month assignment finished, work dried up; the office was closed two years later with a write-off of more than one million dollars.
Step 3 - Warm Up the Market
You should never, ever go into a market cold and start from scratch there. If you've followed the previous step, you are following the money and will already have at least one long term client in the new location. But the new market needs more warming up before taking the big step of opening up a local capability. This usually means working local contacts and introductions from head office, so that the MD or salesman of the new office has a ready list of warm relationships before even stepping foot in the new country or region.
These salespeople must also be local with market relationships and contacts, and an intimate knowledge of the local culture. The ideal person will have spent time in your company already, and therefore already knows how you do things.
Example - The MAC Group
The MAC Group was a business advisory firm that sold itself for an enormous return in the 1990s to what became Cap Gemini. MAC's expansion followed a very deliberate path with three important steps always taken before entering any new country. First, MAC always followed the money in the form of local demand from long-term clients. Second, MAC's model was to work with business school professors in client projects, and MAC's senior partners always established and warmed up these academic contacts before moving into any new region. Third, MAC's new offices founders were sales-orientated country nationals. The result: MAC grew into a highly-profitable $250m business at the time of its sale.
The success of MAC's deliberate approach can be contrasted with an operational management consultancy that again we won't name for obvious reasons. This consultancy opened a US office on the basis of a very large one-off project for a client. But the company did no further market preparation, and sent in joint office heads that delivered the client project, but they had no sales skills and were not US nationals. After the client project ended, the two founders achieved no further sales and left the company after six months. They were replaced by a US national who had no knowledge of the company. This person in turn sold no further business and returned to the EU head office, with relocation for his family to be employed as a consultant at head office. The US office was closed on his relocation.
We hope these examples illustrate the importance of the third step in our approach to geographic expansion: spending time and energy warming up a market before committing resources locally, and the likely perils of not doing so.
Step 4 - Commit to the Chosen Location
Such a commitment is about three things. First, focus on one country or region at a time, and make it successful before moving on to the next; each new location will take up serious management time, and multiple additional locations are major distractions that pull management further back from the required tipping point. Second, don't dabble in markets. Just like learning a new language, you either need to immerse yourself or accept that you will never be credible. Third, take active steps over a major period to bed the business into your global business, for example by using six-month exchange programmes for new recruits at head office.
Example - Lane4
Lane4 is one of the leading and most successful executive development consultancies in the UK. It has strong demand for services world-wide from global clients. Conscious of the need to retain control over quality and have a commonly-understood way of operating, Lane4 is very deliberate in its new office opening. It has effectively created a queuing system so that one office is opened at a time, every 2-3 years. It has done this successfully in Australia, the US and Switzerland. New offices always contain long-term senior company employees in their management teams. Lane4 even relocated one of its founders to the US office to invest in the offices development and support local academic relationships with his contacts.
This deliberate, committed approach can be contrasted with a famous operational consultancy (unnamed in this post out of respect for interviewees) that experienced a rapid growth in international demand for its services based on a best-selling business book. It opened a series of international offices simultaneously to support overwhelming demand. It made no proactive effort to integrate new staff, though the rapid expansion would have made this unviable anyway. Furthermore, the company's laissez-faire appraisal system reduced the chances of a uniform approach to close to zero. The result was a patchwork of offices with inconsistent approaches, and numerous false starts within many countries. With a series of loss-making international offices and investment write-offs, the company itself closed down after five years of losses, despite the fact that its home office was highly profitable over the period.
Our messages from this article are, firstly, that the perils of international expansion should not be under-estimated and, secondly, that there are a series of steps companies can take, that are common to successful expansions we have observed and that can be used to stack the deck emphatically in your favour.
Of course, there are legion other issues to consider in expansion, such as what business model to use, whether to have a physical location, etc. These are determined by the specific circumstances of the particular company, and will be the subject of a future article.
© Copyright 2009, Steven Hacking
The author assumes full responsibility for the contents of this article and retains all of its property rights. ManagerWise publishes it here with the permission of the author. ManagerWise assumes no responsibility for the article's contents.
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