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How To Expand Your Business Internationally

Author: Matthew Smith

Even with a good idea, finding success with a new business is not always a given. It is generally estimated that 80%-90% of startups fail. However, for the companies that succeed, expansion can be a logical strategy for building brand recognition and increasing sales, and with the rapid growth of technology, the transition to international markets can be as seamless as domestic expansion.

Globalization allows the international integration of business operations through increasing efficiency in transportation, communication, and supply chains. Through technology and globalization, many companies have expanded business operations overseas. Recently, prominent American brands, such as Buffalo Wild Wings (BWLD) and Shake Shack (SHAK), have found success internationally. But, global expansion can fall flat, even for the largest companies. For example, Target (TGT) has decided to abandon its $4.4 billion expansion into Canada after just two years. With a number of risks and rewards, several variables must be considered before an organization makes the decision to expand globally. (For more, see: What Are Economies Of Scale?)

Rewards

Synonymous with technological innovation, global expansion has been prosperous for a number of organizations. In particular, expanding a company overseas increases the potential for reaching a larger customer base. It is estimated that 95% of consumers live outside of the U.S. As a result, companies that have saturated their local markets are provided with opportunities for increased revenue streams. Likewise, global companies benefit from access to a larger talent pool.

Compared to developed nations, labor in emerging markets is less expensive. It is estimated that average monthly wages in developed countries are US$ (PPP) 3,000, while emerging economies are US$ (PPP) 1,000. In conjunction with cheap labor, multinationals gain access to new materials and res, benefiting the production of goods.

Risks

While global supply chains can increase efficiency, they also carry inherent risks. From a supply chain standpoint, moving operations abroad requires implementing new methods of distribution, procurement, manufacturing, and logistics. Due to the interconnectedness of the supply chain network, a problem in one area can negatively affect the entire supply chain and modes of production. Particularly, expanding operations overseas requires building new distribution centers and establishing a global transportation network. (See also: Supply Chain Management Jobs Are Booming.)

Even with greater access to labor and res, operational risks exist in hiring and staffing an organization. Highly skilled positions require labor with knowledge, education, and experience with the product or service being sold. In both developed and emerging countries, individuals with a suitable background may be more difficult to find.

There are also marketing risks that come with introducing new products to different cultures. For example, it would be unwise to produce and sell hamburgers or hotdogs in countries where the majority of consumers are vegetarian. By understanding the market, culture, and customs, an organization can produce goods and services that satisfy the needs and trends of a foreign country.

For all the upsides to opening operations abroad, navigating international tax laws can be complex. Companies headquartered in the U.S. are subject to corporate taxes on foreign earnings brought to the U.S. Additionally, international taxes, such as value added tax, sales tax, and import and export taxes, should be taken into consideration before a business expands abroad. (For more, see: How International Tax Rates Impact Your Investments.)

Successes

With the rapid growth of the fast casual sector in America, companies such as Buffalo Wild Wings and Shack Shake have found success internationally. Buffalo Wild Wings has continued its international growth through franchising multiple restaurants in Mexico and the Philippines with anticipated openings in Saudi Arabia and UAE in early 2015. The wing company has limited its expansion to franchisers with significant restaurant and financial experience in order to limit over expansion.

Similarly, popular burger chain, Shack Shake has expanded to 27 licensed restaurants overseas. Shack Shake has leveraged marketing and social media to increase its brand presence domestically and worldwide. With plans to open more stores globally, licensing accounted for $6.5 million in 2014 revenue with a majority coming from international licenses.

Failures

For most companies, success in America does not always translate overseas. Despite its popularity for providing affordable necessities, Target businesses have not translated well in Canada. Given a number of operational flaws, Targets $4.4 billion and 133-store venture proved unsuccessful in only two years. Following an over ambitious growth strategy, Target opened 124 Canadian stores in the first 10 months of its operations.

Compared to American stores, Canadian Target's were significantly smaller, rundown, and disorganized. The new stores also struggled with distribution challenges resulting in low inventory, empty shelves, and out of stock products. Products that remained on shelves were priced higher than those in U.S. Target stores. (For more, see Measuring Company Efficiency.)

The Bottom Line

Discovering untapped business opportunities overseas involves implementing a sound business strategy designed to mitigate a number of risks. Successful global expansion requires goods and services that meet local customs, competition, cultures, and marketing. Organizations must also be cognizant of operational and financial risks, such as tax compliance and distribution challenges.

J. Crew has found global success through gradually adding stores, product differentiation, and focus on customer experience. Similarly, clothing retailer Zara's expansion strategy involves a competitive price advantage. For smaller companies, where a price advantage does not exist, following a model similar to J. Crew's can increase market exposure. Regardless of domestic success, over expanding an organization abroad can exacerbate operational flaws, as in the case of Target Canada.

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