Economic uncertainty in America and around the world has heightened awareness that there is risk associated with expanding into foreign markets. A supplier thinking about launching a sales and marketing presence in the global marketplace must exercise caution. How can a supplier wishing to generate sales from beyond its home market proceed while simultaneously minimizing its risks and maintaining control over costs? It can enlist the services of established distributors, exploit the distributors’ experience, and restrict foreign selling costs to a predetermined share of incremental sales.
I take this opportunity to share with you a plan for launching a sales and marketing presence in the worldwide marketplace. The plan holds down the cost of entering the new market and minimizes various risks that can occur during the process. The plan acts as a guideline for manufacturers with no international marketing and sales experience. When combined with the experience of entering the supplier’s first international market, a company can transform the plan into a policy or procedure for entering new markets in the future. In order to minimize risk and the costs associated with entering a new market, a company can develop an eight-step plan that includes:
1. Properly setting expectations,
2. Developing a bank of resources,
3. Studying local market norms,
4. Hiring a country manager,
5. Selecting a distributor,
6. Negotiating a distribution agreement,
7. Preparing for fraud and scandal, and
8. Incorporating lessons from competitors
When a company begins to discuss creation of a sales presence in a foreign market, each member of the executive team probably has a different vision about expanding internationally. Sales may seek greater total available market. Manufacturing may prize greater volume across which to spread its fixed cost. Marketing might wish greater market share. Research and Development might crave better visibility into the foreign market. Finance may welcome the opportunity to reduce financial risk by spreading revenue across uncorrelated markets. Engineering may seek the opportunity to create an alliance with a foreign customer or competitor. The CEO may seek faster corporate growth and greater global visibility. If the project is to succeed, the executive team must develop and agree to a shared purpose.
Various groups must buy into the foreign market expansion, since those groups will be required to provide resources for the project. Ensure that all groups are prepared to offer resources. More important, confirm that all groups actually buy into the project. For best results, ensure that each group responsible for applying resources in the foreign market actually feels as though it owns its respective piece of the project.
Identify the resources each group will provide to the foreign market effort. Ensure that all groups providing resources include costs associated with the resources in their budgets. Top management must not only proclaim support for global expansion, but it must demonstrate that support frequently. Have the head of the foreign team present to various forums when he or she comes to headquarters. Ensure that members of the executive team visit the operation when traveling in the new market area.
When a company begins to plan its move into a foreign market, it can draw resources from several quarters. Divide resources into two broad groups: data and network. First, use data to build the expansion plan. How large is the market and how fast is it growing? Does the marketplace use distributors, a direct sales force, or a hybrid blend of distributors and direct sales? Is there an established network of seasoned distributors, or must the supplier help establish a distributor from scratch? How eagerly do customers accept new entrants, particularly foreign entrants? How does a company contact and interview potential distributors?
Second, develop a network. When a company enters a new foreign market, it begins with no established network. Develop and constantly nurture the network. The objective of the network is to have someone to call when faced with a dilemma, unforeseen challenge, or scandal. Industry trade associations are a good source of resources. Association staff and member companies both domestically and in the foreign market can provide valuable insight into the foreign sales operation in its start-up phase.
Embassies around the world often have staff that is devoted to helping companies expand sales. Embassy staff can provide data on the size and composition of the foreign market. They gather data on the manufacturing capabilities of indigenous competitors, and the presence and plans of foreign companies. They organize trade missions and trade fairs. Commercial staff in embassies can help arrange introductions to customers, potential distributors and staff.
Early steps when establishing a presence abroad include initiating relationships with a bank, accountant, and attorney. Be sure to develop the human side as well as the functional side of those relationships. Meet the executives of the bank. Include them in your network. In some markets, bankers can arrange introductions to customers that otherwise would be difficult or take an unbearably long time to set up. Attorneys will certainly assist your company by filing all the necessary documents with which your company can legally enter and operate in the foreign market. However, they can also answer a myriad of questions you may have during the start-up phase. Those answers and guidance can only come about if you take the time to develop personal relationships.
While you interview distributor candidates, consider including both those partners you select and those you reject in your long-term network. If you interview ten distributors and select one, your network will be more valuable in the future, if you create a relationship with several, as opposed to only the distributor with which you establish a formal relationship. A distributor with whom you have no formal partnership is likely to provide you with more and different feedback about your company, sales activities, and new market than a distributor that feels obliged to preserve its franchise.
Distributors in foreign markets often form associations. Developing and nurturing relationships here can provide your company access to information unavailable elsewhere. Through such an association, you will have easy access to most other distributors. That access becomes very important when you must overhaul or expand your distribution network.
American chambers of commerce operate in most foreign markets. Two examples are the American Chamber of Commerce in Argentina and the American Chamber of Commerce in Bulgaria. In smaller markets, the chamber may operate primarily as a social organization. In larger markets, you will discover a sophisticated network of committees that address many industry sectors. Since the chambers are composed of all industries in which American companies operate, it represents a particularly good window through which to spot changes occurring in the market. Sometimes changes in foreign markets occur prior to similar changes in a manufacturer’s home market. In this case, the worldwide market acts as an early warning system, clearly a valuable asset.
Irrespective of whether your company plans to relocate a manager from headquarters or hire a local country manager, establishing a relationship with one or two executive recruiters is very wise. A recruiter, particularly one of international scope, is very familiar with problems that arise in foreign companies. Such a resource can help should you choose to recruit a foreign national as country manager. That resource can also provide counsel when difficult issues arise.
All markets have unique characteristics and few are identical to a company’s home market. Prior to entering a foreign market, a supplier must study and develop an understanding of the norms there. Understand how the new foreign market differs from the home market. Do direct sales teams sell goods or services? Do sales flow through distributors? If distributors are used, is it customary to use a sole distributor, or multiple distributors?
Companies may enjoy payment on invoices within 30-to-45 days of shipment of goods in some markets. Achieving 45 days sales outstanding may be manageable in some markets, but not in others. It is important to understand the DSO standard in the foreign market, and to measure the sales operation against local norms, not those in the home market.
Management in the Foreign Market
An early decision in the foreign sales effort is selection of the country or office manager. Within the industry, do companies usually fill the top post with an expatriate from headquarters, or hire a foreign national in the local market? Both solutions work and both have problems. An expatriate from headquarters can quickly instill confidence in the operation among staff at headquarters. He may foster clearer and faster communications with headquarters. However, an expatriate will need time to learn customs unique to the local market. During the learning curve, an expatriate will make errors. Some may be costly. An expatriate experienced with the company culture can quickly train foreign the distributor staff about products and how the company operates.
Hiring a foreign national for the top job is the alternative to an expatriate. A well-qualified local manager brings knowledge of customers and market customs to the operation. Since a local GM has neither relationships with the company’s executive team nor knowledge of the product line, it is important to have a newly hired manager spend time at headquarters soon after joining the company.
After deciding to enter a foreign market, determine the shape of the sales organization. Opening with a direct sales organization is probably the most difficult, most expensive and riskiest alternative. Opening with a distributor is generally less difficult, less costly, and poses less risk. Prior to interviewing distributors, develop criteria for selection. The most frequent cause for changing distributors is inadequate due diligence when evaluating candidates. Since the company entering a foreign market is only beginning to learn about that market, it is important to keep options open. Avoid exclusive arrangements. Ensure that you have the opportunity to modify the geography, distributor lineup, and terms of the distribution agreements in which you engage. Always be sure that you have the opportunity to terminate those agreements for cause and for convenience. Ensure that someone with commercial experience reviews the distribution agreement. Ensure that a local attorney reviews the same agreement. Dual review improves chances for a long-term relationship between distributor and supplier.
The first year in any new market is a huge learning experience. At the end of the first year, the executive team and the local GM are likely to look back and determine that they could have made some better decisions. If it is determined that the chosen distributor was a poor decision, you will need the flexibility to alter the distribution network. By demanding flexibility in distribution agreements, you will have the opportunity to upgrade the distribution channel with minimal negative impact.
Great distribution agreements do not forge great relationships. Nor do they guarantee success. Poorly written agreements, however, often hasten termination of relationships between suppliers and distributors. The first rule to follow when constructing and negotiating distribution agreements is to ensure balance. All relationships and agreements between suppliers and distributors ultimately expire. Expiration sometimes is amicable, as when both parties move ahead in different directions. Upon such disengagement, the distributor partners with a new, established and enthusiastic supplier; and the manufacturer creates a relationship with a new promising distributor.
Parting company with a partner in a distribution relationship sometimes becomes acrimonious. Agreements created in a fashion that favors one party over the other often result in costly litigation upon termination. How does imbalance enter an agreement? An inexperienced author may purposely draft an agreement that contains unbalanced clauses. Sometimes a party to the agreement attempts to stack advantages toward one side of the partnership in an attempt to make a better deal for itself. One partner becomes too clever by attempting to make life better by exploiting the inexperience of the other partner.
Seasoned players understand that biased wording does not serve the purpose of long-lasting partnerships. Bias leads to legal skirmishes and not to an improved relationship. Partners must remember that the real objectives of an agreement and partnership between a supplier and distributor are greater sales, improved market share, better profit margins, and other metrics. The objective of a supplier or distributor should never be a list of advantages in an agreement of one partner over another. Resolution of imbalanced agreements regrettably often involves costly litigation.
Prudence during negotiation of distribution agreements dictates that the distributor be awarded a territory with which it has experience. If a distributor has experience in only a small territory, it is not wise to assign a large territory and hope for the best. A better policy is to open the relationship in the proven territory and expand later, after results in the original territory suggest that an expanded geography is reasonable. Ensure that the distribution agreement clearly states the obligations and responsibilities of both parties while the partnership is effective, upon notice of termination, during the period between notice and effective date of termination, and after the effective date of termination. Concise wording helps to reduce the likelihood of litigation.
Fraud and Scandal
Fraud and scandal are real possibilities in foreign markets. The incidence of fraud is largely proportional to the distance from headquarters. Developing a perspective about fraud and scandal before opening the foreign operation is very important. It is almost impossible to prevent something going wrong in a foreign market. Although discovery of fraud or scandal does not permanently destroy a supplier’s reputation, a slow or poor response to a problem once discovered is unforgivable and unnecessary. A company must have an outline of a procedure to follow once a problem surfaces. When a supplier uncovers a problem, customers and competitors pay attention to how the supplier handles the problem. The marketplace admires and respects speedy and professional handling of a problem. A slow or sloppy approach to fixing problems becomes part of the company’s legacy, can dampen its reputation, and can impede its ability to grow.
Less seasoned management sometimes takes too long to prepare a solution when fraud or scandal surfaces. There may be an attempt to hide the problem from the outside world. Such an exercise is foolish. It is almost impossible to keep the news of the problem from leaking into the market once discovered. Experience mandates that the best action is to implement corrective action as quickly as possible. When the going gets tough, the tough scale hurdles, says mountain climber and entrepreneur Chris Warner, who with Don Schmincke wrote “High Altitude Leadership. “Sweat the small stuff.” In mountaineering, rarely does the first error kill a climber,” Warner and Schmincke wrote. “Death occurs when the third thing goes wrong.” If a company delays cleaning up the first sign of fraud or scandal, it opens the gate for incidents two and three. Attempting later to resolve three problems simultaneously becomes a behemoth, and potentially fatal task.
Lessons from Competitors
Lessons about the foreign market come from many sources. If the executive team gathers lessons of competitors, the company can avoid many of the most common and frequently repeated mistakes made by other foreign companies. Suppliers already operating in the market have a number of errors made and solutions taken. Gather as many of those stories as possible. Compile those tales before marching into the new market in order to avoid the simplest of errors. Not making blunders can save precious management time and scarce corporate resources.
Suppliers rarely offer to help direct competitors in the home market. However, when selling in foreign markets, GMs of competing suppliers often recognize each other more collegially. Although there is little communication between competitors in the home market, GMs managing foreign sales operations in Timbuktu likely have a cordial relationship. Those GMs are probably members of the local club and chamber of commerce. Both attend monthly meetings of one or more trade associations and are members of a local network. When problems or questions about running the operation arise, there is little stigma attached to asking for help from competitors. Fellow GMs of foreign operations can operate as part of a general manager’s extended network. However, in order to take advantage of that resource, remember to constantly nurture, develop, and expand the network.
The decision to enter a foreign market is significant for any company. Entry is expensive and mistakes made during the entry process are even more costly. Proper planning is vital. Ensure that the entire executive team buys into foreign expansion. Continuously build and develop a foreign network. Learn and understand the customs of the foreign market. Correct all problems quickly. Support the GM at both the foreign site and at headquarters. Spend adequate time establishing selection criteria. Take time to select distributors that will accommodate the company’s planned growth. Do not set foot in the new market without a plan to handle fraud and scandal once it appears.
Competitors have made many mistakes in the foreign market. Learn and study those mistakes in order to circumvent making the same mistakes again. Perform adequate due diligence in the early stages of entering the foreign market. Be sure that all company divisions offering resources to the new market plan and budget for expansion. Create and nurture a corporate memory. The lessons learned during the early years of a foreign presence are extremely valuable and ultimately become part of the legacy and company culture.