Updated: Nov 10, 2020
Everyone is looking for the next big thing. For many organizations, international expansion may be the path to finding it. It doesn’t matter the industry of operation or the size of the company, organizations across the globe are looking to grow. While some trends follow consumer preferences and fade with changing desires, international expansion has proven it’s here to stay. U.S. multinational corporations alone have employed tens of millions of people for decades.
Gregory J. Newell, chairman of the International Commerce Development Corporation (ICDC), believes that international expansion is particularly advantageous for companies in the U.S. middle market. Organizations generating annual revenues between 10 million and 1 billion dollars fall into this sector. Working with the ICDC for over 27 years, Newell has identified six advantages that middle market companies receive through international expansion.
New Revenue Channels
Revenue is the lifeblood of an organization. Offering products internationally allows companies to tap into revenue channels they otherwise would not have access to. Newell and the ICDC note that nearly half—45 percent—of mid-market companies derive 50 percent of their income from foreign markets. According to Newell, one fast-moving, consumer products company – which had invested 1.75 million dollars in expanding to a strategically selected market – “recovered that 1.75 [million dollars] within 90 days.” Within three or four years, 70 percent of the company’s total revenues came from off-shore operations.
In addition to, and as a means of increasing, revenue organizations are continuously seeking a competitive advantage over other companies in their industry. International expansion offers that advantage to an organization by broadening its goods and services globally. Once a company has successfully expanded into another country, they have a larger growth potential than competitors who remain limited by the size of their local market.
One example of such growth potential can be seen in a travel hospitality company that the ICDC helped strategically enter China. Because of the competitive advantages associated with international expansion, the company opened its 51st market in China, just a few years after initial entry. It has since added 44 additional markets in the country. Newell explains, “the benefit here [is] having competitive advantage not only domestically against their fellow peers in the industry, but also internationally.”
Reduced Production and Fulfillment Costs
While increasing revenue and market reach are one component of profitable business management, cutting costs is another. One method for middle market organizations to reduce both production and fulfillment costs is to expand abroad. Global economies of scale and local development in foreign markets enable companies to produce and transport goods in and to international locations at much lower costs.
Additionally, the increased production associated with new markets can decrease per-unit fixed costs. As an example of decreasing production and transportation costs, Newell tells how one organization strategically entered Japan, allowing them to later start distribution into South Korea and other Asian markets. Because of the new infrastructure and expertise acquired in Japan, they were able to transport goods to nearby countries cheaper and faster.
International Talent Pools and Training Resources
International expansion enables mid-market companies to take advantage of new talent pools and training resources. Similar to how opening a location in Japan facilitates fulfillment to the surrounding countries, global expansion also connects companies with individuals who can assist in cross training personnel to interact more efficiently and respectfully with individuals from another country. There is also a great deal of talent and new ideas abroad. Opening just one foreign location can introduce an organization to new ideas, outlooks, and possibilities that it otherwise may not have been aware of.
Access to Government Resources
In order to reduce the risk of international expansion, many governments provide resources to assist organizations in their foreign pursuits. Knowing many U.S. companies overlook both home and foreign government support when considering going aboard, Newell discusses a few of the available resources. The most prominent being the U.S. Department of Commerce.
Newell explains, the “Department of Commerce has enormous resources that are available to all U.S. businesses. … They have intelligence, they have institutional memory, they have relationships, and they have financial resources that can accelerate one’s market entry.” The Department of Commerce has personnel—both U.S. diplomats and foreign service nationals—available to assist organizations in about 130 countries. Newell asserts that the foreign service nationals, “are golden key[s] to those markets because they will be in their positions for 25, 30, even 40 years.” They have the relationships, knowledge, and experience to speed up the entry process into foreign markets.
Additionally, Newell highlights the value of connecting with the U.S. Department of State, the U.S. Department of Agriculture, and the Federal Deposit Insurance Corporation (FDIC). On a smaller scale, most states in the U.S. offer grants to U.S entrants for international development and expansion. He also suggests reaching out to multilateral organizations, such as the United Nations (UN) and the World Bank. Between these organizations and others not mentioned, there are billions, if not trillions, of dollars’ worth of resources available to companies that can add value to new markets through international expansion. Companies desiring to expand internationally just have to reach out for help.
While the first five advantages relate to the direct increase of a company’s capital, this final advantage—portfolio diversification—relates to the stabilization of capital levels. With each national market on its own path of fluctuation, a company with stakes in only one nation could face drastic swings in capital holdings. Strategic international expansion can be used to reduce volatility from market changes. Newell says, “All countries historically will have high points and low points, good seasons and challenging seasons. If one is diversified in their portfolio… you then find yourselves able to be protected in one market when another market is down.”
For example, different countries have different growing seasons. If an organization buys, or sells, agricultural products in regions with opposite growing seasons, they can pay, or receive, optimal prices all year round. As Newell puts it, “one can spread, by diversification, revenue flows geographically.” The portfolio diversification of international expansion allows organizations to grow at steady rates rather than experiencing oscillating capital flows that may hinder continual progress.
With the potential for increased revenue, decreased costs, stable capital trends, and assistance resources to support the process, international expansion is highly advantageous for U.S. middle market organizations. While there are risks associated with taking operations abroad, companies that don’t earnestly consider strategic expansion may be taking an even bigger risk with their market share. Competitors will continue to experiment and progress internationally, and organizations that don’t will likely fall behind. Consequently, international expansion may be the path for companies looking for the next big thing.
For more insights on international expansion, view Gregory Newell’s Global Perspectives Summit 2020 presentation here.
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