This article originally appeared in the November 2014 issue of Smart Business Philadelphia magazine.
The reasons for a business to consider expanding internationally are many and compelling: the domestic market for its products or services is saturated, intense competition, margin pressures, etc. The goal is to increase revenues and expand market share.
There is also sourcing as a motive — looking for ways to reduce costs or risks in the supply chain — and production — looking for lower labor costs and being physically closer to new or emerging markets.
“Such a decision can be daunting and should not be made without careful consideration of the risks; after all, for most companies, global markets represent a great unknown,” says Michael A. Coakley, Director, Audit & Accounting, Kreischer Miller.
Smart Business spoke with Coakley on what businesses should know when they consider global expansion.
What is the biggest challenge when expanding internationally?
Perhaps the most significant risk or challenge of expanding internationally is navigating the culture gap. Every country has its own language and culture, and successfully working with them requires some knowledge of how the country prefers to transact business, along with the ability to effectively communicate. This is oftentimes accomplished by having someone ‘on the ground’ in that country — whether an employee or a representative — who is a native or is otherwise knowledgeable of the culture.
Another risk is the longer sales cycle inherent in these transactions due to distance and shipping obstacles. Whether you are selling to or sourcing from abroad, longer lead times must be factored into the cycle, as products could spend a considerable amount of time ‘on the water’ or tied up in customs. Unanticipated delays could lead to stock-outs or delays in the manufacturing cycle, or missed delivery dates to customers, leading to dissatisfied customers and possibly future lost sales.
This also ties into another risk, tarnishing your brand. A reputation for being late would almost certainly cause damage to your brand both domestically and abroad.
Are there any other risks a company should consider?
Other possible risks to a company’s brand and image relate to quality and quality control — whether perceived or real. And then there are social and ethical dilemmas companies may face in other parts of the world — poor working conditions and lack of regard for safety and environmental hazards. Your company’s relationship to or involvement in these situations could prove disastrous.
There are also the hidden or unexpected costs of doing business abroad, such as customs duties, taxes/tariffs, letter of credit fees and insurance. And there is the almost certain significant travel costs associated with a company’s sales or operational leaders needing to spend considerable time in the foreign land to monitor the activities of those working on their behalf; making sure that the local cultural customs are being adhered to, and at the same time, the values of the company as well.
No less important to the decision to expand internationally are the foreign countries’ economic and sociopolitical climates, and foreign currencies and exchange rates. With so much instability and changing demographics affecting many parts of the world, these have to be closely monitored — both at the outset of global expansion and on an ongoing basis.
How does a business handle the risks?
Most if not all of these risks can be mitigated with proper planning and due diligence. Formulation of a strategic plan for international growth and consultation with your trusted business advisors — accountants, attorneys, bankers — are key.
In addition, assistance, including some direct government funding and government-funded services, may be available and can be accessed through a World Trade Center affiliate (locally, the World Trade Center of Greater Philadelphia). The federal and state governments allocate resources to assist companies going global, but these resources are often underutilized as companies don’t realize they exist. ●