Open Forum is an American Express sponsored blog for small business owners. Many posts interpret new Washington legislation. Today's post is titled 4 Reasons to Change Your Mind about Going Global and is inspired by President Obama's State of the Union speech. The post was written by Michael Drucker, COO of FEDEX Express. I have been wanting to write a post on international expansion by early stage companies. I have worked internationally for almost my entire 37 year career and know a little bit about the subject. The post starts with some comments from Mr. Drucker in the post and my responses and then I offer some general advice on international expansion.
Drucker: ...the best way to manage risk is to diversify your customer portfolio. One way to do this is to access new customers around the world.
Hacker: The cost of international business is very expensive and time consuming, which takes senior management time away from their core domestic market. If the U.S. customer portfolio is suitably diversified, adding customers from Saudi Arabia does little to lower the portfolio risk mathematically.
Drucker: Your existing skills will translate internationally better than you think.
Hacker: Your skills will travel as Drucker says, but the learning curve is much steeper than you think. Interpreting new cultures, economies and ways of doing business is very challenging and most of us are not trained to do it well or quickly.
Drucker:...Many developing countries are eager to partner with small businesses in the U.S. and benefit from their spirit of innovation.
Hacker: ...until the foreign partner starts to worry about the financial resources of the little U.S. company and their ability to make a financial commitment to a new, foreign market
Drucker: Staying informed on trade policy can give you a competitive edge ... An aggressive, market-opening trade policy is necessary to create opportunities for your business.
Hacker: Much more important is to find a good partner to distribute or license your product.
My overall advice on international expansion includes five key points:
- Most early stage companies seek out foreign markets because they can no longer grow in the U.S. If you cannot understand your home market well enough to maintain a decent revenue growth rate (>20% per annum), why do you think you can succeed in a new, foreign market where you have no experience.
- Hold off on international expansion until revenue reaches about $100 million per year. At that point the company has a full management team and the financial resources to pursue international markets. The one exception is when there is little or no marginal cost to expand internationally, such as perhaps with a web-based business.
- Typically avoid the U.S. government in pursuing international markets. The U.S. government has an "agenda" for every country. You would not go to the Office of the Mayor in Chicago before doing business in Chicago so why seek out the U.S. embassy in Tokyo, Bonn or Timbuktu. The one exception is government agencies such as OPIC or Eximbank, which I have found to be very helpful in providing financing or guarantees for qualifying projects. This advice may also not apply to social entrepreneurs and NGOs, where social projects are almost always consistent with U.S. objectives.
- The best way to determine the viability of international expansion is not to buy research reports, hire consultants or use middle men (unless the arrangers are industry and country experts). The best way is to arrange meetings with prospective partners, distributors and suppliers, who know the local industry and customer needs and may have the same profit making objectives as you have.
- Unless your product meets the key strategic objectives of a much larger company, there is a good chance that you will just become a product line addition that never reaches its potential. If you are very good at determining strategic fits, bigger companies can be better partners because they have more capital to invest in market building.
So, stay home, focus on new ways to grow the domestic market and call me when you get to $100 million in annual revenues.