Businesses contemplating expansion into international markets face the daunting task of answering a myriad of questions when determining their expansion strategy. Among these, the issue of selecting the most appropriate business model is key. There is more than ample anecdotal evidence to demonstrate how the selection of an inappropriate business model has contributed to the failure of many international expansion efforts. Given that evidence, what issues should businesses consider when selecting their intended international business model, or models?
Deciding factors
Any business contemplating expansion into international markets should meet the three key non-negotiables:
- The business must be proven, profitable and have sufficient cash flow to fund the desired business model, regardless of what that might be.
- The business must have strong and stable processes, systems, and procedures.
- The business must be able to fund a key executive whose sole responsibility is to focus on the international development strategy and its implementation.
The business stands a significant chance of failing to achieve its international growth objectives if these three factors are not met.
Any business model, frequently referred to as a distribution or channel model, can be described in terms of cost, control and coverage. Cost refers to the cost to serve the channel: what it takes in terms of support, training and services given the division of roles and responsibilities between the channel partner and the channel principal.
The business owner will also need to look at how much control the model provides the channel principal and over what elements and ask how much is actually required, given the nature of the products, selling cycle, customer buying behaviour and strength of the brand.
Then, the business needs to look at whether the model provides sufficient coverage of the target market or market segments. Is there a sufficiently large pool of prospective channel partners from which the channel principal can select good quality partners?
Each type of channel model exhibits a different mix of these three characteristics. The key to selecting a business or channel model for expansion is understanding the interplay between these characteristics and the resulting implications for the channel principal. Cost, control and coverage are often represented on a spectrum with cost and control working in direct correlation with each other, and coverage in the opposite direction as in the diagram.
There are many channel model variants that we could discuss, but the most common could be grouped into three main categories: company owned operations, either as a wholly owned or joint venture arrangement; tied distribution models, such as franchising and licensing; and non-tied distribution models such as agents, stockists, distributors and wholesalers. Each of these three has a different combination of cost, control and coverage and is, therefore, appropriate in different situations.
Company or joint venture operations
Company owned or joint venture operations usually have relatively high cost and, therefore, offer generally comparatively lower coverage of a given market. Company operations typically provide the channel principal with a high degree of control of the channel, its operations and performance.
Key reasons for adopting a company-owned or joint venture channel include greater control of branding, especially if customers have a high propensity to switch brands and the brand is synonymous with a particular level of service or support. If the sales process or product is highly technical, or if the perception of product quality depends on the quality of its installation or application, then it also makes sense to set up in the country.
Other factors may point to a company owned or local joint venture strategy in an international context, such as the level of local regulatory acceptance of foreign investment and businesses, relatively relaxed foreign exchange controls and no local citizen directorship requirements. On a market level, indicators that this model may suit include if the customer base is readily identifiable or substantial in size and/or of strategic importance, and there is a low cost of establishing a channel to market.
Joint venturing may be an appropriate strategy in situations where:
- Capital requirements exceed the business’ capacity.
- The business risks are unacceptably high for a company-owned operation.
- Local language, culture and networking play a significant role in ‘doing business’.
- The business requires additional expertise, know-how or management skills.
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