April 29, 2014
Clearly emerging companies must confront significant risks during the early stages of development, even when operations are limited to strictly domestic markets. However, many such companies have found that expanding into foreign markets can actually increase their chances of success, even while they are still struggling to gain a foothold in their home market. For example, young businesses with limited financial resources may benefit from using low-cost manufacturers in foreign countries to produce goods that can be sold at attractive prices in the company’s own domestic market. A new company may also seek out foreign markets that have not been identified by larger competitors and build significant market share as a barrier to entry. The success of the product or service in a smaller foreign market can then be used as a base for entering larger markets.
Globalization can seem like a daunting task for the founders of an emerging company when they are first starting out and struggling to complete development of their first product or service and identify potential customers and partners that can assist the company with scaling up operations quickly and efficiently. Nonetheless, the evidence shows that globalization should be incorporated into initial strategic planning, even if exporting is not the first priority. A group of researchers who surveyed and analyzed globalization among young high-tech companies from Germany and the UK in the late 1999s—and found that internationalization was the norm for those firms and that the key strategic question for them was not whether, but when, to internationalize—generated the following useful list of recommendations to founders and managers of similar firms who wished to improve their chances of successfully growing and internationalizing:
- Recruit as good a team of founders and managers as possible with high levels of international experience, preferably gained in both large and small firms.
- Start as large an enterprise as possible including the size of the founding team and the financial, technical and experiential resources available.
- Incorporate highly innovative technologies into products and services but not at the cost of usability and reliability.
- Select products which are sold to industrial users rather than consumers.
- Build a portfolio of demanding customers but do not become excessively committed or integrated into the non-standard needs of a few large customers.
- Commit the firm to international sales from Day 1 in both actions and all planning targets.
- Build a business model that is scalable in both volume and number of market targeted.
- Be prepared to enter additional new countries rapidly after the first internationalization activity.
- Plan for significant additional costs in developing international sales and marketing activities.
- Appraise markets in terms of aggregate international demand rather than domestic demand and growth.
- Develop a permanent and focused R&D activity.
- Avoid “deep niche” products if high growth is a desired goal and ensure a wide range of applications for both products and technologies.
- Continue to reduce product adaptation/transaction costs, particularly the installation and maintenance costs incurred by new customers or the vendor.
- Assess rigorously the ‘pros and cons’ of exporting direct versus the use of distributors, and consider the effect of industry sector, target country and technological innovativeness on channel selection.
- Manage distributor relationships effectively recognizing the need for continued investment of time and resource in supporting network linkages.
- Get known quickly and recognize the existence of the “liability of alienness” (i.e., larger firms, including customers, are likely to be very wary of entering into trading relationships with unknown firms).
- Be prepared for the rapid entry of new competitors into your product/market space.
- Consider objectively the merits of external finance (i.e., venture capital, business angels), particularly the consequential benefits of factor productivity, reputational effects and advice for fast growth firms.