By Globalization PartnersJuly 2020
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Among the many reasons your small-to-medium enterprise (SME) might choose to expand, you stand to gain from global growth and new markets. Of course, the road to successful SME global expansion can be tricky to navigate. Each country and industry presents unique challenges to international growth. With the right tools and smart strategies, a mid-sized business can adapt and succeed in markets all over the globe.
Challenges SMEs Face When Expanding Internationally — and How to Overcome Them
Whether you’re considering an expansion or already putting plans into action, the global economy can pose unique challenges for growing businesses. Expanding into a new country is like starting a business from scratch in many ways. You have to develop your customer base in a place where no one may have heard of your brand. Further, the market and culture in your target country may be quite different from what you experience at home.
For most growing businesses, those differences call for a completely new approach. While there are major challenges for an SME to enter an international market, there are also many rewards. Careful planning and dedication can help you leap some of the most common barriers mid-sized businesses face as they take on global expansion.
1. Understanding Your Market
Finding and learning about an international market is key to a successful expansion. When you start a new business or introduce a new product, you begin with careful market research. Examining the demographics in your area helps you tailor a business strategy for a seedling enterprise. When you enter a new market, you have to begin this process all over again.
Many mid-sized businesses expand to extend the lifecycle of a current product. As your home market becomes saturated, a new country allows you to introduce the same product into a market unfamiliar with it. Of course, this can be risky without doing the proper research. Something considered a necessity in one country can have limited market value in another culture. Introducing your products into a country where similar products already dominate the market leaves little room for growth.
Careful market analysis can help you choose the right country to expand into. Understanding a population will help you find the best way to position yourself in an international market. As you conduct market research, be sure to address several elements and sources of data.
- Local competition: Are there other companies selling a similar product or service? Are you hoping to replace or disrupt an established industry? Your potential competitors can indicate if there is room in the market for your product or service. They can also help you see how a local market operates, which may be quite different from what you know in your home country. Many competitors can be a sign of a saturated market. At the same time, zero competitors, while enticing, can be a sign of difficulties ahead. If there are a small number of competitors, you can learn from their mistakes and fill in the gaps in the market.
- Barriers to entry: Even if you do not have any strict competitors, you may still find other forces that compete with you. For example, if you are introducing an app for finding local real estate, you may be competing with the more traditional real estate market. You might have to work to convince real estate agents in the area that your app is a tool worth using. Alternatively, entering a market where most consumers don’t have the buying power to afford a home may limit your growth potential.
- Sources of information: Many data sources can help you get a complete picture of the consumers in a particular country. You can conduct primary market research by surveying potential customers. For more first-hand information, you can meet with government trade commissioners. News publications, local trade associations, and statistics can expand on this research. Your home country’s government may publish market reports for other countries to help small entrepreneurs expand into some countries.
2. Expanding Before You’re Ready
A critical mistake for international business ventures is rushing into a new market. An SME needs a strong track record in their home territory before seeking global expansion. Existing issues with your business will not resolve by entering a new market. Instead, these problems are likely to get more complicated. Further, making a move into another country takes careful planning, often with months of work.
You’ll also need the resources and funding to keep your expansion afloat as you’re starting. Many businesses experience negative cash flow for the first several years in a new market. Those that can survive this early stage stand to gain from an international presence. So, it’s critical to have enough funding and revenue to run the second arm of your business for several years. Entering new markets can also come with many unexpected costs. You can’t always plan for currency fluctuation or delays from different governments. Make sure your business is prepared to sustain itself at home and abroad while experiencing some growing pains.
Performing an extensive business audit alongside your market analysis can let you know when your business is ready to expand.
- Market segmentation:Your target demographics in a foreign country may look different. Using government data and independent research, identify and classify segments of your new market. Divide your target market by beliefs, values, lifestyle, and income.
- Gap analysis: Identify if there is an underserved market for your product or service.
- Value and culture alignment:Examine the values and cultural differences in your target market. Different beliefs may influence how your products, services, or brands are perceived. Find ways to align your goals and offerings with the unique cultural values of your target demographic.
- SWOT analysis: Consider your brand reputation and success at home, knowing that this will translate into your international markets. A positive image can follow you into many markets. On the other hand, a negative reputation or issues with your business model can get worse as you expand. A SWOT analysis looks at your strengths and weaknesses, as well as opportunities and threats that await in a new market. This data-driven approach can give you a look into sales and revenue potential in a new market.
3. Trying to Be First to a New Market
The goal of being first-to-market is an excellent motivator for many business leaders. For some businesses, it means introducing a brand new product, something that consumers have never seen before. For others, it means disrupting an established industry with an innovative service. A successful attempt can have high rewards for a small-to-mid-sized business. It can have positive implications for brand recognition and market share, and it gives you a head start over the competitors that will eventually follow suit.
An international expansion strategy that focuses only on speed can lead to challenges, too. Expansion takes careful planning, and it’s crucial to give yourself time. You can establish aggressive deadlines as long as you balance this out with proper diligence. You’ll need to get buy-in from other department executives and stakeholders, which can take time. You also need to ensure all teams have the resources and time they need to make the strategy successful. By developing an adaptive strategy, you can pivot your company toward success in many scenarios, whether you are a first-mover or not.
4. Finding Financing
Financing becomes more nuanced when seeking to expand your SME internationally. Foreign and domestic banks offer different levels of support for expanding SMEs. The governments in different countries may have different laws on finance and differing opportunities for small-to-mid-sized businesses.
While there are many sources of financing for small businesses, some unique opportunities can open up when you export abroad. Since exporting is good for your home country, your government may offer some support. Many governments offer some funding opportunities to aid global expansion for medium-sized businesses.
- Canada: Export Development Canada and Business Development Bank of Canada (EDC-BDC Alliance) offers a variety of resources, including financing for exporters and investors in Canada and abroad.
- The U.S.:The U.S. International Development Finance Corporation (DFC), a government agency, offers funding meant to supplement private investments for SMEs looking to expand in emerging markets.
- Europe: The European Union recently launched ESCALAR, a new financing approach in conjunction with the European Investment Fund, to help SMEs grow and expand throughout Europe.
- The UK:UK Export Finance offers financial resources and more to UK exporters to help viable businesses of any size succeed internationally.
5. Overcoming Cultural Differences
Local culture has an impact on your marketing strategies as well as your business practices. Where you plan to do business can ask you to adjust your approach in many ways. Business etiquette, cultural norms, and communication styles can all change in different regions. Your workforce in a foreign county may behave differently than what you expect in your home country. If you do business with other local companies, you may have to change your behavior to follow new customs.
The more you understand about the way business is done, and the way consumers behave in different cultures, the more equipped you are to enter that market. It is helpful to research the culture of the country you wish to do business with. Make sure to look into many aspects of the local culture.
- Communication: Even when speaking the same language, some ideas can get lost in translation. To avoid misunderstandings resulting from language barriers, work with a translator when doing business in a language you’re not fluent in. Further, it’s critical to consider how information is conveyed. Some cultures value direct, honest language, while others see indirect language as polite. For example, in some countries, saying “no” can be seen as rude, and so someone might instead say “maybe” to protect a business relationship. Depending on where you do business, you may need to become skilled at reading between the lines or speaking more directly to ensure your point gets across clearly.
- Workplace etiquette: There are many aspects to business etiquette which you might take for granted in your home country. In another country, you may have to adjust your behavior and expectations to be respectful of your colleagues abroad. For example, many cultures have different perceptions of what it means to be on time. In some cultures, it is customary to arrive a few minutes early to a meeting. In others, it is acceptable to be several minutes late, and sometimes more without losing face. Other matters of etiquette to consider include whether you address associates by their first or last names, dress codes, and expectations about small talk.
- Dining etiquette: Whether it’s for a lunch meeting or an after-hours function, you may have to learn a few table manners. In some countries, you may have to wait for a cue before eating. Depending on your location, it can be considered rude to finish all your food or to leave some behind.
- Body language: While some countries expect a firm handshake, others use a lighter one. Further, you may need to offer or accept a business card with a certain hand or both hands in some cultures.
- Organizational hierarchy: When hiring in a foreign country, your infrastructure may look a bit different. Some countries follow a strict cultural hierarchy that travels into the workplace. In these cultures, those in positions of power may expect formality from their juniors. Staff may not be allowed to speak during meetings. Other cultures value equality and collaboration across all departments, so businesses tend to have a flatter hierarchy.
There are so many differences in language and culture across international borders. It can be valuable to work with a local expert when entering foreign markets. Partnering with an etiquette coach, translator, and trusted associates who understand these cultural nuances can help you communicate effectively and maintain business relationships.
6. Complying With Local Laws and Regulations
Between local business certifications, tax regulations, and labor laws, it’s easy to get confused about the rules you need to follow:
- Taxes: Traditionally, a business had to set up a subsidiary in each country they expanded into. Setting up a subsidiary involves registering with local tax authorities, opening international bank accounts, and obtaining a tax ID number. This process is lengthy and expensive. Then, you’ll need to adopt new bookkeeping processes to follow local tax laws.
- Labor laws: In each country you expand into, you’ll have to follow hiring laws, minimum wages, and employee benefit requirements. You can research the labor laws in particular countries by browsing GlobalPedia’s local guides.
- Country-specific regulations: Most countries require certain licenses for small businesses, and some industries need specific certifications. Each country has different processes for registering trademarks and patents.
All these laws can be overwhelming for your teams unfamiliar with the rules. Especially when your legal and accounting teams have their hands full at home, it’s vital to work with legal and tax experts in your international markets. Globalization Partners offers a variety of services that help you overcome these legal barriers. Our comprehensive solution allows you to bypass setting up an international subsidiary by acting as your global employer of record. We offer legal, accounting, and HR expertise to help you meet regulations no matter where you do business.
7. Aligning Your Product With the Market
Before entering a new market, most businesses look for a way to test their product. Local differences can change the way you market a product. It can sometimes take some trials before you find the right market segments and value propositions in a new country. Many companies look to a soft-launch as a way to test-drive an offering. For most, this is challenging. Producing a product in a new market requires finding a local supply chain to manufacture goods, which can lead to inconsistent quality and can slow you down in making adjustments.
One way to get around this when you’re unable to test a product beforehand is to use a “localization” strategy to rewrap products for a new market. Using wrappers designed for a particular culture lets you use the same quality items your customers expect in packaging aimed at the new market. Packaging can be easily redesigned as you hone your product for a new market. With properly translated packaging and marketing strategies that meet cultural expectations, you can appeal to foreign customers without changing your manufacturing process.
8. Building a Physical Infrastructure in a New Country
Your business will need a whole new workforce and organization to open a branch in an emerging economy. With all the cultural differences and legal issues associated with any country, you might not be able to drag and drop your existing infrastructure. Working with a professional employer organization (PEO) can make the transition easier.
A global PEO and employer of records can help you build a legally-compliant organization in a new country. This partnership can help you establish processes and hierarchies for back-office departments such as:
- Human resources and payroll
- Accounting and bookkeeping
- Legal counsel
9. Adapting to Change
A plan to expand into an international market can take many shapes and forms. While planning can take months of careful work, some companies fall into the trap of planning too far in advance. They become too slow to respond effectively to change. Many small and medium-sized businesses struggle with predicting trends and developing proactive strategies that allow for changes as needed.
Buy-in from senior management and across departments in combination with clear communication is crucial for developing lean strategies that can change course quickly. When everyone has the same goals and news travels fast, your company can adapt. For a distributed team, project management tools, document sharing, and video conferencing can be vital to keeping teams connected.
Once you open a new global location, understanding the pace of business in your host country can be critical. In many countries, the pace of business is slower than it is in the U.S. For American companies, this can lead to frustrations if the strategy does not account for this pacing. Businesses looking to expand into the U.S. can have trouble keeping up with consumer demand without an adaptive, lean strategy.
Defining clear, short-term goals based on data can enable your team to make smarter decisions. It also allows you to keep close tabs on a strategy as it is being implemented. When something unexpected happens that throws plans off-target, data tracking helps you to catch issues early on. When you aren’t reaching numbers goals, you can investigate why and adjust course to reach success. Setting short-term goals also allows you to create an adaptive strategy that moves when the market moves. A long-term growth strategy set out 10 years in advance may not have the same success.
How a Global PEO Can Help
A global PEO, also known as an Employer of Record, essentially acts as a co-employer that helps you expand more efficiently and affordably. The typical global PEO has experience handling HR, payroll, and benefits, as well as legal issues in any country they operate in. When you work with a PEO, they can serve as the employer of record for your business, allowing you to operate without creating a subsidiary for your company. As experts in many global markets, they serve as a way for you to outsource many aspects of your business abroad.
You can avoid the challenges of learning about the intricacies of administrative duties in other countries and focus on delivering fantastic products and services to a new market. Many who work with global PEOs significantly reduce the cost of expanding and gain better forecasting abilities by working with experienced business partners.
Contact Globalization Partners
If you’re a mid-sized business looking to expand internationally, Globalization Partners can help. We know how to expand medium-sized businesses internationally because we’ve been helping our partners grow in countries all over the world. We have real physical locations around the world that can help you get started and hire in an international country quickly. Our broad range of offerings makes it simple to recruit, manage, and compensate global teams. Learn more about our services or tell us how we can help your mid-sized business reach new markets.
For more information regarding expanding your business internationally, download our eBook 10 International Expansion Mistakes to Avoid: