You may be asking yourself if your approach to international expansion is the right one. Should you grow organically by the strength of expanded international sales? Or would the right company acquisition in the local market be a shortcut that provides instant market access?
As with most questions in international business, the answer is:it depends.
Why (or Why Not) Grow Organically?
There are two main reasons why you would want to grow organically. First, it usually requires less upfront capital investment than buying a local company. Since many growing companies are low on unused capital and may have limited access to debt financing, organic growth could be the better fit. Second, going it alone allows your company to control everything: brand, client relationships, finances, processes and your company culture. For some industries, control is paramount to manageing competitive advantages like intellectual property or internal efficiencies that lower cost structure.
Motivations for NOT growing organically include slower growth. For companies that need aggressive growth as part of their exit strategy (ex. acquisition or merger), then organic growth might not be assertive enough.
Also, the organic growth path has a higher chance of making cultural or market-related mistakes. The company may not understand the market’s buying patterns or time frame. A local company would already understand how business is conducted & avoid this risk altogether.
Why (or Why Not) Acquire a Local Company?
Acquiring a local company gives you immediate access to local markets, revenue streams and likely to required local connections to government and business resources. The local company already understands business cultures, language, etc. And not every company is strapped for cash. Post-IPO or after an investment round a company may have need to put capital to work as soon as possible. Acquisition may be a strategic shortcut for companies like these.
I see two main challenges for your company doing foreign acquisitions. First, there’s a sizable risk of being oversold on the local company’s value. Other countries valuate differently. Plus as a company is sold key players might leave, creating a hole in client relationship management or other vital functions. This is also a point where a departing employee may take intellectual property outside of the company, thereby reducing company value.
The second main risk I see is one of integration with the new company. Many companies choose to have the local acquired company operate independently of the parent firm in order to avoid integration issues. But there are still likely to be numerous cultural misunderstandings and reduced productivity over integration issues.
For Either Approach, How to Mitigate Some Big Risks
It is critical to extensively research your foreign target before market entry. This includes both analyzing secondary data collected by government and industry sources, as well as primary research conducted in country. If international market research is a company forte, then you should do it internally. If not, then outsource this critical step to a qualified international advisor. Intimate market knowledge will make organic market entry and acquisitions much more successful.
Set Aside Additional Budget
No matter how much a company expects to invest into market expansion, it is wise to set aside additional funds for the unexpected (and there is almost always several unanticipated expenses).
Troubleshoot In Country
In any market or subsidiary there will be issues that arise. This is even truer in international markets. The distances may be challenging financially or logistically, but going to visit in person often can clear up issues quicker than a phone call. It’s easier to see a problem and to understand it in context. Again, if you or your team members can’t travel consider sending an experienced international business advisor to investigate and recommend solutions.
A Third (Middle) Option for Expansion
Another option between organic and acquisition would be to seek out a strategic partnership with a local company. While such a relationship needs to be defined and cultivated with great care, it eliminates some of the disadvantages of both organic growth and acquisition. First, there’s no large upfront capital outlay like in an acquisition. The right partner would have both the immediate cultural and market knowledge to help speed product acceptance and avoid the organic method’s slow growth and cultural missteps. And when the partnership is no longer needed, there is no need to dispose of assets.
To explore potential strategic partnerships, consult with your local government export office, industry organizations or an international business advisor for referrals and advice in how to proceed.
Best of success to you in all of your international business efforts. Onward and upward!