By Michal Kaczmarski From FDI Intelligence

The complexities of overseas expansions are often overlooked in the bid to tap into new growth markets. Michal Kaczmarski looks at what it takes to crack foreign markets.

Overseas expansion is often considered a logical step towards boosting company growth, but as Minneapolis-based retailer Target demonstrated recently, domestic success does not always translate across borders. One of the biggest discount retailers in the US – with annual revenue exceeding $70bn – Target decided to expand into the US’s northern neighbour in March 2013, opening 133 stores across Canada and hiring more than 17,000 employees. Just two years later, at the beginning of 2015, the company announced that it would close all 133 of these stores and withdraw from the country. The company had failed to appeal to Canadian customers, and instead of increasing Target’s profits, the Canada venture incurred more than $2bn in losses.

It is not the only company to face difficulties with its overseas expansion strategy. In March 2015, Harvard Business Review published a study of 20,000 companies from 30 countries which showed that it takes an average of 10 years for companies operating overseas to see a 1% increase in their return on assets (ROA). Furthermore, only 40% of such companies reach 3% ROA.

“I would not discourage companies in principle [from expanding abroad] but they have to be careful not to see it as a default option,” says Christian Stadler, associate professor of strategic management at Warwick Business School in the UK and one of the co-authors of the study. “Growing at home, even if that means expanding the product range, is often more promising,” he adds.

According to the study, companies that focus on domestic growth saw 2.4% ROA after 10 years, with 53% of these companies recording ROA of more than 3%.

Culture clash

A number of large multinationals have had to rethink their international strategies in recent years. In 2012, French retail giant Carrefour pulled out of Singapore and, more recently, in 2015, Silicon Valley-based technology firm Yahoo! announced the closure of its R&D centre in Beijing. And, for every big corporate player retreating from new markets, there are a number of smaller ones, such as Pruffi, a Russia-based recruitment agency for online programmers, doing the same thing.

In 2013, Pruffi, which has a monthly estimated turnover of some $150,000 and a headcount of 16 people, decided to internationalise its operations by expanding into Germany. It was not long, however, before the company was forced to retreat back to home soil, due to what its founder and CEO Alena Vladymyrskaya calls an “operational miscalculation”. “Germany was our first international experience,” she says, “and we just were not ready for it in terms of management and our CV database.”

Problems with management and due diligence when venturing abroad are common, according to Yadvinder S Rana, founder of management consultancy Neglob and author of the recently published book The 4Ps Framework: Advanced Negotiation and Influence Strategies for Global Effectiveness. “Partnerships, joint ventures, acquisitions and mergers are not about contracts, processes and procedures, but about people,“ he says. “Top management must identify their best people and promote them to international projects, supporting them with strong local managers.”

According to Mr Rana, executives considering launching an FDI project must consider two things: first, whether the firm’s products or services will suit the new marketplace – given the differing needs of consumers in different countries – and second, whether the company’s management style is suited to the new location. “For example, in countries such as India, Malaysia and China, there is a preference for a paternalistic leadership style. Democratic and participative leaders can’t be successful there, given paternalism is not only a leadership style but also a cultural characteristic,” says Mr Rana.

Walking the talk

Jeff Papas, principal at US-based real estate advisory Cresa Dallas, says that although it is a common knowledge that what works in one culture might not work in another, company executives often fail to acknowledge that. “People think that certain business practices and behaviours are universal and they are not,” he says.

Then, there are companies that acknowledge cultural nuances in principle, but neglect to do so in practice. “Culture is not at the forefront of the typical person’s psyche, given the sheer overwhelming nature of all the other parts of the due-diligence process,” says Mr Papas, who has had experience advising companies on offshoring projects across the Americas and Europe.

Another issue that companies often overlook relates to the site-selection process. Mr Papas explains that few companies study the success of their previous expansion projects, and how well these have worked out, especially when it comes to offshoring FDI.

“It is shocking for me to say this, but some companies rarely analyse past location decisions to see whether they have [been] proved right, mainly because they are looking for a quick solution to existing troubles… most likely when their profits are already falling,” he says.

Right fit

Another factor that can make or break a foreign investment is finding the right partner in a new market. The right partner is not always the most obvious choice, as the example of US automaker Chrysler’s partnership with German counterpart Daimler-Benz shows. In 1998, the two companies conducted the largest transatlantic merger, swapping $37bn in shares. But what at the time seemed to be a good marriage soon turned sour.

“German executives spoke English. Americans, with few exceptions, did not speak German. Germans were accustomed to traveling and living abroad, and were willing to relocate to Auburn Hill [the US town that is home to Chrysler’s headquarters], while very few Americans were eager to relocate to Stuttgart [Daimler-Benz’s headquarters],” says Mr Rana. On top of this, he adds, Germans believed their brand was superior, while Americans believed that Chrysler was more innovative than Daimler.

The result was that the merged company valuation decreased dramatically over the course of just a few years and, eventually, the partnership broke down in 2007 when Cerberus Capital Management, a private equity investment company, acquired an 80% stake in Chrysler from DaimlerChrysler for $7.4bn.

Faltering overseas ventures such as this and, indeed, the more recent Target expansion into Canada prove that international expansion is not a guaranteed route to growth. But, as with all business decisions, the likelihood of success can be raised if a company researches its target market and formulates an expansion strategy. This is exactly what Pruffi has done for its second venture abroad. The company is planning to enter the Israeli market, this time with the help of a partnership with two local firms: law office Advocate Eli Gervitis and the Isralife Media Group.

Ms Vladymyrskaya is undeterred by this failure to conquer the German market. “After we decided to invest in Israel, we found out that a study was conducted showing that 70% of successful start-ups in Israel had hired programmers from Russia. It just so happened that we intuitively selected the best market for us,” she says.

Additional reporting by Mathew Anderson.

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