Unlocking International Growth

An organisation’s ability to expand internationally will depend on the talent and strength of its leadership. Problems occur when boards ignore questions on resource and capability, opting to plough onwards, bewitched by the promise of growth.

Turning away from obvious opportunity is tough, especially in the current economic climate. And yet carrying on regardless has sent plenty of famous retailers and consumer goods companies crashing into the rocks.

The priority for any business, after assessing the size of the prize in a new market, is to look at the human factor and ask: ‘Do we have the people to execute the plan?’

Giles Daubeney, Deputy CEO of recruitment concern Robert Walters, has seen the business grow over the past 25 years from a single office to 54, spread across 26 countries. “It’s no good having someone up on high calling the shots with no knowledge of the local market − you can make grave mistakes that way,” he says.

“The most important thing is to have the right person to do the job. Not having enough people is one of the biggest constraints to growth.”

For large organisations, there needs to be clear decision making between HQ, regional and local operations. David Comeau, Criticaleye Board Mentor and former President for Asia Pacific at Mondelez International, saw the latter company transform from a country-focused set of independent operating units into a category-focused global organisation. “I think a lot of people struggle with this pendulum swing between how centralised or de-centralised a company should be,” he says.

According to David, it was critical to make changes as rules and responsibilities were not clear. “For example, there was a brand manager for Oreo in Latin America who thought they were growing the brand globally, but there was also a brand manager in each country. We hadn’t addressed how the local teams would be involved or how the new order was going to run; it was difficult to accomplish anything,” he explains.

“We worked with the countries to redesign the organisation and asked their opinion on the best way to accomplish what we were trying to do. Collectively, we designed a structure that would allow us to operate globally but still be effective on a local basis.”

This remains a hugely complex undertaking. Tom Beedham, Director of Programme Management at Criticaleye, warns: “It’s all too easy if you’re based in the head office to say: ‘These are our values and this is our culture.’ But the further out you go you may find the message has changed or the perception is different. Learning from peers about how to approach a new market before you enter will mean you are better prepared and can accelerate faster.”

GSK has been evaluating the make-up of management teams across various countries, explains Kris Webb, Senior Vice President of HR for Pharma across Europe, Emerging Markets, Asia Pacific and Japan: “We’re making decisions to ensure that what is happening in our businesses across the globe is aligned with the values of the whole company.”

Aside from the internal dynamics of organisational design, strategy and competency, companies must also navigate the risk of political volatility, currency fluctuations and rising labour costs – to name but a few. Yet the case for expanding internationally is evidently strong, not least because growth in many domestic markets remains challenging at best.

Mark Collings, Head of International for SME Banking at Santander, comments: “Businesses that trade internationally are more resilient than those that remain in their domestic market, and tend to see higher rates of growth.

“If you’re operating internationally you’re not dependent on one market, so if economic instability hits in one geography, you can rely on your presence in other markets to weather the storm. This can put you in a much stronger position and provide growth, even in uncertain times.”

Just don’t underestimate the importance of people and culture before moving into a new territory.

This article was inspired by the recent Criticaleye Discussion Group, Key Considerations for International Expansion, held in association with Santander.

By Dawn Murden, Editor, Advisory

If you’d like to share your experiences on international growth, please email dawn@criticaleye.com

Read more from Santander’s Mike Ellwood on the bank’s growth strategy

Don’t miss next week’s Community Update, which looks at the mistakes leaders make when communicating a company’s values.

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Connecting with China’s Consumers

Western businesses won’t break the Chinese market with ambition alone. It takes patience, research and knowledge of the market’s consumers. Understand the customer and you will know how to position, alter and grow your offering.

To think that China is a homogenous or static market would be a huge mistake. Criticaleye’s Global Conference Call, Understanding China’s Consumer Landscape aimed to drill down into the complexities of consumer behaviour.

Michael Crompton, General Manager for Asia at Criticaleye, said: “Understanding the consumer is so important. The company − its brand, its product or service and everything it stands for − has to match the desires in the marketplace. Work out what people are passionate about and appeal to that. Also consider product differentiation depending on whether you enter a basic, mid-range or premium market.”

Here are some of the key points to emerge from the call:

Foreign vs Home-Grown 

David Comeau, former President for Asia Pacific at Mondelez International, which owns brands, including Oreo, Chips Ahoy! and Belvita, explained that you can’t just export a Western idea and hope that it’ll stick.

“It’s not simply about bringing a product or idea to China, it’s about how we understand what the Chinese want and do it in a way that feels home-grown,” he said.

To tackle this, David gave his Chinese team the freedom to tailor the brand communication and new product pipeline to suit the market. “We gave them ownership, we set them creating messaging around the brand that made sense to the Chinese consumer so it felt home-grown,” he said.

Remember you will be competing against a rising number of domestic brands, many of which are enjoying growing customer loyalty.

Anne Stevens, Criticaleye Board Mentor and Board Trustee for charity Over The Wall, reflected on the market changes that have occurred since she was Vice President for People & Organisation at Rio Tinto Copper, where she led the people strategy and practices across the Americas and Asia Pacific.

“There has been a rapid amount of change in a relatively short space of time; businesses and products are now viewed differently. In particular by millennials and younger Chinese consumers,” she noted.

“Previously, we saw a lean towards Western products, for example Prada and Burberry in luxury fashion, but now there’s a move towards local brands. Leaders need to stay on top of these changes and tune into what the market is telling them.”

Take Advantage of Trends 

A taste for domestic brands is not the only consumer trend in China and understanding more of them helps you position your product or service.

Chris Riquier is Board Director at Foxley, a platform for website design and online marketing; prior to that was CEO for the market research and market information group, TNS Asia Pacific, where he gained insight into the Chinese market.

On the Conference Call Chris noted some trends that Western companies have done well to adapt to; one of which is the growth of domestic tourism, which outdoor clothing company The North Face has taken advantage of. “Previously, their advertising in China was very much directed at Western experiences such as trekking in The Alps, now it’s directed at urban Chinese who want to experience rural China.”

He also explained that uniqueness and self-expression are of growing importance among Chinese consumers. “Individuality is an intoxicating taboo that is growing within the marketplace and according to research, 64 per cent of consumers within Beijing and Shanghai agreed with the statement: ‘I don’t like it when I see others wearing the same clothes as me,” he shared.

Understand the Channels 

According to Iñaki Amate, Group Director for Greater China at Fjord, Western companies often underestimate the power of digital platforms in China, especially those on mobile.

“It’s important to understand why people behave as they do and why people in China consume media in a different way compared to other markets,” he said. “Always test before you enter, and not just segments; create the persona of the different users before you create the products and services. In a market like China, which is so broad, it may sound challenging but you need to go one level deeper.”

Take the pervasive WeChat, for example. While it is similar to an instant messaging platform like WhatsApp, it also has a payments platform, meaning consumers can order food, taxis, manage their money, sort utility payments, pay traffic parking tickets, check the weather – it has a long list of uses and owner Tencent is constantly developing it.

Chris said: “I come back to a Western market and see the messaging apps we have; they seem positively archaic compared to China. Brands have to be aware of this if they are going to connect with consumers.”

When David was at Mondelez he realised the company had to adapt to the rise of ecommerce in China. “We saw other companies [start] on [nothing] and grow unbelievably quickly – for example, we saw a Chinese nut company called Three Squirrels go from zero to more than 200 million sales online. We weren’t growing like that,” he explained.

That’s when Mondelez started partnership discussions with companies, including internet service portal Tencent and the ecommerce company Alibaba, to develop the business’ online mindset.

“That was a huge win for the organisation in terms of incremental growth. A lot of growth will come from those channels as consumers develop stronger online habits; this is happening elsewhere but China’s leading the way,” said David.

Partnering isn’t a Necessary Evil 

There’s often a presumption that China plays by different rules. One of these is that you must join forces with a Chinese entity to get your business off the ground, but this is not always the case.

Chris at Foxley noted that it’s difficult to make a generic statement about partnering and the best course of action, be it a joint venture, M&A, investment or going in alone. “It’s contingent on what market you are going into, your company and products or services,” he said.

“Apple is an example. Where it has strong products it’s going in alone; where it feels less able to compete it’s going down the partnering or investment route – for example, it has invested $1 billion in the app-based taxi company, Didi Chuxing, which is Uber’s main rival.”

If you’re going to form a partnership, be it via a joint venture with a commercial partner or another type, it must deliver discernible value and include clear roles for those involved. “Partnerships in China need to be seen as a good thing. It’s a real chance to create a ‘one plus one equals three’ scenario,” David adds.

Read more from Chris Riquier, or find out how to organise your leadership team in Asia 

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Leading Global Expansion

Comm update_10 SeptemberEvery stage of international expansion requires careful analysis. From evaluating market opportunities to deciding on whether to make an acquisition, form a joint venture (JV) or grow organically, a leadership team must do its homework and be prepared to adapt to the commercial realities of each country. Get it right and the rewards are such that business models can be transformed.

The first step is to give serious thought as to whether a country is a good fit. Paul Walsh, Chairman of FTSE 100 catering and support service Compass Group and former CEO of global drinks giant Diageo, says: “[It’s] about looking at the GDP projections, the populous and the ladder of aspirations. You look at the social acceptability of what you’re selling, the political environment [and question whether] this is a market whereby a non-local company can do well… All of these things have to be analysed, then [you] make your priorities accordingly.”

Bill Caplan, Chairman of crane hire company Weldex International and former Regional Director for Europe, the Middle East and Emerging Europe at temporary power firm Aggreko, says: “You generally look at the macro-economic activity in the country, fine tune it to what’s happening in the sectors that you’re strong in and then, within those sectors, decide on your addressable market.”

Boards should be wary of being taken in by a market’s size and fast-growing GDP. Bart Cornelissen, Head of Emerging Markets within the Global Joint Venture Practice at KPMG, comments: “There is another dimension to this and that’s the whole question of what the ease of entry is like and what the competitive landscape is really about? It’s easy to focus entirely on the potential but you can forget to ask: ‘How are we going to make this work? What’s the right business model, e.g. a joint venture or local partnership, and how do we ensure we have the necessary capabilities?’”

Best-laid plans

Once a market has been chosen, the next challenge is the small matter of deciding on an entry strategy. While some leaders have a formula which they claim can be rolled out, the consensus is that the decision will be based on the speed at which you plan to expand, the experience of your senior leadership team and the risks and regulatory structure of any given market.

“So much depends on the sector, the geography and the business model,” says Charlie Johnstone, Origination Partner at private equity firm ECI. “A good example is [our portfolio company] Fourth, whose software is excellent at helping the hospitality sector understand and control their costs… When we invested they were doing some work in North America but were definitely underweight there.

“As we didn’t need [to introduce] a new product to sell into the US, a sales-led office opening strategy seemed sensible. However… given the small, monthly payment nature of the contracts, it would have taken a long time to scale. So, we helped Fourth identify and buy a software business in Connecticut which was in the same sector… [and] this gave the company immediate scale in the US, a sales force and signature clients.”

Tea Colaianni, Group HR Director at Merlin Entertainments, explains how an acquisition in Istanbul has given the theme and leisure group a platform from which to grow: “We’ve always wanted to be in Turkey… [so] the location was very attractive and it gave us an opportunity to establish a relationship with a number of people: landlords, city officials and so forth. We’re [now] in discussion to open possibly another two attractions in the same location.”

Alternatively, JV may be the best option as this allows organisations to share not only the risks and capital investment, but capabilities as well. David Moore, Chief Portfolio Officer at private equity firm NorthEdge, comments: “JVs allow you to leverage a locally-based business’s infrastructure, whether that’s people, manufacturing capability, logistics, know-how of operating in the territory, customers, routes to market or an established supply chain.”

Andy Dunkley, CEO of clothing company Lee Cooper Brands, which was acquired by global fashion group Iconix in 2013, comments: “We’ve got a JV partner in Southeast Asia, Li & Fung… We add to the portfolio of products that they can sell and [the hope is] they’ll grow our business and provide a supply chain, which we as a company will never do. So they help us on that missing jigsaw piece, as it were.”

Not every country presents a series of choices when it comes to selecting your entry strategy. Paul says: “In Vietnam, for example, a lot of the entities that you’re looking at are actually state owned and the government will only allow you to take a partial stake.”

Starting from scratch

The other tactic to use when entering a new market is to opt for organic growth. It is generally a far slower route to take, but it does have its advantages. Giles Daubeney, COO at international recruitment consultancy Robert Walters, comments: “In our industry [the issue with] acquisitions is if I buy a company… and all the consultants decide to leave, which can happen if they’re unhappy with the new compensation package, you’re left with nothing.”

Giles goes on to explain that expansion has to be client led. “I was having a meeting with [a major client] and he said: ‘Listen, what are you guys doing in Japan? We’ve just entered that market and we think it’s a huge opportunity.’ We then went and did a bit of research and decided to open an office in Tokyo… We’ve been in Japan 15 years now and we’ve got just short of 200 people, two offices and it’s purely organically grown.”

For Mark Silver, CEO of European property management specialists VPS, if you’re going to grow organically, the management team needs to really understand the market. “If I was going into, say, Scandinavia, I’d look for an acquisition because… it’s a really new area for us. But if I was going to go into Portugal, where we’re not currently located, I might choose to do that via organic growth because we have a business in Spain, so it’s just down the road.”

Whatever route you choose it will require genuine focus from your senior leadership team. “If you are going to invest or build you are committing yourself and you can’t get cold feet part way through, so you must have done your homework,” comments Paul. “I think the leadership, wherever they may be based in the parent company, has to invest time in visiting the market, understanding the people and creating strong relationships.”

Without that first-hand attention to detail, you may not appreciate the need to make changes to strategy. Bill says: “[Don’t] be afraid to revisit your… business plan and change it as you go along… [because] no matter how much due diligence you do… once you’re in, more is revealed and, as a result of that, you end up having to be responsive to things that you didn’t necessarily anticipate.”

It’s universally agreed that it’s wise to hire people that know the market from the inside. Paul explains: “You have to get people with local knowledge. Where businesses fail, in my opinion, is where they think they can just have either ex-pats or people visiting from London; you’ve got to have people who are senior and know the market, and you have to establish a very firm bond of trust.”

International expansion is difficult to get right but, as long as the markets are carefully selected and the entry strategy is aligned with an organisation’s capability, the rewards will be very much worth the effort.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk 

Brazil: A Tough Nut to Crack

Comm update_29 Oct

New entrants to Brazil are regularly bamboozled by the country’s administrative and tax systems. In order to capitalise on the growth opportunities of the world’s seventh largest economy, there are two golden rules: do your homework so you’re not caught out by the bureaucracy and take the time to get the right local management team in place.

Andrew Heath, President of Energy at Rolls-Royce, says: “Some of the challenges include the tax structure in Brazil – import/export is quite complex – and [there’s] quite a heavy social cost in terms of employment… On those topics people need to make sure they get really good advice in terms of how best to structure themselves and the sort of activities they should look at in-country.

“That certainly would be at the forefront of our mind. Rolls-Royce has been in Brazil for over 50 years so we have a fairly good knowledge of the country, but even so we have to take good advice in terms of making sure that we structure things in a way that we don’t suddenly fall foul of the tax system, because you actually pay import/export duties between states in Brazil as well. It’s not straightforward.”

Pankaj Ghemawat, Criticaleye Thought Leader and Anselmo Rubiralta Professor of Global Strategy at IESE Business School, says: “I remember working with one multinational, which is a people-intensive business, and they thought they knew what they were doing, so they gave their Brazilian employees the standard 13th month bonus.

“Under Brazilian law, that was seen as improper, so they effectively had to give a 14th month [bonus] as well. That’s part of the reason – not the only one – why this particular multinational, even before the current meltdown, had pulled back a bit from its very aggressive expansion plans in Brazil.”

Music company EMI has certainly had its ups and downs in the country, with an accounting fraud case back in 2006 and, more recently, the decision by Brazil’s anti-trust regulator to freeze the takeover of the company by Universal, even though the deal has been approved in both Europe and the US.

Nick Wilkins, Global Head of Manufacturing and Supply Chain at EMI, understandably emphasises that “getting good trustworthy managers in place that know both the market and the business environment is absolutely essential” if a company is going to navigate the business environment successfully.

A similar point is made by Bryan Marcus, Former Regional Head of Latin America for Volkswagen Financial Services: “The issue is always trying to find somebody that can put [across] the local perspective and also understands the corporate or the global priorities… So it’s not just about having local people who understand the local perspective, culture and challenges.”

Oliver Engelsdorf, Head of the International Desk for Multinational Business Development at Santander UK Corporate & Commercial, states quite simply that a business cannot go into Brazil without good lawyers and accountants. “There is too much bureaucracy and tax issues that you need to be aware of and trust me, you will need them, sooner or later,” he warns. “So it’s better to be well-advised from the beginning, and go [holding] the hand of someone that knows a little bit about it.”

Going for growth

Provided you’re aware of the realities, there’s no denying that Brazil does have its attractions. Ian Stuart, Chairman of Aspen Pumps and former President of the Latin American division for Black & Decker, says: “If you’ve got the right solutions and products there’s a big market there. Even though it’s not growing rapidly right now as an economy, it’s definitely growing in terms of its need for more value-added products.”

Andrew says: “It’s blessed with a wealth of natural resources, clearly a lot of oil offshore, and it leads the world in terms of deep offshore development of oil fields. They’ve got rich hydroelectric potential, which they’ve been using effectively for many years… [My] view of the country is that, with a continuingly stable political system, it is going to be one of the growth regions of the world for sure.”

Rolls-Royce is in the process of building a brand new facility to do assembly and testing work in Brazil and is also setting up a supply chain to support it. “We’ve been pleasantly surprised,” says Andrew.  “The important thing is to not come in with a western… view of the world in terms of specs and standards.”

Bryan says: “There are short-term challenges and there are some political issues which I think still need to be addressed and resolved… Brazil has got to be a long-term investment. You’ve got to have a high level of patience and a longer-term investment horizon than maybe for some of the other developing countries where there may be some low hanging fruit.

“The effort needed to set yourself up effectively in Brazil is quite high… It’s not so much a capitalist market as people think; I think the opportunity is the scale and the very large number of middle class and potential middle-class customers, but you’re into a five to ten-year return cycle, I would say, rather than three to five which is maybe some people’s expectation.”

Like each of the BRICs, success doesn’t come cheaply for businesses and assumptions are dangerous. The country may be getting the World Cup and the Olympics but beyond the samba fanfare and marketing hoopla it’s a country with serious socio-economic problems and an infrastructure sorely in need of significant investment.

The red-tape can be dealt with, but as ever the fundamental issue is to find staff that grasp the local and corporate culture. Maria Tereza Leme Fleury, Criticaleye Thought Leader and Dean of Fundação Getulio Vargas (FGV) business school in Brazil, says: “The multinationals need to acclimatise [and] adapt. If they try to transfer their own HR and management practice with no adaptation they will face problems. It’s the same when Brazilian multinationals go abroad and try to manage the employees the way they manage in Brazil.”

Andrew says: “The only thing we’ve found is that at senior staff and management levels, certainly in the oil and gas industry, you pay quite a sizeable premium because if you want people with experience then there’s definitely a shortage of supply… therefore it’s very much a sellers’ market, if you like, so the wages are quite high.”

If in-roads are to be made, it’s a case of having that local talent (ex-pats will only take you so far) and to have developed the right relationships with individuals that understand the governmental system (not to be confused with bribery). “Only local people are really going to be able to do that for you,” says Bryan.

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk