- When considering expansion to another region, a business must carefully consider the handling of the expansion.
- There are some more stable expansion strategies that a business could consider.
- A company must balance the risk and reward of expanding to new areas to determine if it is the right move.
When a company is expanding operations into a new country, it needs to carefully consider which strategies it should employ. One such approach is a regional strategy, which starts when the company gains a foothold in one country, and then it leverages its strengths across borders to expand into the region as a whole. But when is it appropriate to employ this strategy?
What is a regional expansion strategy?
A regional expansion strategy is an important piece to a company's growth plan, helping a company establish a presence in new and international markets.
Toyah Miller, a University of Texas at Dallas associate professor of organizations, strategy and international management at the Naveen Jindal School of Management, spoke with Business News Daily to shed light on the regional approach and talk about the contexts in which it should be deployed and how it works.
Miller studied nearly 700 Japanese multinational companies and found that the pursuit of a regional strategy often depends on what she called "regional institutional complexity." [See related story: Tips for Taking Your E-Commerce Business Global]
"Regional institutional complexity is the number of countries [in a region] and the diversity," Miller said. "Not just demographic diversity, but aspects of cultural and institutional diversity; so we include the economic environment, the political environment and the regulatory environment within the region."
Her findings suggest that a regional strategy benefits expanding companies when institutional diversity in a region is neither homogenous nor extremely diversified. Instead, companies benefit from a regional strategy most when there is a happy medium; when companies can apply the lessons they have learned from their country of origin to a new region, adopt them accordingly and then expand throughout the region as a whole.
"[Companies] want there to be some difference between the countries they already operate in versus where they're going. But they do not want so much diversity that their skill set and capabilities are not fungible in other countries," Miller said.
Along with a moderate level of diversity, the number of individual countries themselves is a major factor. Naturally, a regional approach demands that several countries be included, but if there are too many, it can become difficult and overly burdensome for those companies to navigate a variety of regulatory codes. Again, companies benefit most from a happy medium.
What are the steps in creating a regional expansion strategy?
When you want to create a regional expansion strategy, it is important that you take some key steps to get there.
First, wait to start building in an international market. You should keep your footprint as small as possible until you are sure you have a solid foundation in that market. Hire local employees that are able to be your feet on the ground and give you daily assessments of what is really happening. You want to balance the risk of hiring contractors internationally with the invaluable reward of having someone local that understands the day-to-day.
Before you expand regionally, you must be sure you have a clear understanding of your product and product strategy. Be prepared to make adjustments as needed — a product that does well locally may not do as well internationally.
You also want to choose a product and market where you have little competition. This allows you to gain revenue quickly so you can reinvest to gain a greater share of the market. Find a partner who understands the region that you are entering. This partner can help navigate the risks and see the warning signs long before you might. This may be someone who is local to the area where you want to expand, or someone who just has a great understanding of the area.
Plan to stick with the expansion for the long term. This is not something that is going to be a quick and lucrative expansion.
Which strategy a company chooses to pursue, Miller said, should be determined by a thorough examination of both the region a company is considering moving into, as well as the company's experience, knowledge and current operations. A careful study of each of these factors — as well as global economic considerations and political climates — is key in choosing which strategy to pursue. And which strategy a company adopts could very well make the difference between a successful international expansion and a disastrous misstep.
What are the types of international businesses?
Some international businesses in which you might be interested are
- Exporting: This is often the first choice when expanding to new areas. This means selling your product in other countries to get sales directly or indirectly. This usually has little impact on the people of the company because few of them have to actually go to the new area where the product is being sold.
- Licensing: This is more about intellectual property than an actual product. This usually allows a foreign entity to use this type of property for a set period of time in return for money based on the use of the property. This usually involves copyrights, patents or trade names.
- Franchising: In this case, a parent company gives the right to another, potentially smaller company or business owner to handle business in a specific way. The franchiser must follow strict rules in operating the business. This is most seen with hotels and restaurants.