This is an age-old question facing software and hardware companies. In this article we’ll examine the pros and cons, as well as the specific conditions that should drive your decision process.
Two basic options confront a tech company considering a foray outside of their home market:
- Set up your own subsidiary, hiring your own employees to “put on the ground” in the target foreign market
- Partner with established traditional distributors or strategic partners in the target foreign market
Let’s look at some of the key factors to consider when designing an international business development strategy:
How much money does your company have available for international expansion? If the answer is “not much”, this alone can be the deciding factor in your decision. If capital is very scarce, you’re almost forced to start out using distribution partners. This isn’t all bad, in my opinion. Using partners initially when you are an international newbie is a much lower risk way to start, and allows you to learn this part of the business without “losing your shirt”. I’ve seen a number of control-oriented management teams invest large amounts of money by putting people on the ground in foreign subsidiaries as well as investing large amounts of go-to-market campaign funds, only to waste it in spectacular failure. Often this failure is due to international inexperience overall, or at least in that local market.
Product Price and Complexity
If you have a high priced, technically-complex product with a long sales cycle, you will tend to benefit more than others by having people on the ground in the foreign market. These are the types of products which are most often sold directly, even in international markets. In this scenario, even if capital is tight and you can’t afford to put down a fully-loaded subsidiary with a dedicated direct sales force in every foreign market, it still may make sense to put a few folks on the ground. As an example, you might be able to afford a channel sales rep and a field engineer in a region to support a large network of sophisticated local country distributors and VARs, supporting an entire continent like Europe or Asia.
Tech Company Management Skills
What is the skill set of your corporate management team? If no one on the team has any experience with indirect distribution, for example, it’s going to be pretty tough to successfully build a working distribution channel in FOREIGN MARKETS which are far from home–in more ways than one. In this case, the most cost effective thing to do is to add someone to the top management team with the requisite skills and experience or retain a long term consultant. Going without this direct hire or consultant often seems the cheaper route initially; but in most cases this end up being “penny-wise but pound-foolish” due to a lot of expensive mistakes in hindsight.
Local Market Cost Structure
Each foreign market should be evaluated individually before deciding on an entry approach for that particular market. For example, in large emerging markets with low costs (such as China, India, Brazil for many vertical segments) it may make sense to put some of your own people on the ground, regardless of the distribution strategy. When local costs are low and the market is strategically important in the long run, the relative benefits of having your own subsidiary are high. In a high cost market with lower sales potential (Switzerland and Norway may be good examples for some businesses), relying exclusively on a dedicated local distribution partner may be a better way to go.
Availability of Distribution Partners
In some cases what may be the best strategy for your company and market in theory is overridden by facts on the ground. Many vertical software and hardware markets have a well established set of distributors and resellers dedicated to their marketplace. In these cases it’s relatively easy to find an appropriate distribution partner. But what if you’re in a business in which this ISN’T the case and it’s tough to identify appropriate partners, which is not all that unusual? Another scenario is maybe there is an established channel, but you’re late to the game and all the obvious “good” partners are tied up with your competitors. Sometimes you may choose to not enter that market immediately. But if the geographic market is considered strategic, then you will need to choose a course that might look sub-optimal in theory. That might mean biting the bullet and outlaying the investment to start your own subsidiary. Or, you might be able find a local entrepreneur with the skill set to set up a new distributorship. If it’s a geographic market that you just HAVE to participate in, then you must — and will — find a way!
There are obviously a wide range of combinations and intermediate options, but “partner or invest” represent the extreme ends of potential strategies. In many cases (particularly large, established markets) the optimal distribution strategy will be a combination of these two main approaches: pairing a small wholly-owned subsidiary along with local distribution partners. In smaller markets, partnering with an established distributor or strategic partner may be the only viable strategy. In other cases, the optimal strategy may be dependent on the specific factors of a particular marketplace (local costs, available partners, etc).
What’s most important is to closely analyze your specific company’s resources and the details of your market segment, as well as the “facts on the ground” in each individual geographic market. Resist the temptation to simply copy your competitor’s strategy or fall back on approaches that you are comfortable with from other vertical and geographic markets you’ve participated in the past. That is how you make HUGE mistakes.
What’s your approach to international expansion? Post a comment below and share with us your own personal experience.
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