This is an age-old question facing software and hardware companies. In this article, we’ll examine the pros and cons of each common choice for your international expansion, including the specific conditions that should drive your decision process.
These two basic options confront a tech company considering a foray outside of their home market:
- Set up a subsidiary, hiring employees to “put boots 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:
Available Capital for International Expansion
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 scarce, you’re almost forced to start out using distribution partners in your target foreign markets. 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, regardless of your capital situation. It allows you to learn this part of the business without “losing your shirt”. I’ve seen many control-oriented management teams invest large amounts of money in their first international endeavor. Putting people on the ground in foreign subsidiaries and investing large amounts of go-to-market campaign funds, only to waste it in spectacular failure. This failure is often due to overall international inexperience, or at least in that particular local market.
Product Price and Complexity
If you have a high-priced, technically-complex product with a long sales cycle, you will usually benefit more than others by having people on the ground in the foreign market. These are the types of products that 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, endeavor to put a few folks on the ground. For 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. This could help support 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 this case, the most cost-effective thing to do is to add someone to the top management team with the requisite skills and experience. Alternatively, retain a consultant with the requisite experience. Going without this direct hire or consultant often seems the cheaper route initially. But in most cases, this ends up being “penny-wise but pound-foolish” due to a lot of expensive mistakes only realized 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, and Brazil) it may make sense to put some of your people on the ground. This may make sense 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 a local 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 for Your International Expansion
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 already have a well-established network of distributors and resellers dedicated to their marketplace. In these cases, it’s relatively easy to find an appropriate distribution partner in a particular region. But what if you’re in a business in which this ISN’T the case and it’s tough to identify appropriate partners? This is not all that unusual.
Another scenario is that 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 may mean biting the bullet and outlaying the investment to start a local subsidiary. Or, you might be able to 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!
A Wide Range of Possibilities
There is a wide range of combinations and intermediate options. But “partner or invest” represents 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. That means 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. Also, be sure to investigate and consider the “facts on the ground” in each geographic market. Resist the temptation to simply copy your competitor’s strategy. Or fall back on approaches that you are comfortable with from other geographic markets you’ve participated in 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 experience.
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