Friday, April 8, 2016

6 Key Risk Factors When Scaling A Business To Global

Protest_against_Uber_-_BudapestWith the availability of high-speed Internet and social media access around the world, it’s easy for entrepreneurs to assume that the world is just one big homogeneous market, and project their business will scale accordingly. Nothing could be further from the truth. Large businesses, as well as small, still fail often by not addressing the very real cultural, economic and political differences.

The challenge is to know what to look for when stepping outside your native market, be able to quantify the downside risk, and implement the required strategy in each of the new markets. In a new book, “Global Vision,” by NYU Stern School of Business scholar and leader Robert Salomon, I finally found some great insights on what to look for, and how to make the necessary changes.

His perspectives have been derived primarily from the travails of several major brands, including Walmart, IKEA, and Tesco. Yet, I believe the conclusions and strategy recommendations are equally valuable for every new entrepreneur who intends to expand outside their local country:

  1. Size market potential granularly based on local economics. The most common mistake is overestimating a particular market’s potential, based on your domestic context. Foreign markets typically have less information available and more variability in sales estimates, which is a setup for failure. Do more local homework and validate cautiously.

  2. Assume large and frequent economic swings. The inability to accurately predict or prepare for sudden changes in the local economic environment creates risks for the markets you know, but can wreak havoc for global initiatives. These economies are often ill-prepared to deal with economic shocks. Double the risk may mean half the opportunity.

  3. Currency exchange fluctuations can wipe out gains. The potential for large currency swings may change the way you need to manage transactions, specify contract terms, and project futures. Smart entrepreneurs have learned to lock in exchange rates, collect on transactions immediately, and pay indigenous organizations to hedge the risks.

  4. Factor in basic infrastructure quality and services. The cost of doing business in any market is heavily dependent on local transportation, energy, technology, and financial services. These components can totally change your customer value proposition, or the business model that you have honed. Re-validate your business model in every market.

  5. Evaluate the political climate and operational processes. Uber and Airbnb are current examples of entrepreneurial efforts that are struggling with government regulations in new markets. It pays to research markets proactively, and engage local experts to negotiate a path early, rather than reactively dealing with fines and tarnished reputations.

  6. Honor cultural sensitivities and assumptions. Cultural traditions often dictate business roles, procedures, and customer expectations. The local culture affects not only the decisions an entrepreneur must make, but also how a market views the company. The best strategy is to engage people in the local market to manage your business there.

My summary recommendation is to quantify the context difference or institutional distance to each new market. The greater the difference between your current and the new context, the more challenging it will be to expand there. Salomon outlines how to convert the comparisons into “risk spreads” that mathematically capture and accurately reflect global market opportunity differences.

But don’t look for any magic algorithmic procedure to solve the complex globalization problems. The challenges are continually evolving and are, at their root, a product of social interaction, economic evolution, and political dynamics. It will always take smart entrepreneurs, armed with the latest knowledge and modern analytic tools, to minimize the risks and maximize opportunities.

Tapping into global markets, especially the large and under-developed ones, not only promises market growth beyond our most optimistic vision, but also empowers people the world over to share in a better economic future. How many global scaling opportunities are you missing today?

Marty Zwilling

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