There’s only so long you can spend on the outside of a new territory before it’s time to roll up your sleeves and go for it, says Adrian Thompson from our Entrepreneurs Panel.
Expanding into new geographies is risky and time-consuming, taking management focus away from core activities. However, more than ever, it is essential that business can successfully compete on the global stage.
There are three different routes into new territories:
- Forging strong distribution partnerships
- Making key acquisitions
- Simply landing “boots on the ground”
All three approaches need a common style of ‘growing by doing’ rather than embarking on endless cycles of research, consultation and planning. None are necessarily mutually exclusive over a period of market development.
Done well, they also all lead to the common result of rapid growth, which is essential for private-equity backed businesses.
Building international distribution networks for strategic growth
For most SMEs, the easiest and fastest way to enter a new country is through establishing a local distribution network. Setting up partnerships with local players is a highly efficient first step into a new market as it:
- Leverages the distributor’s existing infrastructure
- Gives immediate access to channel relationships
- Mitigates the credit risk
When private equity firm Inflexion acquired Aspen Pumps in 2007, the business had a global network spanning 50 countries. This had been achieved through working with country-specific master distributors, each taking responsibility for developing its own territory.
Developing partnerships can also be a winning strategy when you need fast access to new technology, products and channels. Take Greenwood Air Management, a specialist ventilation business. It was losing money, market share and its position as a premium brand.
The high-end market had moved away from Greenwood’s offer by shifting into technically advanced centralised systems. At the other end, commodity players were targeting the sector with value for money products to shift volume.
Greenwood ended up in the middle of the road, waiting to be hit by a bus.
We rapidly needed to move Greenwood from a toilet fan manufacturer to a technology solutions provider. We signed partnership agreements with both the French and Dutch market leaders. This gained access to their technology and the ability to train our salesforce on specification sales.
It also had the impact of taking two competitors out of the UK market. We grew our position together, as, through them, we were able to sell our product range into those markets too.
Within three years, the business went from a loss to generating gross margins over 50%. We were back to being a market leader. Then – and what you’re always looking for – we sold the business to the Dutch partner, achieving an exit value well above the average market valuations.
This is certainly a low cost and low risk way to expand into a new market. But, it can come with longer term limitations. Local distributors can block access to customers, and sometimes you’re not on the same page in terms of priorities.
Ultimately, no one is better at selling your product than you. As the market grows, you can reach a pivot point where you need to take direct control of your business. This is where putting “boots on the ground”, or making acquisitions, can prove a more successful solution longer term.
Establishing your own international sales operation with “boots on the ground”
In some cases, the option of working with local distributors is not viable. This can be due to not having enough margin to share with a distributor, a lack of suitable candidates, or you need to accelerate market traction and a traditional distributor model will take too long.
This is where you need to jump a stage. Appointing low cost, low-risk local market agents comes into play.
That’s how we developed Aspen Pumps’ presence in India and China. We were getting some traction in these vast markets, but needed to prove the longer term potential for air conditioning pumps. Working with local distributors, that would have taken five to seven years to prove. We needed to shortcut that.
From the outside, we could establish the strategic attractiveness of both markets and see they had the required infrastructure. And most importantly, if successful, any surplus cash generated could be extracted back into the UK.
So, we decided to make the jump and set up our own local sales teams.
If it failed, we would have learnt a lot, and the cost of exit would not be severe.
We then went straight into interviewing five people to be our national sales manager for India and China respectively.
Leveraging local relationships in India
In a two-day period, we were able to start really understanding the Indian market by speaking at length to those five candidates. Each was already in senior roles in our industry, had an excellent contact network and brought with them a detailed business plan. We were also able to quickly understand the culture, local salary structure, bonus levels and annual wage inflation.
We built an increasing confidence about the market potential and felt we could be successful by working with the right people. Each candidate was high quality with an engineering degree, excellent English skills and great experience – people we could easily work with.
Aspen’s Indian business is now profitable and has high growth potential through further business streams. We have first mover advantage and brand equity in what is a large and rapidly growing market.
But different players require a new game
We undertook the same exercise in China, where we had a completely different experience.
From day one, we found it hard to find good quality candidates. Large multinationals were recruiting engineers on an industrial scale, driving up wage levels and expectations. Working for a small startup was not seen as appealing. The individuals who did come in were expensive – four times more than the Indian talent. When we finally started the interviews, we experienced firsthand the significant cultural barriers beyond just language.
Although the candidates had strong CVs, we found them to be, in reality, inexperienced and unable to construct high quality business plans. Also differences in management culture and style were challenging. China has a very hierarchical culture, so we found the candidates didn’t feel comfortable proposing new initiatives or addressing conflict.
After 18 months, it wasn’t working, so we closed it down. But apart from going out there and the recruitment fees, our investment was minimal. We still accrued 18 months of market knowledge, and our old sales team ended up becoming independent sales agents for Aspen.
We broke even, established a market presence, but most importantly, learnt so much by going from A to Z quickly. When investors ask about our plans for Chinese expansion, we can talk with authority about the issues and complications, the wage levels, and where the channel is in its maturity cycle. All without having spent years, and huge amounts of resource.
The advantages of acquisitions
Over the last five years, Aspen has completed seven highly successful acquisitions. These have turbo charged either our market penetration within a strategic territory or entry into a new product sector.
In our first acquisition, we acquired our Australian master importer, an excellent business with a robust and dynamic management team. We hit the ground running, supporting the existing team with a significant investment into sales resources and additional stock holding. We also took on several of their suppliers and gained invaluable insights into the global air conditioning market.
Over the five years since purchasing the operation, we have doubled sales and margins, gained direct excess to a high potential market and merged with our New Zealand business.
It sounds obvious, but, for an SME to successfully grow through a buy and build strategy, they need an experienced M&A team. We decided to invest ahead of the curve to recruit seasoned professionals. However, if you work with the right private equity team, they can support you with some of the heavy lifting.
Do your planning, but plan to do
So what are the four key things I would recommend to achieve a successful expansion into a new territory?
1. Be hands-on
You can pay for big consultants to produce detailed reports on the market and the potential strategic options. But unless you get involved in a hands-on way in the early days, you are wasting time and just won’t understand a new market.
2. Balance research with activity
Structure and research is, of course, essential to an international expansion plan. Each market must be ranked on its relative strategic attractiveness, as well as to judge the potential financial rewards and investment involved. However, as you start to drive into the actual detail on the risk versus the ease of implementation, you need to decide when it’s time to learn through activity.
After a certain level of analysis, I find you start to get bogged down. You’re still on the outside, and it becomes time to get on the inside. Big businesses can often lose that agility to move quickly. They get stuck in processes, which give security to management because there’s a piece of paper, there’s a sign off, and everybody can look at the plan on the board and smile. But where’s the actual net delivery out of this – versus being able to quickly reach more customers, learn and grow.
3. Be prepared for an initial investment risk
Making an initial, measured small investment into a new market, either through local distributors, bolt-on acquisitions or your own sales teams, can be a highly effective way of opening new gateways to rapid business development.
Accepting the possibility of failure is of course a reality.
4. Learn as you go
Agree with your private equity house how you’re going to manage it and the time and resources you’re going to spend. Then most importantly – implement your plan, learn, adapt and expand by doing.