When it comes to expanding your business abroad, one size does not fit all.
Amazon expanded into Europe via acquisition and investment; Dropbox posted their US team abroad in a series of long-term placements; Facebook leveraged business partnerships instead.
The structures US businesses choose when landing and expanding in Europe determine the success of their growth overseas. Most companies’ first instincts would be to go it alone and self-fund their international expansion, but it’s important to understand the other options available and the benefits and disadvantages of each – whether joint venture, acquisition or merger.
Choosing the right footprint for your business abroad starts by making your business secure at home.
Consider the expanding US business as a set of concentric circles. With the core of the business solid, expansion into other markets should follow a ripple effect – where effective business processes at home are repurposed abroad. It’s far easier to tune a process that already works in a home market than to solve problems at base and new ones created by international expansion.
US teams must be thoroughly prepared for expansion, understanding the reasons, risks, and costs involved. At our recent New York panel event, Media Trust CRO Alex Calic spoke about his experience founding a European entity in this way. “The first attempt was a venture capital-funded attempt to create a UK entity and operate everything from there. This wasn’t efficient, as we were still trying to figure out what we wanted our business to be in the US.”
Rushing to expand too quickly can burden the business. “At Dropbox we did tons of planning — maybe we even overdid it and could have gone earlier — but we talked to other companies, asking them these same questions about mistakes, and one that stood out was doing it too fast”, says Dropbox’s ChenLi Wang. “[Expansion is] just like building a product. You have to go through one cycle to learn and iterate and then the next cycle to learn and iterate. Don't try to do five simultaneous experiments at the same time. If you try to launch five products at the same time you're going to run into the same issue as launching in multiple countries at the same time.”
Destination is key. Many US businesses look to the UK for their first expansion overseas – sharing as it does a language, business lexicon, and, for the most part, working culture. Wider European expansion often follows by building on personal networks belonging to the London team. The UK’s position as the go-to choice for expanding US businesses is under some pressure from Brexit, however, with the likes of France, Portugal, Ireland, Germany and now Austria vying for American startup attention.
Whatever the choice, market landscape is a key factor in making the right choice. “The natural tendency in any marketplace in the world is loyalty to a domestic brand,” says Jon Williams, drawing on his experience at Snapchat. “In choosing your entry point, you have to research whether there exists a strong local competitor there, and think very carefully about moving forward.”
Only with operations in order and plans in place should leaders consider which business structure to adopt abroad.
Option 1. Acquire
Buying local competitors is a fast route to growth in new markets. Local competitors offer tempting benefits, not least regional market penetration, local cultural understanding, skilled teams and established legal and administrative structures. Nextdoor’s acquisition of Streetlife and Amazon’s purchase of BookPages are both cases in point. Today, Amazon now employs one quarter of its workforce in Europe.
Culture is the key sticking point during acquisition. A failure to ‘match up’ the workplace routines of parent and child businesses can make for expensive mistakes. Regional differences in workplace culture nearly cost Lincoln Electric, and Daimler-Benz and Mitsubishi their parent business – failures that could have been avoided with better preparation.
US businesses must also evaluate what they’re paying for. After all; only 23% of parent businesses earn back the costs of their acquisition. Is a localized competitor offering technology, processes, insight, or little more than a regional sales team? The former may add value to the parent business; the latter may cost it in terms of retraining the local team.
Option 2. Merge
Merging with local competitors offers the same risks and benefits as acquisition: market penetration, administrative efficiency and established networks against cultural differences, disjointed offerings, and the upfront costs involved with retraining new teams.
Where Daimler-Benz’s acquisition of Mitsibushi failed, Renault’s balanced relationship with Nissan was more successful – enduring and growing in value by 16% to generate shared revenue of €5.0bn in 2016, to become the number one car seller in the world in the first half of 2017.
Scaling is the key risk while merging. A US player may feel like a big fish in Silicon Valley, but to a local partner who dominates their market, partnership with a foreign business may pose a lower priority than the US business would like. The local partner’s staff may be less willing to accept new ways of operating or new metrics - after all, they’ve done well by doing things the way they do them - and end up disengaging from the US startup and its team.
Option 3. Build a joint venture
The third alternative is a joint venture with a regional partner, where each party owns a significant share of the new local entity.
Working with a local partner may require capital outlay, but costs can be offset by the speed at which the US business can start generating revenue abroad. This is often essential to prevent a local competitor taking market share, which the US business would otherwise have to win back.
Joint venture partners offer valuable readymade personal networks and administrative insight, providing heavy lifting services for the parent business which otherwise prove distracting during expansion. Excite.com and BT formed such a partnership in 2002, with the latter buying 50% of the former's UK entity to support its move overseas. For BT, the joint venture was less financially significant than to Excite, given the businesses’ differences in size. More recently, Politico Europe was founded as a joint venture between Politico and Axel Springer along 50/50 lines.
In this way, joint ventures can offer an agile, cost-effective alternative to direct investment, and acquisitions and mergers with European businesses. For parent businesses in the US, the choice of expansion model revolves around their goals abroad and appetite for cost and risk there.
Case study: Read how US firm Parsec leveraged joint venture relationships to land and expand in Europe, here.