Easier to admire than to imitate
"The trouble is, these global role models are much easier to admire than to imitate" Christian Stadler, HBR June '15, Global Growth, Paltry Returns
The metrics make one pause. Financial analysis of 20 years of financial results from 20,000 companies in 30 countries tell an alarming tale. Only 1% of the firms had a positive return on assets after 10 years of export work - yet those that focused on their domestic market had returns 140% higher after a decade.
The authors of the study conclude that means that companies are better advised to focus on their domestic market as they tend to underestimate both the magnitude of their domestic opportunity and the resources required to achieve GE type success.
Makes one ponder....
Correlation or causation
Anybody can clearly see the implication, right? After all, if you take your middle market company global you'll pay the price in financial underperformance. But, will you? Is the issue really that they went global?
If going global was the cause of underperformance then there wouldn't be a large number of inspiring small business export success stories. Yet there are many of those successes. So what accounts for the fact that small businesses and enormous multinationals succeed in growing global sales profitably while the middle market struggles?
The model they follow.
Comparing global growth models
Multinational behemoths have runways that are decades and many millions of dollars long. They can enter a market with strategic objectives, build sourcing supply chains, launch local R&D centers, lobby governments and help to define their commercial opportunity.
Small companies have to approach markets tactically, find pockets of opportunity which they can exploit quickly, and make commercial decisions based on short-term objectives. Of course their willingness to sell globally probably reflects a long-term strategic perspective, but transactions and market entry plans are evaluated and reevaluated recognizing practical limitations.
Too often middle market companies take the former approach when the latter is more appropriate for their resources. And that's why the efforts consistently underperform.
Often things get sideways right from the start. How many executive planning meetings involve a discussion of the BRICs, with population & GDP growth rate metrics? And how many result in a decision to "enter" India or China? Many.
Yet how many of those same executive teams are aware that they'll likely invest for at least five years without nearing break even or that those 'markets' realistically represent 5 or more unique submarkets to pursue? It's an approach that's destined to fail - and yet those in the export community continue to promulgate the notion that companies have to follow a linear process:
- market selection
- market development
1 is largely theoretical; 2 is often a poorly informed gamble; 3 is far longer, more expensive and resource intensive than expected; 4 is far longer coming, possibly at a lower price than expected, and plagued with local support challenges; and finally 5 is replaced with a debate over whether to abandon the sunk costs or persist.
Focus on customers not markets to start
Small companies have realized, by necessity, that market changes have enabled new models - opportunistic customer focused models.
Middle market companies can preserve their resources by adopting a similar approach - and the best part is that it will simultaneously generate results in both the domestic market which they may underestimate AND the international market at an account level.
Using well crafted digital marketing companies will enable the right buyers to find them from all corners of the same city and the entire globe. It's no longer necessary to push into a market, or into an executive's office, to collaboratively explore how you can help them. Now they'll invite you in....if you're properly positioned.
Companies can work on transactions, recognizing revenue on projects prior to massive market entry investments. And then, as prospects and projects are identified, insight is accumulated into which markets offer opportunity. Even then an incremental, iterative method can be used to further refine the approach - like a "lean market development" effort.
With actual market data and global sales revenue results in hand, middle market companies can then confidently allocate resources to establish market presence and develop local initiatives in markets they've seen to be fruitful.
Going global is the opportunity - doing so incorrectly is the risk.
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image - HBR