5 Steps To Manage Risk Before You Begin Exporting

Companies dealing with sluggish economies or saturated domestic markets often look to international expansion to manage risk. Consider this though: by expanding internationally, a company simultaneously mitigates and creates risk. There is inherent risk in expansion, particularly internationally; even mammoth retailers like Target have failed spectacularly.

Before expanding, a company must plan carefully, understand the market, staff carefully, and accept that the venture may still fail.

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Step 1: Develop Business Plans Unique To Each Market

Business plans are not "one size fits all" documents: you must create distinctive ones for each market. Large, diverse countries like China and India may even require regional plans. Specific considerations to address include:

  • Infrastructure: Plan for unexpected costs or shortages in countries with poor transportation or information technology infrastructure. 
  • Trading obstacles: Study how tariffs and taxes affect exports. Some countries have special trade zones and other opportunities to cut red tape.
  • Financing: Domestic banks may be reluctant to finance an international venture, but you may receive assistance from the US Export-Import Bank.

International expansion can be an effective way to extend the life of aging product lines and counter the seasonal variations in the US market. However, you have to make sure that there's room in the market and that consumers will be receptive to your products.

Step 2: Determine If Your Product Will Sell

Begin with the market analysis and intelligence data available at the US Department of Commerce's Export.gov website. Search by country, commodity, or industry to learn about trade barriers and market opportunities. For instance, Export.gov notes that there's a new market niche in Niger for fragrant rice imported from the United States. The growing middle class views it as a luxury product.

Sometimes, a mundane product in the United States makes an unexpected splash overseas. German consumers just love grape Kool-Aid and Pop Tarts, while Spam is a luxury gift item in South Korea. A careful study of the market can help you decide whether to compete based on price, value, or uniqueness.

Step 3: Decide How To Distribute

The three most common distribution methods are direct exporting, licensing, and partnerships/joint ventures. The target country may choose for you. India has tight restrictions on foreign ownership and investment in certain industries. Other countries have protectionist laws like "buy local" requirements that encourage foreign companies to partner with domestic firms or manufacture in-country.

Choose wisely when selecting in-country partners. Many emerging markets have business cultures that tolerate bribery and other forms of corruption. That's part of the cost of doing business there, but in the US, it's a criminal offense. Make sure your partners understand and follow your home country’s laws.

Step 4: Invest In A Diverse, Experienced Workforce

Entering the market is easier if some of your team members share cultural ties with your target market. That knowledge can help you avoid embarrassing mistakes that insult potential partners or befuddle consumers like this example from an Inc. article:

Parker Pen, when expanding into Mexico, mistranslated "It won't leak in your pocket and embarrass you" into "It won't leak in your pocket and make you pregnant."

Business culture and compliance are challenging for inexperienced companies: even innocent mistakes can have severe legal consequences. Companies can incur civil or criminal penalties in the US, while other countries may bar companies with a history of paperwork errors.

Make sure your compliance team is well versed in the language, culture, and regulatory environment. Because of the complexity, small to mid-sized companies often rely on third-party logistics providers instead of investing in in-house training.

Step 5: Calculate The Cost of Failure

What happens if the venture fails? Researchers estimate that the failure rate for all international expansions is between 70% and 90%. Common reasons include supply chain failures, market saturation, and poor strategic decisions - all of which go back to basic market research and business planning.

Be realistic - even pessimistic - about expansion and factor downside costs into the business plan. Have a plan in place to minimize losses and calculate how much you can afford to lose if the expansion fails. Detail the exit strategy you'll employ and develop metrics to track performance. Have targets in place and be prepared to pull the plug quickly to minimize exposure.

International expansion is complex, with no guarantee of success. Maybe that's why only about 5% of American companies engage in exporting. As former US Trade Representative Michael Froman noted in 2015, "95% of our businesses are missing out on 95% of the world's customers." With careful planning and research, your company can be part of the successful 5%.

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