Companies today need special capabilities that give them a competitive advantage. Yet, when it comes to internationalization, firms often fail to leverage their capabilities abroad.
These firms need to ask themselves two fundamental questions. First, what is our unique value-creating set of capabilities? Second, do these capabilities signify a competitive advantage in the new setting, or do they need to be adapted or supplemented? Asking these two questions before entering new environments protects against over-optimism and may help avoid costly mistakes.
However, this is not enough as companies, particularly in early stages of international expansion, often have insufficient knowledge to be able to answer them. Hence, these companies may benefit from the following five strategies. .
Pace of Foreign Expansion
Successful companies in the computer industry make product innovations at a certain pace and rhythm: every 12, 18, or 24 months. This allows them to focus on individual projects and then to transfer attention and manpower to the following project. A similar pattern was recently found for internationalizing companies: Firms that showed a certain optimal pace and rhythm in foreign expansions were more profitable over long periods of time.
This result is particularly salient because it is not what many companies do. Top executives are sensitive to “herd effects,” and often expand through acquisition waves. They don’t spend enough time identifying and evaluating potential problems. And when the problems accumulate and can no longer be ignored, failed acquisitions are sold off. Companies learn from their mistakes and then often make more international acquisitions, increasing the likelihood of untimely sell-offs.
This turbulent roller-coaster ride is unnecessary and a more balanced pace and rhythm allows companies to screen, evaluate and integrate acquisitions into the company more carefully.
Clearly, foreign expansion should not be too slow either or companies will risk losing opportunities to gain economies of scale and scope and to apply or acquire new capabilities. However, there is a speed limit. Companies ignoring the limit may fall into a “speed trap,” where executives believe that speed is vital for success even though it reduces the quality of the decision-making process and endangers the company.
Probing New Markets
Companies in the computer industry regularly “probe” the future, using prototypes or alliances or even asking gurus for advice. This is a sound strategy that can substantially increase the shareholder value and profitability of internationalizing firms. Probing is an especially good idea when a company invests in a new country, in a region whose culture it does not know well or in area where political or economic risks are high. If the probe fails, the company can withdraw and make larger investments in a more successful market where it understands the local culture, or where there are fewer economic or political risks. Companies that actively probe new countries and continents have a profitability of up to 50 percent higher and a higher market value than firms that do not use this strategy. Those who don’t use it are also more likely to be taken over or to go bankrupt.
Paths of Learning
Understanding a foreign culture can be crucial for foreign success. For instance, if a specific culture is needed as part of the mix of capabilities to create a competitive advantage. It is also needed for screening and implementing international acquisitions and detecting problems that otherwise remain under the radar until it is too late.
Much knowledge of foreign cultures is tacit and can only be learned through experience. A successful strategy is to design “paths of learning:” series of foreign expansions that allow companies to learn from their cultural experience to avoid costly mistakes later. Evidence shows that firms learn a lot from prior expansions in the same “cultural block.” Cultural blocks are groups of countries with similar cultures, such as the Anglo-Saxon countries, Latin America, South East Asia, Latin Europe, Central and Eastern Europe, the Germanic block, and the Nordic block. It’s been proven that entry experience in one country helps companies to expand more successfully in the same cultural block. Hence, starting in one cultural block and expanding there is an example of a “path of learning”.
Balancing Acquisitions and Organic Growth
Acquisitions always imply short-term problems as the firms grapple with different pay structures and human resource policies, information systems, and corporate and national cultures. However, acquisitions also help to break inertia, to bring in the variety needed to respond to a changing environment, and to keep companies successful over long periods of time.
Yet, too much emphasis on acquisitions is harmful if it shifts top executives’ limited time and attention away from internal affairs, causing it to ignore or underestimate internal problems. There must be a balance, for focusing just on internal growth can also be detrimental, since a company may become inert and miss opportunities for greater speed or new people and ideas, as the industry changes and competitors race for leadership. The most successful companies are able to strike a balance between acquisitions and organic growth over long periods of time (i.e., decades).
Strong and Diverse Boards
Over the past years, a push towards stronger and more independent boards of directors has swept over the U.S. and Europe. What is generally less appreciated is that strong and independent boards are in the interest of top executives as well. Executives are sometimes over-optimistic or over-confident and they can benefit from an outside view. Forming a strong and independent board of directors will trigger questions about proposed takeovers, building on information from the due diligence process and from other sources. The board will also sharpen the executives’ analysis of whether the company will be able to create a competitive advantage in a new setting. It can help determine whether the company has the right pace and rhythm of foreign acquisitions; whether probing is used wisely and sufficiently; and whether the company strikes the right balance between acquisitions and organic growth.
Such boards correct for over-optimism and overconfidence, illusions of control, and for ignoring or underestimating problems, which reduces the likelihood that executives will be surprised by what they did not know and make costly mistakes, in the worst case ruining their company and setting the stage for their own dismissal. In addition, a strong and diverse top management team, reflecting a variety of viewpoints and experiences and stimulating constructive debate, decreases the likelihood of naïve mistakes being made. Unless the diversity comes in such a form that it splits the team, creating “fault-lines” that hamper interaction and the exchange of information and ideas. Especially in complex, rapidly changing environments such as those faced by internationalizing firms, a diverse top team that communicates well is important to appreciate the rich variety of opportunities and threats. CEOs may shield themselves from hubris by appointing strong team members who are not “in their own image,” but are nevertheless cooperative and exchange relevant information and viewpoints, stimulating constructive debate.