What Model Works for Me?

Do-it-yourself solutions are not always the smartest.

WHEN EXPANDING INTO INTERNATIONAL MARKETS, often it’s difficult to know which types of relationships or business models even exist abroad, much less what types are best for you and your organization.

Some entrepreneurs just assume that if you are entering a new market you must make the necessary time and capital investments to set up infrastructure, hire employees, research local regulations and perform the necessary steps and filings to make it legal for you to do business. However, there are many other ways to get your product or services into international markets.

Don’t make it harder than it has to be

As we’ve been seeing, the first step in this process is to identify your target market and to understand how much potential business exists for your organization within it. During this process you may find that the total potential does not exceed the cost of creating a local presence for your company. However, as you do your research, you may discover that there are companies currently operating in your target market that will deliver a much better result and at a much lower cost to you.

It’s funny, but sometimes working with a specialist in a particular geographical area or specialty can generate an ROI greater than you could generate without their assistance, and at a lower cost. It doesn’t mean that you or your company isn’t good at something or that you are missing the mark. Rather, it might be a sign of realistic business planning and unbiased, open-minded analysis.

Think about it for a second: Why do Fortune 500 companies often use third-party advertising agencies for various locations around the world? Why do manufacturers of products sell distribution rights and use independent sales reps in lieu of creating their own sales organizations? Or why do companies that source parts or complete manufacturing processes abroad use brokers or reps, rather than opening their own plants or trying to place a colleague in the country? The answer is simple. Often the third party has certain sustainable advantages due to their niche focus and local savvy.

For instance, a distributor of medical devices in Europe will already have developed a network of local and regional sales representatives, all with existing customer relationships. Also, that same product distributor probably has a clear understanding of European Union requirements ranging from required filings, approval steps, to label requirements, etc. It will take you a long time and lots of work to get up to that kind of speed.

So if you are a non-European manufacturer of a particular medical device, would it be easier for you to research all of these things yourself, making trips back and forth, spending a fortune along the way, only to finally be able to start the sales process from scratch without any leads, contacts or relationships, six to eighteen months later? Or would you rather invest time and money to find a reputable distributor who can handle everything and start selling your product in the new market with some reasonable volume in a shorter time, while you continue to run your business at home?

Yes, you may not make as much gross profit as you would working without a distributor. Yes, you may have to give up 20 per cent or 30 per cent in commissions. But, if you get 300 per cent more sales… more quickly… then… well, you do the math. Let’s look at the primary types of relationships you might consider.

Partnerships

In this set-up, the parties entering into the partnership all agree to bring something to the table, whether that is capital, infrastructure, relationships and/or other resources. These are probably the most integrated types of relationships and business structures. Often partnerships share in expenses, labor and management resources and in the profitability of the organization. However, this type of business structure tends to be the most complex to initially set up and operate. Also, partnerships require more cash capital and human capital resources to operate effectively.

Joint ventures (JVs) and strategic alliances

These can be great because they can leverage the resources of the various participants. There probably are organizations that specialize in different elements of your business process (or extend beyond it) that your company doesn’t currently have in place. Imagine sophisticated distribution experts, sales organizations, material sources, customer service resources, or intellectual properties that tie in with your product or service and can expand your revenue if properly set up. Or maybe your partners can expand your existing customer base or supply contracts.

We have a similar relationship established for our US-based medical device manufacturing business. We have developed some unique materials and a few patented designs, so we established a strategic alliance with a manufacturer of similar products in Australia. Our Australian counterparts then came to the United States, where we showed their personnel how to work with the new materials and how to make the designs that we developed. Now they not only buy the materials from us, but they also pay a small royalty to our organization for every product they manufacture and sell that is based on one of our designs.

In this example, we both benefited from multiple elements of the business process. We are able to leverage their manufacturing capability, skillsets and customer base to get our product designs recognized in an area of the world where we don’t currently operate. For their part, they benefited from access to our intellectual property, cutting-edge materials and skills training. When these forms of partnership work, it’s clearly a win-win enterprise.

Franchising

Franchising is another great model, for both franchisees and franchisors. The benefits vary, depending on which side of the equation you’re on. If you have a knack for business and you possess the necessary skillsets and know-how, and you just want to jump into a fast-growing trend or business, then a franchise can be a great fit.

The franchisor is an organization that should provide almost everything you need to get started. This typically includes a handbook on how to run the business, financial modeling, marketing pieces, national marketing support, an established supply chain for products or goods, plus constant support, training and oversight.

In exchange, as a franchisee you pay an upfront franchise fee and ongoing royalties that average about 6 per cent of gross revenues. Your job is to select a great location within your territory, negotiate lease agreements, hire your labor and manage your business. Thanks to the franchisor’s strengths, this can be a great alternative to spending a great deal of time and money in an attempt to create something new in a foreign market. The same cautions about doing your homework diligently and gaining the most favorable terms possible apply here, of course.

However, if you have created a successful business that could be replicated successfully by others, then it may be extremely lucrative for you and your team to put together a franchise package and model, and then find others who want to open additional locations in other parts of the country or world. This sort of business works best with such organizations as fast food restaurants or home service businesses (clothing repair and alterations, shoe and key shops, lawn care, child or pet care, etc.). Becoming a franchisor gives you the opportunity to generate additional revenues through your franchise fees, royalties and the ability to leverage the overall size of the organization to reach a broader audience in new market areas.

No matter what model you choose, just make sure that it fits with your vision of what you want to do as an entrepreneur and as a business owner.

M.O.