Expanding your Startup Abroad: Why Entrepreneurs Should Proceed with Caution

So, your startup has become successful, and you are thinking of expanding to other parts of the world to reach a wider market. It is a very sought out idea in the world of international business, but are you up for the task? Many have tried but failed to make an influence in a foreign market. It is only those who are well prepared for the challenge that make it out alive.

Here are some challenges others have faced in the past that you should consider before taking this leap.

Workplace Variations

Businesses and how they run drastically vary from country to country. Workforces may operate at different hours or efficiency depending on where they are in the world. Some factors that dictate how people work in each part of the world include labor laws, work breaks (Siesta in Spain), attitudes, and business hours.

This is the exact problem the American retail corporation Walmart ran into when they attempted to expand into Germany. The massive corporation opened 85 stores in 1997, but they did not last long as they did not consider the massive workplace differences between the U.S. and Germany. Most Walmart stores across the U.S. are open 24 hours a day, 365 days a year. In Germany, there is not a business that operates like this because of the strict labor laws and restricted business hours in place by the German government. Germans were also a little freaked out by how outgoing and cheerful Walmart workers were, as this is not a common practice in the German workforce. Furthermore, German employees were uncomfortable with Walmart’s idea of “service with a smile,” and they felt working at the retail chain overreached into their personal lives. Because of this, Walmart ended up closing all its stores in Germany in 2006, losing a whopping 1 billion U.S. dollars.

Market and Consumer Differences

No market is the same around the world, as consumers come from all walks of life and will inherently purchase different products and services. It is important to note that just because your startup is highly successful in one market, that doesn’t mean it will become successful in a foreign market.

Home Depot found this out the hard way when they tried to reach a new market by opening twelve stores in China in 2006. Home Depot’s DIY home improvement mission did not sit well with China’s consumers, and they closed all stores in 2012. DIY home improvement is seen as a hobby in the U.S., but in China, it was seen as a sense of poverty. China also has a favoritism towards female consumerism when it comes to home decoration, differing from Home Depot’s male consumerism U.S. market. After the fact, Home Depot was hit with a 160 million U.S. dollar tax check after closing its doors in China.

Economic Issues

There are many economic conditions that could impact your decision on expanding your business, but the one that has stifled businesses in the past is a decline in the economic sphere and market collapses.

It is never a good business idea to expand to a foreign market during a time of economic distress, but American electronic retailer Best Buy did just that. Best Buy bought a 50% stake in Carphone Wireless, a U.K. mobile phone company, for 2.2 billion U.S. dollars in 2010. The electronic powerhouse planned to open over 200 stores in the United Kingdom, but with the economic world still in shambles following the Great Recession from 2007-2009, they only managed to open 11. Best Buy also did not do enough research on the U.K. market, as U.K. consumers prefer small stores in city centers and are more likely to buy electronics online. Because this differed from Best Buy’s big store and superior customer service model, all stores closed their doors in 2011 and Best Buy lost 318 million U.S. dollars.

Foreign Competition

A startup that offers the same goods or services as yours could already be established in the market you wish to expand to. They most likely would be unwilling to make room for you in the market, as this would consequently diminish their overall profits.

Hailo, a U.K. based taxi-finding app, took on this hard task when they expanded abroad to the U.S. in 2013. Uber and Lyft already dominate in this certain market with their ride-sharing apps during this time, so it looked like Hailo’s expansion would be an utter defeat. However, it was not a total failure for the company, as they received 77 million U.S. dollars in investments from venture capital groups. Hailo pulled out of the U.S. in 2014 but did not lose a significant amount of money since they realized quickly that they would not be able to compete in a price war with Uber and Lyft. They also realized that New York and London were not the same at all in terms of cab services, as London cabs are seen as luxurious and New York cabs are the exact opposite. Hailo saw over 100 million U.S. dollars in revenue from Europe in 2013, so they would be just fine staying put in Europe.

Successes

Although most businesses and startups will crash and burn in foreign markets, there have been some that have exceeded expectations. These businesses and startups achieve success by conducting extensive market research and developing a new and consistent business model.

This is exactly how McDonald’s reached their status of most popular fast-food chain in the world. McDonald’s unveiled a brand-new business model to the world in 1948 with their self-service and efficiency initiatives, which in turn led to lower costs, cheaper products, and most importantly, faster expansion. Nowadays, efficiency within McDonald’s establishments around the world are at an all-time high with their self-order kiosks and mobile ordering apps that reduces wait times and increases the accuracy of orders. McDonald’s consistency of their business model is highlighted by the fact that their most popular menu item, the Big Mac, will taste the same regardless of where you purchase it in the world. This efficient and consistent business model has cemented McDonald’s as a stable around the world for years to come.

Another example of success in a foreign market is beverage powerhouse Coca-Cola. The company first gained prominence in foreign markets when they shipped the drink to American soldiers serving in WW1 and locals in these regions discovered the drink. This generated a market abroad, but Coca-Cola knew they would not be able to guarantee success from this one drink because different places have different tastes. In turn, Coca-Cola decided to diversify and purchase beverage brands around the world, which totals to over 500 different brands today. They also conducted market research on different consumer markets around the world, creating drinks and marketing campaigns that would satisfy particular consumers. This market research and diversification of products along with their localized marketing campaigns has propelled Coca-Cola to the top of the beverage food chain.

Start Small, Remain Small

There are many other challenges that can hinder expansion into a foreign market, but the ones highlighted above have been known to give businesses the most trouble. The purpose of this article is not to frighten or stop you from expanding your startup, but rather a warning to proceed with caution and do some research before you go down this road. Almost 90% of startups fail, so it is best to start small and remain small until you believe you are up for the big leagues. Even if you never feel you are ready for a foreign expansion, microentrepreneurship is a fast-growing discipline in the business world. In today’s day and age, your startup is considered successful if you beat the odds and become a part of the 10% of startups still operating.

Do you think you have an innovative startup idea that could be a part of the 10%? Be sure to submit it into the Citizen Entrepreneurship Competition 2024! This runs from June 1st through August 31st!