Risk Management

Five Strategies to Mitigate Global Risks

Planning, rather than reacting, is key to achieving strategic goals, particularly when expanding into foreign markets.
Greg CastelloOctober 24, 2016
Five Strategies to Mitigate Global Risks

Winston Churchill said, “He who fails to plan is planning to fail,” and that’s great advice for any company entering the global market. Successful companies mitigate risk with careful market research and preparation. Planning, rather than reacting, is key to achieving strategic goals, particularly when expanding into foreign markets. These five steps will help your company prepare for the international market.

  1. Assess the Political and Business Landscape.

This summer’s Brexit vote in the UK proved that even stable, wealthy countries can still deliver huge surprises. The vote to leave the EU added a new level of uncertainty – and risk – to import/export strategies, and it roiled global currency markets. Political risk can be even greater in developing nations, where regime change can lead to abrupt transformations in the legal and security environment. For example, new Philippine President Rodrigo Duterte has alarmed the business community with statements that experts fear could discourage new foreign investment in the country.

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You can cut down on losses from the unexpected by developing a business plan that considers both the political situation and business environment. Be sure to do the following: Determine whether there’s a real demand for your product. Calculate the overhead costs from legal compliance, taxes, reporting, and employee compensation. And evaluate the transportation and distribution infrastructure to ensure it can adequately support your needs.

2. Choose the Right Business Partner.

International expansion is easier and less risky when you partner with experienced professionals who understand local culture and business practices. The right business partner can help guide you through the maze of regulations and cultural expectations, but the wrong partner can do significant damage. For instance, bribery is an accepted part of business relationships in many countries, but it’s illegal in the United States. A partner who practices business-as-usual in his native country could land your company in a lot of legal trouble at home.

Be wary of extensive resource commitments in countries that have particularly challenging market conditions or strict trade restrictions. Consider testing the waters with a strategic alliance or joint venture before fully entering the marketplace.

3. Hire Experienced Local Talent.

The best way to ensure success is to hire experienced people who understand your company’s vision, strategy, and goals. Remember: People run businesses, so having the right team in place is crucial and perhaps the biggest key when expanding. At the very least, local employees can help you avoid embarrassing cultural and language mistakes that have tripped large companies like these:

Mercedes-Benz entered the Chinese market under the brand name “Bensi,” which means “rush to die.”

 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.”

Don’t rush the hiring process or cut corners. Take the time to conduct due diligence on all applicants. Perform background checks, check work history, and interview carefully. Some countries require additional security checks or certifications as part of anti-terrorism efforts, so be sure your employees can meet those requirements. Once the team is in place, offer training to make sure they’re comfortable with cultural norms and workplace diversity.

Employee turnover and training are expensive, so do it right the first time.

4. Develop a Business Model for the Market

You need a business model that fits the country and its demographics. Large countries with diverse market segments and geographic regions (like China and Russia) may require a multi-part model that includes specific strategies for each region.

Assign a New Product Introduction (NPI) team to determine correct business and operating models and profit expectations before entering a target market. These vary by country based on economic, social, and cultural differences that influence the business environment. The NPI team should tailor the product or service to meet the needs of the market and target customers. For instance, does the local market need basic products or is there a demand for premium services?

The model should account for all direct and indirect costs associated with international trade. Those calculations can be complex because shipping methods, tariff and duty calculations, in-country special trade zones, and protectionist laws vary from country to country. Mistakes can be expensive and disrupt supply chains, so many companies turn on third-party logistics suppliers for expert knowledge and guidance on supply chain management and trade compliance.

5. Have Contingency Plans in Place

Once you determine that you can do business in the country, consider whether you should.

Obtain all the information in advance and understand the risks and benefits. Everyone loves an optimist, but be realistic about the risks involved in international expansion. Even large, successful corporations have had spectacular market-entry failures. In 2015, Target recorded a $5.4 billion loss on its failed expansion into Canada. As one retail analyst noted, “Anything you could have gotten wrong in the playbook, they got wrong.” Here’s more:

“It faced huge supply chain problems due to a myriad of problems at its warehouses, poor communication with headquarters, and the use of inexperienced staff. That left stores poorly stocked and selection limited, disappointing shoppers who had eagerly anticipated its arrival in a market where the discount space was long dominated by Wal-Mart Stores.”

Factor downside mitigation into the model by asking how much could you lose if the expansion fails and how can you minimize the loss. Develop an exit strategy in case the business isn’t successful and establish metrics that measure success or failure. Establish those targets ahead of time and track them continually.

Every business decision involves some level of risk, particularly when a company is venturing into the international marketplace. Successful companies recognize that risk is unavoidable but carefully manage it with thorough market research and preparation. This is an area where failing to plan almost guarantees failure.

Greg Castello is chief financial officer for Flash Global, which designs and implements service supply chain strategies for rapidly expanding companies.