Navigating the risks of international expansion

Largely lost amid the story of Target’s data breach and the eventual forcing out of former CEO Gregg Steinhafel was the fact the retailer’s expansion into Canada has been a disappointment.

Of course, Target is just one of any number of companies that has sought opportunity internationally, either near or far, without meeting expectations. Mattel failed with a freestanding Barbie store in Shanghai, foreclosing on Barbie’s dream house after only two years. Starbucks was never able to find its stride in Australia, losing more than $100 million between 2000 and 2008 and licensing its remaining 23 stores to a local chain earlier this year.

Figuring out how to navigate the risks of international expansion is critical as companies increasingly look to international markets for growth. A survey done earlier this year by the Chubb Group found 52 percent of US and Canadian companies surveyed plan to increase overseas activities in 2014.

One internal factor has to do with a company’s willingness to accept the ambiguity and lack of immediate return inherent in overseas expansion.

“The key to managing any business is balancing demands from all stakeholders for both the short and long term,” said James R.F. Berkeley, managing director of London-based Ellice Consulting Ltd. “You go through a period between when investments are made and there is return. You have a mature market at home that is throwing off money, and an immature international one that isn’t.”

In these circumstances, management, investors, and/or shareholders can get impatient, and not give an international investment the attention or chance it deserves. “[Management] sometimes pull the plug prematurely, without having rethought and retooled the strategy,” said Berkeley.

Culture

“Giant companies fail when they enter many markets because they don’t get the culture of the new locale,” said Jerry Cahn, visiting professor at the University of Shanghai for Science and Technology. “A strong, positive corporate culture is usually a great asset, but it can also work against you when entering a new market, because you are set up to do business one way – a way that may not work or be compatible elsewhere.”

Sometimes the business model is a good one that just doesn’t fit a specific country, according to Joe Bannon, senior vice president, global marketing and brand strategy at 5MetaCom, who handled global branding for a Fortune 100 pharma company in Europe, the Mideast, and Africa. “It’s not necessarily a reflection of the brand. Sometimes local management doesn’t get the brand, or doesn’t do a good job communicating it.”

A business failure isn’t necessarily a risk to a company’s brand. “Companies fail all the time, whether with specific hires, or product lines, or circumstances outside their control,” he pointed out. The reason for the failure is what matters.  A breach of ethics, a change in the way a companies operates, or a diminishment of the core product will hurt the company. ”

FCPA compliance

According to Paul Schawada, director at Chicago-based management consultant Locomotive Solutions, cultural nonalignment also plays a big part in one of the biggest risks companies face when doing business overseas: running afoul of the US Foreign Corrupt Practices Act.

US companies “absolutely will face corruption pressure in overseas markets, particularly in emerging markets,” he told Advisen. “A critical first step is to decide what your organization’s stance will be on the issue.”

While it may be black and white from legal and liability perspectives, he observed that it’s not uncommon for large companies to take a risk/reward approach. “For those companies, it comes down to the fines from occasionally getting caught just being a cost of doing business overseas,” Schawada added.

Bannon said there were times he had to cease operating in certain countries.

“We went in with the best of intentions and having done our due diligence, but in some countries the external pressures, whether from suppliers, customers or government officials, made it impossible to stay there,” he said.

Supply chain

Among the risks that are insurable but the most difficult to predict are those that wreak havoc on the supply chain, including political instability, the potential for war, and terrorism.

“Some of this flares up practically overnight and then new regimes come in and there is chaos,” said Mike Nelson, chairman and a founder of NY-based law firm Nelson Levine deLuca and Hamilton. “I’m sure Iraq looked like a different place to do business in two years ago than it does now.”

He also cited natural catastrophes as a concern. “Nobody could have predicted the tsunami (in Japan) of a few years ago,” he said. “There were worldwide implications beyond the terrible loss of life with supply chain interruption, the scarcity of natural resources.”

“Much depends on a risk manager,” said Huhnsik Chung, partner-in-charge of the NY office of Edwards Wildman who has served as outside general counsel for numerous companies who have expanded internationally. “If a company doesn’t have the size or the financial backing to have a professional risk manager the best thing to do is to align yourself with a trusted broker who can assess the different types of risk you’ll face as an international enterprise and identify the types of coverages to mitigate as much risk as possible.”

He cited the volatility and chaos that can result from a regime change as a risk that can be largely addressed with the help of a savvy risk manager or broker.

Knowing what is legal in the US doesn’t necessarily help a company overseas. “You can’t assume laws and policy coverages will work from country to country, or that the same risks will be present, or that they can be dealt with the same way,” said Nelson. “Also, things can change very quickly.”

The legal and regulatory environment must be examined before expansion, said Chung. “You have to assess and then plan and create a compliance roadmap to ensure that your expansion and your method of doing so adheres to the legal and compliance requirement of the jurisdiction you’re going into,” he said.

Tech/IP risk

Technology and intellectual property represent a huge range of risks, some insurable, some not. “Companies have even widely varying risk profiles when it comes to intellectual property,” said Schawada. “For some companies, technology and IP isn’t all that important with regard to the market, and for others, it’s their lifeblood.” Companies who are relying on technology merely as a tool have to worry about security, while those who are selling it have separate risks and steps they should take.

Key actions usually include one or more of the following, according to Shawada: 1) Product redesign, to either eliminate IP within products intended for the overseas market, or to make it less accessible; 2) Compartmentalization — breaking up components, designs, etc., to prevent any one entity from having access to a complete (and therefore usable design); and 3) Vetting partners to evaluate their track record for working with foreign entities and their reputation for integrity.

“Data is a huge piece of this is in many ways invisible to us,” said Nelson. “We’ve grown accustomed to having new ways of doing things but we don’t appreciate that it’s all data driven.” He said that these risks are among the hardest for insurers to underwrite properly and for risk managers to assess.

Privacy laws

Another aspect of risk a company has to take into consideration are the laws that pertain to rights of privacy and breach of private information.

“Different jurisdictions have imposed different requirements on businesses to ensure they maintain confidential information in a secure format and will have different responses in the event of a breach,” said Chung. “As you’re expanding you have to have a vigilant IT system that is designed to address the standards and protections imposed by different laws.”

An often-overlooked aspect of intellectual property has to do with whether it’s appealing and culturally appropriate for a given locale. “Translations can be tricky,” said Berkeley. “Just because it’s technically accurate doesn’t mean it works. Also, specific words and images can have completely different connotations.”