What to get right onshore before heading offshore
There’d be few New Zealand business owners who haven’t considered offshore markets at some stage whether for expansion, supply, new sources of revenue and customers or the possibility of a new venture.
It’s an equally energising and daunting prospect given the challenges of increased costs, complex regulatory and compliance issues and legal and political risks that come with the benefits.
Those more technical aspects aside, given New Zealand’s distance from major global markets and small scale in terms of population and business size, there is a lot to know before stepping offshore.
However, many New Zealand businesses successfully open their doors to new markets and customers every year. And in my experience of helping Kiwi businesses to discover their market and build the capability to enter and succeed, there are some fundamental elements that make a big difference.
Understand Your Market
While it’s important to be strong in your homeland first, just because a product or service works in New Zealand, doesn’t mean it’ll succeed in another country. Indeed, failure to understand a potential market and its customers is one of the biggest pitfalls for Kiwi businesses.
So first and foremost, know the market your potential customer operates in and ensure that everything you do is wrapped in that understanding. That will require a strong investment in tailoring your offering to suit the market and a campaign to promote it appropriately – again something many businesses fail to do properly.
With food and beverage products for example; you may need to modify some ingredients and change labelling and messaging to ensure you’re on target. And, despite the common Kiwi assumption that English language is universal, many countries do not deal in English. Even the fact that some people read from right to left as opposed to left to right, will impact how your product is presented and marketed.
Understanding these specifics has a huge impact on how your product is received. And, while it seems obvious – if you’re in a non-English language country ensure you have an appropriately translated website – something that many Kiwi business fail to do.
Given New Zealand’s two big challenges of being a very long way from our global markets and very small, our businesses need to be thorough in choosing their market entry model.
You can take the passive online approach of e-commerce, which can be a fantastic way to level the disadvantages of scale and distance. Or choose more active forms ranging from an in-market agent to find customers and negotiate sales or selling directly to an in-market distributor through to strategic partnerships and licensing/franchising. They all come with their pros and cons and the tax implications will vary with each model.
The reality is that a lot of money can be lost through the value chain depending on the model and ideally you want an entry strategy that puts you as close to the customer as possible. However, it’s not always feasible as articulated in the food and beverage market where there are multiple players taking margin along the way.
Likewise, for the manufacturing sector, exporters may see their investment in innovation sucked out in the value chain so it’s important to look at a business model that can capture that.
NZTE takes businesses international by growing their capability to capture innovation, looking at how they are branding what they do, understanding pricing mechanisms in their potential market and aligning that with design, distribution, marketing and after sales service. These all add real value to the product, taking more control and shifting the business up the value chain.
And, as the saying goes, you don’t know what you don’t know. To help determine the best model, it’s useful to do a value chain mapping exercise to see how much margin is being taken out at different stages by different players.
It’s also important to understand your competitors, considering how they might respond to you entering the market, what you need to invest in to get market penetration, build awareness and get the right pricing model.
Finally, business model success is influenced by how it’s managed and that means being engaged and building strong relationships and very often a local presence.
Think about your existing support networks. This can start with your board of directors, professional advisers, NGOs, the likes of NZTE, MFAT and KEA and industry associations. As a starting point they can guide businesses to the appropriate channels to market and customers. Your task is to sell a solution that meets the market needs – so independent advisors and directors should be technically sound and customer focused.
Secondly, consider your existing connections and partnerships and ‘follow' those, whether they are suppliers or customers, distributors, importers or wholesalers. Use the resources of NZTE, MFAT and KEA, find out about appropriate trade shows and events.
And don’t just assume it’s about getting there and showing off your product. Use these networks to find out who is attending, what they’re likely to be looking for and how your offering is relevant – before committing.
Be friendly and open to, and with, people you meet on the plane and in airport lounges; and finally, use online networks like LinkedIn and contribute to the stories being exchanged.
In short, be open to all the opportunities that might be right in front of you. Identify the market needs and sell a solution.
People and culture
A weakness for New Zealand is that we’re still a very monocultural society and whilst this is starting to shift, in general our business practices and knowledge of global markets is average. That manifests in a limited ability to understand other cultures, to front up prepared, to speak another language – even our own indigenous language.
There’s no such thing as a Master’s Degree in Cultural Mindset, but there are plentiful opportunities to help businesses develop it by having good advisers and networks and doing your research before going anywhere.
First impressions count and can make or break your deal. So know protocol. For instance, signing a contract in China is a very, very formal event that requires adherence and respect. Whereas in the US, it’s all about legal documents and unless you have a team of lawyers, you wouldn’t want to sign anything.
Personally, I never go to the Middle East without a suitcase full of ties and suits – and the one time when the airline lost my suitcase – the first thing my host did was take me out and buy a new set of ties and suits.
New Zealand business culture is very pragmatic and casual – a bit too casual with not enough time spent on analysing the audience needs, planning and preparing. At home, we’ve gotten very good at turning up and winging it. That doesn’t work overseas.
A common mistake is to be take too broad an approach to potential markets – which ultimately waters down your chances of success.
There needs to be a focus on defining specific markets and needs that fit your offering and aligning with that. For most New Zealand companies, this means starting small – focusing on just one market, or even one segment of that market. Ultimately, it’s always easier to expand a niche than to scale down.
In choosing the right market, you may need to find out who is most likely to want to purchase your product or service, not just who could purchase - talk to people first-hand and gauge their reactions to what you have to offer; research online; understand perceptions of New Zealand in your market.
Focus on lower risk, high potential return markets. If you have a competitive advantage in New Zealand, look for markets where this can be sustained. The trick is to find the balance between opportunity and your chance of success.
An exporter can have a fantastic product, but let themselves down in not doing the homework around finance.
A prerequisite is having enough capital and equity. Exporting is a costly business – almost always costlier than expected – and you need to be sure you can make enough profit to cover the costs before making the leap.
As well as carrying out an export cash flow forecast, determining financial feasibility also loops back to the need for robust market research required to understand pricing strategies and set-up costs ranging from professional advice, freight and logistics and marketing through to compliance.
So it’s best to assume that more is better so that you don’t have to engage/disengage and then start over.
It’s also critical to have retained reserves for if and when things go wrong and/or when hard times hit. Reserves are an important indicator of your ability to grow abreast of your customers, ride out down cycles, fund emergency situations and change or adjust your business model if needed.
Target market and entry model will help determine how much you set aside. If you’re looking to enter the United States for instance, be aware that everything takes four times longer, is four times harder and four times more expensive than in New Zealand.
There are many non-equity ways to de-risk international growth and to invest in projects, ranging from bootstrapping it by family financing, accessing public support and grants, including those which NZTE and their Regional Business Partners offer as part of tailored support packages to businesses, and even absorbing development costs into product manufactured cost and pricing decisions.
Ability to story tell
While your products or services are unlikely to be genuinely unique, your story and value proposition are - that’s what will resonate with your customers. Thus, story is one of the most powerful ways to differentiate yourself from your competitors.
New Zealand businesses are generally poor at telling a compelling and succinct story to their audiences - and that makes it very difficult to differentiate and get people to pay attention.
The task is to put yourself in the shoes of the potential customer and engage them in a compelling picture of why they’d want to buy your product or engage your service.
This is about more than facts, it is about sharing the heart behind your business and value proposition – the experience they can expect from you beyond the day-to-day transactions, and the relationship you are promising to have with them over time.
Through storytelling you can use passion as a means of building connection and engagement.
Craig Armstrong is Director (Customers) at New Zealand Trade & Enterprise, leading a team that helps New Zealand businesses grow into international markets. Craig brings 25 years of experience with a range of businesses in leadership, marketing, finance, sales, operations, change management and business development roles - including with Lion Nathan, Cadbury Schweppes, Hunterskil Howard, CPLG, National Foods and HJ Heinz.
Before joining NZTE in 2007, Craig was founding director of an Australian-based business providing strategy, marketing and commercialisation resources to companies and to private equity clients.
Business Tips from BDO's expert team - what to get right onshore before heading offshore
Structure: The key driver in choice of structure should be the commercial aspirations and needs of the shareholders. As with all tax advice, different businesses require different solutions. Our global network of specialists in this area can help you develop a tailored solution for your business that works from both a New Zealand and a foreign tax perspective, to meet the aspirations and needs of the shareholders.
Plan for Disruption: Have faith in the BAU processes as your time, energy and focus will be massively disrupted with international expansion. This is true, even if you have dedicated resource on the ground in other jurisdictions. How will these processes be impacted once you are operating abroad and how will they remain excellent?
Internal culture: Who is going to be impacted by the change and what is their attitude to change? Are they invested in the journey, or is it an owner-led exercise? Owners need their staff to be engaged and expect the unexpected. Also, what is the risk with changing your culture and becoming a multi-national operator? Are you comfortable with the ROI?
Due Diligence: Do your due diligence on overseas regulations and operations, ensuring you have a thorough knowledge of what you are dealing with and the legal/cultural requirements.
Funding: By all means budget for expansion, but how much flexibility do you have in your budget? How much of the unexpected can you afford and how will it be financed (from existing cashflows, or externally funded and what are the limits on this – think ‘what if?’)
Overseas earnings and ROI: How lucrative are the deals abroad (not only in terms of turnover, but expected profits). Does this return stack up, after tax, for the investment required? Return on investment is critical and should be substantial given the complexity and risk involved.
Exit Plans: What does success look like abroad? What are the exit options? Assuming all goes well, how long can it be sustained with the current ownership model and how will you exit if you need to? Assuming it doesn’t, when should you pull the pin and live to fight another day?
Continuity of Advice. Naturally your professional advice requirements will expand. Who will you use, such as other professionals, NZTE resources etc? How can you ensure these advisers maintain and understand your journey to date? Their advice should be ‘technically correct’ and aligned to your own and your firm’s capabilities, culture and understanding and factoring in governance requirements and your needs as the firm, the risk and strategic requirements expand.