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June 04, 2015 Article 4 min read

The U.S. economy is recovering slowly but steadily, and there is good news domestically — low energy prices for one — making the U.S. extremely competitive. Yet times still aren’t great for a number of middle-market manufacturing and distribution companies. If you look at other parts of the world — China, India, and many other emerging markets — growth rates, demand and wealth creation, especially among the middle class, are much stronger.

That should be a wake-up call for American companies focused solely on the domestic market. What we’re seeing in the M&A space only underscores that warning. Higher values are being put on companies with international operations.

We see increased enterprise value in firms operating in multiple countries vs. those with a solely domestic footprint. To state it frankly, I’m concerned for companies where most of the wealth is tied up in the U.S. market because that wealth over time could erode.

With a brighter outlook at home in the near term, now is a good time to develop — or revise, as our world of constant change demands — your company’s international strategy. That old saw about making hay while the sun shines? It’s true, and companies would be wise to consider diversifying risk and taking advantage of opportunities to get more active in foreign markets.

Globalization isn’t going away, and it affects all businesses — even, perhaps especially, those with a domestic focus. If anything, business leaders today are under pressure to develop ever more sophisticated, nuanced international strategies. Unfortunately, there are too many companies that don’t have any international strategy at all.

The most common concerns we hear from middle-market manufacturing firms about expanding internationally surround complexity, risk, and cost. Those are valid concerns. We’ve seen companies rush into new (to them) and emerging markets, and it didn’t go well. One didn’t consider the impact of currency movement on their costs; they lost money on every product they sold and had to shutter the operation. Others skipped due diligence, trusting people they shouldn’t have until their customers were stolen and their plants duplicated.

That’s why you don’t rush. That’s why you focus on a continuous loop of diligence, process and control in developing your international strategy, just as you do in your manufacturing. That’s why you choose your strategies wisely. A reactive approach, when customers — or competitors — are forcing your hand, is much more fraught than learning your customers’ needs and proactively working to meet them.

All businesses today should be, at the very least, internationally aware, if not necessarily internationally active. Your strategy might be as simple as monitoring various markets. It’s not a question of active or inactive; it’s not that black or white. An overwhelming majority of businesses need to be in that gray space between monitoring customers, competitors, and suppliers in more than just the domestic market.

At a minimum, companies should be able to identify:

  • Your market share in key global markets
  • Your major competitors in those key markets
  • Supply chain impact; what vendors exist in those markets, and what relationships they have in place with your competitors
  • A competitive price in each of those markets
  • Environmental factors that could significantly impact your business, such as the pricing of commodities, raw materials, energy, and currency

If you can’t, you might be, consciously or unconsciously, taking a bury-your-head-in-the-sand approach, one that may result in the unfortunate discovery that your competition is undercutting you on price or delivering more value at a similar price, and you’ve lost market share. As your customers expand their international operations, they’re looking for global suppliers and distributors. In many cases, it’s not enough to set up shop closer to a border; customers want their suppliers in-country (or perhaps in-region).

The positive flip side is this: We’ve seen clients whose competitors were too slow investing in particular markets where their customers needed product created. As a result of entering those foreign markets, the clients have grown their businesses tremendously and gotten hundreds of millions of dollars in new business.

Which brings us back to that yin-yang balance between opportunity and risk. When developing your international strategy, it’s important to balance the evolution of international activity with the degree of complexity, investment, and uncertainty your company is willing and able to handle.

Potential strategic approaches run the gamut: On the lower-risk, lower-complexity end of the spectrum, consider sourcing, exporting, contract manufacturing, and licensing arrangements. Mid-spectrum, consider contractual, equity, or profit-sharing joint ventures with local or regional strategic partners. On the highest-risk, most-complex (and most capital-intensive) end, consider greenfielding and acquisitions.

In other words, you can dip your toe into international waters rather than dive headfirst. Particularly in Europe right now, where there is excess capacity, you might be able to contract or buy someone else’s excess before investing heavily to build your own.

Is developing a strategy that reaches beyond your original borders a tall order? Indeed. But it’s a necessary process. A deliberate, well planned — and, of course, well executed and nimble — strategy may require less of a financial investment than you assume. In any case, the journey calls for serious company soul-searching since your international strategy, in whatever form it ultimately may take, helps position your business for sustainable future growth.