International expansion: a company must make itself understood

In this Italian-language video, shot at Battery Park, I say that my work is to make a company “ready, solid, consistent and understandable” for the markets it wants to enter. Here I explain why the last word is the most important, drawing on Pankaj Ghemawat’s study of the distances between countries, and what being understandable requires, in practice, of an Italian company looking to the United States.

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Video transcript (translated from Italian)

Every now and then I take some time to look at things from another perspective. Right now I am in New York, a city I visit often, several times a year. I am here because this city represents the international side of my work.

I am not here as a tourist. I am here to study, to observe how companies prepare for the future, how companies build and weave international relationships, how companies modernize to face their markets.

My name is Andrea Barchiesi and I am a business strategist. My role is to help companies take on their own market. Or open new markets. So it is not only about marketing and communications. It is about making the company ready, solid, consistent and understandable.

This means working on the structure, on the decision-making processes, on the overall vision. Starting from what is certain, that is, from an in-depth analysis of the data.

Because strategy is not a document but a way of thinking. And in a place like New York, where everything is the result of a precise choice, strategy becomes visible: in brands, in stores, in products, even in the streets.

Understandable is the word that matters most

Battery Park lies at the southern tip of Manhattan, facing the Statue of Liberty and Ellis Island, where for decades the immigrants arriving in the United States passed through. Those who landed there had to make themselves understood by a country that did not know them: with a language, with papers, with a trade to explain. For an Italian company entering the United States, the test is not so different. In the video, of the words I use to describe a company that is ready, the last is “understandable.”

A company that is ready to go abroad is a company that makes itself understood by people who do not know it.

International expansion is usually described as a sales problem: finding customers, a distributor, the right trade fair. These steps are necessary, and they come later. An American partner, an investor or a large customer decides whether to trust a company by reading it: the financials, who decides, what the product promises, who answers when something goes wrong. If they cannot read it, even the best product gets no further.

Between two countries there are four distances, and geography is the easiest to see

In September 2001 the strategy scholar Pankaj Ghemawat published an article in the Harvard Business Review with a title that was already a thesis: Distance Still Matters. At the time it was taken for granted that globalization had shortened every distance. Ghemawat observed instead that companies routinely overestimate how attractive it is to enter a foreign country, because they look at its size and overlook the costs that distance brings with it.

In his framework distance takes four forms. There is cultural distance, made up of language, customs and social norms; administrative or political distance, that is, laws, institutions, agreements between countries; geographic distance, made up of miles and time zones; and economic distance, which separates countries with different incomes and costs. For an Italian company looking to the United States, economic distance weighs less than the others, because both are wealthy countries. The other three carry weight, and geographic distance is the only one you can see on a map.

The example Ghemawat discusses at greatest length is Star TV, the satellite television service launched in Asia in 1991, which seemed bound to succeed. News Corporation bought out its founders for $825 million between 1993 and 1995, and lost about half a billion dollars between 1996 and 1999. For Ghemawat, one of the most serious mistakes was ignoring the cultural distance between audiences in different countries; the other was underestimating administrative and political distance, in countries where governments kept a close watch on television.

Pankaj Ghemawat showed that between two countries there are four distances (cultural, administrative, geographic and economic) and that companies tend to underestimate them when they choose a market.

Ten years later, in World 3.0 (2011), Ghemawat measured how much less integrated the world is than people believe. In a 2012 interview with the Wharton School he cited two figures: about 2 percent of telephone call minutes cross a border, and foreign direct investment is about a tenth of total investment. Most economic life stays within national borders, and anyone who crosses them enters a system with its own rules.

Making yourself understood is work that begins in Italy

That is why my work with the companies I take to the United States begins before the trip. On my international expansion page I list the eight areas of preparation. They range from the business plan for the U.S. market to financial statements readable by people who use U.S. accounting standards, from governance to the product and its rules, all the way to the documents a partner asks to see before deciding. Read with Ghemawat in mind, they are the way to shorten the distances that do not appear on a map.

Administrative distance is made up of very concrete things: a food company has to comply with FDA labeling rules, and a U.S. company has to be set up under American tax rules. Other things are not part of Ghemawat’s framework and matter just as much: a family business has to explain who decides and what will happen when the business passes to the next generation, and the financial statements have to show, in a few indicators, what an American analyst looks for. None of these things can be fixed on arrival. Cultural distance is subtler, because it concerns the way you present yourself, negotiate and respond when something goes wrong, and it shrinks above all through meeting people. I describe how the work is done on site in my answer to the question What do you do in the United States?

Data is the starting point, not the whole of the preparation

In the video I say that the work starts from what is certain, that is, from an in-depth analysis of the data. It is the right starting point: market size, prices, margins, the cost of shipping and of duties can all be known, and knowing them dispels many illusions. The tools for reading them, from business intelligence to financial projections, serve this purpose, and a business plan without them does not survive the first question.

Data is the starting point, what can be known for certain; the decisive part of the preparation is what the data does not say: how the company decides, who runs it, what culture it has.

It is also the part on which an American partner forms an opinion most quickly, because they see it in meetings even before they see it in documents. That is why, when I assess an Italian project for people who invest from the United States, I look at the structure and then at how it will hold up over time. This is what documents show least: who decides and how, the people, the company’s principles. A business strategy can be solid in Italy and remain unreadable in New York, until someone has translated it into the conventions of the people who have to assess it.

A flight shortens geographic distance. The others are shortened by the work done before leaving.

What to do and what not to do

• Before choosing a country, measure the four distances, not only the size of the market.
• Make the financial statements readable by people who use other accounting standards, and write down who decides what.
• While still in Italy, prepare the documents a partner will ask to see before deciding.
• Do not rely on a trade fair or a distributor alone to enter a country.
• Do not mistake the interest shown at a first meeting for a decision.

Sources

• Pankaj Ghemawat, “Distance Still Matters: The Hard Reality of Global Expansion,” Harvard Business Review, 79 (8), September 2001, pp. 137–147. https://hbr.org/2001/09/distance-still-matters-the-hard-reality-of-global-expansion
• Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Harvard Business Review Press, 2011.
• “Not That Flat: Pankaj Ghemawat Challenges Globalization’s Adherents,” Knowledge at Wharton, Wharton School, 2012. https://knowledge.wharton.upenn.edu/article/not-that-flat-pankaj-ghemawat-challenges-globalizations-adherents/