As China’s domestic business ecosystem changes, smart Chinese companies are changing their business strategies to respond to new realities. The smart companies are not just doing “business as usual”, but have started exploring overseas markets for partnering and investment opportunities.
Seeking opportunities in foreign countries with different languages, market dynamics and business cultures can be a daunting prospect. Many management teams understand that it is critical to deliver future growth to ensure not only the survival of the company but also acquire new technologies, resources, profits and access to previously untapped market.
Staying at home is no longer the best option. In the words of Gordon Livingston, a famous behavioral psychologist, “There is nothing more pointless, or common, than doing the same things and expecting different results.”
Once the decision to invest overseas has been made, careful planning and swift execution are critical for success. While many experienced China executives and managers understand this in the context of their domestic market, they sometimes find themselves at a loss when planning for a project in a foreign market.
The following is a brief summary of the practical steps necessary to develop a successful overseas investment strategy. It outlines the areas where every Chinese company needs to focus plan and execute an overseas investment strategy. As Lao Tzu said in the Tao in the sixth century B.C., “a journey of a thousand miles starts with a single step”. The first step in the journey of outbound investment is to develop a strategic plan in order to map out the compass heading, destination, and the early steps of the journey. This plan will, in turn, make the rest of the journey less treacherous.
In our experience, the outbound investment strategic planning process benefits from the company and its team of external advisors following these stages:
Requirements and Goals Definition
The most important part of a strategic plan is to clearly articulate what the company hopes to achieve at the end of the execution of the plan. The more clearly a company can define the destination, the easier for all parties involved to unite and work towards a common goal. Vague statements about profitability and empty statements about a better tomorrow are not actionable and provide little sense of direction. The company must define what success means, what it looks like, and which milestones are critical to achieve success. Only then there is a common destination, and the company and its advisors can try to identify the different routes to the destination and weigh the pros/cons of each option. While these goals can be determined by top management, it is advisable to consider input from different operational levels of the organization.
There is nothing more pointless, or common than doing the same things and expecting different results.
– Gordon Livingston
As Sun Tzu once said: “if you know the enemy and know yourself, you need not fear the result of a hundred battles”. This stage of the planning process forces a company to take a very objective and hard look at itself. This involves clearly articulating its mission, vision, strengths and weaknesses, competitive advantages, and threats and opportunities created by external environmental factors. The company can benefit greatly from the perspective provided by an external team of outbound direct investment (ODI) advisors since organizations and individuals are not naturally adept at self-assessment. At the end of the stage, the company would be in a better position to find ways to reinforce its strengths and use them to offset its weaknesses, therefore increasing the chances of success.
Identify, Compare and Select Target Markets
Europe, the US, Africa, and Latin America, like China, are a collection of very diverse regional markets, rather than one monolithic market with uniform characteristics. This stage focuses on applying modern management tools to select the market that is most likely to provide the resources and outcomes the company seeks. It is not time efficient or cost-effective to search for targets in every country or region. Success is more likely if the company focuses target search efforts on a limited number of priority countries. Targeting “the world”, “Europe” or “Africa” is too broad. ODI advisors can help with this process.
Determine Mode of Entry
There are many ways to access priority markets. Local or regional approaches differ from place to place. While this might change along the way, it is important for management to have a clear idea at the outset whether it is preferred to enter the market with a joint venture, a partial or complete acquisition, or by building a distribution network. The well-defined goal helps determine the structural options available.
Develop the Company’s Investor Profile
In all modes of market entry selected in the previous stage, the company will have to look for key partners in the selected market, whether it is acquisition targets, master distributors, suppliers, or joint R&D partners. In order to (a) build a network/business ecosystem composed of the right cooperators/partners, and (b) increase the chances of successfully negotiating and growing such an ecosystem or partnership, it is very important that the company produces in advance a compelling and professional self-introduction that clearly states the company’s capabilities, assets, and talents that make it attractive to local ecosystem cooperators.
Ideal Target Partner Profile
In entering a new market, whether as an investor or trader, a company will need assistance to identify either acquisition/joint venture partners, or a variety of different suppliers of goods and services. The company may work with agents, distributors, contractual or equity cooperators. Each type of relationship requires a clear definition and thought the process to define what is needed and how to find it. Finding those cooperators to build an ecosystem takes time and expertise. ODI advisors can support this as well. Depending on what is needed, the way to find and acquire access to these skill sets varies.
Investment Target Identification and Selection:
In this stage, the company works with its team of ODI advisors to evaluate the possible targets and develops a strategy on how to engage in negotiations or approaches whether openly or via professional ODI advisors.
Investment Terms Negotiation and Documentation
In this stage, the company works with its ODI advisors to negotiate a mutually beneficial arrangement, and all related contracts are drafted and executed. The approach should not start with contracts, but rather by working with ODI advisors to define the advantages and disadvantages of the proposed partnership. The compelling business case needs to be developed and articulated so all parties can see the benefits to all involved. Seasoned ODI advisors can act to support.
Post Investment Integration and Operations
Many cooperative efforts fail due to poor planning and poor integration. The company that succeeds in closing a deal is not necessarily “successful” since the signing of the contracts is the beginning rather than the end. Advisors can help management to develop ongoing plans to manage and monitor operations in the new market. During the 1970’s Japanese companies invested globally. Many of those investments failed because integration was ignored.