Growth strategies start out with a focus on the core business and the home market, but most executives at some point want to look beyond the home base. What, then, does it take to succeed at international expansion? It was one of the questions we explored in our recent research on the pathways to value-creating growth, which involved analyzing the regional growth patterns of thousands of companies. Of the ten rules of growth this work generated, Rule #8 is: go global if you can beat local.
First, we found a good reason to have global ambitions. Half of all corporate growth in the decade up to 2019 came from foreign markets. There are regional nuances, though. Eastern Asian and European companies relied on international markets primarily to compensate for slow growth at home while faster-growing regions such as Latin America and North America gained less benefit from international operations (exhibit).
Wherever you’re based, however, venturing abroad makes sense only if you first excel at home. In that context, “beating local” has two meanings. First, it implies having an exportable competitive advantage that also enables you to be a market leader. The second meaning of “beating local” is that you need to be able to win profitable market share from local competitors in your destination region. Without a transferable source of advantage, your company will simply be competing head on with local players that are more established and have a better understanding of the local context.
We found that overall, companies expanding internationally generated higher TSR than their industry peers, but those with healthy growth in their home markets—a prerequisite for an exportable advantage—benefited twice as much. The latter category generated an additional 2.6 percentage points of annual excess TSR, while those that struggled locally gained only 1.3 percentage points—not enough to offset the performance drag from the weak home market.
Once you’re confident that you have an exportable advantage, how do you orchestrate the international expansion? Companies that pursue growth abroad tend to fall into one or more of the following four archetypes:
Business model pioneers: These companies have developed a distinctive business formula and aim to scale it internationally by applying it in other markets.
Global commodities players: Competitively positioned on the cost curve, these companies are looking to secure more raw materials. By applying their operational efficiency to operations in new regions, they aim to win higher global market share.
Product innovators: Businesses with cutting-edge products can sell them (sometimes with local customizations) to international markets. This approach is prevalent among software-based businesses that leverage their scalable technology to target a global customer base. To succeed, these companies need to constantly reinvest in innovation to maintain a product advantage.
Brand builders: Companies in this category are typically consumer goods and apparel businesses whose brands resonate globally. They often tap into segments of emerging markets that are both increasingly brand conscious and able to afford higher-end goods.
Many companies gain a foothold in their target market by acquiring a local player. In this case they need an M&A strategy that defines how acquisitions would help them execute the growth plan, along with clear search and assessment criteria, and boundary conditions around size, sector, and geography. Whether you expand organically or inorganically, you should map out how your transferable advantage will enable you to create value. This may require adapting your product or service offering to local preferences and understanding how incumbents are likely to respond. Companies also need to ensure that the new operation combines talent knowledgeable about the local market with leaders central to the company’s success at home.
Consider the experience of a Middle Eastern real estate and retail conglomerate that expanded into 17 Middle Eastern and North African countries over a decade. Despite regional similarities, the company took the time to learn about each country to understand key nuances such as the competitive landscape and customer preferences. It also paired personnel with local market knowledge with staff from the parent company who were experts in key functions such as finance. This advance work allowed the organization to allocate resources and establish footholds in the new markets faster.
Finally, companies need to thoroughly understand country-level risks and challenges. These can range from inflation and currency fluctuations to political instability. While international growth holds a lot of potential, it is vital to anchor those growth plans in the right mindsets and capabilities, supported by a clear and transferable advantage. This is easier said than done; our experience suggests that one of the most difficult steps in the strategy process is building an objective perspective of whether you have a true source of distinctiveness. If, after reflection, you decide to move ahead, know that success rests on developing a deep understanding of the target market, tailoring products and services to meet local needs, and ensuring that you have the right capabilities in the right place to execute and manage your international growth strategy.