Five golden rules for successful international expansion

Despite representing only 0.5 per cent of all firms in the UK, medium-sized businesses, with a turnover of between £25 million and £250 million as defined by UK Trade & Investment, account for 20 per cent of employment and 25 per cent of turnover in the UK.

Furthermore, estimates from the Confederation of British Industry suggest this contribution is due to grow and could be worth up to £50 billion to the UK economy by 2020.

A large part of this growth will be driven by accessing international markets, but there are a range of challenges associated with new market entry.

Rule 1: Start with a clear and deliberate strategy

New markets can represent a significant opportunity for mid-market businesses, but it is important to be considered in your approach. For example, emerging markets, while attractive from a growth perspective, can be highly complex from a regulatory and employment perspective, and necessitate relevant management expertise which is often not present in mid-sized businesses.

A detailed SWOT – strengths, weaknesses, opportunities and threats – analysis of potential new markets will identify which regions should be targeted, while also clearly pinpointing the relevant skillsets required.

3i invested in Trescal in 2010 when it was the leading European specialist provider of calibration services. The management team wanted to expand its footprint outside Europe and we worked with them to identify which markets they should target.

Detailed analysis showed it made more sense for Trescal to work with its existing global clients and enter these markets where there was the greatest client-pull for its services. This led Trescal to enter the US market with the acquisition of Dynamic Technology in 2011 and only then look at emerging markets, with an organic entry strategy into Brazil.


Rule 2: Sell products or services tailored to the local market

A killer product in your domestic market may not necessarily translate well into a new market. Each country has its idiosyncrasies; commercial and cultural variances between regions are often more difficult to grasp than the obvious legal or regulatory differences, but they are equally important.

This is particularly key for consumer-facing businesses where it is imperative to adapt your products or services to the new market’s consumer habits. The changes could be aesthetic, such as the branding or packaging to match the market’s preferences, or it could require more fundamental changes to your product.

When luxury lingerie retailer Agent Provocateur entered China, it had to ensure its products were tested and labelled as per local regulations. It also had to adapt its presentation and visual merchandising strategy to keep in line with more conservative local tastes. This is where having an investor with an existing local network and deep market knowledge can be invaluable.

Rule 3: Choose the right structure

Having defined your target countries and relevant products or services, the next step is to choose which legal structure is most appropriate. Is it best to access a new market directly by placing a new sales team in the region? Or would it be more appropriate to test the market through a third-party distributor or are you confident enough in the market’s appeal to access it through a bolt-on acquisition?

On-the-ground experience is key and so it is worth comparing notes with businesses that already have a presence in your target region to find out what worked for them and what to avoid.

Rather than focusing on one roll-out method to expand Mayborn’s tommee tippee brand internationally, we used our experience to see which approach would work in each target region. Mayborn has subsequently entered new markets through a balance of direct retailer and third-party distributor models across its core geographies. The company has been transformed from a UK-centric business to a truly global company with more than 60 per cent of sales coming from outside the UK.

Rule 4: Allocate the requisite financial and human resources

Internationalisation is not a shortcut to growth; expanding with a clear and deliberate strategy takes time and can incur costs which should be viewed as an investment in the business for medium to long-term growth. These costs and the management time required for success are often underestimated and, therefore, shareholder support is critical if the company is to realise its full potential.

Private equity is well suited to help in this regard. In December 2010, 3i invested in Element Materials Technology, an international materials testing business which was previously a non-core division of Stork, a Dutch engineering conglomerate. Since our investment, we have used our testing and inspection experience to work closely with the management team to identify and complete nine bolt-on acquisitions in Europe and the United States.

As part of this expansion, Element redesigned its organisational structure moving from a geographic to a sector model. In addition, to help integrate these acquisitions, the management team has gone through an extensive process to standardise their operational and commercial practices, putting in place a clear integration plan for all new acquisitions.

Rule 5: Choose a good financial partner

Given the time and investment needed for international expansion, mid-sized businesses succeed when they are supported by a financial partner that not only has the capital required, but also the experience and network of people in international markets.

This is what 3i can offer. We have teams in nine countries across three continents and a portfolio of companies which are present in more than 80 countries. We have significant international experience and, as a result, have the expertise and network to help our portfolio companies manage the risks and succeed in accessing new international markets.