Focusing Your Global Development
Given the stagnant state of the U.S. economy, the recent financial crisis and lower expectations for growth in domestic markets many companies are looking to international markets to ignite growth and meet future development projections.
By Ned Lyerly
Arecent survey conducted by the International Franchise Association reported that 61 percent of respondents indicated they currently operate restaurants outside the United States and 74 percent indicated they plan to start or accelerate their international development efforts. Also, two-thirds (66 percent) indicated that international expansion is important, very important or extremely important to the future of their companies.
With such high interest in accelerating international expansion, questions arise such as “How do we get started on an international expansion effort?” and “How should we focus our expansion efforts?” The decision to “go global” or accelerate international development is a critical decision for any company. Expanding in international markets is a major undertaking that requires proper preparation, diligence and planning.
To begin with, an organization must have a solid domestic foundation and must be in a solid competitive position. Its core competencies and positioning need to be clearly understood and need to remain the guiding force as the company expands into new markets.
Additionally, it’s critical that the franchise has a profitable business model, strong unit-level economics and a track record of success in its home market from both a company-operated and franchise basis. A profitable business model must be duplicated in international markets for the company and its franchisees to succeed.
Another consideration is the current state of the organization’s domestic business. Is it properly supported from a financial, human resource, marketing and development perspective? A company should never consider international expansion without first ensuring that is has channeled the appropriate support to its core, domestic business.
Some advocate that a company should not consider international expansion until it has fully optimized its domestic markets. Another viewpoint is that optimization of domestic markets can take decades and international opportunities should be taken advantage of as long as a company is effectively managing its ongoing growth in domestic markets. Starbuck’s is a great example of a company that embarked on an international expansion effort that paralleled a rapid roll-out of its concept domestically.
Once the organization is ready to evaluate international opportunities, executive management commitment is a key element in the international expansion process. A top-down corporate mandate must be articulated to align organizational resources in support of an international effort. Often, a company’s existing resources are fully or principally focused on its domestic operations and it’s important for management to send the signal that international expansion is a strategic priority for the company.
An expansion effort will not succeed or will fall short of its potential if the organization is not fully committed and properly focused on the task. Many organizations become interested in international expansion because a prospect approaches them and they are motivated by the upfront fees and potential “easy” revenue associated with selling an international master franchise or area development agreement. This is a common mistake that must be avoided.
The first step in a new or reinvigorated international expansion effort should be the creation of an international business plan, a due diligence effort and a feasibility study.
To initiate the business plan, the organization should start from the “30,000-foot level.” What would it like to achieve with its expansion effort? What is the market potential and what is the ultimate goal or success destination? Market potential and success definitions will vary from brand to brand and industry to industry; however, measuring them in international markets is not that different than measuring market potential in their home market. The drivers of an international franchise business will likely be measured in similar ways; however, cultural, demographic, macro-economic and micro-economic differences will need to be taken into consideration.
Once a destination is defined, the organization should identify the gaps and resources required to achieve the desired results. The organization needs to evaluate its internal resources. Does it have the capital, both human and financial, to support a global expansion effort? Does the organization have the right people in place to lead a successful international expansion effort? What human resources are needed? Where should they be placed? Which positions should be 100 percent dedicated to international and which functions can be supported from domestic positions? Global expansion requires focused support to be successful.
To succeed, an organization will need a dedicated international team to expand and support its international franchise operations. Establishing this team typically involves several stages.
Initially, most organizations staff an international division with key operational support personnel, franchise business consultants or a lead international executive to develop the plan and initiate international development activities. The operational support is often adequate in the very early stage of development as many franchisors augment the initial base of international operations with functional support from their domestic staff (sales, marketing, training, supply chain management, development, legal, human resources and franchise administration) and thirdparty consultants.
As international activities accelerate, additional functional support is dedicated to the international division. Human resource requirements are often driven by the pace of international expansion (unit growth) and other factors such as the cultural or geographic distant between one’s home market and one’s international operating base.
Companies often staff their international division first with a solid base of functional support in their home markets. As business expands, operational personnel are often hired or placed in foreign markets to provide day-to-day management support. As the brand grows regionally, there will be demand for establishing regional support services across a variety of functional disciplines.
Staffing is also determined by the amount of control the franchisor plans to have on its international franchise operations. In a master franchise model, much of the local support falls into the hands of the master franchisee and the corporate support staff is involved principally in brand management and system support. In a direct franchise, area development and joint venture scenarios increased levels of direct support are required from the franchisee. Once the business format is defined, it is combined with the human resource plan and will become a key driver of the financial plan for the international expansion effort.
When developing a financial plan the organization needs to evaluate its financial strengthens and its business model. Is it cash rich? What business model does it employ for franchise development? Is the organization willing to risk its own capital in foreign markets? Will it need external financing? If the franchise is just starting its international expansion effort, the company should have realistic expectations regarding the return it can expect from global development. It can take anywhere from three to five years before an international franchise program becomes profitable, if not longer. Management must understand this reality and build it into their financial projections.
The financial plan should include all costs associated with starting up and growing the international business. Key costs to consider from the outset are:
• Human resource planning
• Modification of development agreements and franchise agreements
• Preparation for proper international franchise disclosure
• Local legal representation
• Trademark registrations
• URL and domain-name registrations
• Marketing research
• Travel and entertainment expenses
• Translation expenses: legal documents, training and other materials
• Sales and marketing expenses to promote your brand
• Due diligence and background checks on foreign applicants
• Direct foreign investment, if applicable
At the outset of an international expansion plan, legal costs can be considerable as the organization prepares its legal agreements for international use and registers its trademarks and domain names in key foreign markets. The organization must be ready to make this investment. Failure to protect one’s marks and URLs can be a costly impediment to market entry if the marks have been registered by another entity in a priority market.
Marketing research is another aspect of the due diligence and feasibility process that cannot be overlooked. A franchisor must conduct market research in target countries prior to marketing its brand to learn the nuances of its brand and validate consumer acceptance. Certain concept modifications will be required and clearly understood prior to franchising. Another planning or due diligence effort is critical evaluation of the organization’s existing tools and support systems. Are they ready to support an international operation?
• Legal systems and processes
• Disclosure documents filed
• Trademarks registered
• Franchise administration
• Finance, accounting, IT and POS systems
• Logistics support
• Training systems and materials
• Marketing information and systems
• Operating systems and support processes
Of particular concern is procurement and supply chain management. If an organization is a product-driven company, then procurement and supply-chain logistics are paramount to the viability of your concept in foreign markets. Can your products be exported to the target market in a cost effective manner? What barriers to entry exist? Can quality be preserved? Can the product be produced locally? How does it compare with imported product in terms of price and quality? What are the status and capabilities of in-country distributors? Do logistical barriers exist that restrict the reach of your concept in the local market? A franchisor must answer these questions prior to executing a franchise agreement in a new market.
After a franchisor has refined its business plan and made the commitment to initiate or recommit to its international expansion effort, it’s time to develop a focused global market development strategy.
Again, the franchise needs to look internally and determine its strengths. What is its positioning? What drives its economic engine? How does it compete and how can it leverage its existing infrastructure and brand into a profitable business model in foreign markets? Is the brand a low-cost provider in its industry? Does it offer premium products and services that are not available in foreign markets? Is there a distribution system or network that can be leveraged for foreign operations? Who are the franchise’s target customers? Once those questions are answered, then developing focused global market development strategies becomes a relative straightforward exercise.
Contiguous Market Development
Often, one of the first and most logical expansion strategies that a franchisor employs is geographic expansion into contiguous markets. This strategy makes sense because it often leverages existing resources, brand awareness and distribution networks. Contiguous markets are easier to support due to the fact that time and cultural distance are limited. This is a sound and efficient expansion strategy that contributes to the growth and penetration of your franchise in a centralized geographic region. This approach will also create value for your home market as regional economies are achieved. For U.S. franchisors, Canada and Mexico are prime targets for contiguous market development.
Ease of Doing Business
Another simplistic approach to identifying markets is to target markets where the political and economic environments are structured to make it easy to conduct business. There are a variety of sources for evaluating and ranking markets. A list of Internet-based resources is available at
Singapore, New Zealand, United States, Hong Kong, China, Denmark, United Kingdom, Canada, Ireland, Australia and Iceland round out the top 10 markets for ease of doing business in 2008, according to the World Bank Group.
While the “Ease of Doing Business” ranking is a directional guide, it should be supported with other rankings including economic and political risk, transparency, economic freedom, competitiveness and general business rankings.
Market Selection Matrix
A more sophisticated approach to focusing your expansion effort is to develop a “Market Selection Matrix” or “Country Selection Model.” This method combines macro-economic data, demographics, and country risk factors, with a brand’s own critical success factors to establish rankings for priority markets.
Once a franchisor clearly understands the factors that drive its economic engine, then it is relatively easy to rank countries according to these factors.
To expand on the Market Selection Matrix further, one should consider analyzing a variety of factors across several broad categories:
• Cultural Acceptance
Under the category of demographics, what factors contribute to your franchise’s success? What age groups are the heavy users of your products? Is urbanized population important for the success of your brand? Is population growth important? Are your products and services geared toward male or female consumers? What other demographic factors contribute to the health and success of your franchise system? Understanding the demographic trends that drive your business will not only help you prioritize which countries to enter, it will also help you estimate market potential and demand for your products and services. The following are some key demographic factors to consider:
• Age distribution
• Income distribution
• Gender distribution
• Ethnicity distribution
• Total population
• Population growth rates
• Lifestyle trends
For the economic category, a business should evaluate purchasing power across markets. Purchasing power is a strong indicator of a country’s economic strength and its ability to afford your products and services. Purchasing-power parity and its growth rate are key indicators that measure countries on an equal footing. Economic factors that are important to your particular business need to be ranked as well. The following are some key economic factors to consider:
• Gross Domestic Product Per Capita
• Purchasing power parity
• GDP growth rates
• Consumer Price Index/Wholesale Price Index
• Currency valuation
Infrastructure is another key consideration for country selection. Obviously, countries with established or rapidly improving infrastructures will be more attractive locations to support franchise operations. Several infrastructure measurements that should be evaluated are:
• Import barriers
• Local/regional supply options
• Distribution issues
• Quality of telecommunications
• Quality of road system
• Probability of natural disasters
Political factors to consider are type of government, political risk, country risk, political affiliations and cross border trade with both your home country and other countries.
Cultural acceptance is a defining moment for a franchise when it enters a new market. Which countries are more open to your products and services? Which factors are most important for your brands?
• Appeal of western products and services
• Lifestyle trends
• Leisure activities
• Disposal spending in segment
• Religious/cultural norms
Financial drivers will vary widely by franchise and industry, but some consistent factors to consider across all franchise systems will be:
• Labor cost
• Real estate cost
• Cost of goods sold
• Corporate tax rates
• Withholding taxes on royalties
• Construction cost
It’s important to develop a method for determining which countries will deliver the strongest unit economics for your franchise.
Properly structured, a Market Selection Matrix will highlight key targets markets where your franchise is most likely to be successful and will allow you to focus your sales and development efforts.
While many organizations and consulting groups have developed their own market assessment models, two models that have been published by Udo Schlentrich and Hachemi Aliouche, Rosenberg International Center of Franchising, Univ. of New Hampshire are noteworthy.
These models, highlighted here, graphically illustrate inputs to market selection models and depict the decision logic involved in the market selection process.
The key to utilizing this approach is to weight and customize the particular inputs to match the success criteria of your particular franchise.
Two other expansion strategies worth noting are product or service driven strategies and an emerging market strategy.
Product or Service Driven Strategy
Product or service driven strategies focus on prioritizing markets where an organization’s product or service are non-existent, underrepresented or well-represented but market demand is high and not being met. These strategies require thorough market analysis of a franchisor’s particular industry, the competitive landscape in foreign markets and a thorough understanding of local consumers in the target market.
Emerging Market Driven Strategy
An emerging market strategy focuses on markets where economic and political factors are accelerating and improving at a rapid pace. Entering these markets would be somewhat risky, but the rewards could be substantial as the franchise may face limited competition and would have the opportunity to be first or early to market, which typically yields competitive advantages. Over the next four decades, China, India, Brazil, Mexico, Russia and Indonesia will all grow to be top 10 markets and are worthy of consideration.
A franchise should evaluate all of these strategies for market selection and employ them individually or in combination. The key is to intimately understand one’s brand and “focus” on the key elements and financial drivers that yield success in foreign markets.
Is it the right time to take your franchise internationally and in which countries do you focus your efforts? Ultimately, each franchisor will have to answer these questions for themselves. However, there’s no time like the present if you have a solid domestic base, a strong business plan and a focused country selection process
Ned Lyerly is senior vice president of global franchise development for CKE Restaurants, Inc. He can be reached at 314-259-6413 or