Global expansion isn't required but horizontal growth is

2022-09-23 original Startups

Being global isn’t necessarily important, but securing the possibility of horizontal expansion is very important. Growing a business properly on a single, one-off basis is generally difficult no matter what you do.

Let me clarify one point so there’s no misunderstanding: even a service that looks, from the outside, like a completely single, standalone offering is, internally, growing through changes such as expanding its business segments or incorporating and merging with other services. A product with many bottlenecks that would obstruct this kind of growth strategy will struggle to grow in the mid-to-long term, so those seeds should be pulled as early as possible, at the planning stage.

That said, I don’t think everything needs to expand globally. Global expansion fails to go as well as expected far more often than people think. There are several reasons, but they all come down to “resource problems stemming from cultural differences.”

Cultural differences are not something to underestimate when expanding overseas. Customers’ daily lives differ, and so do business customs.

Take my time developing high-end audio equipment: the structure of houses differs greatly from country to country. We were planning and developing products with the US as our main target market, assuming houses with fairly large living rooms. Would that actually apply to Southeast Asia?

We also had a problem that kept occurring only in Russia, and when we investigated it, we concluded that the equipment was being installed in locations that were extremely cold or extremely hot, one or the other, at an extreme. Can you imagine what was going on? Audio equipment is generally placed near the edge of a room. The area by the window in Russia must be quite cold. And where are heating appliances placed? Next to the fireplace, by the window, or sometimes both at once. It was that kind of chaotic environment.

When you run into use cases like that, you need to fundamentally rethink your approach to quality assurance. Identifying and absorbing these cultural differences properly generally falls to local expatriate staff. Local staff could potentially do this too, but they often don’t understand Japanese “culture,” so in most cases an expatriate is the effective choice.

What does it cost to send out an expatriate? If you calculate it as roughly $230,000 a year to post one person, that seems to roughly match the reality at many companies. That’s a pretty large amount. Especially at an early-stage startup, you rarely find staff hired at an annual salary of $230,000.

But sending out expatriates, executing global expansion properly, means being prepared for exactly that kind of expense. Many companies skimp on this and fail as a result. It’s a well-known story that when Mercari expanded into the US, all of its board members relocated there. I think they understood that without that level of commitment, succeeding in an overseas market is difficult.

That said, I do think some types of businesses lend themselves easily to global expansion. Here are the conditions:

Non-verbal in nature
No regulatory constraints (or a globally common standard)
Closely tied to daily life (used the same way, in the same context, everywhere)

These conditions boil down to one thing: the intermediate cost, the effort of organizing needs, explaining the product’s value, and rolling it out, needs to be extremely low. Products that are simple in structure and use tend to fit these conditions fairly often, I think.

The content of this post is an excerpt (original text) from the following book. If you’re interested, please pick up a copy.

The Shape of a Happy IoT Startup

Originally published in Japanese at https://clazytech.com/2022/09/1206/. Translated with LLM assistance and reviewed before publication.