Ten years ago, Clayton Gush came to a serious realization. Cetacea Corp., his newly formed scuba diving accessories company in Foster City, California, lacked the necessary market share in the United States to keep the business afloat. Determined to persevere, the then-22-year-old entrepreneur resolved to dive into foreign waters with the help of partner Jim Youngblood. After revamping the preliminary business plan Gush had drafted in college, the partners turned the company into an export business. A smart move: Today, Cetacea brings in just under $2 million selling to diving enthusiasts worldwide.
Cetacea's tale of survival parallels that of many of today's small businesses. More than ever, entrepreneurs nationwide are witnessing the globalization of the business landscape--and are taking part in the revolution. "As we move into the 21st century, business will become more internationalized," says Michael Zey, professor of management at Montclair State University in Upper Montclair, New Jersey. "Your source of labor will be international; your source of financial support will be international; your market will be international. Most companies now realize they cannot live by the domestic market alone."
According to the International Trade Administration, each year international trade accounts for more than $800 billion in economic activity. And by 2000, experts predict that amount will exceed a staggering $1 trillion. "For better or worse, there's a tremendous interdependence of the world's economies," Zey says. "You really can't ignore that internationalism; it plays a positive role in development. Yours will be a bigger and better company if you go international."
Experts agree that shifting the focus from domestic markets to foreign ones is a complex process for businesses, one that takes serious time and effort. But the changing marketplace demands that business owners at least consider the possibility--if they don't want to be left behind. As the saying goes, it's not in the still calm of life that great challenges are formed.
In Good Time
A business's growth at home often triggers the move to expand overseas: Either the business has already established a strong domestic presence, or the market has become so saturated that the only practical prospect for growth exists on other continents. It's a situation that catches some entrepreneurs off-guard. "In many industries, we've found margins are being squeezed and growth rates are declining," says John Minor, vice president of insurance brokerage and political risk consulting firm Aon Trade Credit Inc. in Chicago. "The real opportunity for growth is in new markets overseas. It's not so much `I'm ready to go international'; it's more `I have to look somewhere for more profits.' "
Of course, that's not always the case. Sometimes a move toward globalization can be timed perfectly by evaluating key indicators. According to Joseph Monti, a partner at management consulting firm Grant Thornton LLP in Los Angeles, identifying the primary characteristic that distinguishes your product or service from the competition is the smart entrepreneur's first move. "Is it a brand name?" Monti asks. "Does it establish critical mass? Does it provide access to distribution channels? Is it proprietary technology?" Unless you know the answer, you're clearly not ready to take on any market outside the United States, he maintains.
Comer J. Cottrell's ethnic hair-care products company, Pro-Line Corp. in Dallas, is a good example. When he started the business in Los Angeles in 1970, Cottrell relied solely on domestic sales. But before long, he realized his own competitive advantage--specially formulated shampoos, conditioners, relaxers and other styling aids bearing a `Made in the U.S.A.' seal--could likely tap into a huge segment of the worldwide market. Using the connections he made during his stint in the military, Cottrell initiated Pro-Line's global expansion by getting his products on the shelves of military exchanges in 1970.
"He realized that [African-American] servicemen and servicewomen did not have products to choose from that were specifically formulated for their hair-care needs," says Paul Owsley, Pro-Line's director of international sales. "[Military] stores were stocking general market products, which store managers assumed had crossover appeal. But they didn't, because they weren't adequately formulated." After the products became available in military exchanges, sales skyrocketed; the products eventually made their way into the civilian market--ultimately securing Pro-Line's global position. Today, the $50 million company exports to 40 countries.
Another wise move in timing your global strategy is to find the right partner. Signing a contract with a company you know little about could mean early failure for your international venture. And for many small businesses, rebuilding after an acute financial loss can be difficult, if not impossible.
"[The right partner] is one who doesn't dilute your reason for going international," Monti says. The strength of the relationship often leads back to your business' specialty. A good partner will not compromise or diminish your company's distinct competitive advantage. It may take some time to find the right partner, but don't make a hasty decision: You'll regret rushing into a situation that isn't right from the start.
Allied Forces?
Carol Frank can attest to the dangers posed by foreign partnerships. The designer and distributor of bird cages has made mistakes along the way, like disclosing the addresses of her customers to one partner, who eventually tried to take their business away from her. But sometimes no amount of research or preparation can prevent your worst nightmare from materializing.
Since 1996, when Frank launched Dallas-based Avian Adventures, three partners in Mexico have proved untrustworthy. To summarize her string of bad luck: Partner No. 1 lied about owning a well-established family business and manufactured two truckloads of inferior cages before she let him go. Partner No. 2, an associate of the first, also manufactured mediocre products. Partner No. 3, whom she thoroughly researched and trusted the most, refused to sign a long-term contract and later copied her cage designs and began manufacturing replicas for her top competitor. The whole scenario cost Frank two vital commodities--time and money.
Undaunted, she's just forged a new relationship with Partner No. 4--also in Mexico--and they've created a cage design they think is superior to the one stolen from her. "There's a big part of me that just never [bows to failure]," she says. "I've got a real sense of survival."
That's often what it takes to succeed in unfamiliar or distant markets--in addition to certain preventive measures. For instance, there's no substitute for meeting potential partners in person or for checking their bank and customer references. And until you trust the potential partner's company completely, a letter of credit provides secure transactions. Federal agencies offer links to reputable businesses or at least let you know the reputations of the ones you intend to partner with. It's also important to have an attorney draw up rock-solid contracts, have at least one backup supplier, and, above all, trust your instincts.
Make No Mistake
In the words of Confucius, the cautious seldom err. This adage holds especially true for small business.
As Gush expanded Cetacea, he eventually understood the benefits of having a set pricing structure and ultimately put one in place. As Cottrell exported hair-care products to more countries, he altered the packaging and instruction sheets to fit the needs and preferences of various cultures. And as Frank experienced failed partnerships, she learned the hard way about the importance of research. But despite these stumbling blocks, all three entrepreneurs went on to build profitable international businesses.
Learn from those who have gone before you when you take your business into foreign lands. And keep these points in mind:
- Don't rush in. "Impatience causes [entrepreneurs] to do some stupid things that can jeopardize key relationships," says Monti. It takes time to establish your company in an international market and form lasting business relationships. Although Americans prefer efficiency, much of the rest of the world moves at a slower pace. It all comes down to understanding cultural idiosyncrasies and realizing they play a vital role in all international relationships.
- Don't consider your business a domestic one in an international market. Instead, develop a real commitment to your company's international clients and partners, and localize your efforts.
- Don't entrust the management of an international operation solely to U.S. expatriates. "In my opinion, it's not the best strategy," says Monti. "While they understand the company and the product, they don't understand the local practices and culture and don't have the relationships. The best strategy is to have a local general manager with a support staff that could be seeded with U.S. expatriates."
- Look into using local suppliers. Continuing to rely on your U.S. supply chain instead of a local one could be a major setback. "You really miss out on the opportunity to take advantage of being local," Monti says. "And when you extend that supply chain across a border, not only do you increase the cost of maintaining it, but you also increase the cost of managing it."
- Loosen up. Being too inflexible or conservative can also hurt your business, especially when it comes to credit terms. "In many cases, an importer will be approached by many exporters, and they'll not only compare the quality of products but also payment terms," Miner explains. "The trend nowadays is toward open account payment terms." Unfortunately, that tendency undermines the safety ensured by a letter of credit. But with competitors in Europe and elsewhere offering lenient options, you really don't have a choice--that is, assuming you've researched the company enough to decide that its reputation and net worth are acceptable. "It's a reality--you have to do it," Miner continues. "If you're going to penetrate a market, you have to be competitive."
The Developing World
It's no secret certain markets hold special promise for U.S. small businesses. Although in the past Europe and Japan topped the list of traditional trading partners, experts now expect these areas to experience little growth in the near future. Instead, the key players for the next several years include Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey. Dubbed Big Emerging Markets (BEMs) by the U.S. Department of Commerce, these nations comprise nearly half the world's population and are expected to double their share of world imports by 2010.
Not surprisingly, Asia's recent financial crisis might affect such predictions, especially since the market accounts for more than one-third of all U.S. exports.
But no one knows what the long-term ramifications will be, and as everyone waits for renewed growth in this area, an optimistic economic world hopes for the best. Based on the turmoil in Asia, entrepreneurs must carefully weigh both the risks and rewards of doing business there. Big opportunities mean big risks--but can also translate to big rewards. A well-thought-out plan will help you prepare for the ups and downs you'll face in the market. (For more information on the Asian economic crisis, see "Pulse," April.)
The Asian situation aside, these 10 BEMs share a number of distinct features that account for their role as leading markets for U.S. products, services and investments, including geographically large markets, huge populations and ongoing economic reforms. By 2000, these countries are expected to be a larger import market than the European Union (EU), and by 2010, BEM imports should surpass those of the EU and Japan combined.
According to Susanne Lotarski, the U.S. Commerce Department's Eastern Europe and new independent states director, U.S. companies are among the leading investors in Poland and surrounding areas. "The region as a whole is growing very rapidly, at a rate of 4 percent [annually], fueled by the entrepreneurial firms that have sprung up in the past five years or so," she says. In addition, the region's imports tripled in that period and, in 1997 alone, grew about 27 percent. "These will be fast-growing markets for U.S. companies and entrepreneurs."
As we near the 21st century, the changing tides of global trade will increasingly lure those with innovative minds and pioneering spirits across borders in pursuit of unknown--yet promising--rewards. Only through strategic steps, from evaluating the best time to go international to meticulously researching potential partners, will small businesses lower their risks and heighten their likelihood of success. And as globalization of the business landscape continues unimpeded, shifting the focus from domestic to international markets remains the natural next step. It won't be easy, but it won't be impossible.
Resource Centers
- U.S. Department of Commerce, Trade Information Center. Access loads of free information, including government export services, market research reports, counseling services for specific countries, answers to FAQs, referrals to helpful sources and more. Call (800) USA-TRADE or visit http://www.ita.doc.gov/tic
- National Trade Databank. Use it as a CD-ROM at your local library for free, or order a monthly Internet subscription. This comprehensive resource contains country reports, trade statistics and more. Call (800) STAT-USA or visit http://www.stat-usa.gov
- World Trade Centers Association Inc. (WTCA). With more than 300 regional offices located in virtually every major trading city in the world, the WTCA links business and government agencies involved in global trade. Services include trade information, trade education programs, exhibit and display facilities, and trade mission assistance. Call (212) 432-2626 or visit http://www.wtca.org
Contact Sources
Aon Trade Credit Inc., (312) 845-1409, fax: (312) 701-4143
Avian Adventures Inc., (214) 631-2473, carolf@airmail.net
Cetacea Corp., 1140 Chess Dr., Foster City, CA 94404, (650) 571-9411
Grant Thornton LLP, (213) 688-1701, jmonti@gtllp.com
Pro-Line Corp., (800) 527-5879, fax: (214) 920-2696
U.S. Department of Commerce, (202) 482-1104, http://www.mac.doc.gov
Michael Zey, (973) 538-8192, mik3399087@aol.com
This story appears in the May 1998 issue of Entrepreneur. Subscribe »
