When companies thrive in their home base, temptation can be great to expand to new locations, either across town or around the world. The problem: Many companies think of geographic strategy as a short-term checkers match rather than as a long-term chess game.
“Many companies don't understand that what works in one location may not work somewhere else.”
"The decision to expand is sometimes driven by the wrong reasons," says Associate Professor Juan Alcácer, who teaches in the Strategy Unit at Harvard Business School. "In many cases companies are not thinking of the long-term consequences of what they are doing."
Such snap decisions can result in geo-mistakes that sap energy out of an organization and cause it to lose focus on what it was doing well in the first place.
Geographic expansion should provide access to a fresh market and to additional resources. But companies that take a strategic view also realize that the new territory should increase a firm's competitive advantage by complementing and adding value to its current business.
After all, the strategic value of a new location depends on three things, Alcácer says: the strength of available resources, such as nearby supporting industries; the company's ability to seek and retrieve knowledge in this setting; and its capability to do something better than competitors.
An example of a firm playing tactical checkers instead of strategic chess is one that decides to expand simply by finding the cheapest places to open up shop; Alcácer says it's a mistake to allow low costs to completely override other factors.
"You should not only think about whether there's a market there or cheaper labor," he says. "You also have to think about what your competitors are doing, whether it's the right time to enter or exit that location. Reducing your costs might not provide you with a competitive advantage at all."
Walmart has been a smart expander since it opened its first store in Rogers, Arkansas, in 1962. Sam Walton slowly branched his growing enterprise to other small rural towns, where the retailer was able to outmaneuver mom-and-pop competitors. The management team again waited until they had developed enough resources before going head-to-head in suburban areas against big-box retailers like Kmart.
Timing Is Critical
A crucial consideration for managers to get right early on is whether the business can afford to spend the required resources—especially when it means siphoning time and attention away from an existing successful business.
"When you open a new operation, it requires not only money but also the time and energy of managers to make sure it's going the right way, and that means you can't focus as much on the base business back home," Alcácer says.
In addition to making sure the resources are in place, corporate strategists must decide which locations to target. Companies often blindly follow their rivals from city to city or country to country without analyzing whether that same situation is right for them. Many businesses that jumped on the China expansion bandwagon are now sorry they made that move, says Alcácer. "They are realizing that they were not well prepared for the market or that it wasn't the right market for them."
Alcácer advises companies to consider sending an advance team to live in a target locale to research the market and business models before expanding.
Another problem with following competitors: an increasing risk that those rivals will gain insight into your operations and even poach highly skilled workers. Sometimes it's best to avoid following the herd and seek out an original niche.
That was the road taken by animation studio Pixar, which established itself near the mudflats of Emeryville, across the bay from San Francisco. Pixar deliberately steered clear of LA, where the bulk of the movie industry resides. Alcácer says that when Disney bought Pixar in 2006, Pixar executives asked to remain based in Northern California because they didn't want the company's culture to be negatively affected by the culture in Southern California.
In some industries, however, executives believe they don't have much choice but to cozy near the competition, especially when they need to plug into unique knowledge that exists in certain areas. Biotech companies, for instance, often operate close to top-notch universities to interact with scientists and cutting-edge research that could potentially feed growth, even if their competitors are also on the same block. Detroit and Silicon Valley, likewise, provided valuable clusters of talent and suppliers where, Alcácer realized, "whenever you saw one firm, you saw the other ones."
In an effort to keep key information from spreading around town, firms operating in these types of highly competitive environments need to maintain strong internal linkages between units and create a culture of collaboration among workers across distances, according to the working paper Local R&D Strategies and Multi-Location Firms: The Role of Internal Linkages, by Alcácer and Minyuan Zhao of the University of Michigan's Ross School of Business. By internalizing its innovations better and faster than nearby competitors, a firm can gain lead-time and a stronger competitive product position in the market.
A company can also prevent pilfering of key information by cutting a project into pieces and shuffling the parts piecemeal to workers in different regions. Alcácer says this model can work like a "need-to-know" spy operation, in which certain information is assigned to specific employees, who are not privy to the whole picture.
Expanding operations to another country brings a whole new set of complications, says Alcácer. For one, businesses that expand internationally need to adjust their offerings to a completely different market since each country has its own "knowledge profile."
"Companies often don't consider adapting products to the different markets," he says. "Successful companies that expand assume that by doing the exact same thing they are doing in the home market, they will be successful overseas. But many companies don't understand that what works in one location may not work somewhere else. We tend to believe that technology has made us homogeneous, but distance matters. Countries are different; consumers are different. People in India are different than the people in the United States."
Vodafone learned that lesson the hard way. The London-based telecommunications venture initially forayed into Japan on a learning expedition to better understand the country's sophisticated consumers, but was soon captivated by the established market. The exploratory mission quickly morphed into sell mode. Vodafone bought handsets used in Europe in bulk and tried to introduce them in Japan. Unfortunately, Japanese consumers were hooked on a completely different technology, forcing Vodafone to abandon ship after a few rocky years.
"Vodafone needed to study the Japanese handset," Alcácer says. "When you enter a market to provide a service or product and try to learn at the same time, these two [goals] can be conflicting. You can successfully do both at the same time, but you need to be conscious of the two activities."
Another consideration for an international expansion is that the resources required are greatly magnified, and success might only make matters worse in the short run. "When you start to expand overseas, you often see a negative effect on your operations back home. You are literally going through growing pains, and the more quickly you grow, the more likely you are to have problems."