Should cultural distance factor into your international expansion strategy? In the past, people working in international business embraced the notion of cultural distance. According to such theories, it costs less for a company to go into countries that are culturally similar to your own. The idea was that if you could stage your market entry order in a way that would minimize cultural distance, and thus costs, your business would be more successful in a shorter time horizon.
Back in the 1970s – 1990s, there was a fairly popular thread of research indicating that the less cultural distance a company had to travel, the lower the investment would be. There was Hofstede’s cultural dimensions theory, Kogut and Singh’s cultural distance index, and so on. These theories are still taught in business schools today, and they have their place. But researchers have since proven that they are not very useful for purposes of market selection.
Why did these theories fade from popularity? They looked primarily at culture, which is interesting, but they tended to ignore some of the more practical operational factors that a business needs to consider. For example, even if cultural distance is very short between a business’s home country and one it wants to move into, there might not be an international trade agreement in place between those two nations. Or, even if cultural dimensions are very similar, a country might have national laws in place that make it very difficult for a foreign company to actually operate there.
Cultural distance theories also tend to ignore the fact that businesses today have a great deal of creativity and ingenuity they can apply with regard to now only how they go to market, but what products they decide to bring to market, in what form. Digital companies have even greater flexibility at their disposal.
Use Market Complexity Instead of Cultural Distance
Instead of using a cultural distance measure for international expansion planning, look at market complexity. You can boil down market complexity into a few key areas:
- Language. Does your company already speak the language of the market, or is there a high degree of people in that country who speak the language proficiently enough to buy and use your product or service?
- Currency. Do you already support the currency used in the country, or do they have a habit of paying in a currency you already support?
- Payments. Are the local payments you already offer sufficient for you to grow in this market, or will you need to add new types of payments in order to grow?
- Pricing. Do you have a pricing and packaging strategy that works for the market in question?
- Presence. Is your brand known in this market already, and do people in this market have any reason to trust you? For example, do you have channel partners, direct sales reps, a local office, top local search engine rankings, PR activities, awareness?
- Ease of doing business. Is this a country where you can easily operate? Generally, the worse the ease of doing business score, the harder it will be for your business to scale a presence there, even if you can initially gain some traction in the market.
There are many other aspects to complexity you could consider, such as internet penetration, trade agreements, time zone, physical distance (depending on what you’re selling and your sales channels), and so on. But, the ones listed above are generally the most important.
For more guidance on this topic, check out “International Expansion Planning in Three Simple Steps” and “The Best Data Sources for International Expansion Planning.”
Consider the ROI Timeframe
Consider return on investment (ROI) when deciding how much you’ll invest, in which market, to grow your international business. In the past, most non-digital businesses tended to pick easier markets in the early days, because they needed to use the return on those investments to fuel future investments in the more difficult markets later. The idea was that the revenue from “easy” markets would enable them to invest more, later, in “harder” markets. That idea still has merit, even for digital businesses.
However, in today’s world of venture funding and high-profit business models such as SaaS, where longer-term and more complex metrics like lifetime value are prized, companies have a bit more leeway than they used to, and can invest earlier in more complex markets. Nowadays, you can address more markets simultaneously. For example, you can target early adopters across many markets at once, using digital methods. You don’t necessarily have to incur a huge expense to go shallow in lots of international markets at once, as you would have had to in the old days without a digital business model.
Depending on the stage of your business, and depending on how you’re funded, you might actually want to invest in some of the more difficult markets sooner. You can gain a competitive advantage from early entrenchment in the market. That said, if your business doesn’t have much of a global muscle yet, you might be introducing more complexity than you really need.
Even if you’re seeing plenty of demand from a “difficult” market and you have the funds to address it, you might not be operationally prepared to do so. If you start targeting a market that you’re not truly ready for, you run the risk of stretching your business very thin. A high-complexity market will require a lot more of your company — creating far more stress for your employees — than “easy” markets would.
And remember to consider your opportunity cost. If you focus on too many markets at once, you risk neglecting improvements you could make for customers in existing markets. No matter what, if you choose high-complexity markets early on in your expansion efforts, you’ll need to tolerate a longer time horizon to see a return on those investments.
Would it make more sense to have a “big bang” approach at some future time, as opposed to a “rolling thunder” approach that starts today? Rather than leap head-first into difficult markets just because they are large, take a step back to evaluate your short- and long-term goals for both your international business and your broader global business. Only then can you determine which markets really merit your focus today.