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Chapter 1: WHY WRITE AN INTERNATIONAL BUSINESS PLAN?
CHAPTER 1
Why Write An International Business Plan?
TACTICS WITHOUT STRATEGY IS THE NOISE BEFORE DEFEAT. – SUN TZU
THIS BOOK IS ABOUT PREPARING AN INTERNATIONAL BUSINESS PLAN —a formal written plan for a company that seeks to gain benefit from foreign markets for new customers, raw materials, manufacturing partners, capital or labor. Countless opportunities await, but there are many pitfalls too. The time you spend in creating a solid business plan will help you anticipate the tough spots, modify your approach and climb to the peak of success in the international marketplace. A wise business leader is one who formulates a strategy that accounts for the considerations of going global.
FAQs of an International Business Plan
■ QUESTION : Why write a business plan at all? ■ ANSWER : A business should never be started or operated without a clear plan of what the owners intend to do and how they intend to accomplish their goals.
Not having a business plan is equivalent to driving through a new area without a map. ■ QUESTION : If I already have a domestic business plan, why make an international one? ■ ANSWER : The need for a business plan is even more acute when a company is looking for opportunities in international markets. Many of the basic building blocks for an international business plan are similar to those for a domestic one, but in the global environment, a company will encounter new and different issues with additional risks. ■ QUESTION : What will an international business plan accomplish for me? ■ ANSWER : For any business, a plan will settle or fix your vision into a working commercial model both for internal management purposes and for use in persuading external resources—e.g., investors, bankers or potential business partners—of the realized and potential value of the business. If properly formulated, it will define your company’s goals, identify meritorious features and potential pitfalls and establish operational policies, structure and procedures. For an international business, a plan will also cover features of cross-border and crosscultural trading that your company will need to address in order to benefit from the advantages of, and survive in, the global arena.
Global Facets of a Company
Is your company “global enough” to warrant an international business plan?
Global companies come in many sizes. Perhaps you think that a global company has to be a giant multinational corporation with franchises in every major metropolitan area around the world. Consider whether any of the following situations might fit your company: ■ A processed food business in Hong Kong specializing in favorite local dishes decides to export its products to California to tap into the Asian population there and the general popularity of Chinese culinary delicacies. ■ A manufacturer of popular dolls in Spain contracts with local distributors in other
Spanish-speaking countries for promotion and sale of the dolls in those countries.
The manufacturer is able to capitalize on the favorable demographics and opportunities for using its own promotional assets (e.g., TV commercials) in new markets of Spanish-speaking consumers. ■ A producer of an animated television series in Japan localizes the content for distribution in English-language markets. Or vice versa! ■ A Nigerian watchmaker uses parts imported from Switzerland.
Each of these companies is linked to the global economy and can benefit from an international business plan. The development of an international business plan—whether simple or complex—can be important to the realization of international success for a giant conglomerate as well as for a small company.
Achieving International Advantages
Having made the decision to “go global,” your company must next consider how it is going to proceed to achieve the many advantages offered in the international trade arena. A company might seek to reduce its costs and risks, expand into new markets, procure reliable and less expensive sources of supplies and materials, improve production and technical abilities or enlarge its available labor pool.
Building an international company is similar to building a house. You begin with a vision. Your vision is translated into a plan. Your plan serves as the basic guideline for turning the vision into a real home with a strong foundation, secure walls and a protective, leak-proof roof. Likewise, an international business plan is the blueprint of a global company. It is an essential tool by which a company can identify desirable opportunities of cross-border operations and set short-term and long-term company goals for achieving perceived international trade advantages.
REDUCE OPERATIONAL COSTS Primary reasons for entering a foreign market are to take advantage of perceived market opportunities and to reduce the costs of operation and production. Without a plan, however, opportunities can turn out to be more costly than the anticipated benefits.
What is so attractive about moving into another country? Perhaps you think that you will be able to reduce labor costs by tapping into the large pool of lowwage workers available there. Maybe the foreign country allows foreign investment in land and building facilities. If so, these resources might be available at less expense than in your own country, which would reduce your company’s capital costs. Some countries offer incentives to attract business investment, such as exemptions from local taxes and tariffs or reduced licensing and documentary fees.
But what about the extra costs of doing business in another place—a faraway place? Will you move your whole operation or run two facilities? How do you coordinate and divide responsibilities? What about the expense of training, travel, moving, import and export, business registration, operational licenses and protection of the expanded use of trademarks, patents and other intellectual property? Do you have a plan to find and implement the advantages in such a way as to overcome the additional burdens?
REDUCE RISK BY DIVERSIFYING MARKETS A company’s international business plan may seek to establish global operations that are aimed at diversifying the company’s market opportunities in order to reduce the risk of dwindling demand. By entering a new foreign market, a company can increase sales, extend its customer base and gain protection against variations in buying cycles that might occur in the company’s home market. For example, a company that sells clothes used in warm weather, such as swimsuits, can follow the summer around the world to create a steady, year-long demand. Plan in advance to avoid potential disaster when demand falls below sustainable levels—whether because of market saturation, outmoded products or otherwise. Foreign markets can provide good opportunities for selling older, more mature products that have become obsolete in technologically advanced markets.
A network of global facilities can allow a company to divert products and supplies quickly to regions where demand is booming.
REDUCE RISK BY DIVERSIFYING SUPPLIERS Companies that use raw materials will benefit from an international business plan that addresses the risk associated with relying on a single supply source.
Materials that are scarce or even non-existent in a company’s home country may be abundant and inexpensive in a foreign market. Assume that a company sells quarried stone. It can obtain varieties from quarries in various parts of the world to ensure a reliable supply regardless of disruptions at any single source because of uncontrollable events ranging from inclement weather to labor disputes to political or civil upheaval. If you plan in advance, your business need not be limited when materials become unavailable or prohibitively expensive in one market. Instead, you will know how and where to pursue reliable sources in other countries. Risk reduction strategies might include shipping materials from a foreign country for manufacture elsewhere or finding a manufacturing facility within the foreign country where the materials are easily available. To assure access to products that are unavailable in Japan unless imported, Japanese automobile manufacturers
have a long history of building production plants in other countries. This is particularly true if there is also a significant local market for Japanese cars.
INTEGRATE GLOBAL LEARNING Education and environmental scanning is an important strategic tool for every business, regardless of its size or scope of operations. For a company that can afford the investment, cross-border operations can be a powerful learning tool for enhancement of operations and product development activities. Setting up business operations in a foreign market is an excellent way to observe how other companies deal with the unique technological, social, cultural and political factors that impact demand in that market. In addition, global operations can provide direct access to companies that have developed internationally recognized practices in key functional areas, such as new product development, manufacturing and supply chain management. Compiling and integrating this information into your business will strengthen and enhance its market standing, and therefore make global learning a key component of your business plan.
ACCESS GLOBAL TALENT A company that participates actively in foreign markets often gains access to valuable human resources in those markets. Many countries, such as India, have a large pool of well-educated scientists and engineers who can provide high quality services at tremendous cost savings to firms located in higher-priced markets, such as the United States and Western Europe. By establishing a foreign branch office or strategic relationship, such as a joint venture, a company may attract local managers who are interested and experienced in international business. This creates a pool of talent that thinks globally and tangibly supports the company’s development of new markets and resources. If your business might benefit from global talent, your international business plan should provide for the recruitment and utilization of such resources, which in turn may significantly reduce product development costs.
Your international business plan is a useful tool for achieving the advantages of going global. However, it is at least equally significant as a guideline to focus your company on how it will need to adapt its business to account for the differences it is likely to encounter in the international business environment as compared to its domestic markets. The world offers significant business opportunities, but these opportunities are accompanied by significant challenges.
The greatest challenges stem from attempting to deal with the distinctive, and often quite different, nature of the business environment. For example, a company looking to set up manufacturing facilities in a foreign country may encounter government controls, difficulties in making an effective transfer of core technologies, poorly educated or trained local workers, financial restrictions and a lack of inputs and supplies that meet rigid quality standards. You must have a plan of action for handling a new environment if your company is going to enter and stay successfully.
LESSON : The following scenario almost ruined one company’s efforts to set up an overseas manufacturing facility. Government controls on foreign investment required that the company set up a new joint venture with a local partner. Problems began immediately. The company first discovered that the local partner’s employees lacked the technical background to absorb the technology licensed to the joint venture. It next encountered resistance from the local employees being trained. When they were assigned to the joint venture, they felt that they were being cast adrift from their main company and were reluctant to accept training in new techniques. Another major problem was uncovered when the company learned that the industrial infrastructure was inadequate. As a condition to forming the joint venture, the government required that supplies be purchased from local companies; but local inputs fell far short of the quality required for finished goods being exported for sale in the company’s home market. Some were even unavailable and had to be imported. Unfortunately, the importing process was very slow because of a lack of import financing and the need to satisfy local bureaucratic requirements. As a result, production cycles were delayed, increasing costs significantly. A further blow to the company’s efforts developed when several factors combined to cause a substantial change in market demand. Initially encouraged by government incentives that supported a strong demand in the local market for the goods being produced, the company was faced with a sudden shift in government strategies toward agricultural production. Such policy shifts are not uncommon in developing countries and can create havoc with a company’s business. In addition, rising inflationary pressures led to credit controls that reduced the financial resources of potential buyers, including several government-owned businesses. Finally, the cost advantages of entering the foreign market were further reduced by a flow of low-priced imports from other countries.
ACCOUNT FOR MACROECONOMIC EFFECTS A major risk of going global is increased exposure to macroeconomic conditions in other countries. An important feature of any international business plan is the development of policies and procedures that take into account the likely consequences of another country’s macroeconomic problems. For example, inflation in a foreign country can lead to radical changes in monetary policies, including devaluation of the local currency. Other macroeconomic conditions can adversely impact the availability of capital to local banks and firms from external sources, such as the World Bank, the International Monetary Fund and other multilateral agencies that release funds only if a country has met specific standards. In such cases, a firm would be unwise to risk a substantial investment without a contingency plan or long-term goal in mind.
ANTICIPATE POLITICAL TRANSFORMATIONS A change in the political landscape of a foreign market can lead to different governmental attitudes toward core business and investment issues, such as protection of private property and labor relations and requirements. These changes can result in adoption of new laws and regulations that increase the costs associated with using local resources and cause delay in commercial production.
By means of an international business plan, a company can anticipate and set procedures in advance to deal with political transformations.
BEND TO SOCIOECONOMIC CONDITIONS Socioeconomic conditions define the marketplace and the unique cultural norms that exist within a particular country. Foreign companies must always carefully consider how their products and marketing activities will be perceived in the local market, and their business plan must allow for product and service adaptations to ensure acceptance around the world. For example, a company marketing birth control products or food supplements for infants must consider whether those items might clash with social values in a local country, might be unaffordable or might be misused because of poor education. Differences in social classes and languages in foreign countries may dictate adjustments in advertising and packaging, as well as in personnel management and human resource practices. For some companies, a useful strategy is to establish autonomous facilities or enter into joint ventures with local partners in order to gain a better understanding of the demands and customs of consumers in those countries. Selection of a local partner who has already established a significant customer base or distribution chain may also be an advantage. In order for such strategies to succeed, however, the company must plan its entrance into the foreign market with circumspection. It will need to select local managers who understand the local market, train them in the specifications and functionality of the company’s products and demand standards of quality and customer service at least equal to those in the company’s home market.
Making the Vision an Internal Reality
Most people who want to start a business begin with an idea—a vision—and a belief that it can be accomplished. The “how” might be a little fuzzy, but there is a strong commitment to make it happen. The vision must now become a structured reality. It is time to make a business plan.
ESTABLISH A SPECIFIC METHODOLOGY The business plan is a means of converting a vision into a specific methodology.
It helps the entrepreneur clarify how the idea will be achieved. It forces the company to determine the specifications of the new goods or services, how they will be marketed, how the company will be managed, where the money will come from, where it will be spent and who will be hired to make the company successful. If you have never prepared a business plan, you might view it as a waste of time.
You can also become particularly frustrated after having revised a plan for the third, fourth or perhaps tenth time. However, when you finish you will probably be glad that you completed the task. You will most likely have learned a great deal. If you are not happy with your efforts, your business plan is probably not finished. ADVISORY: A business plan may be unpleasantly revealing. One of the authors worked for several months on a business plan with an entrepreneur. At the end of the process, the businessman discovered that the product was good, but he could not get it to market at an acceptable price. He moved on to other projects. Although disappointed by what he found, he was happier to have uncovered the truth at an early stage rather than after having spent a lot of time and money—both his and others—on a project that was doomed to failure.
BUILD A FOUNDATION FOR GROWTH The utility of a good business plan will continue after the drafting is done. A primary use of a business plan is to serve as a guide for the growth and development of the business. Each and every important activity of the business must have a relationship to the plan. If it doesn’t, the company is drifting and troubles are not far in the future.
MEASURE PERFORMANCE A good business plan also will serve as a company report card, allowing managers to compare what actually happens to what was predicted when the plan was first written. Unforeseen events will undoubtedly affect the business, sometimes creating profitable gains and other times causing havoc. But, if the company’s actual performance deviates significantly from the plan, management will need to reevaluate the goals and methodology to determine which factors have not been recognized or properly considered.
Convincing the Rest of the World
A business plan will most likely be given to third parties outside of the company for various reasons, including: ■ To raise money from potential investors and bankers, who will review the business plan to see how you intend to generate profits in order to pay them not only the initial sum invested or loaned, but also interest or dividends. ■ In the start-up stage, to persuade key managers and employees of the value of the venture and to convince them that it is viable and worthy of their long-term commitment.
■ In the franchising context, to serve as the primary disclosure document in the offering circular required to be filed and provided to franchise participants. ■ To identify the nature and scope of the business for prospective domestic and foreign business partners, who will review the plan when determining whether a basis exists for a joint venture, or for a long-term manufacturing or distribution arrangement.
Accordingly, keep in mind what elements outside parties will need to see in your company’s business plan. After all, they will use the plan as a means of understanding the strengths and weaknesses of your company. A good business plan will thoroughly address the issues most commonly considered by third parties who might evaluate your business, including: ■ Products offered ■ Managerial acumen ■ Demands of the marketplace ■ Risks posed by actual and potential competitors ■ Strategic plans for innovation, marketing and financing ■ Overall business environment in which your company will be operating and plans for surviving within that environment
Business Plan: Myth And Reality
Conventional thinking about business plans is flawed. The primary reason for writing a business plan is not to raise money, but rather to flesh out ideas and to look for weak spots and vulnerabilities. A party that may be a source of capital (investor, banker, venture capitalist) will want to examine your business plan carefully, of course, but the major issue is: Does this concept seize an opportunity with the necessary drive and skills of its people? Here are ten top keys to a successful business plan: 1. By writing the business plan, you should begin to comprehend the discipline needed to capture the opportunity. The dream—the idea—must be grounded in reality. 2. Use the plan to clarify your goals and confront both positives and negatives. This is the most valuable outcome of writing a business plan. You will develop a clearer understanding of your purpose and the strengths and weaknesses of the concept. 3. Stress implementation of the plan. The plan must describe how key objectives will be attained. For operational success, the plan must state the details as to “how” things will be accomplished. These statements are crucial. 4. Make the plan workable by distilling your goals to one-page action summaries for each section of the plan: “Plan your work and work your plan.” The key is how you make the plan work for you after it is developed. 5. Recognize and include, as part of the management team, professionals whom you will need to retain, such as an accountant, lawyer, marketing expert, etc. If your firm is going to be a small start-up, these professionals may be contracted for service. If you have a larger enterprise, then plan for the inclusion of people with these talents and abilities. Create a management team that has complementary skills to get the job done. 6. Schedule regular meetings with management to discuss ONLY the plan, nothing else.
Set key goals for each core business area. Develop brief strategy statements for the next three-month period. Then go back and fill in the financial figures. Whether the enterprise is small or medium in size, or simply a concept on paper, active discussion of your plan is a sound approach to generating realistic financial projections. 7. Discipline yourself to maintain balanced attention to all areas. Don’t focus only on the financials or marketing. Seize opportunities to improve continuously by stressing the strengths of all areas and commitments to overcome weaknesses. 8. Plan for both positive and negative contingencies. Anticipate the unexpected. What if a new competitor enters the market? Engage in contingency planning so that, when there is a crisis, you can be proactive and undertake planned action rather than being simply reactive. 9. Audit your plan each month to maintain progress control. The plan must be a working document, not simply paper to gather dust on a shelf. Creativity, energy and drive keep a business on track to succeed. 10.Update your plan every six months—that way you extend it another year. It helps guide your decisions and records your reasons for doing what you are doing. It keeps you focused on your mission and goals. It’s your roadmap to success. Bruce H. Kemelgor, Ph.D. College of Business & Public Administration University of Louisville (Kentucky, USA)
