umbrella, but so do less glamorous expansions.
A restaurant is a great way to illustrate the levels of choice open to companies considering geographic expansion today. A US business could expand locally (next town over), intrastate, interstate, or internationally. The risk goes up each step of the way. Let’s say you own the best steakhouse in Dallas. With your partner, you’ve decided that you want to add a new location (aka geography) to drive growth. Where do you locate? If you stay within a 30‐minute drive, you get the benefit of people knowing your brand and the option for existing staff to support new operations. Great! But you’ll run out of customers pretty quickly, so what about a new spot in Houston? Still in Texas, so you know your state tax code and requirements, but you can’t leverage your staff, and your brand may not be as good. Let’s say Houston is a hit, and now you decide to be bold and try a move to Atlanta. Suddenly you have to worry about the logistics of remote management, the creation of brand, supplier, employee, and the development of a new customer base. Throw on top of that the added cost of airfare for senior management to run back and forth, the tax ramifications of nexus in another state (may want to look that one up if you don’t know), and the hurdles to clear become much higher. Of course, all new customers and a growing brand, diversification of revenues, and a wonderful marketing tale for your other stores are the potential offset, but the risk factors go up. Clearly the more remote the location, the greater the risk of quality control issues or the dilution of your original vision.
Let’s take it up a notch. What about opening up your next steakhouse in Paris, London, Beijing, or Moscow? Now you have international tax code to become expert in. You also need to meet new legal standards for employees, food production, an entirely new marketing spend. The logistics of management now not only span distance but also time zones, language, and cultural barriers. This is incredibly expensive and risky . . . especially for a restaurant.
But what about other industries?
I had a chance to interview long time client and strategy guru John Beering. I’ve worked with John during his time at Pratt & Whitney (where he served as the Director of Marketing for Commercial Engines and Global Service Providers), Eaton Corporation (as Senior Vice President and General Manager of their Commercial Powertrain business), Trojan Battery Company (serving as Chief Operating Officer), and caught up with him in his new role as President and Board Member of United Access and Arch Channel Retail, the second largest retailer of wheelchair‐accessible vans in the US.
John had been responsible for global expansion in a number of his roles, and I asked him about the realities for industrial corporations considering that kind of move. He reflected on his time at Eaton, serving large automotive and trucking OEM partners like Daimler, Mercedes‐Benz, Volkswagen Group, and Volvo:
I think when we were looking at trying to do a major expansion, China or India would be a good example, you really had to think through method of entry. We’re going to go look at an acquisition? Is a joint venture going to be more appropriate? Is export even viable? If [the answer is] yes to any of those [questions], what is that going to look like? For a JV, what’s the endgame? Can you do it in a way that’s successful? Our preference at the time was majority ownership for joint ventures. Being majority owners allowed us to roll it up and report the earnings. It also meant that we had control over the operating approach. You know, prior to my time there they had some JVs in the same geographies that didn’t go so well. In hindsight, the prior Chinese JVs were either 50/50 or the Chinese partner had the control and so of course they played by different rules. Eaton also made the mistake previously of having a different deal team from the integration and management teams. This meant they lost relationship continuity – which is everything in China. Eaton also maintained a strong culture centered on doing business right – their ethical North Star. Operating in China (or many Asian countries for that matter), where the local leadership’s worldview and business standards and practices are just different than ours. Assuming they will automatically adjust to our Western standards was naïve and unrealistic. This is why the relationships are so important. You need the relationship foundation to establish trust and work through misunderstandings over time. Where we had established bases of operations in China or India, then the challenge centered [on] how to partner more meaningfully with key customers. They might say, ”Let’s do a joint venture . . . and we want the joint venture on site. We probably wanted it on our existing campus to capitalize on our existing investments. The next requirement was if we were going to have a volume commitment from the customer partner to make this business venture work. And then if we take product in the other markets, are we protected on IP and things like that? Among the biggest items in the foreign JVs is protecting IP [intellectual property] and being mindful not to enable a new competitor unintentionally in other established markets. Other important considerations include talent availability, capital and operating costs, tax structure and cash repatriation, currency risk, etc.
Geographic expansion in the corporate world is high‐stakes poker, and that makes this question the number‐two concern on the list to consider.
However, larger businesses of scale have a tremendous advantage leveraging their existing geographic footprint. If you’ve already worked through the hurdles that John raised, then that is a huge competitive advantage. Doug Fletcher talked a bit more about this very point:
It’s so much easier to hunt in an existing geography for professional services than it is in a new geography. And maybe it’s true with products, too, but it’s especially true in a service business because services are such relationship sales and people naturally trust people [who] are from their area more than people from faraway places. Example: If I’m from New York and I want to sell in Mobile, Alabama, that’s going to be a hard sell, right? But if you’re in New York and you’re trying to expand into Connecticut or New Jersey, that’s an easier sale. New geography is hard in the services business because you have no established brand reputation and you have no established relationship base; you’re looking at a multiyear proposition before you can expect any sort of traction.
Michael Woodfolk, President of the Darden School Foundation, and I spoke a bit about their recent expansion to the DC Metro area. Michael is smart, effective, kind, and polished. He’s the friend you wish you had more of in your life. Michael has an incredibly challenging role as the head of a 501(c)(3) that is the funding engine of UVA’s Darden School. He’s led this organization for the past 5 years, although he’s been at the school for over 20 and is a fellow graduate. He illustrated how through its recent geographic expansion the school has been able to drive growth, not just by accessing new students, but by better engagement with alumni:
We had to innovate. Our innovation was to launch the executive MBA at our new UVA Darden Sands Family Grounds, our DC Metro facility in Washington, which is very different than Charlottesville, Virginia, . . . We launched an executive MBA there and since our largest alumni base sits within Washington, DC, all of a sudden Darden becomes more real to alumni. You’re all busy, we just have to make sure we figure out a way to be relevant to you and part of being relevant is being seen. That big sign that used to say USA TODAY on a huge building in Arlington, VA, now says UVA Darden School . . . so it’s not just Charlottesville anymore. It’s now Washington, DC. It’s not just the traditional MBA, it’s the executive, and we’re already thinking about, what’s next? The night MBA? We have the marketplace to do that now.
Michael showed a success story for expansion, but as a rule, existing geographies are the low‐risk route. Site location, build‐out cost, staffing challenges, maintenance, and operations can be significant unknowns. More concerning is the potential for the geography’s ability to sustain the revenues necessary for the investment to access that market physically. New geographies offer access to new customer pools, and a non‐core test environment for new products/business model testing.
Notes
1 1. Charlie Osborne, “Google Slams on the Brakes
