I was questioned about international expansion recently. It’s a topic I think about frequently. Exactly why are small cap American companies slow to expand? The answer was provided to me in the early 90′s by John Clement, a very influential British leader who had taken a small company called Unigate plc and transformed it into a multi-billion dollar global organization. “US businesses have never needed to expand because the US market was generally the largest in the world. US firms need to stop being so insular, or foreign companies will overtake them.” Now the discussion seems prophetic, and in retrospect I was fortunate to be in a position to be tutored by one who thought “globally” long before it was the buzz word of the new millennium.
In the early 90′s the term “Global Market” did not apply to the majority of US small cap organizations. These businesses were churning profits and increasing sales in the domestic market, while ignoring the international market. If they sold materials internationally it was only to prospective customers begging to buy their products. There was no thought put to market conditions, support, or follow up.
Business in the US market was growing each year, profits were soaring and executives leading these companies had no worries. It seemed to most that this would last forever! That same economic success of the 90′s and up to 2008 was noticed, however, by many organizations outside of the US, and these companies did what any prudent business would do; expand their international business into the U.S. market. This thinking was not new to these organizations whereas their own national economies could not support the growth and sales objectives of firms looking to grow profits each year. They were already doing business outside their borders to survive.
During this period a strong US economy strengthened the outside organizations that gained entry into US business arena profiting from the sales opportunities and unknowingly preparing them for the economic shift that was soon to take place. The United States no longer offers maximum growth opportunities. Instead this opportunity has shifted to the emerging markets of China, Africa, India, Middle East and Latin America. These foreign companies who learned to act globally earlier are now well versed in the ability to enter these emerging markets by simply using the business model developed from their entry into the U.S.A.
Unfortunately many U.S. organizations are now run by executives who grew up in the “insular” U.S. business culture. They either approach the international market as they would the U.S. market, or through business ignorance feel that growing internationally is not required thinking that growth in the U.S. market will return quickly. Evidence says that neither of these strategies will work. The international market can no longer be ignored by U.S. firms who want to survive, and lessons need to be learned quickly to conduct business abroad. Here are a few simple rules to follow:
1) Business in emerging markets are still very relationship oriented. People in the emerging markets value relationships. Many of them have purchased US products without any support or follow up in the past. These people also want assurances that the supplier will be there for the long term and they want to trust companies they are doing business with.
2) Take time to learn the culture and habits. Going into a meeting and pounding on the table to make your point or demanding an order may work in the U.S., but would be considered an insult in most countries. Business relationships are culturally driven in many emerging countries. It is not uncommon to be invited to a potential client’s home to have dinner and meet his family. Spend the time in business development getting to know the area you are entering. A great analogy of this misunderstanding is when Tide Laundry detergent was introduced into China and did not sell. It was later determined that many Chinese hand wash their cloths. Tide’s packaging had to be changed to accommodate their needs. Once they changed the packaging Tide Laundry detergent became one of the largest sellers in China. Due diligence done to understand culture and habits will pay off in sustainable future sales.
3) Know U.S., International and local laws. What may be legal in the country you are doing business in, may not be legal in International or U.S. regulations. For Instance in many countries it is legal for a foreign official to be an owner in a company that sells to their sovereign government. This however is a violation of the International and U.S. Anti corruption Acts (FCPA). FCPA is easy to adhere to if you know the regulations but equally as easy to violate if your firm does not understand. These rules are simple to follow if you know and understand them and do not complicate it with teams of lawyers.
4) Get to know import and customs requirements for the countries you are selling to. These requirements vary from country to country, and need to be taken into consideration prior to entering a new country market. There are a few countries easily identified that are “closed” markets such as Brazil, South Africa or Egypt. These countries have set the import duties so high on certain products that it is difficult to compete price effectively in these countries. Unless your strategy is to locally produce you may not be successful in these type markets from a price standpoint.
5) Utilize the in-country U.S. Embassy. The U.S. Embassies in foreign countries offer an excellent source of access and assistance to decision makers, customs, and regulations. As one U.S. Ambassador to an oil producing nation stated to me, “The U.S. spends millions of dollars every day buying oil, and it is my job to get some of those dollars back”. In most emerging countries many of the Ambassadors are senior Foreign Service personnel not political appointees. This makes them accessible, business savvy, and eager to promote U.S. interests.
As one who has spent years developing International markets for many type of industries, I feel it is an exciting time for U.S. companies. We no longer have to rely on the market conditions of the U.S. economy to grow our businesses, and there is an amazing amount of opportunity in many of the International markets who have hardly been touched by the global crisis. Worldwide, U.S. produced goods are perceived as high quality and many of these new markets are clamoring for access to goods produced in the United States.
The entry into the Global market requires a cultural change by many U.S. small cap firms and their executives. The global market is not just for the Procter & Gambles and Caterpillars of the world. The companies who take steps to build their global footprint will be well positioned for the eventual return of the U.S. economy.
Jan 31
Jul 03
Investing in small-cap stocks generally relies on fundamental analysis instead of technical analysis. Technical analysis, which relies on charts and graphs of previous company data to draw patterns, generally doesn’t have the necessary data to draw conclusions. Small cap companies also don’t have the stability of larger companies, and their stock and skyrocket or fall like crazy at a moment’s notice.
Instead, small-cap investors use fundamental analysis to determine how sound the business’s core principles are. A fundamentally sound business is much more likely to succeed than a fundamentally weak business. By analyzing the business’s management, business plan, and financials, a fundamental analyst can form a pretty good idea of whether or not to invest in this company.
Small-cap stocks are generally short term investments. Instead of purchasing a stock and waiting years for fruitation, small-cap investors generally buy their stocks in hopes that the stock will jump in price, netting them a nice sum of cash.
Investing in small-cap stocks is generally a more advanced tactic. New investors should stay away from risky investments like these, and instead focus on learning and applying a proven system. Once a novice investor has some experience under his belt, and a successful system to fall back on, then he can start dabbling in riskier methods of trading.
Small cap stocks are usually the ones that go on to make the enormous gains. It stands to reason it is much easier for a small cap stock to move up easier then an enormous blue chip stock. Most of the stock markets golden stocks were small caps. When they are “Blue chip” it’s time to look elsewhere.