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Mistakes That Can Sink Owners Expanding Overseas

By Elaine Pofeldt

CNBC.com - November 26, 2013

When Tony Ellison launched an outpost of Shoplet, an online office-supply store in the U.K., he got a crash course in international business.

Although the British customers Shoplet began serving in June speak the same language, "it's still a vastly different culture," said Ellison, the founder of the New York City–based company. Even the names for common products and services are often a little different in the U.K. Free shipping isn't available like it is in the U.S. At least, not if you sell it as "free shipping." In the U.K. it's known as "free delivery," where it's just as big a selling point as it is in the U.S., but the words make a big difference.

Building a cross-cultural business offers a big opportunity for entrepreneurial firms like Ellison's 75-employee firm. It's become a little easier, too, in the mobile phone era, enabling companies to find new customers all over the world. The International Trade Administration at the U.S. Department of Commerce estimates that more than 70 percent of global purchasing power is outside the U.S., and exports now account for 13.8 percent of the country's GDP.

Many entrepreneurial companies are seizing the opportunity. A 2013 survey by JPMorgan Chase found that 61 percent of middle-market firms say they are actively doing business in international markets this year, up from 58 percent in 2012 and 43 percent in 2011.

Still, it's easy to make mistakes that can quickly unravel your international expansion efforts.

"When I look at privately held companies, when they're expanding overseas, many tend to underestimate the amount of capital required," said Morgan McGrath, head of international banking for JPMorgan Chase's commercial bank. They may also be unaware of the time senior managers in the U.S. need to invest in tasks, such as meeting government officials and customers abroad. "They want to deal with the top person in the company," he said. Some firms may also be unprepared for the rigors of recruiting talent, which can be time consuming, especially for a privately held company that is not well known overseas.

The challenges highlighted by JPMorgan Chase are most likely to apply to corporations of some size. However, for any business owner, large or small, there are some critical mistakes to avoid—mistakes often made by entrepreneurs when chasing the international consumer. Here are three:

1. Don't go overseas on a 'budget travel' budget.

It may seem obvious when expanding internationally to learn as much as you can about the local culture, but many business owners still don't place enough priority on the cultural exchange and fail to implement the necessary changes. Entrepreneurs should be prepared to invest in hiring well-qualified professionals to help with localizing the company's website and marketing materials and steer clear of cheap, automated solutions. The risk of offending customers with a poor translation is too great. 

"It's better to not do it at all than do it wrong," said Liz Elting, co-CEO of TransPerfect, a global translation firm based in New York City. 

It's also important to consider how you'll adapt your customer-service processes to a new culture. When Ellison opened his outpost in the U.K., he realized he needed a call center there—and hired expert help to determine where it should be located. People in the U.K. speak with many different accents, and he wanted to make sure that customers throughout the region could easily understand his customer-service reps. "The recommendation we got from our consultant was to open a center in Glasgow," he said.

2. Don't avoid confrontation.

Sanjay Kamlani, a Mumbai-based serial entrepreneur, once advised multinational firms for PricewaterhouseCoopers, and he has seen many cross-cultural business ventures sputter because of misunderstandings.

Kamlani was determined to avoid that as co-founder and co-CEO at Pangea3, a legal-process outsourcing company launched in 2004 in New York City. Pangea3's legal services delivery team in Mumbai included many young employees, reflecting India's demographics. Its clients, however, tended to be mid-career attorneys in the U.S. Given that young people in India are taught to be very polite to those who are more senior in their fields, there was potential for miscommunication, especially in cases of communication over urgent client issues.

"They will say it in an extremely non-confrontational, deferential manner to the point that someone from the U.S. would not even understand there is a problem," said Kamlani. To prevent that from happening, he trained his team to speak to overseas clients in a more direct way than they normally would. "They hired us to be experts," he said. "We had to teach people to play that role."

His efforts worked out well: Thompson Reuters acquired Pangea3 in 2010. Now Kamlani runs 1991 Ventures to advise, fund and build new cross-border businesses in the United States and India.

3. Don't let your business get lost in translation.

Yes, it seems obvious, but business owners still let their overseas opportunities get "lost in translation"—and often in ways that have less to do with language than psychology.

"One of the big problems you can get into is thinking your customers are going to be the same—and your products will have the same value proposition," said Peter Cohan, venture capitalist and lecturer on strategy at Babson College and co-author of "Export Now: Five Keys to Entering New Markets."

This is true whether you're operating in an economy that is similar to the U.S. or a developing nation. At Shoplet, Ellison found that consumers in the U.K. are less likely than Americans to snap up his highest-priced merchandise and tend not to stock their supply closets in one swoop. They place smaller orders more frequently, so he takes that into account in his planning. "The U.K. market is a lot more frugal," he said.

Although the middle class is growing in developing economies like India, it is easy to overestimate similarities to American consumers. In India, consumers spend a much larger portion of their income for basic necessities, including food, than U.S. residents do, so they don't have as much left over to spend on other items, said Sunil Mirani, CEO and co-founder at Ugam Solutions, a data analytics firm in Mumbai that serves customers in the U.S. and U.K., as well as in India.

"My guess is that U.S. firms might find it hard if they try to sell what they currently sell in developed markets," Mirani said. "It's not about 'dumbing it down' and removing features. It's having to start fresh by understanding the consumer psyche here. Very simplistically speaking, the value consciousness is way too different."

His company faces a different challenge in getting its workers, many of whom are based in India, to fully understand the concerns of a merchandiser in the U.S. that might rely on his firm's services. "They may never have visited a Target or Williams-Sonoma," Mirani, who went to college in the U.S., said. To bring this understanding to his team, Ugam Solutions has a dozen employees in the U.S. and close to the same number in the U.K. "The fact that we need to be close to the customer doesn't change," he said.