T
he decision to develop foreign markets is a particular- ly significant strategic move for any firm, and one that is fraught with both competitive and cash-driver com- plexity. As our economy becomes ever more globalized, export markets are becoming increasingly important, but for- eign competition keeps getting smarter and working harder in our home market. In the future, for all but the most nar- rowly local firms, foreign-market development will likely become one of the major ways to build shareholder value.Small and medium-size U.S. firms operating in our large domestic economy are generally at a bit of a disadvantage com- pared with similar-sized foreign competitors. The sheer size of the American economy is such that many U.S. firms have been able to grow significantly without developing the expertise and
In the future, for all but the most narrowly local firms, foreign- market development will likely become one of the major ways to build shareholder
value at anything
beyond a merely
average rate.
flexibility required for the export market. In contrast, many foreign companies have had to develop these capabilities because of the limited size of their home markets.
Consequently, they have become stronger, tougher competi- tors. Too often, American firms fail to pursue the export mar- ket in a focused way, but instead approach it haphazardly or opportunistically. While anyone can get
lucky, those who do well in developing their export potential are those who do it for the right reasons, with a sound, step- by-step strategy. They do it also from a position of strength, not as a quick fix for problems at home, such as sagging sales, obsolete inventory or eroding margins.
The first issue to consider in evaluat-
ing export possibilities is the adequacy of your scarcest resource, management time. Unless your cash drivers are in reasonably good shape overall, you almost certainly can’t spare the senior management time that needs to be invested, much of it up front, to develop foreign possibilities. The stronger your cash drivers overall, the greater the probability that you have the depth and breadth of expertise to make it in foreign markets—markets with different practices, where you must accomplish ambitious goals despite the additional obstacles represented by differences of language and culture.
From a sales-growth point of view, untapped domestic markets are generally better opportunities than unknown overseas markets that are much farther removed from your existing base of business experience. If, on the other hand, you are already broadly serving the domestic market, or if the remaining unserved domestic areas are particularly competi- tive, it may be time to explore export options.
Your first task in evaluating export potential is to develop a general understanding of demand, pricing and distribution in the target markets. What advantages accrue to local com- petitors? Which exporters are doing well there? Can you make a fair return? What additional levels of cost, investment and time will be required? Do you have the cash-flow flexibility to support such an endeavor? Unless you have highly reliable for-
The first issue to
consider in evaluating
export possibilities is
the adequacy of your
scarcest resource,
management time.
eign subcontractors or partners for most key areas of the busi- ness, you will need to start off very slowly, first building your own base of expertise and knowledge before making major commitments to a new market. If you do have reliable foreign subcontractors or partners, their full costs need to be incorporated into all forecasts, and working arrangements must be explicitly defined in clear agreements.
Inventory and receivables are two cash drivers that are almost inevitably dif- ferent in export environments, compared with domestic business. Transportation, customs and paperwork delays will prob- ably add significantly to inventory days associated with the export portion of your business. Accounts receivable are usually best handled through a letter-of-credit arrangement available through larger banks and some medium-size ones. Be sure to get these arrangements in place before booking that first overseas sale.
Since letters of credit generally count against your line of cred- it, be sure your banking relationships and credit capacity are adequate before embarking on your export strategy.
In many cases, the export portion of your business will have operating and financial characteristics so different from your past experience that it will be almost like entering a dif- ferent industry. This is not necessarily a brick wall, but it does raise the question, how different is too different? There is no easy answer, of course, but generally this question needs to be evaluated in terms of what you bring to the table. What skills, relationships, competencies or knowledge bases do you already have that will help you maintain and enhance your cash drivers in the new market? If you don’t already have some significant part of what it will take, perhaps your long- term growth strategy needs to develop along an avenue other than export.
Ultimately, the firms that most completely master the issues
Unless you have
highly reliable foreign
subcontractors or
partners for most key
areas of the business,
you will need to start
off very slowly, first
building your own
base of expertise and
knowledge before
making major
commitments to
a new market.
of strategic integration at the cash-driver level, whether from domestic or export business, will maximize shareholder value.
It is appropriate that we turn next to the assessment of such value in cash-flow terms.
ASH FLOW CAN’T INTELLIGENTLY BE VALUED OVER A
period of time without reference to the associat- ed risks. Although we have already explored much of the subject of risk through the process of looking at the cash drivers, we have done so specifically only in the sense of operating risk. There is anoth- er dimension of risk, that of financial risk to the business’s financial stakeholders. These are the firm’s lenders and own- ers, and the risk to them is erosion in the market value of the debt and equity they hold.