Internationalization Guide for SMEs

Are you thinking about expanding your business across borders?

Internationalization is obviously an ambitious goal that must be prepared properly, but the opportunities for companies are incredible.

In today's globalized economy, internationalization has become almost an obligation rather than an option, especially in countries with small markets like Portugal. With low growth, legislation and economic policies that are not very market-oriented, it is almost mandatory in many sectors to diversify markets to ensure the company's survival in the medium and long term.

Technology is redefining boundaries, meaning that many SMEs no longer hesitate to develop their activities in international markets. Internationalization is no longer the prerogative of large economic groups.

The first steps.

Where to start? With so many ways to conduct global expansion, it is imperative to have an effective plan. Just like a strategic marketing plan, an internationalization plan must take into account the issues that affect the company’s day-to-day operations. Therefore, the first step is to outline the context of such activities in order to establish an effective and reasonable starting point. This is precisely the starting point, the company’s strategic marketing plan that draws the starting line for the internationalization plan itself.

Identify the objectives.

Identifying the company's internationalization objectives is the initial phase of the internationalization strategy. For SMEs, the common denominator of internationalization is growth through international sales. Obviously, this is the first intention of a company when it thinks about internationalization. However, this objective may coexist with the response to other, more profound issues such as the need to reallocate labor to reduce production costs, or even to compensate for a drop in activity in the domestic market. The company may also need to gain know-how and technology to remain competitive. Another factor is the brand itself, the need to increase notoriety, which not only benefits the company in the international market but also in the domestic market. And finally, risk reduction through diversification gives the company continuity and stability, depending less and less on the fluctuations of the different markets.

However, for the internationalization plan to be effective and achieve its objectives, it is necessary to identify the most obvious growth opportunities that exist: analyze the target market's numbers to see if it is expanding, stagnant or declining; identify adjacent opportunities; companies with the most sustainable growth are those that have expanded their businesses into adjacent opportunities; analyze the most favorable trends and policies, consider the options that various market trends offer and work with those that best suit the company's commercial offering and value proposition.

Internationalization is a significant undertaking that must be approached methodically and thoughtfully to transform your company and lead it to incredible opportunities. In this practical guide, you will find the six phases of an effective internationalization plan. However, it is important to adapt it to the specificities of your company in order to develop it under optimal conditions :

1. Selection and analysis of target market(s).

As we have seen in other topics on our agency's blog, tools such as Porter's Five Forces and the classic SWOT and PESTEL analyses can be beneficial in determining the advantages and disadvantages of opening a business in specific markets. Using reliable and accurate metrics is another important initial step in assessing the attractiveness of the target market.

Target market selection.

One of the first steps that companies must take before internationalizing is to raise basic questions, on which the beginning of the construction of an effective strategy will be based, such as:

• Will it be profitable for the company?

• Will there be a sufficient target audience interested in the company's products or services?

• How easy is it to do business?

The answers to these questions begin the construction of the company's internationalization strategy, analyzing and selecting the target market(s).

Several factors must be considered to find the right market and the best fit for the company's products and services:

• The size and expected growth of the market.

• Ease of access to the market, geographical, political, legal, technological and social barriers.

• The compatibility of different markets with the company's portfolio.

• Availability of resources and distance to the target market.

• Competitive environment.

• External influences.

However, and especially for Portuguese SMEs, we believe that the main deciding factor for identifying the target market is economic indicators. Also, depending on the products and services that the company sells, aspects such as political stability or even infrastructure should be taken into account. Economic indicators to consider:

• Economic growth.

• Purchasing power per capita.

• Inflation.

• Exchange rate.

• Imports vs exports.

Target market analysis.

Once the target market(s) have been selected, another aspect that we must take into account in the internationalization plan is a series of variables and premises that will define the degree of difficulty we will have when implementing the company's products and services in each territory. These variables can be language, geographical distance, cultural differences and market size. There are more variables, but these are the most common. Remember that each market and each company has its own specificities that must be met.

These variables must be analyzed in the different target markets, to position each target market in relation to the company and the country of origin.

This analysis of the target market in relation to the company's territory of origin reveals certain adaptation needs of the company in order to operate in the target market. In terms of language and as an example, if English is spoken in Spain, France and Italy, for example, English is not as common as in the Nordic countries. What is the need for the company to adapt to the use of languages other than English? Another example is the size of the market. In the EU, the markets are small but they make up for it with a capitalist system similar to Portugal, a stable economic and political situation, common rules and almost non-existent barriers.

Hence, in theory and for Portuguese SMEs, the obvious markets are those in the EU, preferably Spain in the first phase. If we were to classify each variable with a score, the Spanish market would certainly have the highest score. The Spanish market is geographically close, has a similar language and culture, and has low barriers. Another advantage of the Spanish market, which the Spanish also use in our market, is that it serves as a way of testing the strategy in an easier market and then expanding to more demanding markets, with the necessary adjustments.

There are also negative factors in expanding into EU markets. For example, if there is an economic downturn, the likelihood of it spreading to all EU markets, including ours, is high. Therefore, if a company is thinking of escaping this economic downturn, it may be more advisable to look to non-EU markets. These guidelines serve as an example of how to use market selection criteria. I would like to stress once again that it is important to bear in mind that each company is different and market selection criteria must be adapted to the specificities of the company and its products and services.

Differentiation in the target market.

Competition between companies is greater than ever, and international markets are no exception. All companies that want to operate in the same market are exposed to competition between companies and brands. Therefore, it is essential to develop a series of arguments that allow the company to position itself ahead of the competition in terms of the value of its offer, exploiting its competitive advantages. The marketing department plays a fundamental role, as it is responsible for communicating the competitive advantages of the company and its products or services to the target market, as we will see later.

Here, as we are talking about internationalization, we assume that the company has already developed arguments with competitive advantages for the home market. For the target market, it is necessary to look for similarities between companies in the home country to identify singularities between them. and the companies in the target market with which you will compete. Here we try to find the competitive advantages already identified in the source market with the needs of the target audience in the international market to allow the company's offer to be placed on a more competitive level. We do not talk about price, although it cannot be ruled out; the most important thing here is the perception of the benefits that the company provides in relation to its rivals in the target market.

2. Choose internationalization methods.

Once the target market has been selected, the question arises of how to develop the business in this new market. Typically, there are seven ways in which a company can enter a given international market:

• Export: The company produces its products locally and sells them on the international market. This is the most popular and least risky method of internationalizing a company. It is best suited for the EU market and for Portuguese SMEs and startups.

• Direct investment: The company installs the manufacturing process, takes over, or merges with a foreign company. Although direct investment allows the company to reduce taxes and transportation costs, it is also the riskiest and most expensive option.

• Licensing: The owning company licenses other companies to manufacture and sell its products. These companies pay a fee to use the trademark of the owning company's products.

• Agency: It works as a commercial representation in which the agent has great freedom to negotiate and sell the products of the owner company, thus bringing financial return to the company. Agents focus on sales and commercial development.

• Distribution. Distributors add margins to prices, which can be higher than an agent's margins. The price then becomes higher for consumers. The manufacturer may not even know the selling price, he may only know the price the distributor paid him.

• Franchising: Franchising is the same as licensing, except that the original business still has some control over the franchisees' manufacturing and marketing processes. This approach is much more cost-effective than owning your own facility or buying a local business.

• Joint ventures: The company partners with another company abroad to take advantage of its know-how in the target market.

There are several options available, but for most Portuguese SMEs, exporting, agency and distribution will be the most common. However, exporting is the most suitable for Portuguese SMEs and startups. In terms of target market, it is especially suitable for the EU (but not only), with a low risk and a more effective knowledge of the market and its specificities. Depending on the contracts, it is possible to use exporting and agency or even distribution in conjunction, this allows the company to have a more real perception of the market, benefiting from local know-how and reducing the risk of poor performance by an agent or distributor.

3. Develop a network of international partners.

The successful internationalization of a company, in a globalized economy such as the one we live in, necessarily involves the creation of a network of reliable and transparent partners. The company can thus not only count on local know-how, but also associate the brand with projects and other local initiatives, reinforcing the idea in the customer's mind that the company's products or services are an attractive option.

This strategy not only reinforces and potentially expands the company's range of solutions, but, by following a careful approach to selecting our partners, we have achieved a positioning in the territory that contributes to reinforcing the foundations on which the company's presence is based and, consequently, a positive image of the company in the target market.

Finally, there are certain points to keep in mind when creating local partnerships: look for partners who have similar values and objectives or who are effectively seeking similar growth in the sector (preferably with complementary products and not direct competitors or substitutes); look for partners who can fill the gaps detected in the internationalization process and complement the company's values, helping to reduce the risks and investments required for internationalization.

4. Adapt the marketing strategy to the target market.

After laying the foundations for internationalization, it is essential to think about the pillar of your strategy, which is the new customers in your target market. In fact, developing your business abroad will necessarily mean a new customer base. As in the domestic market, marketing in the international market must also act to captivate this new target audience, focusing on their specific characteristics and needs.

As much of the work has already been done in the domestic market, identifying the typical customer, for the international market it is necessary to adapt the typical customer strategy to this new reality, while maintaining the base. Therefore, it is important to know the expectations of this audience and how the company's offer differs from the local competition. Also compare the behaviors and preferred channels of this new audience with the audience in the domestic market to make the necessary adjustments.

One of the essential tasks of marketing is to adapt communication and commercial documentation not only to the behavior of this new audience but also to the language. When it comes to language, there is a classic mistake to avoid: poorly done translations. It is important to hire a talented translator who is fluent in technical terms.

Many marketing decisions are associated with the internationalization process. Extensive market research must be carried out to ensure that the offer is adapted to the target audience of the new market. Depending on the market research, the company may have to modify certain characteristics of the offer to better adapt it to the needs of the international target audience.

Finally, the costs involved in introducing new products or services into a foreign market consume a considerable amount of marketing resources, both financial and human, to compete with companies in the target market. It is therefore important to allocate the necessary resources to new operations, as we will see in more detail in point 6.

5. Organize the company's various departments.

An internationalization process is complex, and to carry it out with certain guarantees it is necessary to involve several departments within the company. There are several departments that play a fundamental role in internationalization, as we saw above, the marketing, sales, operations, R&D, quality and HR departments. Collaboration between these departments, as well as fluid communication, is essential for effective internationalization. Within each of these departments there will be members who work almost exclusively in collaboration with the business development department, in charge of executing the company's internationalization strategy.

The professional profiles that best suit the requirements of an internationalization plan are, above all, profiles with knowledge in marketing, sales and operational profiles, and these are the first ones that we must incorporate most urgently to meet the requirements of the initial phases of implementation of the strategic plan. They must be people with fluency in languages, with commercial and strategic vision, capable of carrying out administrative management but, above all, with skills to negotiate and present the services that the company sells to both partners and end customers.

6. Plan financing.

The final key to success in internationalization lies in financing the project. Indeed, internationalizing a company to a foreign market will require planning a perfectly calibrated budget to ensure a successful launch. It is therefore necessary to draw up a business plan entirely dedicated to the internationalization project, taking into account the economic and fiscal environment of the target market. It will then be beneficial to draw up a list of potential sources of financing, both within the target market and domestically and even internationally outside the target markets.

If you want to know more about the internationalization of your company, talk to us without obligation, we can advise you free of charge, via email: info@truebrands.pt or in the boxes on our website: www.truebrands.pt