9 Mistakes International Companies Make When Entering the US Market
What I learned from 300 international tech companies.
How many international technology companies attempt to enter the US market and fail? There are no official statistics. We do know that direct investment by international firms in the San Francisco Bay Area alone approaches $4 billion a year, which explains the steady inflow of international subsidiaries, entrepreneurs and expatriates. Too many of them arrive with ambitious plans, only to leave in a short year or two after failing to make meaningful inroads.
“They do not take the time to learn how to do business here, in terms of business culture and practices.” — Matteo Daste, Partner, Squire Patton Boggs
Companies fail because they make mistakes. Over the last decade, I worked with, advised or closely watched more than 300 international tech companies, mostly here in Silicon Valley, but also across the country. I have observed how they operate, I looked at data from a survey of 200+ international tech companies and I asked friends and experts the same question: “Which are the critical mistakes that international companies make when entering the US market?” Here are the ones to avoid:
1. Lack of Focus
This insight comes from an observation that Viki Forrest, CEO of ANZA Technology Network, shared with me. With some exceptions, international companies come from much smaller domestic markets than the US. As they experience even moderate success in their home market, they are often forced to diversify in multiple sectors/verticals/categories or to integrate vertically to continue to grow. This approach rarely works in the US. In many industries, the US market is so large that the only viable strategy is to break it down in narrow niches and focus relentlessly on targeting and serving one or two of them.
“Large markets must be dissected into narrowly defined niches that then require extreme targeting.” — Viki Forrest, CEO, ANZA Technology Network
Properly identifying the competition is an issue that is tightly related to focus and niches. Who is my competitor in the US market? Companies often fail to understand who their competition is in the US. They may not find competitors with similar breadth of offering, but that may not matter at all! As soon as they focus on a niche segment, they often find out that the niche is already “taken” or vigorously contested by highly specialized US-based vendors.
2. Misunderstanding the Market Dynamics
There is ample room for mistakes when it comes to market dynamics in the US. First, foreign companies often prioritize product/service features that are of little consequence for their new, US-based potential customers. Second, they make poor channel choices. Third, they misunderstand the regulatory nuances of their industry.
The first hurdle is appreciating the fact that the US is not a market, but 50 different markets with different rules and standards.
Misunderstanding Customers
In my experience companies consistently overestimate how much the target market values certain features and underestimate how much it values others. A couple of examples:
When it comes to the American consumer, some European companies tend to overestimate the value of beautiful design and superior engineering vis-a-vis the price of a product, especially in certain product categories that carry little emotional capital for the consumer, think about kitchen appliances for example.
The opposite may be true, for example, of advanced software products where, for American corporate buyers, price considerations might be secondary and the company communicates to the market that the low cost of its engineers translates in lower prices. That positioning is counterproductive.
Misunderstanding Channels
What is the right channel of distribution to reach the buyer? That is a function of the market. For example, if you are in Europe and you are selling a B2B product, chances are that the largest share of your revenues comes from SMBs. To serve those SMBs in Europe you’d work with a relatively large number of channel partners in local markets. As you enter the US, you may find out that SMBs only make up a small share of your addressable market and that instead the market for your product is mostly Fortune 1000-type companies. These customers expect vendors to go to them with a traditional enterprise direct business model. There is a mismatch in the distribution model.
Misunderstanding Regulation
Regulatory differences are often only partially understood. The first hurdle is appreciating the fact that the US is not a market, but 50 different markets with different rules and standards. In highly regulated industries such as spirits, healthcare, pharmaceuticals, utilities, waste management, aviation, real estate and financial services, that means that market entrants must navigate a complex web of federal, state and local regulations. If government is a key industry actor, such as in defense, aerospace and law enforcement, certain rules may prevent a foreign company to even operate or sell, forcing a company to operate through local, certified partners or JVs.
3. Sample of One (Customer)
Here’s another fairly common situation: a company moves the US on the coattails of a single (large) customer deal. Management assumes that there is appetite in the market for their product or service. That initial customer win, however, does not automatically translate in wider demand.
Companies that find themselves in the enviable position of suddenly winning a large US account from overseas often rush their market research or skimp on proper opportunity evaluation and planning. They assume that they can extrapolate the demand and behavior of a few customers and prospects to the whole market but then demand takes much longer than expected to materialize.
“Many companies come to America because one big customer has called them, but they have no plan beyond that one customer.” — Franz Neumeyer.
4. Poorly Localized Product
Introducing a product that fits well in the new market is not only a requirement but also a need. Most entrepreneurs underestimate the importance of adapting features, pricing, channels and marketing support. A product offering should be redesigned to match requirements (localization), business model (pricing) and questions (collateral) of new, potential customers.
With “product localization” we not only mean localization in a strict sense, for example the kind you may see in software localization — although that is certainly part of it. Localization in a broader sense includes product marketing, channels and positioning.
Bad “Translation”
The most obvious example of poor localization is “literal”! It is frankly surprising to still see software products or web applications ship with poor language choices, grammar mistakes and typos. Also prevalent is the lack of adaptation to US business norms, data formats and user expectations. For example, address forms with wrong or missing fields and dropdown choices, personal information requests that are culturally insensitive — if not outright illegal — or references to obscure and non-applicable foreign legal requirements.
Feature Mismatch
Sometimes, the mismatch is built into product or service design decisions, creating a fundamental disconnect between the product that a company has built for the home market and the product that it should build for the US market. For example, European manufacturers of industrial equipment may favor innovative materials and “high-end” components to achieve superior performance, whereas US customers may want rugged, cheaper, easier-to-maintain components, that can be serviced by less skilled field operators.
Untested Pricing
The best way to price a product to be sold in a market is not to look at what your competitors are doing, but to estimate, through research, what the optimal price point is. That is an often overlooked step. The good news is that quite valuable insights can be produced with relatively small investments in research.
A few years back we worked with an online maker of Italian made-to-measure suits. To determine what price point buyers were prepared to bear, we made a modest investment in a survey with a few hundreds consumers in certain target segments and ran a Van Westendorp’s price sensitivity analysis. The results were extremely clear and revealed an optimal price point that was almost 50% lower that the prices applied in Europe.
Product Marketing and Sales Collateral
I am convinced that the vast majority of marketing materials, brochures, catalogs, even imagery, trademarks designed for a French, German, Japanese or South African customer are going to be either unusable in the US or require extensive rework. Companies often take shortcuts on their marketing and sales collateral. That results in work products that convey an unprofessional or “cheap” image or simply signal that the company is not serious in its investment in the market. Sometimes they are instead too polished and sleek or contain information that is structured in ways an American audience is unfamiliar with. Surprisingly, at trade shows in the US, we still see companies that print brochures in A4 instead of Letter size!
5. Too Much Focus on Technology
Many international companies tend to focus on their product’s (perceived) or real technical superiority. They build their messaging around technology and product execution, overlooking critical elements of the total value proposition for each specific target segment. Companies’ investments should aim for rapid integration in the ecosystem, quick delivery and relentless customer support, with the goal of tearing down as many adoption barriers as possible, as quickly as possible.
Innovative or disruptive solutions have a limited window of opportunity in which to establish a market before competition catches up.
Ecosystem Integration
How does the product fit into this market’s ecosystem? How can I complement my product and service with the missing component of the total solution the market needs? International companies should not be shy to seek ecosystem partners that are already in the market to lower customer resistance. If a company makes software that 70% of its US target customers use in connection with another vendor’s platform, product investment should aggressively be directed to pre-integrating the two softwares.
Timing over Technology
It is dangerous for international companies to over too much with their product in a market entry phase. Innovative or disruptive solutions have a limited market entry window of opportunity before competition catches up. Time advantages are critical in a market like the US, where new technology adoption is typically fast and tends to reward early market leaders. The market tends to forgive minor flaws in an innovative product as long as the company is quick in iterating and incorporating customer feedback. Too much investment in product development upfront can be as dangerous as a flawed product.
Finally, an integral part of the value proposition and total solution is after-sale support. A key consideration for companies that want to sell into the US is how they are going to support customers that are multiple time zones away from their home base.
6. Insufficient Marketing Firepower
Failing to adequately fund marketing and sales activities is one fatal mistake that international companies make over and over again when planning to enter the market. In the US, with its highly marketing-oriented business culture, investments in marketing will attract top sales talent. Underspending all but guarantees that only subpar performers will be willing to join the organization.
Additionally, in many international markets, sales people are often used to perform their own prospecting and to source leads. Here instead the general assumption, which informs the way most companies are structured, is that marketing produces most of the leads for channel partners and in-house sales teams.
A Higher Bar
Finally, there is a significant structural gap in the sheer size of marketing investment that international companies must bridge. Let’s take, for example, average total advertising spend per capita, across all categories, as a proxy for “the cost of doing marketing” in the US.
Companies in the US spend an aggregate $190 billion a year in advertising, representing 32% of global spend
Emarketer, a market analysis firm, puts the total spend in advertising at $600 billion globally. Companies in the US spend an aggregate $190 billion a year in advertising, representing 32% of global spend, or an average $594 per capita. By comparison, in a highly industrialized and advanced country like Germany, average per capita advertising spend is much lower, at $347 per year. In Brazil, the average drops to less than $100 for year!
We can argue over the merit of this data, but it is safe to assume that competing for customer mind share in the US requires much larger investments that in other countries.
7. Bad Hiring Decisions
Hiring capable hands to build the first market entry team in the US is critical. And hiring mistakes can be extremely costly, whether hiring employees, consultants and advisors. The very first hire will be responsible for closing the first customers and building a sales and marketing team. How do companies fill these positions?
The Expat
The first instinct is to send someone from home base. Companies promote someone from within and invest them with the mandate to launch US operations. Almost invariably, this individual lacks both any deep knowledge of the US market and direct experience opening a new office and entering a new market. Double whammy!
The Salesperson
The alternative is to find a sales leader locally. But, In the market for talent, international companies in the US are at a terrible disadvantage. They tend to overestimate the candidates they have access to and they rarely appreciate how skewed the distribution of talent is in the US. Companies must candidly ask themselves why a top US sales and marketing executive would join a company with and unproven product and no track record in the market.
The Rolodex Advisor
A third option is to hire the sleek, polished (former) executive “rainmaker”, who promises to open her Rolodex, make a few calls and get meetings. In all fairness, I have only rarely seen these type of arrangements produce meaningful ROI. In the early stages of entering the market, there is a lot of tedious, time-consuming, relentless work that a part-time senior business developer is rarely willing nor capable of doing.
8. Slow Reorganization
California is 9 hours away from Western Europe, 15 hours away from Beijing or Shenzhen and 17 hours away from Sidney! Companies often underestimate the burden that managing a US subsidiary places on management and colleagues back home, not to mention on remote customer support teams servicing US customers.
Not surprisingly, the companies that thrive here are the ones where the founder or CEO moves to the US to lead at least in the first few months.
If the US is the company’s first international subsidiary, employees may never had an opportunity to learn to collaborate remotely! Micromanaging instincts and decision making by the water cooler must give way to extensive delegation. Organizations must give local-market teams the authority to execute autonomously while continuing to move in the right direction.
It is a delicate balancing act. Ultimately what is required of companies when they enter the US market is that they reorganize and start to do things differently. This kind of change requires full commitment. Not surprisingly, the companies that thrive here are the ones where the founder or CEO moves to the US to lead at least in the first few months.
9. Not Understanding Cultural Differences
“They do not take the time to learn how to do business here, in terms of business culture and practices.” — Matteo Daste, Partner, Squire Patton Boggs
The US market is relatively open to new entrants, and prevalent American business practices are pragmatic and direct. Most developed economies have plenty of similarities in their fundamental values, customer behaviors and markets dynamics. Goods and resources move across the globe. It would therefore be tempting to ignore cultural, social and organizational differences.
Business Culture
Yet, almost every expert and every experienced international entrepreneur I spoke to stress the importance of cultural adaptability and of networks as a fundamental keys to success in entering the US market. Matteo Daste, Partner at international corporate law firm Squire Patton Boggs put it bluntly, “They do not take the time to learn how to do business here, in terms of business culture and practices.”
Even menial daily business tasks with employees, partners and customers are a minefield of possible missed opportunities. Everything matters: how to run meetings, how to communicate in email, how to speak in public, how to deliver a key message during an interview, how to talk to employees.
Loyalties Built on Trust and Reputation
Credibility, reputation, and trust can make a real difference in the US market. Such credibility is built on a track record of success rather than on credentials and seniority, especially in places like Silicon Valley. As Fadi Bishara, CEO of international Silicon Valley accelerator Blackbox, told me, “In most international business culture, grey haired and more formal is considered the essential source of credibility. They don’t understand that this is not the case in SV, where the merits of good products trumps the years of experience, age and appearances of the entrepreneurs.”
He continued, “They also underestimate the level of interconnectedness amongst the tech industry, and how every interaction can either add or detract from each operator’s trust capital, so to speak, and how quickly your reputation can deteriorate based on the smallest of signals, such as the way they treat an employee or a partner.”
“Many international entrepreneurs […] over estimate the value of the transactional aspect of business and under estimate how much of the business in SV is relationship based.” — Fadi Bishara, CEO, Blackbox VC
In this context, it becomes pretty obvious pretty quickly that the process building relationships trough careful and frequent interaction cannot be delegated. Ultimately, it is the founder or CEO’s job to “navigate the way into the highest payoff relationships.”
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