Going International? Don’t Forget The Six Senses


International Strategy


Want to expand your business to international markets?

Contemplating where to compete outside the home base?

This guide will help you answer those questions with impactful frameworks and powerful free tools.

Read on to learn more!



Table of Contents


International Expansion In The Time Of Pandemic

Finally, a post on International Strategy!

I had been waiting to begin writing on this topic for some time now. Two reasons —

  • It’s a passion of mine
  • It’s an important area of Strategy


Now you may question why one would think about going international at all in the current climate. After all, a pandemic has marred the world.

Global supply chains are seeing shortages — materials, containers, energy, and labor (cue in the great resignation).

Shipping Costs and Commodity Prices have spiraled, to say nothing of the other what-have-yous of supply chain snafus.

My short answer to that pessimism is that going international doesn’t always require a global supply chain.

You could, for example, look for international expansion by developing local supply chains in new markets*.

There is, of course, a case to be made about resilience and growth too.

To Expand, Or Not To Expand


With the whac-a-mole that COVID 19 has played globally, it makes sense for many businesses to have an international presence.

Think of it as putting your eggs in more baskets**. In today’s climate, it’s primarily about revenue resilience.

However, there can be more ‘maritime’ drivers of expansion at play. It’s especially true if the companies think long-term, as they should in case of such strategic plays as market expansion.

Consider, for example, the drivers uncovered by an EIU survey of CxOs in 2015 (definitely a sunnier time).

Drivers of International Expansion, Aug/Sep 2015, n = 155 | EIU


Then, it is instructive to see that CxOs across the spectrum are considering international expansion despite the pandemic. Consider another survey by EIU from 2020.

CxO considering changes in Global Presence, Sep/Oct 2020, n = 600 | EIU

*It depends on the type of product or services your business offers, the type of long-term value chain choices you have made in the past, and your pile of cash.
**Such a move depends on the firm’s industry and financial appetite for such opportunities.

Notes On EIU Surveys

Sidebar: EIU CxO Survey 2015 — Sample

To quote the EIU verbatim on the sample —

In August-September 2015 The EIU surveyed 155 senior executives who have some or very good knowledge of the issues involved in their company’s expansion into foreign markets.

Survey respondents included 33 chief financial officers, 31 chief operating officers, 31 general counsels or chief legal officers, 30 chief procurement officers and 30 heads
of payroll or senior payroll professionals.

Geographically, 46 respondents were drawn from North America, 46 from Europe, 47 from Asia-Pacific and 16 from rest of the world.

They represent a wide range of industries, including manufacturing (16% of respondents), IT and technology (16%), professional services (16%), financial services (11%), retailing (8%), transport, travel and tourism (6%), construction and real estate (5%), and energy and natural resources (5%).

Of the companies included in the survey, 80 have an annual revenue of less than US$500m and 75 have an annual revenue of US$500m and above.

Sidebar: EIU CxO Survey 2020 — Sample

To quote the EIU verbatim on the sample —

[The chart] is based on a survey of 600 C-level executives conducted in September and October 2020.

Around a third of the respondents (34%) are based in Europe, another third (33%) in North America and the balance in Asia-Pacific.

Their companies are distributed across a wide range of industries, with the largest representation from the financial services (15%), technology (15%) and retail (11%) sectors.

Just over half (53%) of the respondents work in companies earning annual revenue of over US$500m, with the rest earning between US$100m and US$500m.

Most of the companies represented (83%) are no older than 20 years, and 44% have existed for fewer than ten years.

A Pinch Of Salt, May Be Not


The survey above is a year old already. The EIU conducted it in September/October 2020, right before the stinky stuff started to hit the proverbial fan. So one might take the results with a pinch of salt.


However, that pinch of salt may be less salty. Global economic recovery continues even though inflationary forces and a possible energy crisis loom large.

My point is that it doesn’t matter how the CxOs have changed their minds about international expansion since the survey.

Crises build a stronger case for international expansion IF the firms are willing to be smart about it.

The Purpose Of This Post


I won’t build that case for international expansion in this post. Nor would I answer the question of if and when a company should consider going international.

For now, let’s leave the questions of if and when for a future article. Answering them is not the purpose of this post.

Instead, this post will focus on a particular part of International Strategy — market selection, aka, answering the question — Where to compete?

You may think the answers are obvious — start with geographical neighbors and/or largest markets for whatever you are selling. But there’s more to this question.

E.g., the biggest markets may not be the most accessible to startups on a budget.

In demonstrating the methods to answer this question, I will use a specific firm as an example. To begin with, I have assumed that the firm considered has a need and intent to expand internationally.

Please bear the following points in your mind before you jump to the next section —

  • The analyses in this post are not exhaustive. There are multiple ways to skin the cat. Neither the whole cat is presented nor are all the ways shown.
  • These analyses are for demonstration purposes only. They are not business advice, at least not yet. Think of them as hypotheses that the firms must confirm with deeper dives.


Now that that’s out of the way let’s get fussy first.


Get Fussy

Fussy is a deodorant company based out of London. They got on the scene in October 2020 with a Kickstarter campaign for funding a refillable stick deodorant.

It’s precisely the type of hippie product the world needs now. In embodying that spirit, they are like UK’s #1 natural deodorant brand WILD.

Only, they are wilder.

Folks at Fussy sent an entire olive tree to Alan Jope, Unilever’s CEO, to make peace over a cease-and-desist.

Alan asked them not to sweat it, which they will, given their product’s aluminum-free proposition. If you know your deodorants, you know what I mean.

Sidebar: Fussy’s Value Chain

Source: FAQs on Fussy’s website and informed assumptions

Procurement

Ingredients: Where possible, they source most ingredients closer to manufacturing. Some ingredients have to be sourced from abroad. Procurement activity is likely outsourced to the manufacturing partner.

Manufacturing: Asset-light model — having outsourced manufacturing to a partner in the UK. I suspect it’s Herrco Cosmetics, but that’s not pertinent to our discussions here.

Marketing: Likely online only. Their online ads landed them into hot waters with Unilever in the first place. Videos on youtube look agency quality.

Product Development: Packaging designed by Blond. Deodorant R&D is probably outsourced to the manufacturing partner.

Route to Consumer: Subscription-only model. UK deliveries are free. Overseas consumers pay a premium of 40% — 50% on the refill’s cost-to-consumer.

Route to Sustainability: Fussy is working with partners running sustainable practices. It offsets net carbon in the supply chain through Climate Partner (e.g., by buying CO2 reduction certificates).

Fussy’s Cost To Consumer

Fussy sells its refills for £ 5 each to subscribers in the UK. As of this writing, the opening price of the subscription is £ 13 as there is a one-off cost associated with the deodorant’s case.

That brings the price (or cost-to-consumer) of the case to £ 8.

Let’s assume for a moment that most of Fussy’s sales are through regular subscriptions instead of one-offs. Let’s also assume that Fussy will retain subscribers over a very long period.

In that case, for all practical purposes, one can assume the one-off cost to consumers for buying the deodorant’s case to be negligible.

Think the price of case per refill over a lifetime of refills. It’s depreciation, plain and simple.

E.g., each refill lasts 4 — 6 weeks. Then over two years, the cost of the case to a consumer on a per refill basis is between £ 0.3 — 0.4.

So for our purposes, we can assume that each Fussy deodorant costs the consumers £ 5.3 in the UK. Outside the UK, there is an additional cost of £ 1.99.

Hence, Fussy costs £ 7.3 per deodorant (or around $10 per stick in the US or € 8.7 in the EU).

Fussy v/s Conventional Sticks

Compare Fussy’s cost-to-consumer with that of conventional stick deodorants. As of this writing, a typical stick costs between £ 2 — 3 per stick.

So Fuzzy costs the consumers 2× as much in the UK as do conventional sticks.

The calculation assumes that Fussy’s sticks are around 50 ml (or g) in size like the conventional sticks. If they are smaller, the cost per use to consumers becomes even higher relative to other sticks.

Consider the cost to US consumers and contrast it with that of the conventional stick deodorants. Consider AXE Phoenix listed on Walmart at $ 1.62/oz. That’s around $ 2.8 for 50 ml.

Cheaper deodorants might be half of that. But let’s assume that a typical stick costs $ 3.0 per 50ml in the US.

The calculation is rough as a 50 ml SKU will have its cost considerations. And of course, there’s the assumption that Fussy also has a 50ml (or g) unit size.

I am also not sure if Fussy’s prices include VAT, e.g., when exporting to the EU. But let’s live with this for now.

Meaning Fussy will be 3× as costly as conventional sticks in the US.

Assuming the EU to be somewhere in between, let’s agree for the moment that Fussy is around 2.5× as costly as conventional sticks on the global market.

Remember this figure.

An Urban Affair

In most markets below $ 10,000 GDP per capita, roll-on deodorants dominate the markets*.

India may be a significant exception to that, given the income disparity and large market size.

For practical purposes, one can consider the $ 10,000 GDP per capita as the cut-off for the transition from roll-ons to sticks. Then, the cut-off for switching to Fussy is likely to be $ 25,000.

In reality, consumers don’t trade up to costlier products at such concrete cut-offs. Some may also make a jump and embrace aerosols. But as a heuristic, it works just fine.

The calculation equates GDP per capita with personal incomes, but this should be ok at the hypothesis stage.

Fussy’s 2.5× cost-to-consumers and correlation of urban population with GDP per capita (see chart below) make me believe that Fussy is a predominantly Urban proposition.


No shit, I hear you say.

I agree. I could have claimed this at the outset, but I wanted to put some logic behind the assertion*. The assertion above is important for two reasons —

  • determining markets based on general affordability of the product**
  • devolving from country level considerations to city level market identification (see here)

*Especially since there isn’t any recent credible global research regarding rural v/s urban behaviors in adopting green products or e-commerce. Global datasets on the rural v/s urban income divide are also not available entirely. At least I couldn’t find something useful in the public domain. Would you please comment below if you know of any relevant resources?
**There will always be exceptions. Meaning, Fussy may yet find a consumer base in Markets far below such heuristical cut-offs. That’s especially true for large markets below the GDP cut-off and with high income disparity — e.g. India, China, Brazil.


Whither Get Fussy? — Costs

Armed with Fussy’s Urban consumer roots, we can now conduct an exercise in Market Selection.

There are various ways one could think about this.

Ultimately all the criteria will boil down to consumer preferences (including willingness or ability to pay) and Fussy’s cost to serve those preferences.

If the costs are higher, Fussy makes less money per stick, and there’s less available to reinvest in the business or make it attractive to more investors.

Import Duties

E.g., Import duties imposed on UK manufactured deodorants are one criterion. Higher duties will be a deterrent to Market Entry.

However, this is unlikely to be a big deal or a helpful filter in THIS particular case.

Why?

Because if you consider the countries above $25,000 GDP per capita threshold in the Tariff map below, most charge duties at 5% or lower.

Effectively Applied Tariffs on UK Manufactured Deodorants | MACMAP

VAT

VAT might be a more important consideration, especially if Fussy doesn’t pass it on to the consumer AND is not refundable.

For example, most EU states will charge VAT (at not less than 15%!) on goods regardless of origin.

I am not sure how these rules may have changed since the EU updated its VAT rules for e-commerce in July this year. But the point is that this is an important consideration.

However, it is also a consideration that you can factor in during hypothesis testing — i.e., once an initial set of markets is under review.

International Trade*

Fussy can look at the markets that already import deodorants from the UK. There is a supply chain precedent there, and processes are likely to be better known for the largest importers.

Countries Importing Deodorants From The UK; The Share of UK Deodorants Exports (%); 2019 | OEC

This type of thinking is straightforward, and its results are also plain. E.g., the chart above suggests targeting primarily European Markets for Fussy’s international expansion.

“Thank You, Mr. Obvious!” I hear you say. And, markets like UAE, Israel, and Egypt notwithstanding, I somewhat agree.

But remember that this post is about the demonstration. I had to include it for the sake of completeness.

Besides, this chart tells us one important thing. Despite being the largest deodorant market and the largest stick deodorant market, the US isn’t a big export destination for the UK.

What if the US has unrealized potential for importing from the UK? And what if, conversely, the largest importers i.e. the Netherlands, Germany, and France are already importing at potential?

That will definitely have an impact on the answers to the questions — where to compete, and how?

Turns out there is a way to understand the gap, by market, between actual imports and potential for imports from the UK. It changes the landscape a fair bit**. Take a look.

Potential to Actual Gap in UK’s Deodorant Exports | Intracen

*The charts in this section depict data and estimates for all deodorant types, not just sticks.
** For example, you may want to understand why there is a gap in the first place.

Distance Effects

In the treemap chart above, most of the biggest importers are also the closest to the UK. That’s because international trade tends to be inversely correlated to the distance between trading countries.

What’s more, this distance needn’t be physical. For example, it could be a cultural distance (i.e., how culturally different are two trading partners?) or economic distance (e.g., rich/poor differences). More on these distance effects later (see Sidebar: The CAGE Distance Framework at the end).

Typically, expanding in closer-to-home markets will help save on working capital (read inventory in transit).

That assumes the transit time to be commensurate with distance only (and not bureaucratic BS, for example, or transit delays due to traffic/congestion).

Faraway markets might also require warehousing, whereas the closest ones, e.g.those within 2 to 3 days of transit, can still consider storage-free deliveries, especially if market volumes are small.

You may use fancier measures like growth rates of exports to markets and so on to further filter destinations.

In conjunction with the chart above, such considerations duly address the Total Addressable Export/Import Market.

However, they don’t always address the Total Addressable Market. E.g., while Germany may import from the UK, it also manufactures and sells its deodorants within its borders.

Freight

Freight rates are yet another consideration. Typically, average logistics costs in e-commerce deodorants shouldn’t be more than 15% of the total product cost (to the company).

However, the current climate may be quite different, what with the freight rates still keeping so high, lorry drivers still missing, and energy costs rising.

A subscription model may allow Ocean Freight on some international lanes as fulfillment dates can be known and synchronized.

But as you may have read a zillion times since the pandemic began, ocean freight costs are killer right now. Here’s the global index on them —

Freightos Ocean Freight Index, Global Basket | Source


Fussy’s carriers may be using air-freight as a likely recourse right now (nationally and internationally). However, it has gone up too since the company launched.

Freightos Air Freight Index, Global Basket | Source


Companies like Fussy, which are starting now, may consider a tactical retreat from or omission of particular markets in light of such high costs unless they have deep pockets.

E.g., Fussy may choose to omit specific high logistics cost markets at the moment. Still, if those markets are singularly promising, it may look for local manufacturing partners for long-term solutions.

Bear in mind that the full impact of logistics cost might be higher than the range I mentioned above. That is because companies may offset carbon emissions by buying CO2 reduction certificates.

Companies must appropriately allocate such costs (e.g., in the proportion of carbon emissions at every link in the supply chain).

Even with that logic, such sustainability costs will likely be higher for supply chain links like manufacturing and procurement. One may consider these factors in deeper dives on a market selection.

Internationalization By Localization

Local production in international markets is a proposition that may not take off immediately for product-based early-stage startups.

One requires a minimum order quantity of volumes sold in a market to contract to manufacture. For example, in Fussy’s case, that quantity may be around 10K units per order.

Many contract manufacturers may require annual assurances in volumes. It may be early days for Fussy to provide such guarantees in markets outside the UK.

That is especially true because of small volumes and higher transaction costs associated with managing multiple manufacturing partners.

But when it can provide assurances, Fussy may consider setting up a second location in mainland Europe, for example.

Considerations in localization should also include the availability of the sustainable infrastructure — a core tenet of Fussy’s proposition.

If localization is to be done by investing in an international market, it is important to understand factors like the market’s affinity to FDI and the availability of local investments.

Equally important are the governance mechanisms and laws in place — not least the protections available to businesses and recourse measures in areas like labor disputes.

You may contest local v/s export considerations as this post is about where to play and not how to play. However, in truth, the two questions are often entangled.

Suffice to say that the final decision on where to play and how should be based on business cases that provide robust assumptions on future profitability in a market contingent on the chosen route to market (e.g., imports v/s local production).


Whither Get Fussy? — Consumers

Up to this point, we have seen several ways to develop hypotheses around the international market selection. All of them consider the cost to the company.

However, one CANNOT ignore direct consideration of consumer preferences, demographics, and purchase power.

You must begin with the consumers. It’s Marketing 101, Strategy 101, and Supply Chain 101. It’s 101-101, come to think of it.

If you are too focussed on costs, consider this — consumer adoption of a product ultimately drives economies of scale and scope in the long run and the complexity of your product offerings.

That, in turn, drives the cost considerations. Your goal is to satisfy a need consumers have. Costs are the way you invest in doing so.

Consumer Cohorts

Fussy will likely have a sense of what its target consumer cohorts look like and what markers shape them.

E.g., age, gender, ethnicity, income groups, broadband penetration, e-commerce adoption, et cetera — the usual consumer stuff.

It can then look for similar cohorts outside the UK and target those markets for international expansion.

The assumption here is that as an insurgent (as opposed to an incumbent like Old Spice or Rexona), Fussy is likely to lead with a limited set of offerings.

It wouldn’t adapt extensively to different markets at the outset. That’s why similarities are essential at this stage — adaptation costs.

The rest of this section demonstrates different ways to look at consumers. These tools are NOT a replacement for proper consumer research.

However, short of proprietary consumer data and in-depth reports (e.g., from agencies like KANTAR), the tools of this section are a bloody good starting point.

For example, one way to look at consumers is to bank on their cultural identity.

The Homefront: Cultural Traits — I

Marketers have extensively researched the impact of culture on product choices and consumer behavior.

Cultural markers can therefore provide more insight into international market selection hypotheses.

Like charity, the use of such markers begins at home. I mean, who’s more like the British than the British?

Then, why not start with bringing freshness to British expatriate pits? Here’s a map one could consider —


You see a lot of markets overlap with previous screens from cost considerations. That’s good.

What’s better is that this map improves the relative importance of some smaller markets like Malta and Cyprus v/s Markets like Belgium and Romania that are otherwise more significant markets.

You also see other markets emerge in the ex-pat segment — Australia, ASEAN as a group, and South Africa.

National Culture: Cultural Traits — II

There are other cultural markers one could utilize.

Consider Hofstede’s 6D model of national cultures that scores countries on scales of 1 — 100 over six dimensions.

I cite some consumer characteristics of cultures that score high or low on these dimensions in the table below. These are not one-to-one comparisons. However, since the traits are relative, you can take a guess.

Culture DimensionHigh ScoreLow Score
IndividualismConsumers tend to see brands as unique human personalities (E.g., wild, fussy, et cetera. Get it?)A high % of consumers tend to use social media to make a purchase decision.
Power DistanceConsumers care about social status, standing out, and using the #1 brandConsumers tend to be more active in sports and exercise
Long-term OrientationConsumers are relatively more conscious of pricesConsumers tend to spend more hours on social media
Gender of NationsConsumers care about status and showing success. They tend to take more care of appearance to do so.Consumers focus more on quality of life and caring for others.
Uncertainty AvoidanceConsumers tend to have a low tolerance for ambiguity, use more medications, and engage more in cleaning and washing due to higher fear of dirt, bacteria et cetera.Consumers tend to be early adopters of innovations, have an enthusiastic attitude towards health, and engage more frequently in sports, exercise, and travel.
IndulgenceConsumers are more likely to pay for extra quality and try on innovations. This dimension correlates strongly with GNI/capita*Consumers are likely to be more thrifty and less open to new-fangled products.
Consumer Characteristics Based On Dimensions Of National Cultures

Cultural Traits — III: Going 6D

So how does one use the 6D model in identifying international opportunities? The first step is to recognize that national cultures are highly nuanced and layered. Remember —

  • Consumer characteristics based on national cultures are averages — there will be segments** within countries that work well for your brand despite national culture.
  • National culture must be seen relative to that of other countries. E.g., Fussy should consider new markets in comparison with their home base in the UK.
  • Cultures evolve, however the relative differences between countries tend to be quite resilient.
  • Different dimensions of culture impact each other and can be correlated. Please recognize the trade-offs when you focus on selected dimensions.


Now that you know the above, here are some pointers on the usage —

  • Use your brand identity. E.g., here’s how I score Fussy on the six dimensions —
    • Individualism & Indulgence: HIGH
    • Long-term Orientation & Gender of Nations: MIDDLING to LOW
    • Power Distance & Uncertainty Avoidance: LOW
    • How high is HIGH and how low is LOW? Gauge that using the home country’s scores.
  • Don’t try to win on all dimensions. There are no perfect markets.
  • Don’t use 6D model to eliminate markets. Use it to prioritize markets
  • Don’t get married to the 6D model. Don’t use it as the first filter. Instead, always use it together with, and after, other filters/tools.

*Remember our discussion on 2.5×, GDP/capita, and Fussy being an Urban product/brand
**Only those cohorts need to be big enough to be commercially viable.

Cultural Traits — IV: A Demonstration

Ok, enough talk! Here’s a demonstration of the 6D model comparing European countries with the UK. The UK is in the top right quadrant.

A Sample 6D Comparison: Europe | Hofstede


For me, Individualism and Indulgence are critical as they relate to consumer willingness to pay for extra quality and perception of human attributes of brands.

Uncertainty Avoidance (bubble gradient) relates to engagement in outdoor activities and willingness to try innovations and is, therefore, included.

Long-term Orientation and Indulgence typically correlate negatively. Power Distance typically correlates negatively with Individualism.

That leaves the Gender of Nations — that dimension is missing in the chart. As I said, don’t try to win on all fronts.

From this, one could prioritize deep-dives into markets in the top right quadrant. One could tactically omit the destinations in the lower left quadrant.

Markets in the lower right quadrant require inputs from other tools or considerations like the relative size of the TAM.

I will leave you with another visualization — the 50 most populous countries in the world. Make of it what you will.

A Sample 6D Comparison: Top 50 Most Populous Nations | Hofstede


Hunting For International Markets At City Level

We are now fast approaching the end of this post.

Let me demonstrate what I think is a powerful approach for prioritizing international (and even local) markets for urban startups.

If I had a quintessentially urban offering, I would start looking at international markets for expansion using the tool in this section and then apply other insights and filters.

The central logic of the approach is to consider different urban centers as markets instead of aggregating everything at the country level.

Companies should (also) consider profitability at the level of such urban centers anyway. So why not hunt for international markets also at the city level?

One can then juxtapose other filters, e.g., the country-level filters discussed earlier in this post, over such city-level selections — more on that in a bit.

Fussy is a London startup. Since I expect most of its sales to be in cities within the UK, let’s look at cities similar to London.

See the visual below for an example. Please open the image in a new tab if it’s unclear. Or, you can open the link in the caption to play around with the tool yourself.

World Cities Similar To London | METROVERSE


Understanding The METROVERSE

The visual above depicts cities that resemble London’s economy and industrial makeup. That determines the type of people (read consumers) who end up living in those urban spaces.

At the top, you can select ranges of population and GDP per capita. I set cities above 1 Million in population and above $ 25,000 in GDP per capita.

The GDP cut-off follows from our earlier analysis of Fussy’s cost-to-consumer relative to conventional sticks.

The inner ring depicts the top ten cities that most closely resemble London. Stockholm ranks 1st in similarity, followed by others in a clockwise fashion.

Leeds, Manchester, and Birmingham feature from within the UK. That’s why I mentioned above that one could look at local urban markets as well.

The outer ring depicts ten more cities, starting clockwise with Nagoya in Japan at similarity rank 11. Bubble size denotes population.

You may wonder why New York or Singapore don’t make it to the list. The 1 Million population cut-off adds so many other similar cities to the list that New York and Singapore sink in similarity rankings. They appear when we increase the cut-off to 2 million or more.

I believe the above quirk is significant. Market selection isn’t the province of the obvious — not always.

You can filter out cities by region or country as well. For example, one may limit similarity study to cities in Europe. Here’s what you get —

European Cities Similar To London | METROVERSE


Compare this with the country-level results from the 6D model. Can you explain the differences?


Making Sense

We have come a long way in this first post on International Strategy.

I have demonstrated a number of considerations and tools that will help you develop hypotheses to answer the central question concerning this post — Where to compete?

Obviously, at this stage, there are some unanswered questions. I have captured some of them in the Q&A below.

Q&A

So where should Fussy expand?

Good question! And you will notice that I haven’t provided anything concrete by way of an answer.

That’s because quite frankly it’s for that company to decide. My purpose here was not to solve the problem of market identification for Fussy.

My purpose here was to demonstrate the type of thinking that goes into answering the question — Where to compete?

And on our way, I have also provided you with some tools to start thinking about such matters.

Besides, I have made certain assumptions about Fussy (e.g., export over localization), its business proposition, brand identity, and key market (the UK, or London). I could be way off.

There is also the question of Company Strategy and Fussy’s access to resources. All these things matter in the market selection and I am not privy to them.

That’s why I said, the thought process is more important here.

You are a sly fox, aren’t you?

Thank You. You are too kind. But I do mean what I said in answer to the previous question.

My company is expanding to international markets. Should I just use these tools?

Well, these are just some of the many tools or datasets that you can leverage. What you end up using really depends on the context of your business, your industry, and your objectives.

Moreover, these tools are useful only for developing your hypotheses on where to compete. You will still need to do deep dives for hypotheses testing and decisive business cases.

Sometimes, especially in the decision phase of your expansion, you may find that there really is no option other than to get eyes on the ground, commission proprietary research, issue Requests for Proposals (RFPs), et cetera.

What tools such as the ones demonstrated here tell you is that you don’t have to start from scratch. There’s enough information out there to start.

The more important point I want to drive home is about how to think about such challenges. What’s the framework for identifying the potential markets for international expansion?

I think that’s the main takeaway here. Read on till the end for the framework.

Where can I find more tools for International Strategy?

The UNCTAD, WTO, World Bank, and IMF websites are great starting points.

We are also collating a number of other useful tools and our original frameworks here. The link may not work yet for you but we are building it. Keep checking this page. We expect it to be operational before November 01, 2021.

If you know a free resource for international strategy, let us know in the comments below, on our LinkedIn page, or via email.

Is this an exhaustive list of considerations for identifying international markets?

As the list of tools emerging from this post, the considerations discussed herein are NOT exhaustive.

However, they are quite powerful, and I daresay, sufficient for when you are only beginning to consider international expansion.

We have not considered, for example, factors like Economic Openness. See the list below from Legatum Institute

  • Market Access and Infrastructure, such that products and services can be easily produced and delivered to customers;
  • Investment Environment, such that domestic and foreign sources of finance are widely available;
  • Enterprise Conditions that ensure markets are contestable and free from burdensome regulation;
  • Governance that is underpinned by the Rule of Law, as well as Government Integrity and Effectiveness.


Some of the considerations in this post may hint towards these factors or are driven by them.

These (and other) factors are also included in the generalizations we have indicated in our consolidated framework. But we haven’t looked at them explicitly in this post.

You must not ignore them, especially when approaching the decision phase in the market selection.

You keep mentioning a framework. What is it?

Good question.

We assemble the framework for international market identification in the next two sections. However, here’s the lowdown. Two types of factors or dimensions will influence your choice of international markets for expansion —

  • Intrinsic — factors that you can influence or have more control over. These have to do with your company’s strategy and devolve into two separate considerations —
    • Your target Consumers
    • The Cost-to-serve those consumers
  • Extrinsic — factors that you typically have little control or influence over. These external factors can be organized under four dimensions, extensively studied by trade economists —
    • Cultural
    • Administrative
    • Geographic
    • Economic


Together we call these six dimensions the Six Senses of Internationalization because they help us sense the right international opportunities.

You will recognize the intrinsic dimensions from the way I have structured this post. The four extrinsic dimensions have not been mentioned explicitly until now. But trust me, a lot of what we have discussed till now falls into one of these four dimensions.

Read on till the end to find out more.

What if I have more questions?

Feel free to comment below, write on our LinkedIn page or email us if you have more questions.


With Q&A out of the way, let’s distill from our discussions in this post, and assemble the framework.

A Matter Of Strategy: Intrinsic Dimensions

Your international strategy can’t operate in isolation. It has to serve the overarching company strategy AND must follow the same four principles of strategic discipline that I laid out in The Four Riders.

Strategic discipline is critical for every firm but decidedly more so for early-stage startups. Resources are constrained, all hands are on deck, and every move contributes to whether or not future resources will be available.

Would you rather focus on product-market fit in a few core markets and come out strong or try doing too much and fail?

Make no mistake, international expansion (and for that matter its reversal) is resource-intensive.
The message is simple. Choose your battles, wisely.

And the way to do that is to keep subscribing to your company strategy, assuming it was built on robust fundamentals in the first place.

That includes the brand identity of your master brand (e.g., in this case, Fussy) and the virtues (NOT values) it espouses.

It is one of those moving target problems because, in the first phases of startups, everything’s evolving. From a strategic perspective, it’s a simpler (NOT easier) challenge for large companies and even they get it wrong.

E.g., consider the retreat of GM and Ford from several international markets in recent years.

From that perspective, there really are only two fundamental poles to consider —

  • Consumers — central to your company strategy (if they are not then something is wrong)
  • Cost to serve the consumers — relates to the resources and therefore to strategic discipline


That’s the architecture this post has followed in laying out the considerations. Let’s call these two dimensions the intrinsic dimensions of a company’s international strategy

There are also extrinsic dimensions of international strategy. Let’s understand them next.

Unlock Your CAGE: Extrinsic Dimensions

If you consider all the ways we have looked at international markets for Fussy, you can categorize the approaches along four dimensions —

  • Cultural — E.g., Markets by expatriate population, 6D Model, International Trade
  • Administrative — E.g., Duties and VAT, International Trade, METROVERSE
  • Geographic — International Trade, Neighbors (one of two obvious solution I posted in the section on Purpose)
  • Economic — E.g., $ 25,000 GDP per capita cut-off, METROVERSE, Largest Markets (one of two obvious solution I posted in the section on Purpose), International Trade


International Trade cuts across these dimensions because it is driven by all four. See sidebar on The CAGE Distance Framework.

METROVERSE appears in the Administrative dimension (apart from the more obvious Economic dimension) because the similarity in cities is based on economic and industrial makeup. Administrative policies impact such infrastructure.

Sidebar: The CAGE Distance Framework

A Healthy Dose Of Trade Economics

Whereas our discussions in this post have covered different tools under each CAGE dimension, there is a way to consider these dimensions together using a composite index or ‘distance’.

Economists have studied international trade patterns for decades and have identified that CAGE dimensions have a sizeable effect on how countries trade in goods, services, FDI, people, and information.

The farther apart two markets are on these dimensions the less intense their trade relationship is likely to be. The reverse is also generally true.

Dr. Pankaj Ghemawat et al converted CAGE differences between pairs of countries into a theoretical distance called the CAGE distance. Such distances tend to explain international trade patterns to a fair degree across many product types.

These distances are based on a number of sub-factors. I reproduce below a summary of these factors due to Dr. Ghemawat —

The similarity (or lack thereof) of religious beliefs, ethnicity, social norms, values, and language

Colonial links, common currency, trade arrangements, political hostility, governance mechanisms in destination markets, protectionism, corruption

Physical distance, size, common borders, time zones, access to ocean, transport infrastructure, remoteness, internal navigability

Economic size, income per capita, wealth or income inequality, variations in cost & quality of financial (and other) resources


We will demonstrate the use cases of this composite index in our next post on International Strategy. In the meantime, you can explore it further here.


You can skin the cat any other way and the solutions will still fall under these four affinities.

Together this market identification framework is the CAGE framework (after initials from each dimension).

Here’s a generalization of the factors (due to Dr. Ghemawat) to consider under each dimension when answering the question of where to compete.

The similarity (or lack thereof) of religious beliefs, ethnicity, social norms, values, and language

Colonial links, common currency, trade arrangements, political hostility, governance mechanisms in destination markets, protectionism, corruption

Physical distance, size, common borders, time zones, access to ocean, transport infrastructure, remoteness, internal navigability

Economic size, income per capita, wealth or income inequality, variations in cost & quality of financial (and other) resources

Concluding Remarks: The Six Senses of Internationalization

“This is the end, beautiful friend.”

I believe that in laying out the two types of dimensions to sense international opportunities — intrinsic and extrinsic — we have moved the needle in how to think about international strategy. And though I used Fussy as an example, the basic principles apply to any business.

If you are a company or individual considering international expansion of your business, use these Six Senses of Internationalization.

The Six Senses Of Internationalization


We have also expanded on the need to look for markets at the right geographical level. E.g., startups with urban propositions will do well to identify expansion opportunities at the level of cities or urban centers rather than aggregating Total Addressable Market at the level of countries.

Here’s a single-screen summary of this post for you to use and share—

The Screenshort On International Strategy #1


In our follow-up posts on international strategy, we would continue to explore CAGE factors albeit from the lens of distance effects (see the sidebar — The CAGE Distance Framework).

There’s also the matter of Ease of Doing Business type of factors that we haven’t looked into. Subsequent posts will handle that and the other pertinent question in international strategy — how to compete.

Some exciting stuff is coming your way. Stay tuned!

Sincerely,
Arvind