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23 October, 2012 - 13:31 By News Desk

In pursuit of overseas expansion

Gary Hanson, Partner, BDO LLP

Optimism among UK businesses fell to a 20-year low this summer, according to our BDO Business Trends report. And, with the Eurozone blighted by instability and recession it’s not surprising that turbulence is denting longer-term growth prospects in the UK.

We are witnessing a gigantic rebalancing of the global economy, which will change the way we do business and whom we do business with. The gap is widening between businesses that can adapt and react to new markets and opportunities, and those that continue to chase their traditional base and fight it out over static revenues.

During this period of instability, businesses in the region are developing strategies to reach out to new customers in emerging markets in order to find growth. Many companies have identified exporting and international expansion as critical components of their overall business strategy.

The rise of Brazil, Russia, India and China creates unprecedented opportunity – but also significant challenges. The next 20 years will see an estimated one billion people in these BRIC economies become part of the world’s middle class. These consumers will have staggering spending power and a desire for Western labels, tastes and concepts. Businesses need to embrace this opportunity.

But companies can often be seduced by talk about certain markets and automatically assume that it is the place to be. Expanding overseas has to be right for your business.

An export order is not just another sale, but a completely different way of doing business that may have different regulations, tax implications and could affect cash flow.

Businesses must debate and decide whether they have the management time to pursue new markets and the right skills to succeed, while fully understanding the risks and rewards, and how it can be factored into their existing business model.

Companies can use the opportunity that current difficult conditions provide to reshape their sectors and secure their fortunes. Already, we can see corporates and private equity houses making acquisitions and building a better platform to export to the emerging markets.

Put simply, the UK’s current export model is not sustainable. More than 60 per cent of UK exports are to Europe and less than four per cent to India and China. We cannot continue to export more to Ireland than we do to Brazil, China, India and Russia combined.

Geography needs no longer stand in the way of a company’s aspirations – even an emerging company. However, it is also no longer sufficient to protect local market share. Business growth strategies need to be built around a global ‘growth’ vision where quality, pricing and distribution must be globally competitive.

Equally important is the need to provide excellent service, tailored to meet local requirements, market conditions and the ever changing demands of the consumer.

Technological developments such as the rapid growth in the use of the internet to facilitate international e-commerce, advances in telecommunications, video conferencing and satellite technology have made that process considerably easier and less expensive. But before businesses embark on international expansion, their leaders need to consider not only the tangible barriers such as regulatory and currency implications, but also softer cultural barriers including local business customs, work patterns, and buying decisions and behaviours.

No-one should underestimate the challenges the eurozone and UK economies are experiencing. The landscape has been rocked by the recession but businesses are slowly coming to accept the ‘new normal.’

Having worked so hard over the last few years to drive down costs and push profits up, a cautious approach to debt and gearing ratios is expected. The instinct for many is to hold on to cash on the balance sheet. But without increased investment, businesses will struggle to compete on the international stage or take advantage of the growth opportunities available.

The next generation of business leaders will be those who resist the temptation to sit tight and embrace what the emerging markets have to offer for them.

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