International site selection and ‘the lemming principle’
Successful business leaders are driven by data and profound analysis of all the relevant aspects of a business decision. Primary and secondary effects of any major business activity are discussed with experts throughout the company and are scrutinized by investors from concept to execution. Why would a critical decision such as where to expand internationally be any different? The same thorough research and objective calculations that shape businesses in marketing, new product development and financial structuring should accompany the process for international expansion.
The need for analytical rigor seems clear when it is laid out in this logical manner, but often logic does not drive business decisions as human nature continues to assert its presence in the process. Sometimes this can take the form of brilliant ‘hunches’ that genius leaders seize because they think that they can see beyond the data and short-term analysis. Other times it can take the form of passion: where dedicated business leaders decide based on what they love (damn the data!) and try to make it work.
Unfortunately, most of these non-analytical approaches to business decisions fail to properly assess and exploit all of the opportunities available in the diverse global market. One of the greatest bugbears to successful international expansion is the dreaded ‘Lemming Principle’: following the lead of others and assuming that they know where they are going. Based on the myth of the lemmings tossing themselves mindlessly off of cliffs during mass migrations, the lemming principle is seen all too often in global business expansions as companies assume that others have great reasons for expanding into particular new markets. However, as we’ve learned, mindlessly following the crowd from behind is a recipe for disaster.
The global business environment is a competitive arena. Businesses must be on the lookout for new trends or tools that can offer them a competitive advantage. However, sometimes this legitimate, important business instinct morphs into a dangerous habit of following ‘thought leader’ companies or competitors into new markets assuming that they know something that you do not. Making this mistake is especially dangerous for international site selection, because the amount of sunk costs required to open a branch or plant overseas in a new market can severely impact a business if the effort fails.
Some ‘hot markets’ are legitimate, long-duration successes. For example, Ireland is a well-known potential location for U.S. FDI, and is an easy sell because of the use of the English language, as well as many cultural ties between the U.S. and Ireland, which make it an apparently friendly and easy place for U.S. companies to do business. Ireland’s success with their economic development agency, IDA Ireland, has been sustained over many decades, especially after 1994 when it was restructured to focus on FDI. But is Ireland a better business market than, say, the Netherlands? The answer is, of course, that ‘it depends’: on your product, your logistics requirements, your supply chain and your potential customers. But the difference between a good potential market and the perfect location for your business is critical, and there are no true ‘easy buttons’ when it comes to picking your market.
Following a great company like Amazon may make sense for some companies that support their supply chain, but just because Amazon opened a location in Denmark doesn’t mean that Denmark is right for your company as well. You have to do deep market research that would be specific to your product and industry. Even the best companies can fail to do this. For example, when discussing their recent decision to open an expensive new office in London, a medium sized US HR consulting company was asked what was the basis for moving to London as its European hub, as opposed to the other options in Europe such as Frankfurt or Amsterdam. The answer was simple: they were following their competitors. When asked WHY they were following their competitors, the reasoning started to turn circular — they were following their competitors because they tapped into the same talent base, and they assumed that their competitors were in London because the majority of European business was in the UK as well. Additionally, their partner who was tapped to lead the expansion was English, so they assumed it would make the expansion ‘easier’. The company did not do a detailed analysis of the other locations that might have worked for them, they did not comparison shop, and they did not try to break into a new market that might have had less competition. Instead, they were following the ‘Lemming Principle’: blind expansion into an overseas market location based on the fact that other competitors and similar companies were going there.
This poorly thought-out decision had the expected result — the company struggled. Competition was fierce and they were fighting off the same challengers for market space as they had in the U.S., as well as established local companies. The real estate in London was prohibitively expensive, and talent costs had been whipped into a frenzy by the bidding wars from the other firms. As a newcomer to the market, the consulting company found many doors closed in their face by potential clients — they offered nothing new and competitors from the U.S. had carved out what limited space was available in the red sea of London, leaving mere table scraps. Follow those struggles with the additional challenges of the Brexit referendum, and you have painted about as grim of a competitive picture as you could for this company.
In hindsight, this result seems a foregone conclusion. Of course, they would face stiff competition when they chose to follow other U.S. companies into the same city. Nevertheless, they actually thought it was smarter to go somewhere ‘established’ rather than research the market to look for opportunities elsewhere. This self-destructive tendency to follow trailblazers in international expansion is all too common. What companies forget is that the path of least resistance may lead right off of a business cliff.
How do you avoid the sad fate of the lemming? It may not be possible to be a true trailblazer or innovator in established markets, but you can give yourself the space to take a clear, lucid and independent view of the opportunities available to your company as the rest of the lemmings trample by; give the site selection process the same objective analysis as you would a major acquisition or new product development:
- Establish a multi-disciplinary team to set up your objective criteria for the business expansion. What must/should your new business home have to support your requirements?
- Ensure that leadership commits to objective, data-driven analysis as the basis for expansion decisions. Having someone highjack this process to follow a hunch or chase tax or labor savings is a fatal flaw.
- Exploit the free resources available to further inform your decision-making process. You can’t rely on economic development agencies to be objective, as they are all charged to promote their region/country/city, but they can provide you with insights that you may not have thought of in your planning process. Once you discover a new factor, be sure to ask other potential locations about the same issue. They may be willing to provide the same incentives or advantages once they know that competitors are offering it to your business.
This process takes time and resources, but the payoff far outweighs the initial costs. Instead of plunging off the side of an expansion cliff, hoping for the best, your company will be stepping forward with confidence into a new market that best serves your specific interests.
Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company which offers market research, political risk assessment, and international negotiations assistance. Mr. Samson is a former U.S. diplomat and international law advisor for the Department of Defense.
