Success on the US Market - Unlocking the Potential


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Success on the US Market - Unlocking the Potential

  1. 1. DI how to... Read more about DI’s international consulting unit, DI International Business Development, on confederation of danish industry 1787 Copenhagen V · Denmark Tel. + 45 3377 3377 · · Succe ss on the US market Confederation of Danish Industry (DI) is the strong voice of corporate Denmark. On behalf of our 10,000 member companies, DI works to provide the best conditions for Danish businesses in order to improve the opportunities for growth and overall competitiveness. >¶ Success on the US market Unlocking the potential HOW TO...
  2. 2. Success on the US market Unlocking the potential Published by Dansk Industri (Confederation of Danish Industry) Edited by: Jacob Kjeldsen Press: Kailow Graphic A/S ISBN 978-87-7353-981-1 500.10.12 1 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 2
  3. 3. Foreword This handbook has been prepared by Confederation of Danish Industry (DI). Through DI’s international consulting unit DI International Business Development (DIBD) and other international units, DI is devoted to assist members of DI in international business development on the growth markets of the world. The mission is to make them winners in an ever globalised world, where growth is often found in difficult and very different markets than the traditional Danish markets within the EU. One market that we have dedicated significant attention to is the United States. While Danish companies have proven immensely successful on the majority of western markets, the US has stood out as an exception. Exports to the US market have increased, but taking the size of the market into consideration and comparing with our traditional European competitors, there is still room for improvement. To accommodate members of DI, we opened a DI office in New York in 2007, assisting our members in penetrating the US market. The decision was made after an extensive research on the challenges faced by Danish companies based on a range of interviews with Danish companies already operating in the US. In this handbook, we have updated the original findings with our comprehensive experiences from New York. Hence, the handbook takes on the ambitious task of providing inspiration, concrete tools, and input on consistent strategies for Danish companies wishing to penetrate the US market. However, we also feel certain that Danish companies who are already serving customers in the US will find the advice offered useful. I wish to thank all the people who have contributed to the preparation of this handbook. Their kind participation and willingness to contribute with their individual experiences have made this project possible. With the handbook, I hope we can play a part in unlocking your potential in the US. October 2012 Jacob Kjeldsen Director – DI International Business Development 3 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 4
  4. 4. Contents Introduction 7 Background 7 Structure 9 Delimitation 11 US-Denmark Relationship 13 US-Denmark Trading 13 A Snapshot Comparison 14 Experiences from the US Market – Case Studies 17 Introduction 17 Morsø Jernstøberi: The Challenge of Finding a Right Set-Up 18 Tom’s Group: Modesty will not get you far in the US 22 Danstoker: Using the Existing Business Model Was Not an Option 24 With 300 mill. consumers and a purchasing power that ranks among top 5 in the world, the US alone constitutes a market that is larger than Germany, UK, France, Italy, Sweden, and Norway combined The Do’s & Don’ts 27 Introduction 27 Preparation and Entry Modes 28 Sales, Distribution and Marketing in the US 30 US Management and Employees 32 Location 34 Legal Issues 36 Bureaucracy and Practicalities 37 Conclusion 38 Entering the US Market through Successful Partnerships 41 Introduction 41 US Market Entry Planning 42 Partner Development and Management 59 Successful Partnerships in the US 67 Concluding Remarks 71 Appendix 72 5 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 6
  5. 5. Introduction It is the goal of the authors to provide the reader with a structured introduction to the challenges associated with doing business in the US Background That success on the US market includes significant challenges for Danish companies has been well documented for several years. Many Danish companies have pursued different models to unlock the business potential of the largest market in the world, but often with limited results. However, the US market is very difficult to ignore. With 300 mill. consumers and a purchasing power that ranks among the top 5 in the world, the US alone constitutes a market larger than Germany, UK, France, Italy, Sweden, and Norway combined. These countries are traditionally top importers of Danish goods and services. Why is it that Danish companies find it so difficult to create a commercially viable business in the US? The reasons are many and of course very much depending on the individual Danish company. However, a general challenge is the fact that the US market is among the most competitive in the world, with a business environment that is substantially different from Denmark in many areas. A different business infrastructure, culture, and legal system, combined with fierce competition, have been significant factors in the US market having a dual perception among Danish companies. On one hand, the obvious business potential is of course appealing to many Danish business leaders. However, the big reward is accompanied by perceived extensive business risks that make the same business leaders uncertain of how, when, and if a penetration of the US market should be included in the corporate strategy. A large number of Danish companies have been active on the US market for several years. However, only few can claim to be truly successful and many have struggled and subsequently pulled out. This is in spite of the fact that the same Danish companies have achieved great success on other foreign markets in Europe and Asia. 7 S u cc e ss o n t he US m a r k e t With the objective of providing Danish companies with a better understanding of what it takes to be successful in the US market, DI has throughout the years studied the US market. From 2001 to 2004, DI carried out a large project focusing on collecting information and developing business models for Danish companies via surveys and pilot projects. The outcome was a handbook that included a set of clear recommendations for Danish companies. In 2007, DI opened its own office in New York. The office offers integrated and stragic solutions for establishment in the US. In Autumn 2012, it was decided to update the handbook in order to incorporate new experiences, developments, and trends for Danish companies operating in the US market. Consequently, DI has conducted a number of interviews with Danish companies present in the country. In addition, three new case studies have been included in order to provide insights into which strategies that work on the US market and which that do not. Furthermore, the accumulated knowledge and experience acquired at DI’s offices has been translated into valuable information included in the handbook. The objective of this handbook is to offer all Danish companies with an interest in the US market a practical and strategic approach including a clear set of recommendations based on actual hands-on experience. It is therefore a valuable source of inspiration for all Danish companies with aspirations and ambitions to successfully enter the US market. S ucc e ss on t he U S market 8
  6. 6. Structure First, an overview of the US-Denmark relations is provided to give an understanding of the recent development in trade and business relations in general. Included in this overview is a comparison of the business environment in the US and Denmark respectively based on a number of key figures. Next follows a thorough description of three company cases. The cases offer valuable insight into the most effective US strategies. Most Danish companies establish themselves in the US through strategic partnerships with US counterparts. The chapter, ”The Do’s and Don’ts when Entering the US Market”, includes a comprehensive summary of the experiences made by Danish companies when entering the US market. Point of departure is taken in a survey from 2003 where 11 Danish companies were interviewed. The information has been updated and verified by in-depth interviews carried out in autumn 2012 with eight Danish companies operating in the US. Before the conclusion, an approach and framework is presented, designed to accommodate many of the challenges faced by small and medium-sized Danish companies in the initial phases of a US market entry. It attempts to support the traditional Danish approach to the US market that involves the use of agents and distributors. Consequently, the approach comprises a number of strategies that combined, and if applied as recommended, will significantly increase the chances of success for Danish companies and their US partners in the US. Among other issues, the approach outlines strategies for partner selection, partner development, and management. 9 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 10
  7. 7. Delimitation This handbook is intended to have a broad application, but it is important to emphasize that certain areas of relevance to Danish companies interested in the US market have been omitted, for example: >> Establishing subsidiaries, partnerships, making acquisitions etc. What are the exact legislation in relation to product liability and personnel policies? >> Sectors with a high potential for Danish companies. What areas and industries contain the most promising potential for Danish companies? >> description of the US market based on geography. How does the A East Coast compare to the West Coast in terms of industry clusters? How does the Southern part of the US compare with the North in terms of business potential and culture? These issues were omitted based on an assessment of the value for the Danish companies versus the efforts it would take to prepare meaningful analyses of the issues. The omission is therefore quite deliberate, although the authors do recognize the importance in relation to the individual Danish company. It is therefore recommended that Danish companies devote the issues the required attention as part of a US market entry. DIBD is often assisting Danish companies in such analyses. In addition, the strategic framework presented is biased towards Danish companies entering the US market through a US partner, typically a distributor. The bias is made very consciously due to the fact that the vast majority of Danish companies are small and medium-sized enterprises (SMEs). With limited resources available, nearly all Danish SMEs enter the US market through some sort of partnership with a US-based partner. 11 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 12
  8. 8. US-Denmark Relationship The crisis led to a decrease in Danish export to the US from around DKK 36.2 billion in 2006 to DKK 31.7 billion in 2009. The crisis sat its footprint worldwide, but already from the end of 2009 the export of Danish products to the US started picking up, and in 2010 it was higher than prior to the crisis. To put the efforts of Danish companies on the US market into perspective, it is useful to take a short, general view of the US-Denmark relationship. US-Denmark Trading For the past 50 years, the US has been a significant trading partner for Denmark, although the trade has of course been affected by currency fluctuations, geo-political events, and development of the global economy and associated trading relations. The development in the US-Denmark trade for the past six years is illustrated below. In summary, Danish export has increased significantly over the past six years – with the exception, of course, of the financial crisis in the end of 2008. Bill. DKK 40 35 25 20 Import 5 2006 2007 To enable a simple comparison between the business environments in Denmark and the US, key figures for the two countries are listed to the right. The size of the US market makes it important and attractive to Danish companies, and increasingly more companies are seriously considering entering the market. In the following chapter, you can read about three Danish companies who have already done so, and learn about the experiences they have made. 10 0 A Snapshot Comparison However, in terms of US salaries, it is important to note that wages vary significantly from state to state. In general, the labor costs and other business costs are lower outside the greater cities. Export 15 In terms of products, the majority of Danish exports to the US comprise pharmaceuticals, wind turbines, oil, chemicals, electronics, and different kinds of machinery. The Danish import from the US is primarily made up of machinery and transportation equipment. Besides the difference in sheer size, the figures indicate that the US economy compared to the Danish is less dependent on external relations because of the huge domestic market. Another point is the fact that the basic labor market conditions in terms of salary levels, unemployment rates, and weekly working hours in the two countries are comparable. US-Denmark trade for the past ten years (in nominal values) 30 In 2011, US ranked as Denmark’s fifth largest export market. Moreover, the US constitutes the foreign export market on which Denmark has the second-largest trade surplus, and the US is with DKK 125.4 bill. the second largest recipient of Danish foreign direct investment (FDI), Sweden being the largest. By the end of 2011 the US had an accumulated FDI of DKK 68.9 bill., when looking at Danish FDI. 2008 2009 2010 2011 Source: Statistics Denmark 13 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 14
  9. 9. Comparison of the US and Denmark 2013 USA Denmark Market – 2013 Population (mill.) 316.8 5.6 GDP (bill. USD) 16,245 318 GDP per capita (USD) 51,300 56,900 GDP per capita – PPP adjusted (USD) 51,248 38,521 Foreign direct investment and trade (% of GDP) – 2013 25 47.3 Investments FDI 18.6 17.3 Exports 14.0 53.8 Imports 17.8 48.4 Most important trading partners – 2012 Imports (pct. of total imports) 1. China (18 %) 1. Germany (20 %) 2. Canada (14 %) 2. Sweden (13 %) 3. Mexico (12 %) An increasing number of smaller companies are seriously looking into entry possibilities – many through an agent or a distributor 3. Netherlands (7 %) (9 %) Exports (pct. of total exports) 1. Canada (19 %) 1. Germany (15 %) 2. Mexico (13 %) 2. Sweden (12 %) 3. China (7 %) 3. UK (9 %) Business conditions – 2012 Production Manager – Total cost (USD)* 119,300 94,500 Engineer – Total cost (USD)* 107,400 89,200 Skilled Worker – Total cost (USD)* 79,100 68,900 Unskilled Worker – Total cost (USD)* 41,300 64,800 40 37 39.2 25 Weekly working hours Corporate tax (maximum rate) Unemployment (% of total work force) 8.3 7.9 39.5 Pct. of work force with university degree 34.7 * Salaries are from New York and Copenhagen respectively 15 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 16
  10. 10. Experiences from the US Market – Case Studies The three companies are: >> Morsø Jernstøberi: Has been present on the US market since the beginning of 2000. The company has tried different set-ups and is currently servicing the US market through distributors. >> Toms Group: Established its own subsidiary in 2007 in order to expand its presence on the world’s largest confectionary market, but servicing the B2C market in the US turned out to be a very challenging task. >> Danstoker: Is currently considering its market entry on the US market. It turned out that the company needs to adapt its business model and enter the market in another way than expected. Morsø Jernstøberi: The Challenge of Finding a Right Set-Up Background Introduction As the world’s largest market by most measures, the US remains an ultimate goal for many Danish companies. It is no longer only the large well known Danish brands that are aiming for success in the US. An increasing number of smaller companies are also seriously looking into entry possibilities – many through an agent or a distributor. However, a number of issues make most companies - large and small think twice before going for a US market penetration. Uncertainty is common regarding return on investment, how to reach potential customers, finding the right location, distributor liability, etc. This handbook aims at outlining experiences made by Danish companies as a source of both inspiration and practical advice on market entry and how to operate a successful business in the US. In order to provide insight into why it is difficult to be successful on the US market, three company cases will be presented. The cases contain information about strategies for US establishment, experiences, recommendations, and lessons learned. The three cases represent various industries, different company sizes, and different entry modes. Together they will provide a detailed picture of what is required to enter the US market as well as related challenges experienced by the Danish companies. 17 S u cc e ss o n t he US m a r k e t Morsø Jernstøberi has manufactured cast iron stoves since 1853 and is considered one of the oldest manufacturers of cast iron stoves in the world and a leader in quality, design, and innovation. The company was active in the US in the 1970s, but decided to scale down operations due to an enterprise turnaround. With about 70 people employed in product development, assembly, quality assurance, shipping, and customer service, Morsø’s strategy is focused on designing and selling high quality cast iron hearth products. At present Morsø has activities in more than 20 countries around the world. Morsø in the US Activities in the US were restarted in 2000 together with a local distri­ butor in the New England region. The distributor was responsible for all sales and customer relations on the US market. Products were supplied from three warehouses located around the country. The distributor agreement allowed Morsø to reduce the financial risk of re-entering the market, but although sales were increasing, the feeling was that the market had much more potential and that Morsø’s management was out of touch with local trends and market development. As a consequence, Morsø’s management decided to establish a subsidi- S ucc e ss on t he U S market 18
  11. 11. With everything that we have been through, we now have a set-up that works perfect for us. We have learned a lot, and I can say with confidence that I am glad we took the plunge! ary in Nashville, Tennessee. Prior to the establishment, Morsø carried out their own analysis. The objective was to understand the market in greater detail and decide upon an optimal market entry strategy. Besides establishing a subsidiary, Morsø hired a President for its US operations – Morsø’s General Manager of its English subsidiary, who wanted to relocate to the US. Own sales staff was also employed and a centrally located warehouse with offices and showrooms was acquired in Tennessee. However, in the spring of 2012, Morsø decided to shut down the subsidiary as the set-up was no longer ideal, primarily because the location of the subsidiary was wrong. Morsø was not close enough to the customers to provide products and services. Instead of pulling out of the market, Morsø changed its strategy and decided to find a highly qualified distributor on the West and East Coast respectively. Today, business is going very well. Sales are increasing and the company is closer to its customers. Morsø visits the distributors on a regular basis, and both distributors have visited Denmark in order to be further acquainted with the Morsø spirit and brand. Also, Morsø sends newsletters with the latest news to both distributors, enabling them to know what is going on and feel they are an important part of the company. And finally, Morsø has worked strategically on building up a relation between the two distributors that enables them to help and learn from each other. 19 S u cc e ss o n t he US m a r k e t Recommendations from Morsø >> Size: You have to understand the size of the US and develop your stra­ tegy accordingly. >> Choose the right location: Choosing the right location is crucial. You must take into consideration both infrastructure, flight connections, time zones, and location of the clients when you look into various locations. We made the mistake of placing ourselves in Tennessee as we believed we could easily reach our main customers at the East and West Coast. It turned out to be much more complicated and expensive than expected, and our response time was too long. Distribution and logistics are not as effective as in Europe. >> Beware of different business practices: Business practices are different in the US and some aspects are “old-fashioned”. An example is the fact that money transfers are not normal – checks via the regular post system are much more common. The consequence is that everything takes much longer time than in Europe. >> Adapt to the US culture: Do not make the mistake of thinking your product and your way of doing business can reform the US market. You have to adapt to the US culture. Lessons Learned • The US market is a hard code to crack and it often takes several attempts to figure out which set-up works for your company. Morsø went from one distributor to a subsidiary and back to two distributors. However, Morsø now co-operates with its distributors in a very different way. Today, Morsø spends a lot of time and resources on assisting the distributors on market development, supporting them in any way possible. This is the main reason behind the successful set-up with the current distributors. • You need to prepare well, but do not follow your plans too rigidly. There may be a need for adjustments and possibly revising the strategy due to customer responses and general market development. • You need to apply a dynamic entry mode and business model. Take action and change set-up if it does not work. • Stay in touch with the market and the customers. Find ways to do this when working with distributors. S ucc e ss on t he U S market 20
  12. 12. Tom’s Group: Modesty will not get you far in the US Background Tom’s Group has a long history on the US market with its brand Anthon Berg. For a long time, their biggest client was Costco (wholesale), but Tom’s Group wanted to expand their presence, as the US market for confectionery is the world’s largest. An extensive market research was carried out to identify a suitable entry mode for the US market and get an insight into how customers and partners should be approached. As Tom’s Group’s chocolates contain alcohol, the product is prohibited by law in some states, and therefore the different states needed to be analyzed on a very specific level. In 2007, Tom’s Group decided to establish a subsidiary and stationed an employee in the US for a period of a time in order to cultivate the market, get new partners, and develop relations. The biggest concern was whether it would be possible to get a larger market share by setting up own presence rather than just selling to Costco. The whole process from the initial idea to final establishment took around one and a half years. Tom’s Group in the US The Danish Export Manager of Tom’s subsidiary was located at DI’s New York office where he was responsible for sales and market development. He soon realized that the sales processes on the US market were very different from what he was used to in Denmark and Europe. It became clear to Tom’s Group that whoever shouted the loudest would be the potential winner. This meant that the Export Manager and Anthon Berg had to change their mind-set on how to approach possible distributors, retailers, etc. and how to market their product. After four years, the subsidiary was shut down as a result of change in the overall global strategy of Tom’s Group’s. The financial crisis demanded increased focus on costs, and the strategic focus was redirected to existing markets where Anthon Berg had already earned a strong position and a well-established presence. Today, Tom’s Group still sells directly to Costco and another distributor, but due to changes in the corporate strategy, there is no longer need for a subsidiary in the US. 21 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 22
  13. 13. Recommendations from Tom’s Group >> Use a niche strategy: The competition is fierce and you need to focus. You should concentrate your resources on one specific product. You have to be very clear about why your product is the best on the market. Danstoker: Using the Existing Business Model Was Not an Option Background >> Patience and long-term perspective: Patience is everything! Do not lose faith – things take time in the US. A large number of companies try to penetrate the market, and commercial results will therefore not materialize immediately. You need to maintain a long-term perspective. Danstoker designs, produces, and sells boilers to the energy market. Today, the main product group is biomass boilers utilizing straw, wood chips, pellets, and a wide range of other biomasses, and Danstoker is currently selling boilers to more than 65 countries around the world. >> Step by step: Break the market down into states or towns, and focus on one place at a time. This also goes for marketing activities! Danstoker in the US >> Marketing: You cannot penetrate the market without some sort of marketing activity – but it is expensive, thus do so wisely. >> Define your customers segments clearly: Everything you do must start and end with the end-user of your product. You have to have a strong consumer focus – get to know your customers, and know them well! >> Prepare carefully: Use the amount of resources required to get it right the first time. It is costly and takes time, but it will pay off in the end. Lessons Learned • Despite closing down its subsidiary, Tom’s Group still believe they learned important lessons in the US. They gained valuable knowledge of the US market, especially on how narrow the product focus should be and how important it is to have a clear value proposition. • The B2C market in the US is very challenging and requires a different sales approach, because it is so concentrated. The American approach is pushy and the mentality is that there is no greater product than your own. Therefore modesty is not going to get you far. • Define your customer segment and get to know it well – very well if you want to succeed. The customer always needs to be the center of your attention. Through the years, Danstoker has had sporadic sales on the US market through one of its main clients in Denmark and Europe. However, the management of Danstoker believes the US market holds greater potential than the rather limited sales at this point, and is therefore interested in setting up own presence in the country. The key challenge is to find the right entry modes as well as to understand the market in detail. Danstoker has therefore spent considerable time and resources carrying out a market study, which demonstrated that the US market is significantly different from other markets in which Danstoker operates. Normally, when entering a new market, Danstoker looks for ideal partners based on partner profiles developed at the headquarter in Denmark. However, research revealed that the ideal profile does not exist in the US – simply because of the very different structure of the market. Furthermore, Danstoker has spent a lot of time acquiring the necessary approvals and certifications. In order to operate on the US market, they need an ASME (American Society of Mechanical Engineers) certification for the boilers. Danstoker is currently considering whether to enter the market through partners or whether to enter into a joint venture with a US partner or alternatively acquire a company. Next step is to prepare more detailed studies to clarify this aspect further. “It’s a market with real potential – For us, it is simply a necessity to be present on the US market.” Jan Enemark, Danstoker 23 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 24
  14. 14. Recommendations Although Danstoker is still early in the development of the market entry strategy, the company has the following recommendations: >> Prepare properly: Do not rush a market entry. You need to have the internal resources and focus from management in Denmark. >> Allocate time to get the necessary approvals and certifications: It has been very expensive to obtain the ASME certification for the boilers. >> aware of product standards and regulations: The market and genBe eral way of doing business is quite different from what Danstoker is used to, even though it operates in more than 60 countries worldwide. >> Politics matters: Shifts in renewable energy politics have a great im- pact on Danstoker’s business and are outside the company’s control. This is a risk you need to take into consideration. Lessons Learned • It is important to analyze the market and get insight into market structures. • The same business model used on other markets may not apply in the US. You need to be prepared to change your business model to accommodate unique features in the US market. • Although most Danish companies use a distributor to enter the US market, it may not be applicable in your specific case. The recommendations provided by the Danish companies and the lessons learned will be elaborated in the following chapter explaining the do’s and don’ts when doing business in the US. 25 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 26
  15. 15. The Do’s & Don’ts Preparation and Entry Modes Thorough preparation before making the first move into the US market is crucial for subsequent success. Collecting and processing the relevant information for your business not only forms the foundation for deciding whether to enter the US market, it also provides the basis for selecting an entry mode. The advice provided by Danish companies concerning preparation and entry modes can be summarized as follows: Preparation Prepare a detailed market study or business plan. It can be an advantage to get assistance from experts or consultants present in the US market. Introduction In 2004, DI conducted a comprehensive survey of the experiences of 11 Danish companies with significant business activities in the US. The survey had a broad application, as it focused on the areas that business leaders in both Denmark and the US encountered when first entering the US market as well as on the everyday challenges of operating a business in the US. In autumn 2012, DI carried out another survey with the purpose of adding new experiences, developments, and trends to the existing knowledge. A number of companies were interviewed including Morsø, Tom’s, Arla, BK Vibro, Danstoker, Dolle, and LEGO. Furthermore, DI has gained extensive experience through its location in New York, where DI virtually represents a number of Danish companies on the US market. This knowledge has been incorporated when relevant. The survey covers the following areas: >> Preparation and Entry Modes >> Sales, Distribution and Marketing in the US >> Management and Employees US Do not rush into the US market. It is extremely important to prepare thoroughly. The Danish companies participating in the survey all stated that it took about two years from the initial idea of establishment until they were up and running in the US. A key point to consider when developing your strategy for the US market: >> be successful on the US market, you need to have a detailed underTo standing of the market such as customers, competitors, products, technologies, and culture. It takes time to build up this knowledge. You need to be patient for the commercial results to materialize. Product >> you have a product that can compete in the US? You should be able to Do answer questions such as: What are you offering? Why should the consumers choose your product over other products? >> Due to the size of the US market, reaching everybody is utopian - you need to find your main focus. It will probably be better to concentrate your resources on one specific product than a whole range. A niche strategy seems to work best for Danish companies operating in the US. >> Location >> need to be very clear about why your product is the best on the marYou ket and communicate it clearly. Modesty will not get you far in the US. >> Legal Issues >> Build service, know-how, application, and brand into your product. >> Bureaucracy and Practicalities >> Avoid products where price is the only sales parameter. 27 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 28
  16. 16. The size of the US market alone necessitates a focused sales effort. A very important aspect of sales is the distribution Market >> is almost impossible to think about the US as one market – you do not It think as Europe as one market either. >> Due to its size, the US is much more diversified than Denmark– the US has everything. >> Expect the market to be difficult and very different, giving you a steep learning curve. The US market is traditionally characterized by low prices and fierce competition. >> focused. Consider limiting your initial focus to one geographical area. Be Break the market down into states or towns, and focus on one place at a time. Customers >> Make a sharp customer segmentation. Consider limiting your initial focus to one customer segment and get to know it well. Business Environment >> Understand the industry. You need to understand what kind of rules, regulations, certificates, and laws your product has to meet. Business Model >> Revisit and critically analyze your existing business model and consider if it is suitable for the US market. Even though you are successful with your business model in Europe, re-thinking it in a US market context is important. >> prepared to think “out-of-the-box” and reflect upon the following: Be What are the key factors related to customer demand and supplier conditions? >> Define your risk profile and clarify the downside. Make a thorough evaluation and know how much you are willing to risk – the US is a high risk, high reward market. 29 S u cc e ss o n t he US m a r k e t Entry Modes Most small and medium-sized companies choose to enter the US market through agents, distributors, or other types of sales partnerships. If the companies are then successful on the US market, they may decide to set up own sales company. >> you decide to use a distributor, carefully consider if the distributor If should have exclusivity on the US market. Only few distributors have the resources to cover the entire US market. >> Build up a mutually beneficial partnership with your distributor(s) by offering support in the form of training, sharing of market knowledge, company visits to Denmark, provision of demonstration units, etc. >> sure to have in-house resources to support the distributor and assist Be in the market development phase. If not, hire expertise. >> Consider a product development function in the US – the standards and specifications are different from Europe. >> Very often, business in the US requires an inventory, even though you may work with just-in-time delivery in Europe. It requires logistics considerations. Sales, Distribution and Marketing in the US The size of the US market alone necessitates a focused sales effort. The US market is substantially more complex than the Danish, and a market entry hence requires careful preparation and extensive resources. S ucc e ss on t he U S market 30
  17. 17. In the following, a list of recommendations from Danish companies with regards to sales, distribution, and marketing is provided. Sales & Distribution >> First of all, you need to spend time and resources on identifying the right sales and distribution channels at an early stage in the preparation phase. Equally important is attracting the right people. The wrong choice can have a significant negative impact on your results in the US market. >> B2B customers are often very professional and alliances can be made to the advantage of both parties. >> The B2C market is highly concentrated. Sales is often taking place through very large retail chains, which requires comprehensive work and resources. >> Accept that it is costly to find the best sales people or distributors. In general, the wage level higher than in Denmark and furthermore, attractive bonuses are common. Danish companies argue that it is worth paying for the best, as skilled human resources are pivotal to a successful market establishment. >> Take a glimpse at the sales and distribution of your US competitors, and benchmark. >> Large customers can mean large revenue, but also big risk. You may end up being too dependent on one customer. >> to the size of the US market and to less advanced infrastructure, it is Due costly and complex to distribute on the US market. >> Close contact to distributors is provital. You will probably need several distributors on the US market. It is important to select the right distributor(s) and to manage and develop partnerships wisely. Marketing >> Marketing tools in the US are often different from the tools applied in Europe. You cannot penetrate the market without some sort of marketing activity. >> Marketing laws in the US are less stringent than in Europe and Denmark – you are allowed to tell why your product is better than your competitors’ in your sales and marketing material. >> Develop American sales and marketing materials – European materials will most likely not work in the US. A modest approach should be avoided – you need to tell them why you are the best! US Management and Employees In some cases, Danish companies decide to set up own sales company or subsidiary in the US. Hence, they will be much more directly involved in running a business unit in the US and need to tackle challenges related to recruiting and employing manager(s) and staff. At the same time, the company can meet challenges related to general management. For Danish companies, attracting the best US managers can be a challenge for two reasons: Firstly, it is often not regarded prestigious among well-qualified US managers to work for relatively unknown Danish companies; secondly – and more importantly – the salaries offered by Danish companies are often not high enough to attract leading US management talents. This especially concerns stock options and other performance related salary incentives, where Danish companies find the package demanded by US managers excessive. These factors are not only relevant in the recruitment strategy, but also in the retention of US top management. The experiences from Danish companies participating in the survey can be summarized as follows: Recruitment and Hiring of Manager and Employees >> is crucial for a successful entry to use resources and spend time on It finding the right people. When recruiting, analyze and understand your HR needs and employ the people you think will accommodate them. >> Spend time on understanding the wage level in the US. It is higher than expected by most Danish companies. >> Consider using a recruitment agency, but use one with knowledge of your particular business area. >> When employing a US CEO, make sure that he or she has previous experience with working in an European organization. >> Recruitment in the US often requires sponsorships of universities and a good company image in the broader public. >> addition to salaries, the employer must also pay social security, health In care etc., which often adds up to 40 percent of the basic salary. >> connection with the dismissal of an employee, provide the em­ loyee In p with an appropriate compensation package to begin with, improving your chances of avoiding lawsuits later. >> aware of the fact that some states have laws dictating employment of Be minorities. 31 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 32
  18. 18. Review documentation and manuals thoroughly. Make sure warnings are explicit, as common sense is no guarantee Management >> The US should be top management priority. You need to allocate resources to invest in the market. >> Provide the US subsidiary and its management with extensive responsibility and maneuvering space, but also with clear guidelines to operate within. >> the US management is not sufficiently integrated in the Danish/global If organization, there is a risk that it will set its own agenda. >> top management of the Danish company must be committed and The prepared to work hard in the beginning - especially to get to know the people in the US organization. >> Show the US CEO trust and ensure that he/she feels an ownership of the business development. >> department managers in the US communicate directly to their counLet terparts in Denmark. Location Careful consideration on where to physically place the activities is an essential part of a US establishment by Danish companies. The Danish company Morsø ran into trouble as they had underestimated the size of the country and how different the West Coast is from the East Coast. An analysis of location should encompass traditional considerations such as infrastructure, logistics, market access, legislation, access to raw materials and qualified staff, salary levels, production cost etc. How­ ever, also time difference, difference in culture, location of competence clusters, and local government incentives must be taken into account. While time difference may appear to be an inferior issue compared to the more traditional business considerations, most of the companies participating in the survey agreed that East Coast locations will reduce travel time and transportation costs to and from Europe. In addition, the business culture on the East Cost is closer to the European. The size of the US market is attractive to many Danish companies, but sales, distribution, and marketing in 50 states divided into three time zones makes it extremely resource demanding. For most Danish companies it will not make sense to set up presence in all states. It may be more valuable to focus on four economic power centers, as illustrated on the opposite page, where the majority of companies and consumers are present. >> Danes involved in the US operations should have US experience. >> Take differences in culture into account, but do not use them as an excuse for not acting when problems arise. >> especially aware that most American CEOs are very good at mass Be market sales, whereas many Danish companies are focused on niches – American CEOs often lack experience with niche strategies. >> Make sure that US managers get to know the Danish organization well – plane tickets and video conferences are efficient tools in this process. You can also send selected American employees to Denmark for shorter periods of time – for instance for three months. >> difference between Denmark and the US is the working environment. A The US working environment is dominated by control and bureaucracy. 33 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 34
  19. 19. Legal Issues The significant differences in the US legal systems and institutional framework do not only have implications in relation to employees, but also in relation to product liability and consequently to the cost structure of US registered companies. However, it is important to underline that most Danish companies regarded the product liability cases referred to in Danish media as exaggerated. And in the vast majority of the cases where a US company faces a serious law suit, it can often be justified by the actions of the company. The companies participating in the survey give the following advice on legal challenges to Danish companies interested in the US market: Labor Market >> US labor market is more flexible than the Danish. Dismissing emThe ployees is generally more accepted, especially by the remaining employees. However, loyalty among the American employees is lower than in Denmark. A location analysis and comparative study of different locations should be an integral part of the preparation when a Danish company intends to enter the US market. The participating companies provide other Danish companies with the following advice: >> Consider the key factors for your business and compare between different locations – consider using external assistance with US experience in this matter. >> the US, there is no collective bargaining and the trade unions generally In have less impact than in Denmark. This is also one of the main reasons for the many lawsuits related to employees. The lack of a system for settling employee disputes, as it is known in Denmark, frequently causes settlements through the US court. >> From the employers’ point of view, the problem with court settlements is that the winners are not able to claim reimbursement for the legal costs. Many cases are therefore settled out of court. Lawsuits and legal disputes concerning employees are time and resource consuming and remove focus from the business. >> Establish location close to principal customers. >> East Coast is closer – both in terms of culture and time. The >> Different states often offer incentives such as significant tax exemptions and other valuable assistance (Delaware is famous for its favorable business laws that attract many foreign companies to incorporate their US subsidiary in the state). >> Look at the location of competitors and key customer segments. >> The cost levels between the various regions and cities can fluctuate significantly. The cost level is generally lower outside the larger cities. 35 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 36
  20. 20. Other Legal Issues Conclusion >> Take out insurance. It is relatively expensive, but part of doing business in the US. As outlined in this chapter as well as through the cases, there is no onesize-fits-all for Danish companies entering the US market. Each company has to adapt its US strategy to ambitions and available resources. >> Employee insurances must be explained to the employees in detail. >> thorough when preparing product manuals. Often it should be Be prepared in more than one language, and EVERYTHING must be taken into account. >> Review documentation and manuals thoroughly. Make sure warnings are explicit, as common sense is no guarantee. >> Spend time on studying the business laws – for instance, prices cannot fluctuate too much between states. >> Work with good lawyers and other counselors. >> Accounting standards and financial systems are different in the US compared to Europe. >> There are national laws, and then there are state laws – this means that what might be possible in one state, might not be possible in others. Bureaucracy and Practicalities >> aware of US bureaucracy. It can take up to 1½ year to get a green Be card. >> patient – things (visas and other practicalities) take time and require Be a lot of resources. >> not underestimate time consumption in relation with practicalities. It Do takes time to obtain certifications and approvals, payment methods are “old-fashioned”, distribution and logistics take longer than in Europe etc. >> manufacturer-to-consumer infrastructure is not as developed as in The Europe and it is therefore more complex. >> Today in Denmark both companies and customers use the internet to take care of almost everything on an every-day basis. This is NOT the case in the US. A lot of companies handle everything through the postal system or over the phone. As a Danish subsidiary, this is something that you need to keep in mind, since you might lose potential clients/customers because they simply do not know how to contact you. Additionally, this means that sale processes take longer. >> not forget your dollar exposure when planning and implementing your Do US activities – it may pay off to have a dollar cost base. 37 S u cc e ss o n t he US m a r k e t Even though the experiences made by Danish companies are different, it is possible to subtract a number of general recommendations. >> Establish presence. It does not necessarily mean that you have to set up your own organization. You can go through distributors or other relevant partners. However, you need to visit the US, customers, and suppliers regularly in order to be successful. Without a thorough understanding of and feeling with the market, you will not be successful. >> Aim for specific market segments and find your niche. It is important both on the B2C and B2B markets as highlighted in the cases of Morsø and Tom’s Group. All Danish companies recommend focusing on one or a few geographical areas. >> Resources must be available and management in Denmark committed. For internal reasons, Danstoker decided to postpone market entry in the US 3-4 years, as the company believes an entry on the US market requires dedicated and committed management resources. Other Danish companies, including LEGO, too argued that this is a key premise for successful market entry. There should be a willingness to invest in the market. >> long term perspective on the US market is often necessary. Morsø A spent 12 years and a sizeable investment before developing its present business model. However, the experiences gathered were invaluable when designing the present set-up. >> not enter without a unique business idea. You need to establish a Do clear position on the US market. >> Understand the market. It is important to analyze the market and get insight into market structures. The market structures may be different from Europe, and you may need to change your business model to suit the US market. This was the case for Danstoker. The company could not identify the kind of partners it usually works with in the US. >> Focus on one customer segment. You need to know your customer segment very well in order to be successful on the US market. If not, you will lose to competitors having a stronger position and a better value proposition. S ucc e ss on t he U S market 38
  21. 21. >> Form strong partnerships with distributors. Morsø provides extensive support to their distributors and engages actively in the market development phase. >> Use extensive resources on preparation. All Danish companies participating in this survey highlighted the importance of thorough preparation. You need to understand the market, customers, and possible entry modes before entering the market. Collect needed data and consult experts if needed. >> Apply a dynamic entry mode. Successful Danish companies evaluate different set-ups, and on this basis determine the optimal entry mode for the US. If the entry mode turns out not to be successful, be prepared to change strategy. >> Patience is important. Things take time. It is the case in relation with distribution, transportation, transfer of money, getting green cards, etc. The above comprise a comprehensive set of practical recommendations to Danish companies wishing to enter the US market. Keeping these recommendations strong in mind as well as applying the framework presented in the following chapter will increase your chances of a successful US market entry. 39 S u cc e ss o n t he US m a r k e t A Danish company must realize that success on the US market requires comprehensive commitment S ucc e ss on t he U S market 40
  22. 22. Entering the US Market through Successful Partnerships The next section outlines an approach to preparing entry on the US market. It presents a general model for preparing a strategy for market entry, a framework for selecting your partners and creating value for them as well as a framework for developing and managing partnerships in the US. US Market Entry Planning The General Model Introduction Danish SMEs are primarily opportunity driven in their business development. This is not to say that Danish companies do not plan at all or that all business development is purely coincidental. However, Danish companies have a tendency to apply the same decision making framework (or lack of it) to the US as is used for smaller, less sophisticated markets. From the Danish companies interviewed as part of the ”Do’s and Don’ts”, it is evident that even large Danish companies often struggle for success in the US. What all the participating companies have emphasized as a key factor for success is taking the necessary time for thorough preparation. Furthermore, the three cases underline that the management of the Danish company must be prepared to apply a long-term perspective on the entry process. Finally, the cases also illustrate that a Danish company must realize that success on the US market requires comprehensive commitment – both in terms of financial and human resources. This means preparing budgets, dedicating people at different levels in the company, frequent travels, preparedness to adapt, while still staying focused on the strategy developed. The US strategy must be a dynamic process, which means that it must be constantly developed according to the information and experiences gathered throughout the process. Both Tom’s Group and Morsø have changed their strategies on the US market. It is recommended that the Danish company forms a small project group comprising of both top management and key staff that drives the US market penetration throughout the entire process. 41 S u cc e ss o n t he US m a r k e t The decision-making process regarding market entry planning is essentially generic for all markets. It involves taking into account the opportunity in the market and devising a viable strategy, entry mode and implementation plan that will enable the Danish company to pursue the formulated strategy. What sets the US apart from other markets is that companies should take extra care in being methodical in all aspects of the planning process. The reasons behind this are; 1) the potential importance of the US market due to its sheer size; 2) the sophistication of the market (in terms of customers and competition); 3) the fact that regulations can vary a great deal from state to state. A FRAMEWORK FOR MARKET ENTRY PLANNING Products Resources Market Opportunity & Strategy Entry Mode Implementation Competition Business Env. S ucc e ss on t he U S market 42
  23. 23. The illustration of the framework indicates the iterative nature of the entry process. Ideally, a Danish company should initially evaluate the opportunity in the US by examining at five factors: 1. Products – Do we have the right products for the market? The logical choice for most Danish companies is undoubtedly to team up with one or several US partners 2. Resources – Do we have the necessary financial and human resources? 3. Market – Size, structure, growth, geographical segments, buyer groups etc. 4. Competition – Who are the relevant players? What are their strategies (products, segments, and ambition) and resources? How do they serve the market? Etc. 5. Business Environment – Product liability, special legislation governing our industry etc. On the basis of these five parameters, the Danish company is in a position to assess whether it should proceed with the US market entry based on the perceived opportunity. The overall strategy revolves around where and how to compete. It can be boiled down to the two considerations: 1. Ambition – What do we want to accomplish in the US? 2. Positioning – Geographical markets, products, buyer groups, and competitive parameters The entry mode should match the requirements posed by the chosen strategy. For instance, if a Danish company wishes to serve the entire US market with a simple product, the company should opt for a strong US distribution partner. Entry mode through partnerships is the subject in the sections below. On the other hand, if a Danish company intends to target a market with few buyers with a knowledge intensive and service intensive product, the Danish company may consider establishing a US subsidiary with internal resources to develop the market. Subsequent to choice of entry mode, the final stage in the entry process is implementation. The implementation should be dictated by the available resources and the ambition for the US. In this respect it is important to outline clear stages in the implementation in order to unequivocally prioritize the efforts. 43 S u cc e ss o n t he US m a r k e t Entry Mode – Partnerships in the US Make Sense For a large part of Danish SMEs there is no need for intensive analysis in order to determine the optimal entry mode, i.e. the choice between a US-based partner as opposed to establishing a US subsidiary and organization. The rationale for this can be summarized as follows: >> product range of Danish companies is often specialized and thereThe fore fits well with a distributor or agent >> Danish SMEs seldom have the resources required to establish their own organization in the US in the short run >> market is geographically extremely large and therefore impractical The to serve from a single location unless you have the resources to invest in a rather large organization. >> Competition is often fierce – teaming up with a strong US partner therefore makes sense >> Business environment in the US is very different from existing markets in terms of legislation and business institutions >> Due to the fierce competition and sophistication of the US market, the business opportunities will often be found in several niches >> derived from the business opportunity, the strategy will often be a As focused positioning even if there is a potentially wide geographical focus which necessitates the use of partners While the above characteristics do not apply to all Danish SMEs, they do prevail in the majority of cases. The logical choice for most Danish companies is undoubtedly to team up with one or several US partners. This is also the strategy applied by Morsø, and the reason why the following sections are dedicated to issues related to partnerships in the US. S ucc e ss on t he U S market 44
  24. 24. Partner Based Market Entry Each company should obviously go through the stages of the entry planning framework outlined above in order to formulate a viable strategy for the US market, including a decision on the optimal entry mode. Never­ theless, it is clear that the logical choice for many Danish companies will be to utilize US partners in their efforts to unlock the US potential. There are two equally important aspects to devising a successful partner based entry: >> Partner value proposition US >> Partner selection US An important aspect of a partner approach is to visualize the value of the partnership to the US partner. The earnings potential and possible upside have to be clear to the US partner from the beginning. The rationale is simple: In order to attract the best US partners, the Danish company must stand out as an attractive partner. This entails setting goals, investing in branding, allowing for decent profits etc. The other aspect relates to selecting the right partner. DI’s experience from working with Danish companies indicates that the wrong choice of US partner may cost a Danish company three years on the US market: It will take one year before it realizes that it has the wrong partner. One additional year will pass before the Danish company decides to do something about the situation, and one more year before the new US partner has been selected and inducted. Hence, the costs associated with a thorough US partner selection process are in most cases low compared to the potential loss of revenue and direct costs associated with making subsequent changes. In the initial market entry on the US market, Morsø ended up selecting the wrong distributor as it turned out that it was not capable of servicing the market as expected. After three to four years Morsø decided to change its set-up. An important aspect of a partner approach is to visualize the value of the partnership to the US partner. 45 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 46
  25. 25. Partner Value Proposition When the Danish company starts establishing the US distribution channel, it should focus not only on how it wants to create value for the final consumer in the US, but also with respect to the partner and other intermediaries on how to ensure the appropriate motivation. In other words, the larger a reward it is possible to secure for the US partner, the more committed the US partner will be to furthering the sales of the Danish company’s products. Clarifying the US partner’s value proposition before selecting a partner may seem counterintuitive. However, by doing so, the Danish company ensures that it can quickly establish the US partnership. All too often the US partner selected will lose interest because of delays, lack of action and support etc. In most cases the partners will lose valuable time penetrating the US market and it may eventually lead to the dissolution of the partnership. Many Danish companies do not prepare adequately before entering a US partnership, not only with respect to the selection of the partner, but also with respect to what the Danish company can offer. A common mistake is that the Danish company offers the US partner a pile of brochures, a price list, and a telephone number for further advice – and believes that this is sufficient. Even though this approach makes sense from a risk minimization perspective, a solution that is both cheap and entails limited risk will very often mean that neither of the two partners will gain from the partnership. This is especially true in a market as competitive as the US. Another common mistake is that too many Danish companies see their US partners and distributors as customers. Needless to say, this perception will make it extremely difficult to develop a sensible partner value proposition. An important aspect of a partner approach is to visualise the value of the partnership to the US partner 47 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 48
  26. 26. Danish companies that already have US partners will also be able to benefit from developing a partner value proposition. Experience shows that implementing a partner strategy including a clear partner value proposition in existing US partnerships will create a new drive – not least because it will increase the level of communication between the partners. The parameters that the company can adjust with respect to these two avenues are illustrated below. US PARTNER VALUE CREATION The partner value proposition should address the following issues: >> What should we do to become/remain an attractive partner? Task Earnings >> What goals do we have for the market? >> Which tasks should the US partner take care of and how? Knowledge Risk >> How do we expect to support the US partner in his work? >> What do we demand and wish from the US partner? Value >> What do we demand from the contract – what is not up for discussion? >> How do we ensure effective communication? Brand All Danish companies will testify that they would like the US partner and distribution channel to focus on selling their products. The most effective way of ensuring this is to reward the US partner by allowing an attractive return on selling the Danish company’s products/services. This might sound like common sense, but Danish companies are often unwilling to allow high margins for their US partners. In many cases, allowing the US partner to make a substantial profit will actually optimize the Danish company’s revenue as well, as it will create the financial incentive for the US partner to invest maximum resources in the development of the market. Small and medium-sized Danish companies tend to look for American partner companies that are similar to them in terms of size, thereby ensuring that they quickly become important to the partner because of the revenue that stems from their products. However, selecting a small partner also increases the need for the Danish company to actively support the US partner through strong commitment and a focused partner value proposition. Basically, a Danish company can take two avenues to create value for the US partner: >> Increase the value of the perceived benefits >> Decrease the relative costs Synergy Process Earnings The yardstick applied to evaluate the attractiveness of a Danish company in the eyes of a US partner is its earning potential for that partner. The higher the potential, the more attractive the Danish company will look to the US distributor. Risk The willingness to take on risk is often an indication of commitment. It is important to be aware of the different types of risks and subsequently to allocate a given type of risk to the partner best able to handle it. By assuming risks associated with for instance product guarantees, buy back guarantees, bank guarantees, or performance guarantees, the Danish company can effectively minimize the risk for the US partner and thereby create more value for him. FIVE PHASES 49 S u cc e ss o n t he US m a r k e t 50 S ucc e ss on t he U S market Collection of Partner
  27. 27. Knowledge Knowledge intensive processes and products command higher prices than simple products. In general, the more knowledge the US distributor is able to put into the product, the higher the possibility for the distributor to get a higher share of the earnings. A key part of knowledge is training. Attractiveness can be increased considerably by for instance developing a training or competency development program for the US partner. The Danish company BK Vibro has carried out several training sessions for their US partner both in terms of product training and marketing. It has been a great success for both parties, because it has strengthened the relation. Experience shows that there is a direct connection between the quality of the training that the Danish company offers its US partner and the earning potential of its product in the US. Hence, training has a positive effect on sales, and increases the loyalty of the US partner. Process An overlooked possibility of creating value for the US partner is by binding him closer through processes, for instance by giving access to systems, methods, tools, and guidelines that help achieve the goals. This line of thinking is especially evident with respect to successful franchise systems, where it constitutes an important and essential part of the partnership. Brand Brand, image, and references are often attributed a certain value. It is less risky to introduce a product/service when it is already an established brand well-known to the consumers. At the same time, the US distri­butor knows that the Danish company will continue its investments into the brand and most likely contribute to the marketing of the products in the US. However, as mentioned in the Do’s and Don’ts chapter, European brands and references are often not recognized in the US, which limits the brand value. Therefore, focusing on brand building in the US, in addition to acquiring US references, are key factors in the efforts towards a successful establishment on the US market. 51 S u cc e ss o n t he US m a r k e t All Danish companies will base their partner selection on some sort of assessment. However, often the partner selection process is random Synergy As most of the US partners in the distribution channel often represent other companies, the Danish company should carefully consider whether it is possible to create value through synergies between other products in the US distributor’s portfolio. Complementary products, for instance, may create synergies within all of the areas already mentioned, i.e. brands, systems, and training. It will often be difficult to ascertain the value of the synergies, but it is nevertheless important to highlight them and consider how they may create value. When the Danish company has figured out where and how to contribute to the US partner’s value creation, the next step is to visualize the different components to that partner. The different components can either be presented as a set of options or as a take-it-or-leave-it offer. Partner Selection All Danish companies will base their partner selection on some sort of assessment. However, often the partner selection process is random. A quite common US partner selection criterion is that the Danish company has met or responded to an enquiry from a US company/person that the Danish export manager may have met on a trade fair or exhibition in the US. This more or less accidental meeting thereby leads to the US company/person being appointed the company’s official US partner or distributor. S ucc e ss on t he U S market 52
  28. 28. A structured and systematic approach to selecting the US partner will not surprisingly increase the probability of the Danish company becoming successful on the US market. The following examples might appear constructed; they are, however based on actual cases. They serve the purpose of illustrating what a thorough US partner selection process will prevent from happening: example of US Partner Requirements General strengths • Ability to finance sales and growth • Ability to raise financing >> After a couple of years with limited sales, the Danish company realizes that the US distributor also sells competing products • Ability and will to finance commercials and marketing >> US distributor has been given exclusive rights to the entire US A market, but does not have the necessary resources to cover more than three states • Expertise on product and market • Experience with customer target group • Geographical coverage • Customer service • On-time deliveries • Sales force • Market share • Quality in management • Participation in congresses and exhibitions • Reputation among customers >> After granting exclusivity, the Danish company realizes that the US distributor does not possess the needed technical knowledge or intend to invest in training of its employees • Ability to implement 2-3 years marketing plan • General size >> Discussions with potential customers leave the Danish company with an impression that the US distributor has a bad reputation and does not possess the needed political understanding to sell the products Product factors 54 ENTERING THE US MARKET >> Danish company’s newly appointed US distributor purchases a sizeThe able stock at the beginning of the collaboration and reissues an order after a short period of time. After this, no further order is placed by the US distributor, who has obviously not been able to take the product out to the final consumer • Market knowledge • Ability to carry stock >> After a short period and limited sales, the Danish company becomes aware of the fact that the US distributor does not have the needed financial resources to develop the market >> Danish company’s US partner boasts of having good connections to The the various stakeholders within the industry, but after a period of time, the Danish company realizes that the partner does not have the said access to this network Marketing skills • Member of trade associations Commitment • Volatility in product mix • Percentage of business on largest supplier • Knowledge on products • Willing to carry sufficient stock • Complementary products • Willing to allocate money for advertising • Quality and complexity of product lines • Willing to guarantee minimum sales • Standard of physical facilities • Undivided attention to product • Quality of after sales service • Willing to skip competing products • Patent security • Willing to invest in sales training Facilitating factors • Ability to install • Connections to influential persons • Ability to advice • Experience from working with other exporters • Ability to assemble • ”Track record” from previous suppliers • Familiar with Danish company culture 53 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 54
  29. 29. To ensure that the process of identifying the optimal US partner follows a systematic and structured process, Danish companies should apply the following 5-step model: US PARTNER SELECTION PROCESS 1. Preparation of a US partner profile 2. Initial search (Desk and Field research) 3. Screening (Field Research) 4. Final Assessment (Dialogue) Selection of US Partner In the US, there is a normally a strong argument for the US partner being responsible for most tasks. Not only due to the relatively large physical distance between Denmark and the US, but also because US customers in general demand a local set-up to cater for every possible need. Following the preparation of the analysis, the tasks must be reformulated to a number of concrete criteria that will eventually help the Danish company select the US partner. It is important that the Danish company does not list ”nice-to-have” criteria for the US partner, but only ”need-to-have”. If too many demands are formulated, the search process will be too long and not least become more expensive. On the other hand, a list containing criteria that are too general will not produce the desired result. On the basis of the US partner requirements, the Danish company is able to finalize a US partner profile to be used during the subsequent steps. Step 2: Initial Search When the company has finalized the partner profile, the actual search for potential partners can begin. The philosophy of the model is that the Danish company’s level of information about the US market and potential US partners is gradually increased throughout the process. At the same time the number of potential US partners will gradually decrease. The process therefore ensures that resources are used effectively. Step 1: Partner Profile When preparing the US partner profile, the Danish company must decide which functions should be delegated to the US partner and which should remain in the Danish company. In most cases, the Danish company should consider hiring a consultant with substantial experience from the US, i.e. either a US consultant or a consultant with a strong presence in the country. If the strategy of the Danish company is to serve several US customer segments, it should define a geographical area and make this its US market initially. Consequently, the US partner search should be within this area. BK Vibro had tried to identify its own partner through contacts and network, but found it hard as they were not actively present at the market at this stage. Therefore, the company decided to team up with a company specializing in partner search. Through this co-operation, an optimal partner was identified. Today the co-operation is progressing positively. The first step is therefore to determine the division of labor within the distribution channel through a task analysis. When the Danish company has considered where value can be created and the tasks that the partner should take care of, it is in a much better position to develop a profile of the partner. What does the right partner look like? Which competencies and characteristics must the partner possess and which would be nice to have? What should be emphasized when making the final selection? 55 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 56
  30. 30. Step 3: Screening In this phase of the selection process, the Danish company must go into more details and initiate a dialogue – not necessarily through meetings – with the potential US partners in order to make a qualified judgment and selection of its future partner. At this stage it will not suffice to solely evaluate whether the potential US partner is able to perform the task – the quality of the performance must also be evaluated. The existence of an after-sale service organization would, for instance, be a criterion in the initial search phase, while during the screening phase, the quality of the service would need to be assessed. This is what the dialogue with the US potential partners aims at clarifying. Step 4: Final Assessment The final assessment will typically take place as part of a visit to the potential US partner to collect information directly from his employees through face-to-face meetings. In case the Danish company wants to be remarkably thorough, it can also consider contacting and meeting with the potential US partner’s customers, suppliers, and perhaps also other stakeholders. Hopefully, only one candidate should stand out after the Danish company has evaluated all the potential US partners and compared their qualifications on the basis of the requirements. In most cases, however, the number of potential candidates is still around 2-3 and the Danish company must make its decision based on other factors. Step 5: Final Selection of the US Partner The foundation of any collaboration/partnership is a good chemistry and communication between the partners. When the Danish company ends up with more than one US candidate to choose from, the final evaluation should be made by evaluating the potential candidates using one or more of the following criteria: >> Chemistry >> Ability to communicate effectively There is no set approach for applying the criteria. By asking and answering questions from the group of potential US partners, the Danish company will within a short time be able to identify the best and most committed one. Some issues that the company could take up with its partners are: >> the partner to develop a general plan for the marketing of the comAsk pany’s products/services >> Discuss the partner’s technological understanding of the product >> for information on particular customers Ask >> the partner to estimate potential sales Ask In case the Danish company is still unable to decide on one US partner, it is an option to establish more US partnerships. In this case, it will of course not be possible to grant exclusivity. It will under special circumstances be better to have more than one partner. This may for instance be the case when it is not possible to identify one potential partner, who will be able to cover all the different segments on the US market. Instead of thinking along the lines of exclusivity, the Danish company should consider the individual US partner’s ability to achieve a reasonable earning when selling the company’s services/products. Negotiation As a final step, the Danish company will start preliminary negotiations with the selected US partner(s). It is strongly recommended to take the required time to complete the negotiations and involve lawyers and other external expertise in the contract preparation phase. It is difficult to say how long this phase will last, but because of the travels to and from the US and involvement of legal assistance, it will typically take up to two months. Nevertheless, it is imperative that negotiation and conclusion of the contract with the selected US partner takes place before the collaboration starts. Many Danish companies wish to test the relationship with their US partner before they enter into a contract, which may often become an expensive way of avoiding or postponing the contract development process. >> Understanding of the market >> Commitment >> Alignment of expectations 57 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 58
  31. 31. Partner Development and Management One thing is providing partner value and spending significant time on identifying and selecting the optimal partner, but equally important is to have a structured approach to developing and managing the partnership. As some of the cases have illustrated, it is challenging to build up successful partnerships. Despite good intentions many things can go wrong such as huge cultural differences and different perspectives on how to approach the market and the customers. A Partner Management Guide can take many forms and should take its point of departure in your company and its objectives for the US market. However, it can be an advantage to include the following elements: PART I Business fundamentals >> successful partnership requires an “open book” approach A PART II Practicalities >> successful partnership requires that you develop a “partner culture” A within your own organization PART III The co-operation >> successful partnership requires that you have a frequent contact with A your partner (and especially in the start up phase, were the partner still has to get use to the product and gain more knowledge on how to sell it) >> successful partnership requires a lot of empathy towards your partA ners – you must understand their market Feedback system Business plan COM M U N ICATION One way to increase the chances of successful partnerships is to develop a Partner Management Guide. PARTNER MANAGEMENT GUIDE The purpose of the Partner Management Guide is: GOALS Information Demonstrate professionalism Division of tasks/ responsibilities Foundation for partner negotiations Faster and more focused partner implementation Goals & requirements Support Structures Ensure common understanding The elements are briefly described in the following: Part I: Business Fundamentals This section is called Business Fundamentals as it contains basic information about your company, products, services customers, markets, and competitors. It could also contain information about what tasks the partner is responsible for. The purpose of this section is: >> provide the partner with a thorough understanding of the company To and its surroundings >> create a common understanding of the market To Uniform partner management >> provide input for the marketing mix to be applied by the individual To partners Increased partner channel control 59 Support MEANS AT YOUR DISPOSAL Attract the optimal partners Measuring S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 60
  32. 32. Ideas to business fundamentals are provided below: Company Products Services History Product catalogue Pre-sales services Vision, mission Technology After-sales services Values Unique Selling Points Installation Facilities Concepts Testing Organization Packing Return policies Financial info. Transportation Cases Service requirements Gallery References Part II: Practicalities This section is called Practicalities and could contain the following information: >> partner agreement The >> Prices and conditions >> Contact details >> References >> Business planning routines (process) >> Reporting 61 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 62
  33. 33. Business Plan The Business Plan is a central tool in the planning and implementation of future activities. The Business Plan should include: Customers & Markets Competitors >> Budget General markets Competitor profiles >> Sales quantities Customer segments Competitor SWOT >> Prices Target groups Competing products >> Activities Market position Competitor benchmarking >> Customer segment focus Customer profiles Competitor position >> Development initiatives Competitor profiles Competitor marketing activities The business plan should be prepared annually. The US partner may take the initiative of developing the plan, but it is important that it is adjusted and finalized jointly by both parties in order to reach mutual agreement. Enclosed in Appendix 1 are examples of some of the frameworks normally included in a business plan. Part III: The Co-operation This section is called the Co-operation. It is a dynamic part and focuses on how to develop and manage the partnership in a structured manner. It contains the following elements: Feedback system Business plan COM M U N ICATION Measuring Support 63 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 64
  34. 34. Measuring The objectives should be measurable and could for example focus on: >> Market coverage >> Volume, turnover >> Number of customers >> Number of customer segments approached >> Marketing activities implemented >> Size of inventories >> Sales force Support Normally you will have a lot of requirements to your US partner. However, in order to have a fruitful and equal partnership, you also need to support your partner in developing the market. Too often it is left entirely to the partner. Below, some support initiatives are illustrated: TEMPLATES AND GUIDELINES IT SYSTEMS TRAINING RESSOURCE BACK-UP Tender preparations CMR systems Sales training Sales back-up Visit reports Calculation systems Product training Fair participation Check-lists Extranet Negotiation Demo equipment Calculation models Electronic catalogues Marketing Personnel/staff Customer knowledge Inventory man. systems ICT training Competitor knowledge Service management Two other Danish companies participating in this survey, Dolle and BK Vibro, also emphasized the importance of supporting their partners as it will result in a higher degree of commitment which is fundamental to achieve success in the US. Feedback System One of the frequent complaints from Danish companies working in the US through a partner, for instance a distributor, is that they do not get market information and hence have no knowledge of the market situation. This situation can be prevented by incorporating a feedback system as part of the overall co-operation and reporting procedures. By requesting the partner to fill out simple templates you can get information and knowledge about: >> Customers >> Competitors The purpose of the initiatives is to demonstrate to your partner that you want to actively participate in the market development, but also to make sure that you have a structured approach to the co-operation as it will save time and money. Morsø has been successful in building up a strong partnership with its US distributor. Morsø provides sales back-up, training, marketing material, company visits, relevant templates, etc. >> Market trends >> Changes in partner organization We suggest three simple reports: 1) Sales report (monthly or quarterly) 2) Market development (semi-annually) 3) Partner information (annually) 65 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 66
  35. 35. Companies with successful partnerships in the US… … believe that the right US partner and relations are decisive This is unique to successful companies in the US. What distinguishes successful companies from the less successful ones is that they take their time to evaluate and cultivate the right partnerships and the important relationships. Changing partners in midstream can be a costly experience both financially and in time to market. Therefore, if the Danish company is not careful in selecting the right partner, it runs the risk of wasting three years and extensive resources penetrating the US market. Communication Successful partnerships are based on efficient communication and knowledge sharing! So think about: >> What information is relevant? >> How is it exchanged? >> Between whom? >> Frequency? Successful Partnerships in the US By applying the proposed framework as well as taking the recommendations of Danish companies into consideration when preparing a US market entry, we believe that the chances of success will increase significantly. Based on the findings in the cases and the recommendations in the chapter “Do’s and Don’ts”, the characteristics of successful partnerships seem to be the following: … choose the US partner and do not let the partner choose itself The choice of entry mode and US partner is a strategic decision that is decisive for the success of a Danish company in the US market. All too often, the choice of US partner is based upon casual meetings at fairs or on unsolicited enquiries. The successful companies have, prior to the partner search, evaluated the type of functions the US partner should be responsible for in the distribution channel. They have developed a profile of the ideal US partner and selected the partner on that basis. … ensure that the US partner provides knowledge about the market The easiest way for a company to obtain market information on the US market is through its US partner. Successful companies help their US partners by systematising this task for instance by providing them with forms. It is important that the information collected on the US market is checked regularly by independent sources. … allow the US distributor to earn a profit A US distributor should not necessarily earn the same as the exporter – in the US a partner should sometimes be allowed to earn more! It is however important to ensure that there is a correlation between the yield and the risk. In addition to the relation between yield and risk, it is vital that the US partner in the distribution chain can look forward to a generous profit. … establish long-term relations with the US partner The partnership will become more profitable over time. Aside from the already mentioned costs of changing partner, the Danish company should also consider the value of the knowledge built up in the partnership in the US. Consequently, the company should not only set demands, but also show patience in the development of the partnership. … establish clear targets for the US partner Successful companies lay down budgets, goals, and marketing activities in collaboration with their US partner. This is done at frequent meetings on partner development or in annual business plans. 67 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 68
  36. 36. … know the US customers/segments The companies not only know what different US customer segments value, but also how to create this value better/cheaper than their competitors. The successful companies train their US partners on how to service the customer segments, both through technical and product training, as well as through targeted sales training. … do not look for US distributors with a few good customers, but for those who have the ability to develop the market Successful companies do to a certain extent not look at the US partner’s existing network. It is not decisive that the partner already services a number of interesting customers, but rather that he has the needed resources and competencies to identify new customers and build up the market jointly defined. … are aware of cultural differences In global industries it may be less important, but it is often rather important that local culture is taken into account. This is underlined by the fact that several successful companies have as their policies that only locals are employed to cultivate a given market. … support the US partner with capital, leadership, and well-tested concepts It is important to understand that successful companies use a lot of resources to develop the long-term partnership in the US. It is essential to support and help the US partner develop the market. Many companies primarily focus on their expectations to the US partner. It is, however, equally important to make clear what kind of support the partner may expect from the Danish company in the different phases of the sales. … take control of the US marketing strategy from the outset All too often the US partner is responsible for preparing the marketing strategy for the US market. Successful companies work together with the US partner on defining a suitable marketing strategy based upon the company’s experience from other markets, the experiences of the US partner, and the collected market information. …systematically collect information on the US market This is essential in order to react quickly on new opportunities and threats in the US market. Updated market information can moreover be used as a means of control and motivation of the Danish companies’ subsidiaries or agents/ distributors by putting their results in the right perspective. …are patient because it takes several years to penetrate a new market It takes time to penetrate and develop the US market. The successful Danish companies understand that it is necessary to react if the US market changes. On average, the US market takes 2-3 years to mature. 69 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 70
  37. 37. Concluding Remarks Appendix Segment focus Volume per segment Product YY YY YY YY YY YY Segment The strategies related to selecting and working with US partners conclude the US market approach model and therefore also this handbook. XX: Through practical experiences, this handbook offers Danish companies clear recommendations and a structured approach that will increase their chances of success on the US market. XX: It is important for the authors to disseminate the message that even though the US market does pose a significant challenge, Danish companies are in general in a position to do better than is the case today. However, it requires that the Danish companies considering entering the US market prepare carefully and thoroughly, as outlined throughout the handbook. Many Danish companies are already preparing a lot of the suggested analyses and strategies, but often in an unstructured manner. The authors believe that a greater focus on the solutions presented here will allow the Danish companies to create improved business models. In turn, this will not only achieve the objectives set for the US, but also serve as an inspiration for penetration of other markets. Although the approach is developed specifically based on the experiences of Danish companies in the US, it is to a large extent also applicable when entering other foreign markets. Moreover, the recommendations also offer value to Danish companies already present on the US market. Since the strategies are iterative and dynamic, implementing them in close collaboration with existing US partners provides a foundation for improving existing activities. Finally, we trust that applying the recommendations and framework of this handbook will optimize the efforts on the US market. XX: Activity plan: Activity Date/Period Target Estimated Group Cost Payer Responsible 1. Conference 2. Costumer calls 3. Demo-show 4. Fairs 5. Sales Budget Customer Q1-Q2 201x Q3-Q4 201x Q1-Q2 201x Q3-Q4 201x Total segments Unit USD Unit USD Unit USD Unit USD Unit USD Total Visits to the partner: 1. visit 2. visit x. visit Date/who/why Good luck with unlocking the potential! 71 S u cc e ss o n t he US m a r k e t S ucc e ss on t he U S market 72