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Geographic Expansion
Hosted by Willy Foote (June 2005 - Closed)
In 2004, EcoLogic Finance went before its Board to seek approval for expanding its activity beyond its initial focus on Latin America. This paper lays out the factors that led to this decision and thereby frames some of the key strategic and logistical issues involved in the decision of expanding an organization’s geographic reach.
What factors may prompt this process?
- Growing global demand for your product or service. In our case, the global demand for “sustainable” coffee trade finance has been and is expected to continue growing exponentially. The fastest growing market is in East Africa, which is where we first expanded to in late 2004. In terms of overall size, the next largest markets outside of Latin America are in East Timor and Indonesia, which is where we expect to be working by 2006.
- First mover opportunities for your sector. Based on our track record and growth, we are well positioned to be a leader in our field, but only if we have the breadth to address the global need, not just that of Latin America.
- Request of key stakeholders. A critical part of the success of our business model involves working closely with premier market makers like Green Mountain Coffee Roasters, Royal Coffee, and Starbucks Coffee Company. When, across the board, these important partners expressed enthusiasm for expanding collaborative efforts to places outside of Latin America, it was difficult to ignore.
In December 2003 the Harvard Business Review published an article called “Growth Outside the Core,” which outlines some important lessons from private sector companies that are relevant in considering geographic expansion. In a study of the drivers of profitable, sustainable corporate growth, they analyzed 181 different companies in the 1990s, and reached two major conclusions: first, they found that most sustained, profitable growth comes when a company pushed out the boundaries of its core business into a so-called adjacent space. They identified six types of “adjacencies,” ranging from adjacent links in the value chain to adjacent customers to adjacent geographies.
The second finding was that companies consistently and profitably outgrow their rivals by developing a formula for expanding those boundaries in predictable, repeatable ways. Companies that hit upon a repeatable formula have success rates of twice that, and some drive their rates up to 80% or higher. Repeatability allows the company to systematize the growth and, by doing so, take advantage of learning-curve effects (e.g., repeating formula over and over again to refine skills and systematize processes that are developed mostly through guesswork the first time). The majority of standouts have one or two powerful, repeatable formulas that generate successive waves of new growth, allowing them to push beyond the boundaries of their core businesses.
The authors conclude that combining repeatable formulas with adjacent geography can often lead to a breakthrough in performance. Specifically, they cite numerous companies that successfully made adjacency moves with little risk by simply changing a single variable – geography – but continuing to sell the same product to the same customers using the same repeatable formula. Thus, risk was managed effectively because the product sold did not change in terms of customers, supply chain, or market channels.
In looking at this description, we realized that we had the exact ingredients the authors claim makes for a successful performance recipe. Namely, we would be dealing with the same buyer partners, the same supply chains, and the same products; we would be changing essentially only the variable of geography.
Armed with not only the adequate motivation to consider this decision, but also the potential for this being a path toward “breakthrough performance” in achieving our mission, we got down to the brass tacks of what we needed to consider to move this initiative forward. During the workshop, we invite you to consider whether your organization might be ripe for expanding its geographic reach, including identifying whether you have a “repeatable formula” that will not only help you serve a larger marketplace, but also my be a linchpin for breakthrough performance for your organization. Furthermore, we invite you to consider and think of additional such as the listed below that will important in taking this step:
- How would geographic expansion affect your current operations and organizational structure?
- Do you have a realistic handle on the costs of expansion to new areas?
- How transferable is your model to other geographies?
- How will you address the language barrier in new locations?
- Are there greater risks inherent to new areas versus your existing geographic focus?
- Are there more untapped opportunities in your existing geography that you should consider before expanding geographically?
John Berdes - Jun 14, 2005 5:48 pm (# Total: 4) ShoreBank Enterprise Pacific
We are grappling with a similar suite of issues in rural coastal Oregon and Washington. In the last decade we've successfully and serially appended new geographic markets that share a history of reliance on natural resources, and thus culture, beliefs, values (in a broad sense). We've used these commonalities--and a shared crisis of economic restructuring--to deliver relevance to our portfolio of loans and relationships. But the combined and contiguous geography does not add up to scale, so we've settled on the interim notion of "density of impact" to achieve relative "scale of impact". Now we are seeking avenues to export our "advantaged" product lines--small business and community development finance--to other rural communities in the Pacific NW.
We're not dealing with a language barrier--just a culture barrier (think wheat instead of fish and trees). We're pretty clear that efficiencies are available through transaction volume, and we hope enough so that we can continue to customize investment terms rather than demand "conformity" from people who need anything but conformity. Technology--in sales and management--is clearly an expensive challenge. Likewise, we know that customer intimacy (read: localness) is necessary to take more than nominal investment risks (and manage them for return). Finally, true scale will demand an urban presence--easy to do, difficult to achieve while remaining relevant to rural communities and people.
Willy Foote - Jun 15, 2005 4:43 pm (# Total: 4) EcoLogic Finance
John, you are right that geographic expansion is one way to achieve volume and thereby, scale, but it can be easily thwarted without a good understanding of "cultural" factors.
We have definitely dealt with a number of cultural factors in our first foray into Africa. It became clear very quickly that a key to our successful expansion was going to involve leveraging relationships with groups on the ground that had that "cultural" knowledge. Are there partners outside your normal realm that you might look to help navigate the cultural barriers?
In our case, we quickly found that the East African Fine Coffee Association would be a strong ally in the process. The direct parallel for this organization serving Latin America isn't an on-the-ground type organization. Hence, we would have never initially suspected that this type of organization would provide us the type of intelligence that would help us address cultural issues.
Another thing to consider is that, perhaps "scale of impact" may be the place you should continue to focus until some of the factors are in place i.e. the market demand and the relationships.
Pamela McLean - Jun 16, 2005 4:04 am (# Total: 4) Willie Foote wrote "Look for partners that can help you with the cultural barriers... geographic expansion... can be easily thwarted without a good understanding of "cultural" factors...in our first foray into Africa. It became clear very quickly that a key to our successful expansion was going to involve leveraging relationships with groups on the ground that had that "cultural" knowledge..."
It is great to see this point raised, and the increasing appreciation of the need to work in collaboration with local expertise, cultures and social structures.
In a separate thread I have written about how CawdNet (active in rural Nigeria) is separating out its social and entrepreneurial activities. We are now able to serve as "Knowledge Brokers" providing support services and introductions for people/organisation who want to explore and develop their interests in Africa - especially, but not exclusively, in rural Nigeria.
Pam
Willy Foote - Jun 16, 2005 7:27 pm (# Total: 4) EcoLogic Finance
CawdNet sounds like they're really on to something by disagregating their social and entrepreneurial activities in rural Nigeria. Not that these components aren't inextrictably intertwined, but it makes sense to tease out one's understanding of local expertise, cultures and social structures from the core entrepreneurial activities of an enterprise. I'm curious though, in offering this bundled knowledge as a value proposition in and of itself to folks looking to develop interests in Africa, does CawdNet capture that value through a service fee of some sort?
On a related note, and perhaps this is somewhat unique to our "green" lending strategyy, but we have found that one of the best sources of on-the-ground "cultural knowledge" is actually our buyer partners in the US and Europe. Not that they're all experts in local culture per se (i.e., languages, political nuances at village level), but within the context of local business culture as it interfaces with international trade, the best source of insider perspectives on what's doable and what's not -- in our case, how to manage risk in the ag lending sector -- often comes from international buyers who have been working on the ground for years. As long as we, as a financial-services nonprofit offering concrete benefits to buyers and sellers engaged in direct commerce between the North and South, can demonstrate a win-win propostionto these supply chain partners, our business allies provide a wealth of intel on cultural factors that affect business results in the field.
