Nine Geographic Expansion Mistakes To Avoid
Written by Tim Morral
Thinking about expanding your company through domestic geographic expansion? If so, this article is a must-read for you.
Here's the scenario. You want to grow your business. After extensive discussion, you and your partners have decided that establishing offices in other cities seems like the right way to go.
Make sure you look before you leap.
Expanding Geographically: What Can Go Wrong?
While I love sayings like "think forward and reason back," "if you fail to plan, you plan to fail" and "begin with the end in mind," these planning adages and their corresponding planning approaches usually start by envisioning a rosy future scenario, ignoring the possibility that things could end in disaster.
When a vision of the future (e.g. how great the new office will do) is too rosy, people buy into it too easily and they get overconfident.
When this happens, organizational risk assessment is biased in a way that usually ends in disaster. There's no objectivity about the possibility of failure, and accordingly there are no sound attempts at risk mitigation.
Is this the approach you are taking to the geographic expansion of your company? If so, you might be setting yourself up for bigtime failure.
Avoiding Failed Geographic Expansion Attempts
The antidote is a technique called a "pre-mortem" in which you have your team members envision a dismal future scenario in which a contemplated initiative has failed miserably, and then you talk about what could cause these hypothetical failure scenarios. This results in a list of possible failure points that leads to better decision-making and better risk mitigation.
Gary Klein is credited with coming up with this concept as a solution to high project failure rates and devised it because "…too many people are reluctant to speak up about their reservations during the all-important planning phase. By making it safe for dissenters who are knowledgeable about the undertaking and worried about its weaknesses to speak up, you can improve a project's chances of success."
Common Mistakes Made in Geographic Expansion
Applying a pre-mortem approach to geographic expansion, I've talked to a number of folks and scoured various resources to come up with the most common failure scenarios for geographic expansion.
As you contemplate expanding a company geographically, you'll want to make sure you are not setting yourself up to make these big geographic expansion mistakes:
- Picking the Wrong Markets. It can be tempting to go to a market because it's a "hot market" for your industry or because you'd love to spend more time in a certain place. But maybe the markets you'd love to be in are oversaturated with competitors. Companies that expand into markets without an objective approach for prioritizing markets often underachieve on their geographic expansion plans.
- Putting the Wrong Person In Charge of the New Office. What is the profile of somebody who can successfully open a new office for you? Do they need to be entrepreneurial? Do they need great networking and sales skills? Do they need to be good managers? Must they be willing to work 16-hour days? Too often, companies don't thoughtfully consider who should open a new office and what attributes will offer the greatest chances of success. Instead, they hire a remote office manager too quickly or simply let the first company insider that raises their hand do it. The reality is there are skills this person needs to have, and if they don't have the right skills, then they absolutely need to be trained in those skills before they open the new office.
- Thinking It Will Be Easy. It's easy to assume that having experienced success in New York means you'll have similar success in Seattle. The reality is that starting a new office is often as difficult as starting a new business. Fifty percent of new businesses fail within four or five years. It often takes many years before a business consistently covers its costs. If revenue projections for a new office are overly optimistic and the numbers are missed, senior management might cut the cord on the expansion plan. To get it right, companies need realistic expectations, enough stamina and ample runway to give the expansion office a fair chance of success.
- Overinvesting in Infrastructure. You're company may have been started by a bootstrapping founder who treated every dollar as precious, but now that the company is doing well and you are opening a new office, it's tempting to try to make a statement by leasing a palatial office designed to impress. Although this can work for some companies, it's pretty risky to spend heavily. The higher the denominator is in your ROI calculation, the lower your ROI will be. Personally, I'm a fan of minimal investment in the office until there's enough cash flow coming from the new office to justify further investment. Give a remote office manager a blank check, or a big check, and you'll typically find they don't perform as well as you expected.
- Missing or Misaligned Incentives. How should the person you choose to lead your new office be compensated? On one extreme, a big salary that is paid regardless of success or failure is clearly a mistake. A pre-mortem worst-case fiasco for this one might be that the executive you picked to open your new Los Angeles office hangs out at the beach all day, instead of growing the new office. Why not? They get paid the same amount regardless of whether they succeed or fail. The key takeaway here is that you need to motivate performance and de-motivate complacency.
- Intercompany Deficiencies. As a new office ramps up, there's typically things that are done back at headquarters with headquarters headcount, rather than hiring people for the main office. For example, if a New York market research firm sets up shop in San Francisco, the executive running the San Francisco office might start the geographic expansion by just selling work and then ship and closed deals back to corporate for execution. But what if the corporate teams are too busy handling work sold to New York clients and end up delivering low-quality work to the San Francisco clients? What if processes for getting the work done don't scale well to handle the new office? These are pre-mortem fiascos for geographic expansion that you should think about…and take steps to avoid.
- Organization Chart Chaos. Geographic expansion adds an entirely new dimension to an organization. Perhaps, pre-expansion, your professional services organization was organized by industry verticals (e.g. financial services, manufacturing, travel and hospitality, etc.). Each vertical had a VP who owned the client relationship. Now, with the new office in Austin, you've got a senior manager who doesn't fit the previous industry-centric VP roles. Who is senior to whom? Who own the client relationship? Firms that expand without thinking through the short- and long-term implications to their organizational hierarchy often struggle with geographic expansion. Beyond the go-forward org chart, there's often another can of worms to deal with, as in "Why does she get to go to the Paris office and not me? I hate these people. I quit!"
- No Regular Communication. This can be a big problem. In one instance, a Belgian company sent a talented employee to set up operations in Africa. Alone and with little communication to or from the parent company, the manager went a bit crazy and created an environment that was misaligned with the parent firm's company culture. In the end, the manager dies with the last words, "The horror! The horror!" OK, yeah, I'm messing with you. This is the plot from Joseph Conrad's Heart of Darkness. But bad things do happen when companies expand geographically and leave the expansion executive alone, out of sight and out of mind. To avoid this particular horror, there needs to be constant communication and check-ins to and from the home office.
- Eye on the Wrong Ball. This is probably the most common geographic expansion mistake. With the presumption that the business will do well in the future because the business is doing well in the present, a company embarks on a geographic expansion strategy. Talent leaves the home office and there's excessive time, money and attention on the new office. In the meantime, in part perhaps because of the diverted focus, the core business takes a tumble. At this point, the company is fighting a tough war on two fronts. More often than not, the company ends up closing up the new office, bringing everybody home and rationalizing the failure to employees. Risk mitigation for this involves not focusing on what the new office will be like but rather focusing on what the current office will be like once you open a new office. Will the new office put the current office at risk in some fashion? This risk needs to be evaluated and addressed.
These are types of risks that a good pre-mortem discussion on geographic expansion will uncover.
While unbridled optimism can be a great asset for any growing company, it has proved fatal to many companies that leapt into a geographic expansion strategy without first thoughtfully considering all the potential points of failure.
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