Many companies underestimate the operational complexity of expanding to new countries — which can have disastrous costs.
For the past few decades, companies looking to grow have frequently turned to overseas expansion. Executed well, such a move can provide a company with access to new markets, customers, and revenue streams. Occasionally the gambit fails quickly, and these high-profile exits make headlines, like when Dunkin’ Donuts left South Africa after two short years and Walmart pulled the plug on Brazil after a 20-year struggle. Other times, the results are merely lackluster, and companies can accumulate a portfolio of so-so geographies that slowly and subtly erode profitability.
But these notable exits obscure a broader point. Many companies underestimate a key element of success in their due diligence: the complexity of operating in target countries. We have carefully researched companies operating across the globe through the lens of complexity and how this affects the success or failure of multinationals. We found that expanding to countries with high complexity profiles has a direct negative impact on a company’s operating profit.
With a possible recession looming, it’s a good time for companies to assess their country portfolios and rethink strategy. In fact, many companies have passed the point of diminishing returns and are already operating in too many countries. The path forward will often require a tighter configuration of core countries in order to reduce operational complexity and become more profitable.
Applying Machine Learning to Global Market Complexity
Our research began with a new framework for understanding the complexity of doing business in 83 different countries around the world. We scored each country on 31 data points to assess the level of regulatory, operational, and market complexity. We then used machine learning techniques to divide them into eight groups, each with a unique complexity profile. The result is our Global Markets Complexity Index (GMCI). (See “Eight Groups Identified in the GMCI.”)
In the index, Group 1 (MVPs) comprises countries with very low complexity across the board and encompasses many of the world’s most advanced economies, including the U.S., the U.K., Australia, Germany, Japan, and the Nordics. Group 8 (Only the Brave) is at the other end of the spectrum, with high complexity in every area.