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Marketing in the
USA-Know the Territory PROFESSIONAL BRIEFING New York CPA, Angus McDowell, heads up his own accounting and consulting practice, specializing in assisting foreign firms with their taxation and other requirements. Here he outlines some of the problems in getting established in a complex and diverse marketplace. America has for some time now been the fashionable place for foreign owned businesses to establish operations, either through acquisitions or new operations. While there are no statistically valid empirical profitability results for such ventures, it is likely that many are not satisfactorily profitable. Although the U. S. Department of Commerce does prepare statistics, they are not comprehensive, neither do they adjust for abnormalities such as loans and related interest rates, transfer pricing, management fee, royalties and other methods of manipulating profits between countries. The apparent reason for difficulties incurred by foreign business in the USA are lack of initial and continuing market research, bad local management, bad management by the foreign parent, competition, and lack of capital. How can that be true when many foreign businesses have done so well, with foreign subsidiaries and operations in other countries? I am not bashing the foreigners, I suspect that Americans have similar results in equivalent foreign markets. The reason is explained by "McDowell's Knowledge Gap Theory". The theory simply states that the worth (or expertise) of an executive is proportional to business acumen, and to theoretical and practical business experience. Furthermore, when an executive is moved from one environment to another, then the executive's relative business worth immediately changes proportionally to the difference between the two environments. This difference is "McDowell's Knowledge Gap". We can surmise from the theory that an executive moving from one country to another will tend to do well when his or her sum business worth is relatively higher than other executives in the new surroundings (that is moving to a less complex country), and conversely less well when they are on a par or lower (that is moving to a more complex country). This is related to the specific work being undertaken, so that a specialist in an international field may be virtually unaffected in moving from one place to another, if all the important factors remain constant. Let us examine how this affects the foreign business person moving to America or foreign businesses controlling operations here. America is probably the most complex and bureaucratic country in the world. This includes commercial law, commercial regulations, environmental law, taxation, commercial practices, competition, "old school" and friendship ties , nationalism, politics, innovation, education, and just about every aspect of life. All this is compounded by the fact that the U S is not one, but 50 countries plus a district and some dependencies. Also the combined Federated (euphemistically called United) States stretch from frozen Alaska, to baking hot Texas and wet and rainy coastal Oregon, to desert inland Utah. However, it is not just geography that is different. Take the ethnic background. The question "where do you come from?" it may imply New York, Chicago, Los Angeles as possible answers. In truth it is Germany, Ireland, Poland, Russia, Scotland, Italy, etc. It means that Americans have roots in those countries, which may or may not be important. This strong identity carries over into preferences such as food and dress, commercial behavior and morals, and thus into politics. Imagine the result of expanding the European Communities to fifty members, but only increasing its population and GNP marginally. That's the USA. Well, only partly. In some cases where products and services are predominantly based in one area, the US can indeed work as one market. It also more or less has one language (which is to some extent similar to English) and a very strong minority language of Spanish. Now let's revert to McDowell's Knowledge Gap Theory and our foreign executive in the States. We can see; quite obviously, that the knowledge of a foreign executive moving to the USA plunges dramatically as illustrated in the exhibit. The knowledge will slowly develop until it regains its old relative level and conversely, the "old country" knowledge will slowly decline. Not understanding McDowell's Knowledge Gap Theory has resulted, in my opinion, in unqualified foreign executives being made responsible for US operations, and for unqualified main foreign board directors being responsible for managing the executives in the US. In addition to the effects described above, it is frequent in my experience, that executives managing US foreign owned subsidiaries are given responsibility for more commercial aspects than they would be if employed at the home office. Thus the Chief Executive Officer now wears the hats of production, marketing (including sales, advertising, distribution), accounting, finance and research - and there is usually only one in which the CEO may be experienced. Obviously, the smaller the business the more this is prevalent. Often the foreign executives seek to make up for lack of local business knowledge through the use of external professionals, such as lawyers, accountants, and consultants. This can be an effective use of experts, but if they are used as an alternative form of business education they will tend to be prohibitively expensive. Yes, America is indeed a litigious society and that explains some of the high legal fees necessary in market entry. Clearly segregating normal professional fees from "educational professional fees" will help to decide when to provide technical education for executives. It is not easy to overcome the executive problem. The foreign owned company is usually not large in market share terms and thus may have difficulty in being able to pay staff a competitive rate or provide an interesting career path. Also the parent company may be financially insecure compared to the US giants in the business. I have focused on the management difficulties because all credit and blame must rest with them. Good management will know their market, product, competition, resources, etc. and if they don't, when to engage experts, and will therefore steer the business appropriately. For example, they will know:
A US salesperson's salary may be significantly higher than the foreign parent's CEO. And, well done that good sales producer. He or she is well worth extra cost! Thus an US market operations entry effort must incorporate the effects of McDowell's Knowledge Gap Theory. If foreign executives are dispatched to the US, then they should be given the basic management tools to do the job, as should the foreign board member responsible for those operations. If the human resources are correct in the US and at the main board level, the battle is won and the war can continue. Angus McDowell, McDowell CPA PC McDowell's Knowledge Gap Theory
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