Every country has different government system, laws, policies, taxes, currencies, culture and business ethics. Additionally, business operations in different countries require following different codes of conduct. Hence, planning an international business expansion strategy (in this context – market entry strategy) is crucial, before transacting across national borders, to ensure, that you have a well laid out plan that is additionally beneficial for the long term.
In this blog, we will focus on one part of International Business Expansion, i.e., New Market Entry Strategy.
A market entry strategy is essentially planning the distribution of goods/services in a target market.
Marketing, Sourcing, Investment and Control are the main areas of concern when it comes to entering a new market. You have to investigate the regulatory environment, red tape, intellectual property, whether there is a demand for your product or service. Here’s what you should keep in mind before entering a new market.
WHICH MARKET TO ENTER?
‘Is the product suitable for the market?’ ‘Will it be able to keep up with the indigenous competition?’ ‘Does it provide greater value?’
The questions are endless. In such a scenario, in order to build an international market entry strategy, you need to keep these external factors in mind.
- Market Size
- Market Growth
- Government & Tax Regulations
- Physical Infrastructure
- Political, Economic and Operational Risks
- Level of competition
- Production and shipping cost
- Labour, Expertise and Management
TIMING OF ENTRY
It simply means getting the timing right; deciding whether you want to be an early entrant or late entrant.
They are the first players to enter the market with the new product/service. Such ‘Pioneer firms’; get a competitive edge to make themselves more established in a new market devoid of rivals. They also have a better chance of building brand loyalty and possibly create barriers of entry. However, it comes with the higher cost of investment in research, technology, educating customers about the products, etc. Additionally, the new firms can easily imitate the hard work by the pioneer firm and go on to become tough competitions.
They are followers who learn from the mistakes of the entrants. The main advantage is that the groundwork is been laid out for them and the customers are already educated about their product. Comparatively, they invest less time and money as compared to the entrants.
MARKET ENTRY STARETGY MODES
While there are many modes of entry, a few require a mention.
This is one of the most common ways to enter a new market; where the goods produced in one country are marketed in another. It offers an opportunity to learn about the market before finally deciding to go full-fledged investment on it.
* Easy to implement
* Requires less investment abroad
* Relatively low expense
* They can avoid the limitations posed on FDI
* Trade barriers & logistics can sometimes pose a problem
* Prone to fluctuation in exchange rate
* Conflict of interest with distributors
A strategy wherein one company grants another company, the license to use their IP, technology, trademark, brand name, etc., in return for an amount of fee or royalty. It is especially beneficial for marketing firms. A great example would be the Coca-Cola Company.
* It requires the least amount of involvement
* Less risky as compared to complete ownership
* Requires less time investment and capital
* A great way to market in an area where there are barriers to investment
* The licensee may not be able to keep up with product quality, which may, in turn, affect the brand name
* The originating company has no direct control over manufacturing and marketing
* Lose the benefit of manufacturing curve and location economies that come with manufacturing.
An ideal strategy for brands that are well known; here, the Franchiser (originating company) allows a business (Franchisee) to operate and supply the Franchiser’s goods under its original trademark, in return for a fee. Take, for instance, McDonald’s.
* Does not require restructuring your business model, or service/product adoption
* A great way to get returns in a foreign land without the additional cost of opening in new market
* They can have the franchisees agree to a strict code of conduct when it comes to business operations
* It might not be a piece of cake for smaller firms and is ideal for well-established businesses
* Dependence on the Franchisee
4) TURNKEY CONTRACTS
These are essentially contracts, wherein the seller builds a product from scratch and buyer has to just ‘turn the key’ to operate. It mainly caters to the government/sector and is common in the supply and commissioning of plants or the ‘building’ business
* Higher potential for economic returns in terms of exporting process technology
* Extremely beneficial in places where the FDI is limited
* Less risky than foreign direct investment in places where the political and economic climate is not stable
* Good only for the short term
* By selling the process technology, it loses the competitive edge against competitors
5) JOINT VENTURE
A partnership between two or more companies who work together on a particular venture. Take, for instance, Sony Ericsson. If the alliance is formed with an indigenous business, there is usually lesser risk involved and a lesser interference from the government authorities.
* Requires smaller investment
* Production is overlooked by the local partner who has more insight into the local market
* Finances and risks are shared by partners
* Giving technological control to partners can be risky
* Conflict of interest and control between participating firms
Lastly, you need to take a hard look at your finances, leadership team product/services before you think about entering a new market. Great research and planning are required to pay off your international expansion efforts. It is advisable to get in touch with a professional consulting firm that has expertise in this area.
Connect with Choice Peers International, to get effective and immediate solutions for New Market Entry Assistance.