Market entry strategy is a planned distribution and delivery method of goods or services to a new target market. In the import and export of services, it refers to the creation, establishment, and management of contracts in a foreign country
Market entry problems have two variations, according to the Ansoff Matrix
- Introduction of an existing product in a new market (market development)
- Introduction of a new product in a new market (diversification)
As you know from the Ansoff Matrix, usually growth questions require a market entry strategy for the solution. “Our business model is currently stagnating. What should we do ?”
Market Entry Framework
Use the following five steps to approach a market entry
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Paraphrase and clarify the objective in the beginning
As usual, take good notes! Start with paraphrasing the problem and clarify all questions to make sure you understand the problem. Take a minute to structure your thoughts and decide the questions you want to ask based on the structure. In short, in order to have market entry strategy, you need to:
- Understand the company and its current market, and also the new market the company wants to enter.
- Evaluate the financial aspects.
- Evaluate the economic implications of entering the market. If it makes sense, decide how: Through organic (independently) or inorganic (inter-dependently) ? If inorganic, then would it be through a Joint Venture or M&A?
Frameworks such as Porter’s Five Forces can help you structure thoughts and systematically uncover key information. But, in an interview, avoid saying that you are using Porter’s Five Forces or any other standard framework as you run the risk of portraying yourself as force-fitting a framework.
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Understand the client’s company
Understand why the client wants to enter the new market and identify the key issue. Knowing this piece of information will be important making the final recommendation.
Other important information:
- What are current revenue streams?
- What are the client’s key strengths and weaknesses? (SWOT)
- What is the product mix? How many and what types of product lines, brands, variations of products does the company have? What is the lifecycle of each product? Also, how closely related are the current products?
- Who are current customers and how are they segmented?
- What are the current distribution channels?
- What is the client’s current financial situation?
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Understand the market of interest
Understand the market the client wants to enter and evaluate its attractiveness. Start by estimating the market size if that information is available (it is implied that you would first need to estimate market size in such cases).
Always be prepared to size the market yourself if you ask the interviewer what its size is.
- What is its growth rate?
- At what stage of the lifecycle is it? Emerging, Mature, Declining?
- What are the customer segments and what are their respective needs?
- Is there a key technology involved? If so, how quickly is it likely to change?
- What are current trends in the industry?
- Who are the key players in the market? What is their market share? What are their differentiating factors?
- What is their response to the determined key trends?
- Are there substitute products?
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Evaluate the financial aspects
Key questions:
- Costs: What are barriers to market entry (i.e. investment costs)?
- Costs: What are expected fixed and variable costs?
- Revenues: What is the expected price of the product for and how many units are expected to be sold?
- After how many years will the client break-even and what is the rate of return (understand that money has a different value over time)?
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Evaluate the economic implications of entering the market
Remember you do not need to investigate all these questions but you do need to evaluate and understand what questions are important by considering the reasons the client wants to enter the market.
If you decide that entering a new market is a good idea, it would make sense to recommend the client how to do it.
Entering a new market can be generally done in three key ways:
- Start from scratch
- Through a Joint Venture
- Through M&A
Based on the data, if you decide that the venture is not a good idea, recommend an alternative plan (product differentiation, cost cutting, international presence etc.). Since you now know the company structure, the “old” and the “new” market, make sure to structure your recommendation.
- Competitive advantage: Can you apply the same business strategy as in your current market or do you have to adapt the product, marketing or even sales channels to reach customers?
- Timing: Can you lever a first mover advantage or would you rather let the competitors try their luck first?
- Speed of entry: Define whether you want to test a single store or region or whether you want to cover the entire market at once.
- Entry mode: How much commitment are you looking at? Would it be a simple export strategy, where you can exit easily but have less control OR a wholly owned subsidy, where investment costs are high but you also have more control?
- Organisational structure of the new branch: Do you want to decide centrally or leave lots of freedom to the individual manager of the country?
Once you have all your answers, synthesize them to give a recommendation based on the facts you collected. Don’t forget to take another minute to structure your answer but make sure to provide your answer first and then the reasons! Check out our article about the pyramid principle for more details regarding communication.
Different Modes of Entry into a new market
Each of these entry strategies for international markets are different in terms of the costs involved, level of risk, level of ease of execution, and the level of reward. I have arranged these 5 modes of entry into international business on a graph which suggests what are the trade-offs in each of these entry strategies for international markets.
I will put in my effort to explain to you what each of these entail for an offline product as well as for an online product based company. While the crux remains the same for both the types of businesses, how you carry out the strategy could have slight differences.
Let’s understand in detail what each of these modes of entry entail.
1. Direct Exporting
Direct exporting involves you directly exporting your goods and products to another overseas market. For some businesses, it is the fastest mode of entry into the international business.
Direct exporting, in this case, could also be understood as Direct Sales. This means you as a product owner in India go out, to say, the middle east with your own sales force to reach out to the customers.
In case you foresee a potential demand for your goods and products in an overseas market, you can opt to supply your goods to an importer instead of establishing your own retail presence in the overseas market.
Then you can market your brand and products directly or indirectly through your sales representatives or importing distributors.
And if you are in an online product based company, there is no importer in your value chain.
Advantages of Direct Exporting
Disadvantages of Direct Exporting
2. Licensing and Franchising
Companies which want to establish a retail presence in an overseas market with minimal risk, the licensing and franchising strategy allows another person or business assume the risk on behalf of the company.
In Licensing agreement and franchise, an overseas-based business will pay you a royalty or commission to use your brand name, manufacturing process, products, trademarks and other intellectual properties.
While the licensee or the franchisee assumes the risks and bears all losses, it shares a proportion of their revenues and profits you.
When does this work the best?
I explored this strategy in the case where one of the established companies of the other country already had a loyal audience with them.
At the same time, their product line had gaps which I was able to fill up. Therefore, just like two pieces of jigsaw, it made complete sense for them to carry my product.
How is this different from a Joint Venture, you would think? It is.
And in this case, I shall explain the little difference in the subsequent part of the article.
Advantages of Licensing and Franchising
Disadvantages of Licensing and Franchising
3. Joint Ventures
Companies wishing to expand into overseas markets can form joint ventures with local businesses in the overseas location, wherein both joint venture partners share the rewards and risks associated with the business.
Both business entities share the investment, costs, profits and losses at the predetermined proportion.
This mode of entry into international business is suitable in countries wherein the governments do not allow one hundred per cent foreign ownership in certain industries.
For instance, foreign companies cannot have a 100 hundred per cent stake in broadcast content services, print media, multi-brand retailing, insurance, power exchange sectors and require to opt for a joint-venture route to enter the Indian market.
Here is what’s the difference between a Licensing/Franchisee kind of a setup and a Joint Venture.
The subtle nuance that I came across while recently creating a strategy was that a franchise setup would work well when you as a franchiser are a bigger brand in that particular product.
You could be big in your own country and not necessarily in the franchisee’s country.
In case of a Joint Venture, both the brands have a similar level of brand strength for that particular product. And therefore, they wish to explore that product in that international market together.
Advantages of Joint Venture
Disadvantages of Joint Venture
4. Strategic Acquisitions
This acquired company can be directly or indirectly involved in offering similar products or services in the overseas market.
You can retain the existing management of the newly acquired company to benefit from their expertise, knowledge and experience while having your team members positioned in the board of the company as well.
Advantages of Strategic Acquisitions
Disadvantages of Strategic Acquisitions
5. Foreign Direct Investment
Foreign Direct Investment involves a company entering an overseas market by making a substantial investment in the country. Some of the modes of entry into international business using the foreign direct investment strategy includes mergers and acquisitions, joint ventures and greenfield investments.
This strategy is viable when the demand or the size of the market, or the growth potential of the market in the substantially large to justify the investment.
Some of the reasons because of which companies opt for foreign direct investment strategy as the mode of entry into international business can include:
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Restriction or import limits on certain goods and products.
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Manufacturing locally can avoid import duties.
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Companies can take advantage of low-cost labour, cheaper material.
Advantages of Foreign Direct Investment
Disadvantages of Foreign Direct Investment
Conclusion
While every business dreams of global domination within its industry, you need to plan its internationalization strategy based upon your finances, existing capabilities, the growth potential of the overseas market etc. before opting for different modes of entry into the international business.