When you’re expanding a business to a new country, how you take the business into that new international market can make or break the venture. This might sound like a bold claim, but I really believe that the mode of market entry that you choose can have a dramatic impact on how well you do in a new international market. Why is that?
For starters, in order to move forward with an international expansion strategy at all, you need to be clear on how you are going to market and the steps in that process. Without clarity on the what and the how of the route to market, you’re may find yourself wasting a lot of time on tasks that that don’t contribute much to the success of the core project – building credibility and generating sales in the new geography.
Secondly, virtually all modes of market entry involve resource commitments of some kind. So if you make an initial choice that turns out to be wrong and have to design and implement a new route to market, you risk so wasting a lot of time and money in the process.
For all these reasons, getting your mode of market entry right at the start is an important strategic decision.
Mode of market entry?
Mode of market entry sounds technical, but it really just means “the strategy that we will use to enter the market”.
Modes of market entry can be loosely grouped into three categories:
- Trading strategies
- Transfer strategies
- Investment strategies
Trading strategies include direct exports (selling straight to the customer in the target market), e-commerce (selling online) and indirect exports (using an agent or a distributor).
This group of strategies is fairly low-risk and doesn’t require a large investment in setting up legal entities and offices in the market you are targeting. Trading strategies can be a good first step into market, because you can use them to test how well your products and services are received in the new country. If all goes to plan, you might think about ramping up your operations, investing in a presence in-country, or even setting up a subsidiary company there.
Transfer strategies involve the licensing or franchising of intellectual property and or technology. They can provide an easy route to market, because the licensee or franchisee does a lot of the leg work and there is no need for you, as the foreign owner of the product to build a distribution network in market. This means that the initial cost in terms of time, resources and financial outlay to set up is low. Another plus is that local franchisees and licensees have local knowledge which can help in reaching new markets and finding new partners, which may also speed up your entry to the market.
However, there are some potential down sides. Licensing and franchising means allowing a third party to use your intellectual property rights (IPR) for profit, and this means that you automatically have less control over the business model than you would if you were selling your IP yourself.
Because you are handing over your IP to a third party, there is a risk that your IP could be copied or stolen (especially in countries where IPR are not vigorously protected) or that your reputation could be spoiled by dubious partners.
And although transfer strategies are low-cost, they typically provide lower returns than setting up a presence in the target market, so the initial savings you make may not be enough to offset lower long-term profits.
Investment strategies include strategic alliances, joint ventures, mergers and acquisitions and establishing a presence in-market. This category covers a range of options and levels of risk. At one end of the scale you have strategic alliances, which can be as simple as a temporary collaboration between two companies, at the other there are mergers (two companies joining forces permanently), acquistions (one company buying out another), or setting up a subsidiary of your domestic company in the new country.
With the exception of strategic alliances, investment strategies usually involve higher initial costs and risks, and are usually more appropriate for companies with significant international experience and a demonstrated track record in the target market.
How do I choose a mode of market entry?
When you’re deciding which mode of market entry to use for a new market, you should keep in mind:
- The size of your company – different modes of market entry require different levels of effort and bring different levels of return. Smaller companies, for example are often less inclined to take big risks than larger firms.
- Time and resources available within your firm – make sure you choose a mode of market entry that matches the time and resources available within your firm. Think about what kind of inputs are realistic given the size of your company and what level of risk the company can accept. You’ll also need and a clear understanding of what sort of return you need to make the risk worthwhile.
- The nature of your products – are your products physical or intangible? Will they require customs clearance, or can they travel freely across the internet. Will they be sold from supermarket shelves or go straight to the client’s inbox? Previous international experience – do you know what you are doing overseas? Do you have an in-depth knowledge of the market you are planning to work in and its business culture, regulatory environment and banking system? Do you know how best to reach your prospective clients?
- Business conditions and regulations – are there restrictions on establishing foreign-owned entities in the target market, requirements for permits, licenses or other non-tariff barriers which might make it difficult for your company to operate there in its own right?
- The need for on-the-ground representation – Are you likely to need a sales representative on the ground to provide advice and or after-sales service?
- The need for control of your product and IP protection – are you concerned that your IP might be stolen and/or copied in the market you are planning to work in?
So that’s it, folks … a quick round-up of ways to take your business to a new market. Whatever you do, don’t rush the decision about mode of market entry, if you get it wrong it could be costly to reverse.
If you’re a small business thinking of going global and wondering how to get started, check out our e-book Seven Steps to International Success – How to Take Your Company Global.