What to Consider Before Entering a New Market

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Thursday, January 20, 2022

Entering a new market can be a risky proposition. However, if you’re well-prepared you can mitigate a lot of that, increasing your odds of success.

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What to Consider Before Entering a New Market

Entering a new market can be a great business decision, especially from a financial perspective. Expanding can not only increase your profits; it’s also a great way of sourcing lower production costs and diversifying your business to reduce risk. However, that doesn’t mean it’s a simple proposition. Often, businesses make the simple errors when moving into new markets that cause major problems.

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Common mistakes when entering a new market

One of the most common mistakes made by companies moving into new international markets is simply a lack of research. Salvador Ordorica, Forbes Business Council member and CEO of translation firm The Spanish Group LLC, points out that many businesses rush into expanding overseas in order to beat their competition. However, doing so without appropriate research can lead to disaster.

Ordorica points out that Walmart tried expanding into South Korea without realising that its brand, signature products and methods of attracting customers were not appealing to the South Korean market. The company had to withdraw from the country after realizing it would not be able to scale to the extent it needed to. Proper due diligence and research could have prevented this.

Part of the research has to be focused on where you stand in relation to the market. Is your product or service brand new to the region, or is it established? Stephen Wunker of international consulting firm New Markets Advisors points out that being the first of your kind in a location can enable you to erect high barriers to entry for your competitors, such as by associating your product strongly with your brand name.

Of course, there are still risks to being the first entrant into a new market. Wunker gives the example of sushi in the US, which arrived in the 1960s. Initial barriers were to do with infrastructure, particularly the supply chain for high-quality fish and other seafood products. However, even once this barrier was overcome it took around 20 years for the product to really gain a foothold in the US market due to perceptions about raw fish.

Another common mistake is failure to consider communication. You will need to market yourself to your audience; however, this means understanding how best to do so. Social media is a powerful tool, but using the right social channels is not always as intuitive as you might expect.

While Facebook is the most popular social network worldwide, popular networks differ from region to region. India has very little interest in social networks other than Facebook, for example, while Chinese users overwhelmingly use WeChat. Failing to understand the best method to communicate with your audience could be an extremely costly mistake.

While figures are hard to come by, many experts believe four businesses fail to enter new markets for every one that succeeds. If you want to give your ventures the best possible chance, you’ll need to make sure you don’t miss any steps. Here are four key areas you need to be focusing on before entering a new market.

4 thing to consider when entering a new market

1. Find a suitable market

The first step is to work out which market you're best suited to expand into. This is especially important when growing internationally, as small changes in things like the business culture or tax law can end up having huge consequences down the line. It’s best to choose a market that’s reasonably similar to your current base if possible, as this will make for an easier transition.

In terms of what to look for, Euromonitor International recommends focusing on four pillars:

  • Market - including macroeconomic stability
  • Size and purchasing power of the middle class, and how open it is - the demographics of the population
  • Ease of access
  • Overall business environment

You don’t have to find a market perfectly suited to every one of these. However, bear in mind that all of them have the potential to increase the cost of the venture. Expand into a market that seems perfect but has high levels of corruption, for example, and you could end up losing money.

2. Research your market

Once you’ve selected a market, you need to learn as much as you can about it. A significant portion of this is going to be financial. Taxes, duties and tariffs, for example, are going to differ from country to country. This is another area in which mistakes can be costly, so make sure you triple-check everything.

While you can perform desk research, it’s usually worth trying to build up contacts in your new market as well. There are various ways to do this. Some companies recommend signing up for international trade shows if that’s applicable to your industry, which can be a great way of building a network and integrating yourself into the market ahead of time.

3. Define your options

There are a number of different ways you could enter a new market. Avondale founders Karl Stark and Bill Stewart recommend considering forming a joint venture with an established firm if you don’t have many core assets at your disposal. However, you can also enter markets via acquisitions, or with a more cautious route of organic investments.

Of course, you might find your organization benefits from a more diversified approach, so feel free to mix and match as you see fit. The important thing is that you structure your entry strategy according to the assets and needs of the business, rather than relying on a one-size-fits-all approach.

4. Determine your capability

Before you commit to anything, you need to make sure you’re able to commit the appropriate level of resources. According to McKinsey, you’re more likely to succeed if you’re close to the minimum efficient scale of the market you’re entering. You can be below this with the aim of growing rapidly, but that’s better for a small test of a market rather than a full entry.

Calculate what you would need to operate at your chosen market’s minimum efficient scale (remembering to factor in unexpected costs) and determine whether or not you have the resources to enter a market at this time. It’s always better to delay entering than to charge in unprepared, so make sure you’re completely certain before committing to anything.

How to stack the odds in your favor

Once you’ve done your due diligence and prepared to enter a new market, there are a few ways you can improve your chances of success by stacking the odds in your favour. While there are never any guarantees in business, these tactics will give your company the best chance of success when expanding internationally.

Test new markets

First of all, think about testing a few new markets. This will not be possible for some businesses, but if you’re able to launch a single product in multiple markets it can provide you with extremely useful data. Use information from each market to iterate and quickly work out your best chance of success.

Localize what you’re offering

You will also want to work closely with people on the ground in your target location in order to localize your offering.

“There may be cultural nuances that you’ll only be able to tease out if you really roll up your sleeves and get into it (e.g. via in-depth user studies, conversations with locals).” - Vincent Xu, marketing lead at Google
 

You can’t expect simple translations to be enough. Slang terms can often sneak up on businesses, such as with the Ford Pinto in Brazil or the Toyota MR2 in France. Both car brands sound like offensive slang terms in those languages, but because there was not a localization review it went unnoticed at first.

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