What to Consider Before Entering a New Market

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Thursday, May 11, 2023

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.

Article 11 Minutes
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 simple errors when moving into new markets that cause major problems.

Entering a new market [Checklist]

Avoid costly mistakes by asking the right questions

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8 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 potential 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.

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 ideal customers 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 eight key areas you need to be focusing on before 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.

  • 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. Make sure you understand the social and cultural factors

Understanding the social and cultural factors that influence a target market is essential for businesses looking to expand into a foreign market. Conducting thorough research on these factors before entering a new market enables companies to develop strategies that align with their business goals and cater to the unique preferences and behaviors of their target audience.

Firstly, evaluating the social and cultural factors of a target market allows businesses to create tailored marketing campaigns that resonate with local consumers. This can lead to increased brand awareness and higher conversion rates, as marketing messages are tailored to the specific needs, values, and preferences of the audience. For instance, understanding the importance of certain traditions or religious beliefs may inform a company's promotional strategy or product offerings, ensuring that they do not inadvertently offend or alienate potential customers.

Secondly, researching social and cultural factors helps businesses identify potential barriers to entry and develop strategies to overcome these challenges. This may include language barriers, differing attitudes towards foreign brands, or varying levels of disposable income. By gaining a comprehensive understanding of these factors, organizations can create targeted business plans to address these issues and position themselves for success in the foreign market.

4. Look into political and legal factors

Understanding the political and legal landscape is of paramount importance for businesses seeking to enter a new market. Thorough market analysis of these factors ensures that an organization or business owner is prepared to navigate the challenges and opportunities presented by the competitive landscape.

One of the primary reasons to research political factors is to gauge the stability and predictability of the region. A stable political environment is conducive to growth, as it fosters investor confidence and facilitates long-term planning. Conversely, political instability can result in policy changes, regulatory shifts, and even civil unrest, which can negatively impact business operations and overall market size. A thorough understanding of the political climate enables businesses to anticipate changes and adapt their strategies accordingly.

Furthermore, investigating legal factors is crucial to ensure compliance with local laws and regulations. This includes understanding the legal structure within which the business will operate, such as taxation policies, labor laws, and intellectual property rights. Non-compliance can lead to severe financial penalties, reputational damage and even business closure.

5. 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.

6. 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.

7. How attractive is the market?

Undeniably, entering a new market is a significant decision for any business, and thorough research on market attractiveness is crucial to ensure a successful venture. By conducting an in-depth analysis of the market, businesses can identify the competitive landscape, understand potential customers, and develop a robust plan to navigate the challenges and opportunities presented. Assessing market attractiveness allows companies to make informed decisions and allocate resources effectively, reducing the risk of failure and maximizing potential for growth.

Firstly, understanding the competitive landscape in a new market is essential for businesses to position themselves effectively and gain a competitive advantage. This involves identifying key competitors, their strengths and weaknesses, and potential market gaps that can be exploited. By doing so, businesses can align their products or services with the needs and expectations of their target customer, creating a unique value proposition that differentiates them from the competition.

Additionally, businesses must develop a comprehensive plan that outlines their market entry strategy, target customer segments and marketing tactics. This plan should be informed by the findings of market attractiveness research, ensuring that it is tailored to the specific needs and preferences of the customer base. By having a well-thought-out plan in place, businesses are more likely to achieve their objectives and sustain long-term success in the new market.

Lastly, it is imperative for businesses to consider the legal structure when entering a new market. Different jurisdictions may have varying regulations and requirements that can impact business operations, taxation, and intellectual property protection. Conducting thorough research on market attractiveness enables businesses to identify potential legal challenges and devise strategies to mitigate them, ensuring compliance and reducing the risk of legal disputes.

8. Assess the competition

Conducting thorough research on competition before entering a new market is crucial for the success and sustainability of an enterprise. One of the primary reasons for this is to gain insights into the market share currently held by competitors, which enables businesses to make informed decisions about their target audience and potential growth opportunities. By carefully analyzing the competitive environment, organizations can identify niche markets that have not yet been fully exploited and tailor their offerings to address the unique needs of these customer segments.

Furthermore, understanding the business model of successful competitors can provide valuable information on best practices, pricing strategies, and marketing approaches that have proven effective in the targeted market. This knowledge allows businesses to fine-tune their strategies and avoid costly mistakes that could jeopardize their market position.

Lastly, considering the legal structure is an essential component of conducting competitive research. This encompasses analyzing local regulations, industry-specific laws and intellectual property rights that may impact the business's operations in the new market.

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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