What to Consider Before Entering a New Market

Finance Insights for Professionals

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Thursday, September 26, 2019

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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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.

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.

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

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.

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