Suppose you are Gucci's general manager and think expanding into the African markets will help Gucci's profits skyrocket. What are some of the things that you should consider before entering a new market? Which type of market entry strategy are most effective? How do firms decide which market entry strategy to use? Entering a new market can be intimidating, but with the right strategy in place, it can also be incredibly rewarding. Whether expanding your business internationally or targeting a new customer base, having a solid market entry strategy can make all the difference. This article has everything you need to know from understanding the different types of international market entry strategies to exploring examples!
What is Market Entry Strategy?
Market entry strategy refers to a plan that a company creates to enter a new market. This plan outlines the steps the company will take to introduce its products or services into the new market and how it will compete with other companies already operating in that market. The strategy may include researching the new market, identifying potential customers, and deciding the best way to reach them.
Market entry strategy is a comprehensive plan that outlines the steps a company will take to introduce its products or services into a new market while considering factors such as competition, target customers, market trends, and regulatory requirements.
A technology company based in the United States wants to enter the market in China. To do so, it conducts market research to identify the demand for its product, the competition it will face, and the cultural differences that may impact its business. Based on the research, the company develops a market entry strategy that includes partnering with local technology companies to gain access to distribution networks and local expertise, developing a localized version of its product to cater to Chinese consumers, and investing in marketing and advertising campaigns to promote the product in China. The company also ensures compliance with Chinese regulatory requirements to avoid any legal hurdles.
This may involve building factories and stores, partnering with retailers (stores that sell goods produced by others), partnering with an existing local firm that produces a complementary good or service, selling mostly online through a website popular in the new market, or offering franchises to businesspersons in the new market.
Reasons for entering a new market
Three main reasons a business might consider entering a new market include increasing the customer base, no growth opportunities in the market they are currently in, and diversifying risk.
Increasing the customer base. With a careful and detailed plan on the new market a business wants to expand to, companies could see their customer base grow, especially if they develop in a market with the right product-market fit. This could help them see their revenues grow.
No growth opportunities in the market they are currently in. After some periods, businesses may find it hard to grow in the market they are currently in; therefore, it would be more beneficial to look and expand into a new market where they could see new opportunities which would allow them to grow.
Diversify risk. If businesses focus only on industry and they don't expand their portfolio, the risk is too high. There are periods when specific industries perform better or worse than others. Offering products or services in just a single sector would have concentrated risk.
International Market Entry Strategy
International market entry strategies can be complex and risky. Firms must research market conditions in these new markets to see if enough consumers would likely purchase the goods or services.
Firms must also be aware of local laws and regulations, labour policies, and consumer trends. Just because a good or service is very popular in the United States does not mean it will be as popular in other nations.
The costs of expanding into the international market can be very high. Firms that wish to build their factories and stores in new countries must invest significant resources to ensure things go smoothly. This involves lots of legal costs to hire legal teams and ensure that all local, regional, and national laws about the new market are being followed.
To help reduce some of this risk, firms often enter international markets through joint ventures and wholly-owned subsidiaries to ensure that they have time to learn and adapt to the new market.
The entering firm can then begin changing the local firm on a timeline, and to the extent it wishes. Some entering firms may want the profits of the WOS and not attempt to change its branding. Others may change the branding over time to see how local consumers react.
Suppose firms want to enter a new market but cannot afford to purchase local firms outright. In that case, they can buy most of the stock (only possible if the firm is a corporation) and become a parent company.
Types of market entry strategies
Here are the five most common international market entry strategies:
Exporting
Direct exporting involves selling products or services to a foreign market from the home country. For example, a clothing manufacturer in the United States may export its products to retailers in Europe.
Licensing
This involves allowing a foreign company to use the company's intellectual property, such as trademarks or patents, in exchange for royalties or fees. For example, a software company in Japan may license its technology to a company in Brazil to sell to its customers.
Franchising
This involves allowing a foreign company to use the company's brand, products, and processes in exchange for fees and royalties. For example, a fast-food chain in the United States may franchise its brand to a company in India to open and operate restaurants.
Joint Venture
This involves partnering with a local company in a foreign market to share the risks and rewards of the business. For example, an automotive company in Germany may form a joint venture with a local company in China to produce and sell cars in the Chinese market.
Wholly-owned subsidiary (WOS)
This involves establishing a new business entity in a foreign market that is entirely owned and controlled by the company. For example, a pharmaceutical company in the United Kingdom may establish a wholly-owned subsidiary in India to manufacture and sell its products.
Each market entry strategy has its advantages and disadvantages, and the choice of strategy depends on the company's resources, capabilities, and objectives, as well as the characteristics of the foreign market.
Market Entry Strategy Examples
There are several market strategy examples.
Firms that produce physical goods that can be transported have an advantage in reaching new markets through existing technologies like online sales and modern shipping. However, shipping individual units directly to consumers may become too expensive.
A common market entry strategy is to partner with a local retailer to reduce per-unit shipping costs and reach consumers who prefer shopping in stores. The firm can bulk ship to these retailers in the new market, reducing the per-unit shipping cost. However, this must be planned and negotiated, as retailers charge producers a fee or percentage of profit for putting the products in their stores.
Firms that operate as local producers, meaning they manufacture products at their location, need to physically open new locations in new markets. While this can be done in the traditional method, where the firm buys a property and funds all the startup costs, it is expensive. To more rapidly enter a new market and avoid some startup costs, firms can sell franchise rights to local businesspersons.
This allows an individual or firm to make and sell a standardized product under an existing brand. Typically, the franchisee must follow rigorous rules and guidelines established by the franchisor and pay the franchisor a per cent of the profits. Franchises are commonly seen in the fast food industry. They are only successful once a brand has achieved significant widespread popularity.
Sometimes, manufacturing firms can rapidly enter new markets through licensing agreements. Like franchising, a licensing agreement gives an existing firm the blueprints, equipment, and legal right to make and sell a specific, branded product. The licensee must pay a fee or per cent of the profit to the licensor.
This arrangement allows the branded product to be sold in the new market without the original firm paying costs related to shipping and paying retailers. These costs are taken on by the licensee, who may have pre-existing deals with local retailers that allow the products to reach consumers more quickly.
Global Market Entry Strategy
A global market entry strategy is more complex because it can simultaneously involve manufacturing and selling in many different nations. Global market entry requires lots of coordination among multiple firms and brands.
To expand globally, a multinational firm must seek out opportunities to work with smaller firms in new nations. Efforts must also be made to appeal to new consumers. This can involve sponsorships in addition to traditional advertising, where multinational firms sponsor local sports teams and events to generate brand awareness and public goodwill.
Being a global business can involve manufacturing but not focusing on selling goods in specific countries. This is known as outsourcing and involves moving manufacturing to countries with lower operating costs.
For example, many multinational firms in the United States manufacture goods in Mexico and/or southeast Asia to enjoy lower labour costs, more lenient environmental policies, and relaxed government regulations and taxes. However, this can be controversial and harm a brand’s public image.
Market Entry Strategy Framework
Market entry framework refers to a set of guidelines or steps that a company follows to evaluate and select a market entry strategy. This framework helps the company to analyze the attractiveness of the foreign market, assess its own resources and capabilities, and identify the best market entry strategy to achieve its objectives. The framework typically includes factors such as market size, competition, regulatory environment, cultural differences, and risk and reward considerations.
Market entry framework is a systematic approach that a company follows to evaluate and select a market entry strategy for a foreign market. It involves analyzing the market, assessing the company's resources and capabilities, and considering various factors such as competition, culture, and regulation to identify the most suitable market entry strategy.
The framework is a top-down look at conditions and scenarios, going from general to more specific, to determine whether expanding into a new market is the best growth plan. It can be compared with other options, like introducing new products.
First, firms exploring market entry must look at their existing market share. Is there room for growth in the current market? If there is sufficient room for growth, expanding in the current market may be more cost-effective.
The next step involves comparing competitors. How much competition exists in the current market versus the potential new market? Sometimes, firms choose to move to new markets quickly because the local market already has intense competition while adjacent markets have little competition.
Second, firms need to look at consumer habits in the potential market. This involves market research. Firms may conduct polling and hire market research companies to determine whether consumers will likely buy their goods and services in the new market.
Today, firms can use social media to find out whether customers in new markets are expressing a desire for their products.
For example, people may be expressing a desire to have a specific restaurant come to their town after eating at one in a different city.
Market Entry Strategy - Key takeaways
- Market entry strategy is the planned expansion into a new market, typically meaning a city, state or province, nation, or even continent.
- Reasons a business might consider entering a new market include increasing the customer base, no growth opportunities in the market they are currently in, and diversifying risk.
- A market entry strategy framework is a tool used to assess whether or not a firm should expand into a new market.
- Market entry strategies include direct exporting, licensing, franchising, joint venture, and wholly-owned subsidiary (WOS).
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