Whether it’s a completely new geographical region with a range of cultural, linguistic, and economic factors to consider or just a new age demographic — breaking into a new market is rarely easy.
There are all kinds of risks to try and mitigate, and hurdles to overcome. No business will manage to avoid every potential pitfall, so some degree of complication has to be expected.
Businesses that can minimize these risks and challenges can reap serious rewards. In this article, we’ll take a look at 5 of the biggest risks and barriers that businesses typically face when entering a new market.
Let’s start with the risks.
The risks of market entry
There’s no risk-free way to enter a new market. Some may be easier than others, but there’s always the possibility for problems.
We can break down the risks of market entry into 3 main categories — internal, external, and legal. Let’s start with internal risks.
Internal risks for market entry
Internal market entry risk factors are those that come from within the organization. These are generally easier to control than external risks but are often unpredictable and seriously damaging.
Management and organization
How well is your company structured? In your home market, it’s sometimes possible to function successfully with a flawed organizational structure. When you enter a new market, however, those drawbacks can become painfully obvious.
Some common management mistakes include:
- Unclear vision from leadership. A lack of coherent vision from the people in charge can lead to widespread confusion and inefficiency. Make sure your goals are not just clearly established, but also communicated to everyone on the team.
- Sudden staff changes. When a new member joins the team to replace someone else, it’s crucial they have all the information and direction necessary. Failing to do this can result in communication failures and major setbacks when entering your new market.
- Lack of coordination. When working in a new market — especially one located far away from your home market — working together effectively is critical. It’s essential that your team members are on the same wavelength, up-to-date with current processes, and in regular, clear communication with each other and leadership.
Human error is one of those risks that we can’t really control. Mistakes happen, in business as well as life, and while we can’t predict them very accurately, we can say for certain that people will make mistakes.
When entering a new market, a simple mistake can set a project back and send out ripples into the entire process. Usually, one or two small mistakes won’t be the end of the world, but a series of minor errors can add up.
That could involve something like failing to convert currency accurately, using the wrong type of measurement units, or giving incorrect advice about cultural norms. In these cases, one small mistake can quickly snowball into a major setback if nobody catches it.
Things like delays, accidents, labor shortages, problems with transport and delivery, and other challenges related to logistics and infrastructure can be significant roadblocks for businesses when entering a new market.
These kinds of hurdles are especially relevant when expanding into developing countries and regions. Here, infrastructure and technology is often very different from what you might be used to in your home market so it will be harder to predict delays and disruption.
Markets in developing countries are sometimes characterized by more manual processes, a greater need to work closely with local people on the ground, and sometimes the need to adapt your services.
The technology and equipment you rely on as a business won’t always work seamlessly. One big risk for market entry involves technology failing to get the job done effectively in a new market.
One example is the Industrial Internet of Things devices, which can be powerful assets for businesses when it comes to monitoring conditions and optimizing processes like manufacturing. However, if your devices or networks fail, it could set your plans back significantly.
If you’re looking to enter a developing country, it’s worth bearing in mind that technological infrastructure can be very different to your home country. In some countries, we’ve seen a leapfrog effect, where newer technologies have been adopted to a greater extent, as there are less issues with moving away from legacy systems.
Cash flow problems
Entering a new market typically requires a lot of financial resources, and if that supply of money is interrupted or halted it can cause major problems for your operation. Internal issues like this can quickly put a stop to a market entry attempt if not quickly dealt with.
External risks for market entry
As well as risks that come from within your organization, businesses also have to contend with a plethora of external risk factors. These can be much more difficult to control and are often unpredictable.
It’s essential to be aware of and comply with the local laws in your chosen market. One example here is Europe’s GDPR law which requires anyone doing business with European customers, or any business based in Europe, to adhere to strict data privacy rules.
Local regulations and requirements are often overlooked — and this can be especially tricky in emerging markets where regulations can be harder to interpret if you’re not familiar with the landscape.
The cost of failing to keep up with regulations can be high — the maximum fine for GDPR violations is either €20 million or 4% of your annual global turnover. A mistake here can seriously damage your entire company, not just your new market activities.
Politics can be hard to predict anywhere in the world, although in stable regions businesses can be fairly confident that radical changes won’t disrupt their market entry efforts.
However, in less stable parts of the world, all bets are off. Revolutions, wars, and sudden and significant new legal changes are just some of the political risks that you have to contend with when entering a new market.
Sudden changes to government can have severely damaging effects on your business. One example is when Fidel Castro’s government took control of Cuba in 1959, seizing hundreds of millions of dollars of US-owned property and companies.
A country (and a market) is nothing without its people. Events involving social unrest and widespread disruption are constant sources of risk for businesses in many markets around the world.
Things like riots, protests, and revolutions can cause damage to premises and shut down business for long periods of time, while things like nationwide strikes can leave you without a workforce. It’s crucial to have a plan of action to ensure survival during times of civil unrest.
Major non-violent social movements and trends can also impact your business. If you fail to show solidarity or are perceived as being insensitive to a certain public sentiment, this could cause reputational damage that you may never recover from.
Entering a new market often involves introducing your business to an entirely new culture, and this comes with a whole host of new risks to consider.
There will be different customs and cultural nuances to be aware of. This will impact how your products and services will be received. It’s easy to get excited about new market entry and the potential it might offer your business but you need to do your research upfront. Is there actually a market for your product? Will it need to be adapted for success? And at what point, does this become unfeasible? Knowing when not to enter a market is just as important as knowing when to invest.
You’ll also need to think about how culture will impact the way your marketing will be received by your new customers. A commercial that is beloved in Western cultures might be perceived as grossly insensitive in more conservative cultures.
It isn’t just people that businesses have to worry about when entering a new market — nature itself is often working against them. Natural disasters are a major source of risk when establishing a presence in certain parts of the world.
Hurricanes, earthquakes, floods, droughts, and many other disasters can quickly put a stop to any market entry effort. They can destroy property, interrupt shipping, and close down entire economies in a matter of hours. Worst of all, it’s often impossible to predict when the next disaster will strike.
One way to mitigate damage is through insurance, although coverage in developing countries has historically been low. Research shows that only about 1% of natural disaster-related losses between 1980 and 2004 in developing countries were insured, compared to approximately 30% in developed countries.
There are a number of external risks around the market. These can take the form of unexpectedly tough competition, fluctuations in the cost of services and resources your business relies on, and volatile exchange rates leaving a dent in your profit margins.
There are many legal risks to take into account when entering a new market, and this type of risk encompasses both internal and external activities.
Every region in the world has its own set of laws and regulations, and these can change significantly even between parts of the same country. For example, it’s legal in many U.S. states to sell cannabis, however, in others, this could carry a severe penalty.
Among the legal risks to consider are lawsuits, patent rights, and data privacy regulations. To make sure you stay on the right side of the law it’s essential to work with local lawyers in your target market. A major legal setback like a big lawsuit could end your market entry campaign, so make sure you’re staying on the right side of the law.
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As well as risks, there are also multiple market entry barriers to consider. Fortunately, these are far more predictable than the aforementioned risks. It’s pretty much guaranteed that you will encounter these obstacles during your market entry journey, so it’s easier to prepare for them.
There are lots of barriers, but two of the main ones that we will cover here are costs and marketing challenges.
Entering a new market is not a cheap endeavor. You’ll generally need considerable resources to make this happen, and costs can be much higher than expected. Some market entry campaigns cost less than others — trying to reach an older domestic demographic with your product is much more financially workable than trying to establish a solid presence in a foreign market such as China.
A successful market entry will allow you to make back your investment over and over. But it’s important to understand what costs you might need to consider when entering a new market.
- Export and import costs
- Moving to a new overseas market typically involves a certain amount of moving goods across borders. Even if you establish a manufacturing base in your new market, there will be costs associated with importing certain materials and goods from your home market.
- Switching costs
- This refers to the cost involved in switching to a new supplier, brand, product type, or any other kind of alternative. This is something you might have to do a number of times when entering a new market, and these costs can add up quickly.
- Marketing costs
- Reaching your target audience in a new market will require a certain level of expenditure depending on how well-known your brand already is. For example, KFC opening a restaurant in a new region will have less work to do than a smaller and less famous company. Costs here encompass things like market research, advertising, digital marketing, and analytics.
- Access to distribution channels
- This is how you make your product available to your customers. Accessing and managing a distribution infrastructure in a new market comes with a wide range of costs.
It’s important to clearly anticipate as many costs as possible when entering a new market. Even if you do a great job of this, it’s likely that some costs will still spring up and take you by surprise. Make sure you have the financial resources available to handle these unexpected expenses.
Getting your marketing right
As well as the many costs associated with market entry, another barrier facing companies involves marketing.
Marketing is essential in order to make your voice heard and your product known in your new market. You need to immediately start connecting with your target customers across a range of channels and establish your brand as an option.
This comes with a range of challenges. We already covered cost above but here are some other key marketing considerations:
- Demand. Before you even set foot in a new market, do enough people want to buy your product? If there isn’t an existing demand for what you’re offering, your marketing campaign is going to be an uphill struggle. It’s much easier if people are already clamoring for what you have. This is where market research is crucial for helping you to size the opportunity.
- Competitors. Entering a new market means — most of the time — walking onto another company’s turf. You’ll need to show your target audience that you can offer something better than your competitors.
- Brand identity. Your brand has an identity, and it can be hard to import that identity and everything associated with it into a new market. How do you establish yourself in a certain way and send out the right message to your potential customers? Again market research is vital here to understand what to retain and what to adapt.
- Customer loyalty to existing companies. We already mentioned your competitors. Many of the customers in your new market will have existing loyalties and strong ties to them. Luring customers away from a brand they have used and loved for decades is much harder than simply attracting a new customer to your brand. You need to stand out, offer something extra, and clearly communicate this. It’s worth paying attention to your competitors and what people like about them.
- How will you reach your audience? Consider how the people in your new target market get their information and spend their time. For example, if you’re targeting an older demographic, it might not be a good idea to invest heavily in influencer marketing. On the other hand, magazine and TV ads may work to great effect.
- Cultural issues. If you’re expanding into an overseas market, you’ll need to consider the differences in culture and how this affects the tone of your marketing. Make sure your messaging doesn’t come across as offensive or inappropriate or appear tone-deaf due to a lack of understanding about cultural nuances and norms. This is one area where it definitely pays to work with people on the ground who understand the culture intimately.
Marketing is always tough to get right, and this is even more true when entering a new market. The most important thing is to research your new market as heavily as possible and gather as much information as you can before beginning your campaign.
Also, be prepared to adapt your approach as you go along in response to data and feedback.
Market entry always comes with a huge amount of risks and challenges. No business in the world can escape this, not even those with a global presence. Take the case of Starbucks — whose attempt to break into the Israeli market fell flat due to hubris and a lack of understanding of what the Israeli customers wanted. But if you get it right, you can reap significant rewards.
Kadence has helped companies of all shapes and sizes research their target markets and gather all the intelligence they need to lead an informed and successful market entry campaign. To find out how we can help you do the same, check out our guide to market entry or simply get in touch today.