Entering a new market can lead to a massive boost to sales, brand strength and long-term profits. But there’s more to a market entry strategy than great products or services. Understanding the local market – its distribution channels, culture, economic and social trends – through a market research-driven due diligence process is crucial. And sometimes the most valuable insight is the hidden reason why you shouldn’t proceed…
The art and science of market entry
Over the past 40 years globalisation has redefined what it is to be an international brand. For decades, a handful of dominant players in markets such as food and drink (driven by marketing prowess) or automotive (reliant on economies of scale) had been able to enter new markets in ways that most businesses simply couldn’t imagine.
The rapid growth of global trade capacity, and particularly the ubiquity of the internet, has levelled the playing field. Today, a business in Bolton has myriad options for selling in Beijing; an Australian specialist retailer has lots of ways into the Austrian market.
But the process of choosing which markets to enter, how and why remains fraught with danger. The rewards of opening up a new market are potentially great. On the other hand, the cost can be significant, and the list of powerful global brands that have failed to successfully enter new markets is a long.
The factors to consider are varied: there are economic and social dimensions, competition from local companies, the quirks of regional distribution channels, cultural mismatches… and much more. That means undertaking a market-research-driven due diligence project before entering a new market is a must.
Why look elsewhere? The reasons for market entry
What motivates companies to investigate entering a new market? Every organisation will have its own reasons. Exploring them in detail is a useful first step in defining the later market entry strategy.
A huge proportion of value in modern enterprises is wrapped up in intangibles. That means increasing enterprise value requires diversification of the brand. Some very strong domestic brands can move into adjacent markets (Dyson, for example, can leverage its reputation for air-moving engineering from vacuums, to hand-dryers, to room fans and even hair straighteners). A select few can jump into non-adjacent categories (Virgin, for example). But opening up a whole new geographic market can establish a brand with many more consumers, boosting its value.
Saturation of existing markets
Once you have gained significant market share and consumer penetration domestically, it’s easy to see growth stall. Launching new products to address existing customers is costly and high risk. But taking proven products or services to a new market can create fresh upside for growing brands.
Optimising overhead costs
As businesses grow, they build up overheads – around head office functions, for example. They also build up niche skills and experience – in fields such as logistics, legal or financial. These scale well: the more times you can put your experts to work in a new market, the more productive they are. And the more markets you have, the lower the amount each one pays to meet head office costs.
Globalisation has meant businesses can easily work with partners in new markets – creating new opportunities for blended products and services. Local distributors, for example, might be pathfinders for a brand into a new market – demonstrating the potential for a more structured entry into that market.
There are plenty of other motivations, often overlapping. Knowing which is driving the decision to explore new markets will help frame the strategy for successfully entering one.
A phased approach to market entry
There are different phases to a market entry project. You need to size the opportunity to judge whether it’s worth entering a new market. There ought to be concept testing, especially for new categories or innovations in that market. Many clients focus on competitor analysis when they’re dealing with less well-known rivals.
Market entry has many dimensions – and no business is too big to skip them.
We work with a number of high-profile Japanese brands, global names that are already present in different countries in some form of another. But they still need to tailor particular products or brands to the local markets they’re looking to exploit; and understand the specific needs of consumers in those categories.
Market entry projects usually involve a series of questions, and typically each of these is a discrete engagement.
Key questions for any market entry project
- Which markets might we look at?
- What is the macro environment like in a market we want to enter?
- How does the competitive landscape affect its attractiveness?
- What is the best way to enter the market in practical terms?
- How do we adjust our product, service or messaging to optimise our offer there?
While market entry studies are a vital tool in successfully growing a brand somewhere new, sometimes their value comes from showing that entering a new market will not be successful. Around 50% of these projects results in a recommendation not to go ahead as planned. That finding can emerge at any one of the stages above. Far from being bad news, it’s often the most valuable insight a brand can get. Market entry can be costly and complex – not doing so when the conditions aren’t right can save massive amounts of money and time.
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The world is your oyster. But where’s the pearl?
A crucial first step in investigating markets for entry is to analyse why a brand, product or service is successful in its existing markets. How is it used? Who are the type of people that love it? What are those customers’ attitudes across different domains? What role does it play in their lives – and why?
The next step is to look for markets where groups like this already exist. A good starting point can be detailed desk research – using tools like the CIA World Factbook for demographic information, or understanding cultural similarities to your home market through cultural awareness studies like the Hofstede Insights Culture Compass. But ultimately, it’s approaches developed precisely for the brand or product that will reveal good matches. Narrowing down the high-probability markets is hugely valuable for brands that don’t have other clues to go on.
Sometimes brands do have a clear idea from the outset which markets they want to enter. We worked with a company producing ceramics which had a light-touch arrangement with an international distributor. They started to notice a significant uptick in orders from Korea – which was obviously a strong signal that entering that market could pay dividends.
But that also meant understanding why was key to a successful market entry. Closer research revealed that an increase in purchasing power among the country’s middle class had made the designs more attractive; plus online shopping had taken hold and made previously hard-to-get products more visible.
Target acquired. Now what? Next steps in a market entry project
Specific country research starts with fundamental market insight and competitor intelligence work. Initially, that’s secondary research, analysing available insights for the particular category in question. After that, we might move on to interviewing people whose knowledge of the market will provide more nuanced insights.
Companies usually see this as their feasibility study, helping them understand who else is operating in their category, what regulations might be applicable, what the domestic distribution and supply chain infrastructure is like, and what investment they’re likely to need to make under different scenarios.
That industry analysis and expert insight helps generate a strategic overview of the market tailored to the client. Often that’s enough to substantiate the decision on whether and how to enter a market, especially if it’s a close match with the brand’s existing markets.
A good example is some work we did with an electronics brand looking to launch a new product in the US. The group already has a huge presence in America – but not for its new product, a battery system for domestic renewable electricity.
Our project involved interviewing a range of potential stakeholders – such as real estate developers, housing associations, planning authorities and environmental regulators – to get a holistic view of how that market might evolve. That enabled the client to take a realistic view of both the existing appetite for the product and current regulations; and how the landscape might change as they developed the product.
It’s not uncommon for a company to walk away at this point – there might be competitive, regulatory or infrastructure barriers that no mode of entry can overcome cost-effectively.
Frameworks to assess a new market
A structured framework can be valuable in assessing a new market. You might see great consumer interest – but if the regulatory stance is hostile, you have to think twice. One way of conducting a thorough overview of a market to pick up all those factors is to analyse the environment through different PESTLE lenses:
- Political – how stable is the country? What’s the prevailing ideology? What biases – intervention in markets, say, or taxation – do politicians have?
- Economic – how rich is the country? How is wealth distributed? What’s growth like, and where is it likely to continue?
- Social – what’s the culture in the country? What are the typical social structures – family, work, community? What about religious norms? Education levels?
- Technological – what’s the infrastructure like? How wired is the country? How lumpy is technology penetration? What about population ‘techiness’?
- Legal – what rules are there about business ownership? How about liability laws? What recourse do overseas businesses have in the courts?
- Environmental – how might the local climate affect the product or service? What about use of resources? Or end-of-life disposal of products?
Porter’s Five Forces
The next step is to get a grip on the competitive landscape, and that’s where tools such as Porter’s Five Forces come in. Michael Porter worked at Harvard University, and in 1979 he published a paper aiming to describe the ‘microenvironment’ for the attractiveness of any given industry – or, in this case, a new market.
There are three forces from ‘horizontal’ competition:
- The threat of substitute products or services – what’s the alternative to your own offering that people might use? How are they achieving the same goals now, and what might shift their views?
- The threat of established rivals – bearing in mind that in a new market for you, there will be lots of players who know how to operate there better than you do.
- The threat of new entrants – being a new entrant to a market doesn’t mean others won’t follow, too. And if you’re establishing a new category in a market, that might tempt others in, or prompt local businesses to muscle in.
Two forces come from ‘vertical’ competition:
- The bargaining power of suppliers – opening up a new market might help you gain economies of scale from higher sales volumes. But it also makes you more reliant on suppliers – especially around issues such as logistics.
- The bargaining power of customers – understanding the broader competitive landscape will help you see what choices customers have; but, especially in the initial phases, they might need to be tempted to switch brands or try a new category.
Digging into the nuances
Those kinds of analytical tools mean companies can enter a new market with their eyes wide open. But they’ll still need to develop a sophisticated view of customers, competitors and regulations – the kind of insights that will tell them how they might enter a market, not just whether it’s a good idea.
That’s when they’ll commission more in depth market research and run projects like a market segmentation analysis to dig deeper into nuances they can exploit later to optimise their market entry.
At this point, they’ll be starting to research more detail on potential partners; exactly how they would use infrastructure to import, manufacture and distribute in that market; what specific customer niches exist; and even financial planning to take into account the kind of regulatory and cost-of-trade analysis they revealed in the feasibility study.
But above all they need to understand how their brand might be received. It’s not a given that you can simply transplant over your image or core messages.
Culture and behaviour: getting the key variables right
Cultural fit is hugely important. In this phase of the project, we would drill down into the local factors that might help a brand; or create barriers for its acceptance. This is typically a traditional market research exercise, exploring the behavioural aspects of consumers in the new market.
For example, we worked with a Japanese food manufacturer looking to expand into new Asian markets. But in the Philippines, it quickly became clear that there was no appetite for the more subtle flavourings and preservatives in the Japanese product. It was the perfect case of a potentially costly market entry being avoided through strong research findings.
That’s a lesson Pret a Manger learned in Japan, where it opened 14 sandwich shops across greater Tokyo in 2003. Just 18 months later, the company withdrew after its local partner, McDonald’s Japan, pulled out citing heavy losses. Superficial research indicated that Japanese people would love the convenience and novelty of eating-on-the-go sandwiches. But once the novelty wore off, sales dipped quickly. That combination of financial and cultural barriers hadn’t been picked up.
Speaking the language
As well as deciding whether the consumer will use the product, it’s important to explore the way in which it’s marketed. This is particularly important for brand with an established global image – the logos, slogans and even colour palettes that they’ve invested in heavily to define themselves – because those might have unexpected connotations in a new culture. Take, for example, the beauty treatment marketed in Japan as “for clear skin” – which translated elsewhere in Asia as “ghostliness”.
There have been plenty of cases of companies that didn’t do their market research with disastrous consequences:
- Clairol’s ‘Mist Stick’ curling iron flopped in Germany: ‘Mist’ is slang for manure.
- Coors’s slogan ‘Turn It Loose’ translated into Spanish is slang for diarrhoea.
- KFC is known globally for being ‘finger-licking good’ – which translated as ‘eat your fingers off’ in China.
- Also in China, ‘Pepsi Brings You Back to Life’ was interpreted as ‘Pepsi Brings You Back from the Grave.’
But rival Coca Cola entered the China market much more deftly. Initially, signs produced by local distributors for ‘ko-ka-ko-la’ (using symbols for the closest phonetic translation) were translated as ‘bite the wax tadpole’. But the company was developing its own local brand positioning, and settled on the symbols ‘K’o-K’ou-K’o-lê’ – which means ‘to allow the mouth to be able to rejoice,’ a far more apt trademark that it registered in 1928.
The money question – how to approach pricing
The other marketing fundamental that research can steer is pricing – a factor every market entry project needs to examine. Where is the competitive price point for consumers in the new market? What volumes and margins might you expect, based on the market opportunity? How does the new market stack up cost-wise – are you importing or manufacturing locally, for example – and what does that do to your opportunity to flex prices?
More broadly, the profitability of different business models often dictates whether and how to enter a new market at all. For some businesses there’s relatively little financial penalty to operating exclusively through local distributors. But at a certain point, issues such as volume of sales, cost of distribution, tariff levels, changes to local taxes and so on will shift the financial rationale. For example, we’ve already seen many UK businesses enter EU markets directly as a mean of offsetting post-Brexit tariffs, staffing, distribution and other costs.
The financial calculations can also dictate the viable means of getting into a market. At one level, that’s purely a ‘treasury’ consideration. How will profits be repatriated? What are the currency risks associated with the new market? How does banking and taxation work there? But how much you can control the brand locally – rather than relying on local agents – is also a factor. (We’ll look at the different modes for entering new markets in more detail in a separate guide.)
Know when to hold… and when to fold
All these factors are a reminder that even strong and established global brands don’t always have an easy time expanding into a new market. They might have some leverage with their global brand name. They have the resources to invest in market penetration. But to do so effectively – and without incurring higher opportunity costs elsewhere – they need data and insights to ensure their entry is tailored.
Even brands that take precautions to adapt to local culture can miss valuable clues as to their viability in a new market. Starbucks famously waited 47 years to open its first branch in Italy – wary of the very particular approach to coffee there. In 2018, its first shop opened in Milan. But the brand has struggled in the country. Limited research into new markets had affected the brand before, with its Australian business failing to meet the demands of local coffee-lovers; its Israeli operation closed in 2003 within two years of launch.
Granular, holistic research is the key
To gain the right insight to inform your market entry strategies, you’ll need to work with external agencies. For some very fast-growing and global brands, there might be a case for building an in-house team with the kind of expertise and experience needed to evaluate new markets in sequence. But when it comes to local research expertise and cultural understanding, the insights can often be two-dimensional.
McDonald’s Japan is a great example of using local insight to tailor what is, on the face of it, a universal brand. Every country has their tiny variations in the McDonald’s menu. But visitors to Tokyo will find radical departures such as Ebi Filet-o (a burger with breaded shrimp); Teriyaki McBurger; and even chocolate fries.
For many businesses – and business models – international expansion is likely to be a multi-year project with long pauses. That means bringing agencies to advise and evaluate each market entry is the only practical solution – especially if they bring specific knowledge on particular markets to bear.
At Kadence, with offices spanning Europe, the US and Asia Pacific, we are well positioned to support brands with market entry research. Find out more about our market entry services or get in touch to discuss a potential project.