There was a time when only big corporations were able to expand into foreign markets; the costs of entry were prohibitively high for smaller and medium-sized enterprises. However, in an increasingly globalised world, technology has removed many of those barriers.
With faster and cheaper modes of communication, markets across the world are interconnected in ways that were not possible even a few decades ago. As a result, you no longer have to wait for total domination of your domestic market before considering overseas expansion.
If you have a viable product and strong demand in a foreign market for that product, anything is possible. However, you will require careful preparation and adequate financing, as well as capable staff to handle the increased demands put upon your organisation.
Devising a Foreign Market Entry Strategy
Once you have assessed the viability of international expansion and identified potential foreign markets, it is time to zero in on an entry strategy for your business. This can be tricky, as there are several different options available, each with their own pros and cons.
Therefore, let's take a quick dive into the most popular. Here are five tried and tested market entry strategies for businesses looking at overseas expansion.
1. Exporting (Direct and Indirect)
This is one of the oldest and most common strategies for entry into overseas markets. It is also one of the simplest; you produce goods or services in your home country and then sell them in another country.
It's worth noting that exporting can be either direct or indirect. If you take the direct exporting route, you will need to hire sales representatives, as well as agents and distributors in your target market. They will do the legwork at the other end, getting your products to retail outlets or customers. Shipping and logistics are also important issues you will have to deal with in this kind of strategy.
In indirect exporting, instead of keeping the above-mentioned activities in-house, you partner with other intermediary businesses that specialise in the export field. These could include export trading companies, export management companies, export merchants, purchasing agents, or confirming houses.
Direct exports give you more control, but at the cost of higher risk and resources. Indirect exporting, meanwhile, mitigates this to an extent, but with less control over your sales – and potentially even losses if you don't choose your intermediaries wisely.
2. Franchising and Licensing
Expanding into new markets puts extra demand on your existing production capabilities. If you do not have the resources to scale your business, licensing or franchising agreements offer you a workaround.
In franchising, you allow another firm (the franchisee/licensee) in your target foreign market to use your product branding, manufacturing processes, or other specialised information; they then leverage this to manufacture an identical product and sell it in that market. In exchange, you get paid in the form of franchising fees (and, of course, a sizeable cut of the profits).
This method has several advantages; it is a very inexpensive way of entering a foreign market, as the brunt of the investment is borne by the franchisee. Import regulations and government restrictions also do not target franchising businesses. However, there are downsides, too; this type of market strategy generally only works if you already have an established brand, as numerous examples in the hospitality industry have shown. It also may not work in all business sectors due to lower profit margins, while you are essentially putting faith in your franchisees (whose failures can and will reflect poorly on your brand).
The Difference Between Franchising and Licensing
Although the concepts behind licensing and franchising are hugely similar, licensing is more limited. It generally involves one company giving permission for the use of a particular technology or production process to its partner – the licensee. Although franchising does often involve the licensed use of technology or patented methods, it goes much farther and is generally built upon a broader legal relationship.
3. Joint Ventures
In many countries, joint ventures (JVs) are often the only viable market entry strategy available to foreign businesses. Governments often erect tax barriers and ownership restrictions that target foreign companies in an attempt to protect and encourage local entrepreneurs.
Foreign firms are thus "encouraged" to partner up with local businesses, investing money and providing technical knowledge and international connections in exchange for access to the local market.
Ownership is usually shared between these two partners, often in ratios that are determined by the local regulations. JVs can be quite risky, as your firm is tied up in a long-term commitment to a business in a foreign land.
Some of the most successful instances of JVs can be found in the Indian automotive sector of the 1980s, when dominant Japanese firms such as Honda and Suzuki were forced to forge JVs with Indian brands such as Hero and Maruti to sell their cars and bikes.
4. Subsidiaries and Acquisitions
If your business has enough resources, you may want to establish a wholly owned subsidiary in the new market. Creating a daughter firm in this manner can be a very costly endeavour – particularly in a foreign market – but it is often preferable in sensitive sectors where you need highly-skilled staff and close attention to clients.
When you set up a subsidiary from scratch, the process is called greenfield investment. It can be very risky, and conditional to the local business regulations related to foreign ownership in a country.
Therefore, acquisitions are an increasingly popular alternative. This is where you buy up a local company and make it your subsidiary. It is quicker, less risky, and offers quick access to the target market. If the local market has well-established firms, a foreign company can take this route and buy out one of the firms to gain a solid foothold in the market.
5. Turnkey Projects
Turnkey projects are popular in fields where businesses are engaged in time-bound projects, such as construction, heavy engineering, power, or other infrastructure developments.
Here, your aim is to obtain contracts for these huge projects, many of which are often issued by governments or public bodies (although large private projects are also not uncommon). As a contractor, it is your job to design and build the project as per the client specifications.
In countries that do not have the technical and engineering expertise for such projects, overseas contractors are usually given preference. However, due to their lucrative nature, competition is often intense, and there are many players involved in the bidding process.
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As you can see, these are just some of the more popular entry routes into foreign markets, but they are not the only ones. The important thing is that, however you choose to access your potential new customer base, you choose your destination wisely and ensure that you are operating on a sound legal and regulatory basis.
Starting Business can assist in this regard; simply get in touch with one of our expert professionals and arrange a short consultation to discuss your requirements and your needs.
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