New market entry whether domestic or international can be somewhat challenging but very profitable if done the correct way. New market entry can be a geographical phenomenon when a company enters a new geographical market, such as a new city, state, or even a new country. Or, it can be a material phenomenon when a company enters a new market by the introduction of a new product and/or service. Each type of new market entry requires extensive research and strategies for the venture to succeed. A certain level of regional customization might have to be implemented for the product/service to succeed within the new market. New market entry may be accomplished in a number of ways, through exporting, offshoring, licensing, franchising, mergers and acquisitions, a joint venture(s), strategic alliances, Foreign Direct Investment (FDI), piggybacking or partnership(s). Each of these strategies has its own challenges, but can be very rewarding if done correctly and in a manner that complements the companies existing structure.
Why don’t small and medium business enter a new market?
One of the key elements with small and medium businesses is their lack of resources and awareness of foreign markets. How can you enter a new market when you do not what opportunities abound? To solve this major problem for our clients, HafeziCapital has developed a proprietary process for New Market Entry. Based on the current clientele basis, sales patterns and many other metrics, we analyze similar patterns in other geographies and develop a Top Five Market Entry recommendation list. Based on this data and client’s input we move to a more robust analytical process with detailed demographic studies, market entry strategies, legal limitations, and competitor analysis.
With this step-by-step approach, we help small and medium sized business understand the new market and become comfortable with the various challenges that such a market entry will possess. Furthermore, we develop a market entry model to ensure we correctly estimate the financial and human capital needs for such market entry. Moreover, this process allows companies to better understand their competitive advantage both in terms of domestic and international market entry. Ultimately, this process creates value by minimizing the risk premiums associated with the new market entry. This data points educate the client as to the challenges and prepares them to be pro-active to the cultural, legal and economic conditions within the new market.
What are the challenges of new market entry?
Entering a new market can lead companies to significant profits and growth but can also turn into catastrophic failures with heavy financial losses and brand dilution. Therefore, it is important to develop a new market entry strategy and do ample research and analysis to determine the profitability of this new market opportunity. A good example of a mismanaged market entry is that of Blockbuster in the 1990’s. The video rental retailer entered Japan through a Joint Venture with Fujita Den Trading with the notion that it was going to be a renter of “wholesome entertainment,” just as it did in the United States. This excluded, adult movies and extreme horror movies. However, in Japan, a video store could not exist by itself without leasing adult movies, given that adult movie rental composed 35% of all video rentals. Blockbuster’s market entry strategy failed and losses mounted until. In 1999 Blockbuster was forced to sell its interests to its partner Fujita Den Trading and pull operations from Japan.
Why do companies enter new markets?
The reason most companies enter a new market is to expand their market share and to significantly increase their customer base by bringing new products or services to a new market. Before deciding to enter a new market, there are a number of things companies need to consider. Here are some examples of questions that need to be addressed in an empirical manner:
- What is the demand for the company’s product or service in the new market?
- Does there need to be a high demand to justify the cost of new market entry?
- Who are the local, national and international competitors?
- What is the demographical statistics of the new market?
- How big is the new market entry opportunity?
- What are the anticipated profits and costs?
- What methods should be used for new market entry?
When all the research is done and a determination has been made as to what market to enter, the next step will be to create a new marketing strategy to build brand awareness in the new market and promote the new product or service. While a company may be a household name in a specific local market, people might have never heard of it in other areas so it is important to develop a strong marketing campaign and launch the product or service as a brand new item as if no one has heard of it before.
Even established companies with a great history of new make market entry can make mistakes such as the case of French cosmetics retailer Sephora (part of LVMH). The Japanese cosmetic market represented a $10 Billon (US Dollar) in annual sale. By other measures, the market size was the second most valuable (in term of volume) in the world after the United States. In 1999 when Sephora first entered the Japanese market, it did not attempt to learn how Japanese women shopped for cosmetics. For Sephora, it was solely an attempt to increase its economies of scale and scope, rather than understand the targeted clientele, Japanese consumer dynamics, and transference of product and services knowledge to end-users. In 2002, given the various pressures, Sephora left the market bruised and financially weakened.
New market entry can also be done on the international level by exporting your products or services into a new country or by establishing operations in that new country. International market entry requires more efforts and capital than a domestic market entry and can pose a number of additional challenges based on the region selected.