Has your business made the decision to enter into a new market? Perhaps you’re now asking yourself: “What’s next?”?
The market entry strategy you choose will depend on your product or service, the results of your research, and your objectives in the market. Here, we’ll help you explore the two main approaches:
- Exporting (the most common)
- Establishing a local presence
Market Entry Strategy 1: Exporting
When exporting, you can sell directly to customers in your new market. This market entry strategy works when you have a unique offering with a strong customer appeal and have adapted it to match your target niche. Advantages include higher profits without a middle man, complete control over your transactions, and the ability to establish close relationships with your customers.
If there are language barriers, big cultural differences, and unfamiliar ways of doing business, it may be better to export through intermediaries who know the local market better. They can help you find customers, arrange distribution channels, handle documentation, clear your goods through customs, and provide after-sales service.
There are three types of intermediaries:
- Agents
- Distributors
- Export management and trading companies
Agents
These are individuals or firms you employ – usually on commission – to sell your product to wholesalers, retailers and, sometimes, end users in your target market.
The agent takes orders for your goods and forwards those orders to you. Your company, however, has to provide local promotion and marketing of your products.
Filling the orders, shipping the goods to the customers, and collecting the payment is also your responsibility. As is setting up the local price for your product.
You will, therefore, potentially have to bear the credit risk.
Distributors
Distributors buy your product from you and then sell it to end users at a mark-up that provides them with their profit margin. They have bought your product(s) and handle all distribution once they have received them.
They can represent you in all aspects of sales and service, but may handle products that compete with yours. They can represent you either exclusively or non-exclusively.
Export management and trading companies
These companies handle market research, transportation and advertising. Some firms buy your product outright, while others may act as agents on commission.
The major advantage of using one of these firms is the immediate and easy access they provide to markets aboard.
The disadvantage is that you have less control over your overseas sales and you may not have a chance to become familiar with the market.
Market Entry Strategy 2: Establishing a local presence
The second overarching market entry strategy is to establish a local presence — often known as foreign direct investment (FDI). This can take several forms.
If you need a basic presence in the market, opening your own sales or marketing office—sometimes called a ‘branch office’—may be the answer.
If you want to have complete control over daily operations, while acquiring valuable processes and technologies, then perhaps setting up a company in your target market as a subsidiary is the right choice for your company.
Beware, however. This needs substantial resource and long-term investment.
If there’s a local firm which complements your offering or enhances your competitive advantage, then a strategic alliance—such as technology transfer agreements or purchasing and distribution agreements—could work.
Or, perhaps, a joint venture where you cooperate to achieve a specific business objective. This cooperation could be a simple partnership that is limited in scope or duration. Or, it could involve a long-term investment of funds, facilities and resources to set up a separate company in the target niche.
An alliance can create synergies, and help you both spread the risk and investment.
On the other hand, it has a high entry cost, complicated registration procedures, and there’s always the possibility of conflict between partners and potential loss of control by one of the parties.
The financial impact of expanding your business abroad
Whichever market entry strategy you choose, keep in mind the financial impact, as expanding into markets abroad can involve credit, political and currency risks. This includes non-payment, expropriation of your assets by a foreign government, and fluctuation in the value of your currency relative to the target market’s currency.
Trade Credit Insurance is available to help companies mitigate these risks. It may also help you to get additional working capital from your financial institution to support your international expansion. Entering new target markets is an exciting prospect, but can be a lot of work.
Choosing the right market entry strategy will help you focus on the most effective levers to get you growing in new markets. Learn more about how Trade Credit Insurance can help businesses that export.
