Market entry Part 1: How do we choose the company’s target market?
When entering a new market, one of the most important strategic questions for a company is related to the selection of the target market. It really matters whether your awesome English steak house is expanding in the United States, in India or in Malaysia.
In the first post of this article series I shortly introduced the theoretical frameworks for entering a new market. Geographic expansion is a classic market development path among the Ansoff growth strategies, with a starting point determined by the competitive advantage of the company. The other important statement of the article is that entering a market is a strategic decision-making process which includes several sequential decision-making situations.
Analyses
Like other strategic-level decisions, determining the target market of geographic expansion also begins with analysis. In a previous article I pointed out that we can interpret analytical tools on multiple levels based on the focus of the inquiry. In our case it is recommended to start with country- and industry-specific analyses.
Among macro-level or country-specific analyses the most wide-spread one is the PEST (or PESTEL) which investigates how a given country/region can be described by macro indicators. A great framework for preparing macro-level analyses is the CAGE, and the international competitiveness rankings (World Economic Forum, IMD, Doing Business, etc.).
Besides the macroeconomic factors it is necessary to look at the industry as well. On this level Porter’s five force model can be a good a starting point. Porter’s basic statement is that the structure of the industry has a direct effect on the industry rivalry and the corporate strategy. This analysis investigates what strategy a given company should choose in a certain industry.
Aspects for comparison
Country, region or industry analyses themselves are not necessarily useful for a senior manager. For proper decision-making there is a need to analyze and compare alternative solutions. Among the aspects for comparison we can distinguish between internal (resources, competence) and external (industry-specific, taxation) factors. Of course these aspects can have different weights in the decision model. In decision-making situations there are of course ‘all or nothing’-type (e.g., legal, cultural) variables.
The company’s management has made the decision that the main goal of the strategy for the next five years is geographic expansion and the entry to new, so far unconquered markets. Afterwards they gave the strategy department the task to investigate potential markets. The employees of the department examined several regions on macro and industry level, out of which they presented the three most promising ones to the company’s management.
Students in university courses often make the mistake of broadly filling out the previously learned templates but they tend to leave out the country- and industry-specific factors. An English steak house can come across major challenges if they forgot to take into account the beef consumption patterns of the different countries during the decision-making process. India for instance may seem like an attractive choice based on its population and other factors but the fact that cows are sacred animals there can rewrite our equation.
In the next part of the article series we will learn what the management of the English steak house decided.
- Market entry Part 0 – Basics
- Market entry Part 1 – How do we choose the company’s target market?
- Market entry Part 2 – Timing or the first mover advantage
- Market entry Part 3 – Entry modes
Referred literature
Porter M. (1985): Competitive advantage.