How to enter a foreign market: market-entry strategies

Expanding internationally can be a great way to take your established business to the next level. Not without its risks, foreign market entry allows your company to make the most of previously untapped demand and build your brand’s global presence. The key here is to consider your options carefully and pick a method that works for you from the get-go.

Following on from our previous blog on top-level strategies for going global, this post looks specifically at the opportunities for entering a country as part of your global expansion journey. Join us as we explore the range of foreign market-entry modes available to you, from exporting to joint ventures and greenfield investment.

Selecting your target market

When planning your market entry, picking out the right country to enter is an important starting point. You and your team will need to research potential places carefully to put yourselves in the best possible position when it comes to the international launch.

There are plenty of things to consider at this stage. Some of the things you might want to think about include:

• Competition levels – how many other companies have had the same idea as you? Is there a gap in the market or will you find yourself competing against too many other firms?
• Demand – have you done your market research? It might be that you offer an innovative new product that locals will snap up; however, checking that the demand exists is a fundamental step for your organisation.
• Local laws – check on any legislation that could affect your ability to sell in the target market. For example, you might need to package your products in a different way or add new labelling.
• Cultural norms – how well will your product be received on a cultural level? For example, ideas on alcohol, food, and fashion differ significantly from country to country.
• Differences in taxes – how are your goods taxed in the target market? Lower taxes might make for higher profits, but investigate this in any case.
• Transport considerations – will it be easy to transport your products to the country? Which options are available and how much would they cost?

Make a list of potential options and see how they compare on these points. It’ll take time to assess the opportunities and narrow down your options, but preparation is the most crucial part of the international expansion process.

Entry strategies for international markets

Once you know where your company is heading, it’s time to get down to the details of your market-entry strategy. There are so many ways to enter a foreign market that it can seem bewildering at first – take the time to consider them all and work out what’s right for your company and your product(s).

Exporting

The most common and least risky way to get goods into an international market is to export. You manufacture products in your home country, transport them abroad, and then sell through agents or distributors in the target market.

A perk of exporting is that you don’t need to invest in production in a foreign country. That said, you’ll need to look into your transportation costs and tariffs carefully. This method also doesn’t give you much control over the selling process, leaving you at the whim of your distributors.

BP is a well-known example of a UK exporter, sending its oil and gas to countries around the world.

Online direct to consumer

This modern market-entry method sounds very similar to exporting but cuts out the middleman, with no need for a distributor abroad. Another example of how the Internet has revolutionised business is that the direct-to-consumer (D2C) model involves your organisation selling its products online and shipping them straight to the end-user.

As with exporting, there’s still the tariffs and transport costs to consider, but you have much greater power over how your products are marketed. Overheads are kept to a minimum with this entry route as there’s no need for any presence within the foreign market. On the other hand, D2C firms need to carry out overseas marketing activity and build up brand awareness independently.

You might have heard of the Dollar Shave Club. This D2C company delivers razors and shaving products directly to its customers across the globe via mail.

Franchising

Another option that requires a relatively low investment on your part is franchising. This means allowing companies in other countries to use your business’s intellectual property and sell on your behalf. You can set strict rules on the processes your franchisees must follow and the way they produce goods – this gives you a fair amount of control over how your brand is perceived in foreign target markets, provided you can maintain the relationships.

Setting up a franchise can be a great way to spread your reach around the world at relatively little cost. On the flip side, your company will earn less of the profits as a large proportion goes straight to your franchisees (after all, they’re doing most of the legwork!) Your money comes from royalties, so you’ll only be taking a cut. There’s also the risk that you choose the wrong franchisee and your brand’s reputation tarnishes.

Of course, the go-to example of a franchisor is the famous golden arches. Founded in 1955 in San Bernadino, California, McDonald’s is now the biggest name in fast food worldwide.

Licensing agreement

Establishing licensing agreements follows the same principle as franchising, except that the product you’re dealing with is intangible. You allow companies in other countries to use your trademark, production process, or patents.

As with a franchise, licensing is highly lucrative but can result in the loss of control over your brand – you need to be careful about who you choose to make agreements with and make sure that you establish a level of trust first.

To give you an example, artists often use licensing agreements when their work is used on the cover of a book, taking royalty fees each time their art is used in this way.

Partnering

If you choose to enter a foreign market where the culture differs significantly from your own, then it’s likely that you’ll end up doing some form of partnering. Your partnership could entail an arrangement where a local firm will market your products or even a more complicated strategic alliance.

The key benefit of adopting partners is that they’ll be able to familiarise you with how business works in the area using their local marketing knowledge. Often, this will just be confined to one area of your business like marketing or logistics. In other cases, you may be working together on more than one business function and could even be cross-selling (see piggybacking below).

Joint venture

The term joint venture refers to a specific type of partnership that you might want to look into. In this case, you set up an entirely new joint-owned company in collaboration with a local firm. The company you create will be a fusion of your two business models and value systems, in theory making the most of the best elements of both.

Of course, you’ll benefit from their understanding of the local market, culture, and laws, standing a much better chance of succeeding than you would on your own. At the same time, setting up a joint venture can be risky and requires a considerable outlay from the start. One issue that this type of business runs into is splitting up the profits between the parent firms (referred to as repatriation of profits).

You’ve probably heard of Hulu. This company is an established example of a joint venture that started life as a collaboration between NBC Universal, Providence Equity Partners, News Corporation, and The Walt Disney Company.

Piggybacking

A more unusual foreign market entry method, piggybacking, involves collaboration with another non-competing firm to sell each others’ products abroad. This strategy is a two-way street, so you’ll need to ensure that your partner company’s offering aligns well with your brand.

Piggybacking greatly reduces your risks and costs when looking to enter an international market. Equally, like other forms of partnership, it involves a high level of trust between you and the foreign firm you work with. They’ll be marketing your offering and representing your products overseas, so it’s important to find a company that you have absolute confidence in before selecting this option.

Foreign direct investment

You could consider a foreign direct investment (or FDI) as your route into an international market. This term refers to a situation in which your business acquires assets in a company abroad or sets up its own foreign business (see greenfield investments below). The first option differs from a portfolio investment – you’re not just buying equity in a firm; this is an active investment in its assets. It usually involves some level of management or technological input on your part.

As far as market-entry strategies go, an FDI is reasonably high risk and reward: this will likely involve a lot of capital and plenty of time, too, but the pay-off can be worth it. The main advantage is that your company will have a tangible base in a foreign market along with strategic benefits such as access to resources or reduced production costs.

Apple’s $507 million investment in research and development facilities across China is an example of an FDI.

Wholly-owned subsidiary

Think of the wholly-owned subsidiary (WOS) strategy as an extension of an FDI. Rather than investing in assets within the foreign firm, you’ll be buying it altogether. This is only an option if you have access to large amounts of capital to work with but offers you complete control over the organisation.

When entering a market via a WOS, you’ll get access to all of the staff who work at the company, so you’ll have plenty of local market expertise and process knowledge to call upon. However, consider that purchasing the company and tying it to your home organisation can be viewed as ‘putting all of your eggs in one basket’. All of the operational risk is pooled together rather than split across multiple entities.

Volkswagen AG is an internationally renowned WOS system. This parent organisation owns the likes of Audi, Bentley, Lamborghini, and a whole host of other car manufacturers.

Greenfield investment

This foreign market-entry mode requires you to oversee the entire operation from start to finish: you’ll purchase the land, build your base, and then carry out operations as an extension of your domestic business abroad. Greenfield investment is the most challenging, expensive, and risky route that’s open to you when expanding internationally.

The difficulties of this strategy aside, you also stand to gain the most from greenfield investment. If things go to plan, you’ll have a firm foothold in an international market with your own assets in the country. Your organisation will have complete control over its operations, ensuring that you can choose your staff to represent you, market products as you’d like, and maintain your brand image.

Hyundai is the most frequently talked about firm when it comes to greenfield investments. In 2006, the automotive manufacturer established a manufacturing plant in Nošovice, Czech Republic. The local government provided tax relief and subsidies to encourage this investment – and the factory created 3,000 jobs in its first year alone.

This guide has explored how to enter a foreign market. Along the way, we’ve covered a wide range of market-entry strategies that your organisation could use, including D2C, franchising, and WOS methods.

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