International expansion is a powerful growth initiative for many companies and market entry strategy is the most important driver of success to get there. Market entry strategy determines the company’s ability to establish a market stronghold and develop competitive advantage for long-term profitable growth. Furthermore, it sets the stage for all subsequent decisions and actions.
In reality, companies attempt to enter new markets all the time, yet only one in four is successful in doing so. Failure in most cases carries devastating implications for the firm that extend far beyond the targeted market opportunity because millions of dollars are spent, and the reputation of the firm is at stake. Given the importance of market entry strategy and the high rate of market entry failure, we suggest an effective way to think through it.
FIVE FUNDAMENTAL MARKET ENTRY STRATEGIES
Five competitive strategies define entry into a new market. They include the following:
- Extension – exploit intangible assets to deliver perceived and demonstrable superior products to a new geographical market
- Product adaptation – modify existing products to maximize the firm’s local relevance
- Aggregation – derive economies of scale through standardization of products or service offerings grouped for development and production
- Economic arbitrage – exploit cost differences across markets by locating separate parts of the supply chain in different places
- Deployment – exploit strong supplier-client relationships to locate operations in a new geographical market
To varying degrees, each of these strategies is bound together by a shared set of challenges. Typically, managers opt for one or a combination to extract the maximum benefit.
DEVELOPING YOUR MARKET ENTRY STRATEGY
The appropriateness of each competitive strategy rests with the exploitation of the company’s strategic control points. For instance, extension seeks to exploit the intangible assets developed by the firm’s R&D efforts. Aggregation seeks to leverage the organization’s physical assets of production. Product adaptation aims to achieve local relevance while exploiting economies of scale and scope of its products. And so forth. In each case, the end game of market entry strategy is to exploit the relevant strategic control points in the new market.
Exhibit 1. The Market Entry Strategies And Their Implications
The importance of each strategy is reflected in the proxies of the financial statements. Companies with large intangible assets need to provide extension in their products. Organizations with a large fixed asset base need to aggregate development and production. Firms that spend significant resources on Marketing & Sales need to adapt their products to the new target market. Labor-intensive companies can seek economic arbitrage to lower the cost of labor (or other factor costs). Finally, R&D-intensive companies can follow a deployment strategy with large clients.
These five market entry strategies represent the foundations upon which to build various options. An examination of these strategies will inform their commonalities, contrasts, and constraints. Some are pure plays, some may be combined to extract maximum benefit. Although most companies follow a strategy that focuses on one the five competitive strategies, some combine strategies to extract maximum benefit.
For example, Zara, an international fashion retailer, entered the U.S. by extending its brand and by adapting products and prices to local demand. Conversely, Armani extends its brand across markets and arbitrages labor cost with textiles made in Bangladesh. Cognizant, a U.S. IT services company, uses arbitrage to develop software in India and invests heavily in adapting to achieve a local presence in the U.S. market.
A convenient way to formulate strategic options is to map competitive advantage and measure the corresponding financial benefit as shown on the strategy map.
Exhibit 2. Strategy Map: Weighing Your Strategic Options
The proxy metrics gauge the impact of a particular market entry strategy on Return on Invested Capital (ROIC). This line of thinking provokes important questions:
- What are our strategic control points (SCPs)?
- Can we leverage our SCPs in the new target market, and if so, how?
- What is our strategic end game?
- What impact will it have on our ROIC?
- Are there other advantages or combination of SCPs that maximize benefit?
When formulating strategic options, it pays for managers to focus on the exploitation of advantage and its financial impact, and to use this platform to select the strategic options with the biggest contribution to ROIC.