When companies start their operations, they have a smaller base. Usually, companies enter a single market and seek to increase their market shares. Once these companies grow, they may want to explore new ventures and customers. Therefore, they will contemplate entering new markets. It allows companies to grow in size and generate more revenues.
Entering new markets can have its benefits but may also come with disadvantages. Furthermore, these markets may have existing participants that make the process challenging. Therefore, companies require a market entry strategy to increase their chances of success. There are several types of these strategies. However, it is crucial to understand the concept of market entry strategies first.
What are Market Entry Strategies?
Market entry strategies are plans and procedures that companies follow when entering a new market. This market may be for the company’s existing products or services. For example, it may include expanding business to a new location. Similarly, the market may be for new products or services. For example, a company develops a new product to sell in the existing business areas.
Either way, market entry strategies are critical for companies as it helps them ensure success in new ventures. There are several models or techniques that help companies come up with new ways to penetrate markets. However, the ultimate decision for which market entry strategy a company chooses depends on its management.
Market entry strategies may fall into three categories. These include market development, product development, and diversification. The difference between these two is straightforward. The first category, market development, is for new markets for existing products and services. In this category, companies will contemplate how to promote their products and services to a new customer base.
The second category is for new products in existing markets. These products or services include improved or enhanced versions of the company’s previous products. For example, a smartphone company launches a new version of its existing phones. With these strategies, companies seek to maintain their customer base or regain lost market share.
The last category, diversification, is for new products and new markets. Usually, this occurs when a company develops a new product or service that does not relate to its existing line of items. Since the company does not have an existing customer base, the diversification market entry strategy will be necessary.
How can companies make a successful Market Entry Strategy?
The success of a market entry strategy depends on various external and internal factors. Usually, the internal factors are within a company’s control. However, external factors arise due to outside events. Either way, these factors are critical to the success of a market entry strategy. Overall, there are three criteria that companies must consider when developing a new market entry strategy.
The most critical factor for a market evaluation strategy is its suitability. Companies must ensure that they develop a plan that is suitable for their situation. As mentioned above, there are three categories into which these categories fall. Companies must ensure that they choose the proper class of strategy based on their circumstances. Similarly, their choice must include an adequate response to its assessment of its strategic position.
Another factor that plays a substantial role in a successful market entry strategy is feasibility. This factor relates to whether the selected strategy provides benefits more than it incurs costs. For this, companies must assess whether it has the resources to carry out the strategy. Similarly, it must consider the benefits from it against the costs incurred for it.
Lastly, the market entry strategy selected by a company should be acceptable. There are two aspects of this factor that companies must consider. The first is whether the plan meets the company’s objectives and are consistent with them. Similarly, the company must assess whether its stakeholders will accept their plan of action.
What is Exporting?
When considering whether to expand to a foreign market, companies will have various options. One of these is to export its products to a foreign location. With this process, a company continues its business in its existing markets. However, it enters the new market by sending goods to it. In other words, the company stays in its current position and only dispatches goods to an outside location.
Exporting extends a company’s home sales using foreign intermediaries. Usually, this process involves lower risks compared to other foreign expansions strategies. For an exporting strategy to succeed, companies must ensure their products are in demand in other locations. Once they ascertain it, they can use agents or distributors to spread its products to the new location.
Usually, exporting requires no or limited alteration to a company’s existing processes and products. Therefore, it is lower cost compared to other options. However, there are some extra costs that companies may bear, for example, duties and customs. These costs are usually a part of the cost of the product and can be recoverable through increased prices. Similarly, some companies may have reciprocity agreements that can cut these costs.
Overall, exporting is a low-risk market entry strategy. This process does not require a significant investment in foreign locations. Neither must companies take large financial commitments. However, the company’s foreign intermediaries will play a significant role in how successful this market strategy is. It is also one of the most well-known and oldest market entry strategies for foreign expansion.
What is Overseas Production?
Some companies may not expand to foreign locations through exporting. Instead, they may choose to go big and take their production overseas. Similarly, some companies may not meet the demand for their products in other locations through exporting. Therefore, they may want to expand their operations to satisfy the higher demand.
Overseas production is a market entry strategy in which a company clones its production in a foreign location. It is a strategy that allows companies to expand into a foreign market to avoid any exporting costs. Similarly, it may also provide other benefits such as access to cheaper labor, materials, or other resources. However, overseas production also requires a financial commitment and investments.
Overseas production does not depend on foreign intermediaries to be successful. However, these parties may provide companies access to more customers through their services. Despite the production process being overseas, companies will still use a centralized system for their products. It may include centralized marketing, research, and development, control of manufacturing operations.
Overseas production also involves a standardized product. Usually, the company designs and plans the product in its central location. Once done, it sends the standardized product to the overseas unit to use in production. Furthermore, companies make decisions regarding local markets in their headquarters rather than the overseas units.
What is the difference between Exporting and Overseas Production?
Both exporting and overseas production are market entry strategies for foreign expansions. However, there are several variances between them, which are also available in their descriptions above. Some of the most critical differences between exporting and overseas production are as follows.
As mentioned, exporting involves lower costs because a company will continue its operations internally. However, overseas production requires companies to clone their operations in a foreign location. Therefore, it is more costly compared to exporting.
The use of foreign intermediaries is more critical in exporting than overseas production. Since companies don’t have a unit in foreign locations during exporting, these intermediaries are crucial in marketing their products. For overseas production, companies will promote these products themselves, although through a centralized system.
With exporting, a company’s production remains in its home market. The company manufactures goods and sends them to a foreign location to its intermediaries. In overseas production, the company produces its products in the country where the unit stands.
Exporting involves lower risks than overseas production. Due to the higher financial commitment, a crash in the overseas production strategy can have widespread effects. However, the financial burden with exporting is significantly lower. Companies can recover from a failure in the exporting strategy much quicker.
Market entry strategies allow companies to plan for expanding in new or existing markets. Furthermore, there are three categories of these strategies. The exporting strategy involves maintaining production at home locations while sending goods to a new market. Overseas production, however, requires companies to take their production process abroad.