New geographic market entry – small businesses

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Question - How high risk is it to enter a new geographic market?

Answer - It is almost as high risk as setting up a new business.

Key Points

The five major issues for any business entering a new geographic market are:

1. Lack of inside market knowledge
2. The need for sufficient resources to adapt products/services
3. The need for sufficient resources to withstand early set-backs
4. The need to build a more complex management structure
5. The experience of having done it several times before

The reason why these hurdles are more difficult for small companies than for larger ones are:

• larger companies have more money, and so can generally afford to make more mistakes
• larger companies have more experts who can research the situation
• larger companies have more money to research the situation
• larger companies have more money to adapt to the situation
• larger companies are intrinsically more complex, and are therefore more used to managing complexity
• larger companies do it more often, therefore they are more experienced
• larger companies may find it easier to attract people in the market who can bring the knowledge with them – employees, partners, consultants etc.

In more detail…..

You do not need to be a small company to find expanding your sphere of operations to new geographic markets daunting. There are lots of big companies who have failed at this. Marks & Spencers is one example, when it tried to expand into the U.S.. The old Midland Bank (now HSBC) is another. It did severe damage to itself buying into the U.S. market through a company that was not all it appeared to be. Many of the early British computer companies were destroyed trying to expand into the U.S..

The same applies to entering new technology markets you do not understand. Kodak thought long and hard about how to transfer its brand from photography to digital photography, having failed previously in the video market. IBM worried about moving from main frames into PCs (justifiably, as it turned out).

Recent research shows that retailers cannot use the same formula in different countries. The unitary/global brand concept does not work. Coca-Cola has a different formulation of its drinks in each country. McDonalds have different dishes in certain markets, such as the Far East.

The fundamental problem is not knowing the market:

1. what customers want
2. where they buy
3. how they buy
4. from whom they buy
5. who to trust
6. what the legal requirements/regulations say
7. what the short cuts are
8. who the best agencies are
9. who the best haulage companies are
10. how companies do business with each other

The host country can also make things difficult for you. Japan is notoriously difficult for foreign companies to penetrate. The Russian government expects you to partner with a Russian company. India does, or at least did, the same. American companies are very suspicious of small foreign IT companies – will they be around tomorrow?

The second problem would then be, even if you do understand the market, you may not have the resources to do anything about it. You simply cannot afford the R&D for new formulations, or totally new products. You cannot find the money to build your brand on the necessary scale. Large incumbent companies are always at an advantage in this respect. They have economies of scale, established networks, proven products/services, and strong brands. How do you plan to beat that (see our article: Attacking the market leader)?

Thirdly, stretching existing people/structural resources to address new situations is to add a level of complexity that small companies may find hard to manage.

The reason why these hurdles are more difficult for small companies than for larger ones are:

• larger companies have more money, and so can generally afford to make more mistakes
• larger companies have more experts who can research the situation
• larger companies have more money to research the situation
• larger companies have more money to adapt to the situation
• larger companies are intrinsically more complex, and are therefore more used to managing complexity
• larger companies do it more often, therefore they are more experienced
• larger companies may find it easier to attract people in the market who can bring the knowledge with them – employees, partners, consultants etc.

So the first advice to a small business entering a new geographical (or technology) market is to find expertise – people who know the answers to these questions, and who can advise how much adaptation is needed. You can then make a decision as to the cost/benefits of the opportunity. These experts would hopefully be found in the market, but your own government institutions can probably provide considerable free advice – although this may well not be first-hand advice.

The second piece of advice is to limit the complexity by finding a partner in the early stages. Adding additional people to address a new market, and another layer of management to manage the additional people, is to compound the risk. There are many levels of partnership, from agencies, to distributors, to joint marketing arrangements, to joint ventures, to merger and acquisition. Which path you take will depend on how much you can afford, and how much the risk is worth to you. If it is strategically critical to enter the market (i.e. you face a burning platform in your current market), you may well be prepared to take a greater risk and to make a bigger investment. In the long term, owning core resources is better than outsourcing them, if those resources are mission-critical. Again, larger companies have access to more money, and therefore have more choices.

The least risk routes for smaller businesses are either exporting or outpost strategies. By exporting, you may find that your goods take off with the help of your partners/customers, and you can learn as you go. By sending over a skeleton staff (perhaps even one person), you can explore the new terrain at low cost. This is what Honda did to break into the U.S. market. They sent a deputation over to the U.S. for a couple of years to research the U.S. bike market. They still made a few mistakes initially, but they then knew enough to recover from them fast. This is a strategy frequently adopted by Japanese companies. Find a small niche that requires few resources, dominate that niche, then move onto the next one. Or you can piggy-back on another, larger, company entering the market. A U.S. retailer may be prepared to import authentic U.S. products from a small supplier.

Entering a new market is a high risk activity, whoever does it. You can play with large stakes, and make big gains or big losses. Or you can move in slowly, invest less, but take the risk of being copied before you reach critical mass, or of failing to reach the threshold level of investment critical to success. Larger companies can mostly survive both strategies. Small businesses may well not.

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