- 16th April 2018
- Posted by: Manolis
The key element of successfully entering a new region is choosing the best market entry strategy. There are many different opportunities for doing so, from foreign direct investment to indirect methods like using a distributor or licensing.
The biggest mistakes of market entry strategies is not having it or assuming that what worked in other markets will work again in a new one. We have put together this article to give you an overview of different market entry strategies and explain what each of them is best for.
Process of entering a new market
The first step of entering a new market is conducting market research. This includes assessing the current market situation, its size and trends, how strong the competition is and what are the laws and regulations that you will need to comply to.
Based on the overview of the market, the next crucial step is choosing the best market entry strategy. The market analysis will be compared to factors such as your aims, risk tolerance, available resources, and competitiveness.
After we have found the best market entry strategy for you, we will move on to putting together a detailed business plan. It should explain what are the products/services, how you are planning to reach out to customers, how much the costs would be, etc.
Emerhub offers all the services that are necessary for expanding to a new market, from carrying out market research to compiling a business plan. We are familiar with the local markets and assist you with expanding your business by finding the best market entry strategy in Indonesia or Vietnam.
Exporting is one of the ways to enter a new market. You can set up an export company or use a local distributor. However, establishing your own export company and using a local distributor are not mutually exclusive. You can be an exporter and additionally appoint local distributors, too.
Some of the assets of assigning a local distributor include an already existing client base, supply chains, and experience in the local market.
Exporting allows a company to enter many markets at the same time without much capital investment. Its downside, however, is that you don’t control the local market you are exporting to – you depend on distributors and local buyers.
By using an undername import service you don’t even need to acquire import licenses.
Licensing means that you allow local parties to use your company’s name and produce or sell its products or offer a service under a license agreement. You will receive royalties in exchange. This is especially lucrative when your licensee holds a good position in the local market.
Although licensing can be one of the fastest and most profitable ways to expand your business to foreign markets, it also has its risks. For example, your brand image might be damaged when you don’t have a strict control over the company that purchased the license.
However, with a carefully prepared license agreement, licensing can be a great method for bigger companies to expand their markets. Especially for companies with stronger brands or for businesses with a unique technology that local players need access to.
One of the most well-known brands in the world, The Coca-Cola Company, also collects a lot of its profits through licensing agreements. Another example of licensing is Microsoft Office.
Franchising is a business strategy that allows another party to operate a business under your brand name. For example, the franchiser (you) grants the franchisee (second party) the right to use your brand name and operating systems. The franchisee is allowed to use the same marketing campaigns as well.
Franchising is also a good way for bigger brands to expand, although it demands slightly more investment than licensing. However, it is still less capital-demanding than setting up a new legal entity.
In Indonesia, all luxury fashion brands are franchisees (at least technically) because the law requires it. Some of the well-known franchises in the world include McDonald’s and Dunkin Donuts, for example.
In a nutshell, creating a joint venture means that your company partners up with one or more other parties. This can be a useful strategy when entering a new market since your company can benefit from the local partner’s infrastructure and experience in the market.
You create a third company with your partners and are more involved in the local market than in the case of licensing or franchising.
What comes to foreign investment requirements, greenfield is the most capital-demanding option out of all the market entry strategies. Starting a new company requires more capital than cooperating with a local partner.
However, compared to other strategies, where a local partner exists, setting up a new company gives you full control over the foreign operations.
Market entry strategies: capital investment and foreign ownership
Market entry strategies differ in the terms of capital contribution and foreign direct investment, as you can see from the graph below.
Exporting is the least capital-consuming market entry strategy. However, it may have the lowest foreign ownership percentage.
Starting a new company requires the most capital but also gives highest amount of control.
Outsourcing – an alternative to setting up a new company
Setting up your own company is sometimes, but may not always be, the best way to enter a new market. Although it may have the highest potential to gain profit, it also carries the highest risks due to larger contributions.
When setting up a legal entity seems too risky or you would like to test the market before entering on a greater scale, outsourcing is your way out.
Outsourcing means that all the business processes – invoicing (clients pay to Emerhub and we transfer the payments to you), staff augmentation, undername import, virtual office – are delegated to a third party, such as Emerhub. It may be the most cost-effective method when expanding to a new market.
Another perk of using outsourcing services is that domestic companies already have a better understanding of the local market. Instead of spending time on getting to know the foreign market you can focus on your core business.
Be wise and enter the markets of Indonesia and Vietnam before others collect your potential profits.