I am pleased to introduce you to the initial steps of choosing and entering a foreign market. This article has two parts; the first part talks about selecting a foreign market to target, and the second one focuses on the initial studies to decide the market entry.
The markets are different, and the economic scenarios are also different. I will try and convey the most common views. A sector-wise analysis, I hope to share in a subsequent series.
Foreign market research
Foreign market research is of particular importance. It evaluates the size and potential of markets, serving as the basis for selecting export markets and its segment. It is a prerequisite for setting up business policies that are adapted to each market and its environment. Researching an export market is a complicated job due to distinct environment, inadequate quality secondary data, high cost of information, research coordination, difficulty identifying comparison variables and verify the value of data due to researching different contents.
The goals of researching international markets are aimed at a general understanding of new market, accurate and specific understanding of the elements of the business plans, adaptation in the business policies, and optimisation of commercial activities in the market.
The contents of international market research include:
- Market potential research: It is the study of the quantitative demand – current, trends, the predicted demand. Study the fixed qualitative variables – customer characteristics, consumption behaviour, age, income, purchase behaviour, lifestyle, and aspects related to the consumption culture.
- Market penetration research: The study of geographic conditions (transportation costs, logistics, coordination, infrastructure etc.), trade conditions (competition and applicability of business policies), statutory conditions (import policy, dispute settlement procedures, foreign investment, commercial contract provisions) and fiscal conditions (customs duty, import tax, trade taxes etc.)
In addition, research on international markets is of decisive significance in studying how foreign markets are organised and the possibility of setting up factories abroad
Select foreign market
The selection of export markets is a complex and vital issue in deciding the export trading strategy. The company’s success is directly proportionate the quality of research that goes into the selection. Quality research eliminates costly mistakes outside the home market. Selection is a process of assessing market opportunities and identifying export market directions. Exporting companies must study each product or market’s role in the general investment policy and determine the most effective market-product pair.
The selection of export markets is often based on two main bases: the company’s goals and policies. Businesses also consider other factors such as factors associated with profits, growth and risk factors.
There is no fixed strategy to select an export market. Generally, the businesses are following a concentrated approach/centralised strategy or distributed strategy.
Market concentration strategy: the company only selects and applies penetration policies in a few markets. This strategy will make the market division more clearly and reinforce its competitive position in those markets. This method’s advantage is to take advantage of the specialisation strategy, accumulate knowledge about deeper export markets, manage well, and build relationships with partners. It is also cost-effective, and combined with the cluster approach; it saves valuable resources.
The main disadvantage of this strategy is that it only operates in a few markets which limit the business flexibility, increases the risk and makes it difficult to deal with market fluctuations.
Distributed market penetration: the strategy to disperse or expand the market and simultaneously deal with many export markets. This strategy has the main advantage of being more flexible in business and limiting risks in business. Due to the business’s spread, it is challenging to penetrate deeply, management activities are more complicated, and more enormous market access fees. The other disadvantage being fragmentation of export efforts.
The choice of export market strategy depends on the company, the product, the market and the business factors.
While choosing the foreign market expansion strategy of the business proactively, even if pursuing a particular strategy, it must also achieve the goal of selecting the most promising market to penetrate. In this regard, the selection can be made using either of the procedure as follows:-
This market selection procedure often relies on the similarity between the market structures of the foreign market sector in terms of political, socio-economic or cultural characteristics to the home market. Businesses moving to the market area with the highest degree of similarity with their domestic market. This is a form of market selection based on experience.
A high degree of economic, political, social and cultural similarity often finds market areas in the same geographic area, i.e. adjacent markets. If these geographic areas form economic alliances, the basis for the similarity is even more pronounced (e.g. EU, ASEAN, NAFTA, SAARC, etc.). Usually, these markets will benefit from reduced tariffs, reduced costs for market access and culturally homogenised.
Criterion based selection
The narrowing process is conducted systematically to ensure that all priorities of an organisation are being met. This procedure is carried out through the following main steps:
Overall assessment: This step aims to identify a market that is attractive to the business. An essential element of the overall process. Unattractive choices are eliminated and the ones meeting the criterion retained for further evaluation. Broadly the parameters of evaluation being:-
- Political environment;
- Cultural fit;
- Economic scenario; and
- Competition analysis.
The result of this assessment is to obtain an overall picture of potential markets so that those markets can be compared according to the most crucial criterion as per an enterprise’s goal.
Business capability analysis: An enterprise’s ability to expand the market can only be assessed in the specific market context. Ideally, it also allows evaluating the suitability of an organised way or mode of operation. Standing down on a market and competitors, businesses need to establish a relative assessment of their strengths and weaknesses. Derived from its international competitiveness, each enterprise needs to ensure a high level of its capabilities.
The above analysis related to market factors and firm’s capabilities is the basis for selecting the business’s target market. These markets must be a combination of the high attractiveness on all criteria, with the business’s ability to bring a significant competitive advantage, and a large market share to ensure the enterprise’s goals. Following parameters are to be objectively calculated and evaluated to zero in on geography to expand.
- Market size;
- Potential and opportunities;
- Competition analysis;
- Market entry barriers;
- Tariff and non tariff government barriers;
- Economic & political stability;
- Business competitiveness;
- Product acceptance;
- Cultural alignment;
- Ease of doing business and
This brings to the end of part 1. Do share your comments and feedback.