An essential and often recurring topic for many businesses is growth and the ways to successfully achieve this. It is a fundamental part of a company’s corporate strategy, which defines the destination towards where the company aims to move. Typically, companies start doing business in a single home market with a limited product/service portfolio. Over time, companies can follow different paths for growth, depending on their corporate strategy.
When companies have made the most out of opportunities in their current market(s), for instance when ceilings are reached and performance is stable, it can be logical for them to think about expanding business into new ones. These new opportunities could bring the company growth in different ways; increasing sales and share, cost reduction, an extended client base, a broader geo presence, diversification, new talent opportunities, etc.
Corporate growth strategies
Although growth can lead to many benefits for businesses, there is no single strategy that leads to the most effective growth. Moreover, there is a wide variety of growth strategies companies can follow to expand business. One of the most cited and applied theories on this matter is the work by Igor Ansoff (1957). The Ansoff matrix, also referred to as Product/Market Expansion Grid, is a tool that can be used to analyze and plan growth strategies. Based on two axes, regarding existing versus new products and markets, growth strategies are divided into four types:
1. Market penetration
2. Market development
3. Product development
Each of these types has its own advantages, challenges, and risk profiles. The strategy with the least adjustments to the current situation is market penetration, where the main goal is to increase market share in the current Product Market Combination (for instance by intensifying marketing and promotions). With a product development strategy, companies develop new products/services for an existing market. A market development strategy focuses on entering new markets, can be either geo markets or customer groups, with existing products. The strategy with the most radical changes compared to a company’s current situation is diversification. Diversification can be related or unrelated to the current business. Integration moves are also part of diversification. This strategy generally has the highest risk profile.
Market development: identification and selection of target markets
An often chosen strategy is market development. New markets can be new customer groups or new geo markets. Many companies expand their business internationally at some point in time and with increasing globalization these geo expansion efforts are only multiplying.
Entering foreign countries can be tricky though. You have to adapt to a new culture, regulations, entry barriers, competition. Misfits with market needs can occur, compliance with the regulatory and taxes framework must be met but often differs from the home market situation, supply chain complexities might occur, and so on. Different foreign countries have different characteristics regarding these subjects, implying that a company’s ability to compete (and win!) in different countries varies. Next to knowing the characteristics and possible barriers of new markets, companies should know the market size, growth and potential to be able to choose the most attractive markets to enter. In order for a geo expansion strategy to be successful, market intelligence is crucial to identify and select the most attractive markets.
Market development: market entry options
Next to deciding which foreign market(s) to enter, companies must choose how to enter the new market. Entry mode decisions are inherently linked to the pursued growth strategy. There are multiple ways to enter a market, differing in extent of risk and degree of ownership / control. Generally, entry modes can be categorized into equity-based modes and non-equity-based modes. The former refers to foreign direct investment (FDI) types, while the latter distinguishes between contractual agreements. FDI types typically provide a higher degree of control but come with higher risks compared to non-equity-based types. The most commonly used modes of international market entry are; exporting, licensing, franchising, partnering, strategic alliance, acquisition and greenfield venture (launching a new, wholly owned subsidiary). These are ranked from low to high on level of investment risk and degree of ownership and control.
The choice for a specific entry mode with preferred risk and control profile strongly depends on a company’s proposition, its strengths, the desired entry/setup time and the way the new market is organized. The latter specifically referring to the value chain, distribution channels and purchase processes. Furthermore, culture, production and labor costs, sourcing possibilities, and the regulatory conditions in the new market are key subjects to consider when choosing between entry modes. Depending on a country’s characteristics regarding these subjects, some entry modes fit better with the company’s proposition and strategy than others. Market intelligence is needed to get a clear view on the market characteristics and how the new market is organized, enabling businesses to assess the fit of their proposition and strategy with different entry modes.
Companies pursuing growth through a market development strategy should ask themselves two key questions:
1. Which market to enter?
2. How to enter?
Market intelligence plays a crucial role in answering both questions. Firstly, MI is used to identify and select the most attractive markets based on market size, growth, potential, and the company’s ability to compete. Secondly, MI provides an overview of the target market’s value chain, distribution channels, sourcing and production opportunities and costs, regulations, consumer preferences and culture. Market insights in these topics support appropriate market entry strategies that fit with a company’s proposition and strategy. Successful geo expansion and market development strategies are therefore based on data driven market research.
Author: Mark Diesveld
Source: Hammer, Market Intelligence