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The challenges of entering a new market

Updated: Apr 12, 2019

All businesses strive for expansion and with good reason; expanding into new markets widens audience size, thus amplifying revenue earning potential. However, in entering a new market many businesses fall foul of the same pitfalls. This article highlights these widespread shortcomings, to allow readers to be better prepared when looking to capitalise on an expansion opportunity.

1. Research your competition – Don’t go in blind

When entering a new market your potential audience will already have procedures in place to deal with the problem you are looking to solve; these already utilized approaches are all competitors of yours. Notice, competition in this sense extends beyond the firms offering similar products or services to also include all substitutes available in the market. The point being that you must create a compelling argument for the market to switch to your offering, especially if strong relationships are established with brands in the area. A simple test to evaluate the strength of your business’s offering is by gauging how well it can answer the following three questions:

· What unique benefits do you provide that are valued by your customers?

· Does your brand image speak to your target demographic?

· How simple is the transition from your customers existing purchase to yours?

This last point must not be overlooked, as even if you provide a superior product than your competition, high switching costs still pose a significant barrier to entry.

Case Study: Starbucks

It is always useful to bring context to a point through the use of real-life examples, thus a brief synopsis into Starbucks' failed attempt to penetrate the Australian coffee market will be used to clarify the importance of researching competition prior to entering a new market.

In July 2000 Starbucks opened its first store on the continent of Australia, the chain expanded quickly, opening a further 86 stores across the continent by 2008. However, the company simply replicated its US stores and made no adjustments for the local market. As a result, Starbucks incurred losses of $105million in its first 7 years in Australia and was forced to close more than 70% of its stores in 2008. A major reason for this failure was the chain not understanding Australian coffee culture.

Australia has a deep-rooted coffee culture, originating from the mid 1900’s when large numbers of Italians migrated to the country. Consequently, the coffee industry in Australia has significant resemblance to that of Italy; where coffee shops are considered social hubs and relationships with baristas extend beyond that of a simple transaction. Starbucks paid no attention to this and tried to infiltrate the market with a product which represented a very American coffee culture; where coffee is simply viewed as a commodity and the store its purchasing channel. Thus, the product Starbucks offered simply clashed with the local culture. Moreover, Starbucks kept their US menu, making no amendments for local tastes, and the highly sweetened drinks that are popular across the US didn’t agree with the Australian pallet. The accumulative effect of this lack of adjustment and the fact that Starbucks was priced at premium compared to local Australian cafes, led to the chain failing to garner popularity across the continent.

2. Adjust to cultural differences

The Starbucks case exhibited in the previous section also highlights the point that simply because a product is successful in a certain market, does not guarantee its success will translate over to a new market. The reason for this being rooted in the cultural nuances across different territories. Culture derives from history, thus a message which has context in one area of the world doesn’t necessarily have any meaning in another. This means when entering a new market, you must tailor your voice to meet the needs of your desired demographics in the region.

One approach to overcome this deficit in cultural knowledge is to build a dedicated team from constituents of the market you wish to grow within. However, this is not a straightforward process, ignoring the geographical challenges of such a task, working cultures in different countries often clash. For instance, in Japan it is common practice for every decision no matter how minute to be approved by a senior member of staff, resulting in a significantly slower pace of business compared to European companies. This raises the question; which culture does the new branch of the organisation follow? Companies often strive for a hybrid that can both satisfy the needs of the division’s employees and business’s headquarters. However, creating a culture which balances such a complex ecosystem is easier in theory than in practice.

3. Review local laws, regulation and bureaucracy

This may seem obvious, but it is sometimes overlooked. Different territories will have different laws and bureaucratic procedures. It is always good practice to consult with a lawyer to familiarise yourself with local laws that will impact your business to guarantee you don’t inadvertently break the law. This includes getting to grips with all the taxes your business is liable and exempt from.

4. Make sure marketing is an integrated process

Often marketing is an afterthought and only considered during the sales process. However, this is a limited outlook, as marketing works best when its influence can be felt throughout the development stages all the way to the customer purchase journey.

As previously mentioned, one of the most common mistakes when expanding into a new market is; assuming that prior success in an existing market will replicate under the guise of the same business plan. When entering a new market, much use can come from taking the perspective that you are launching a new start up. This mindset promotes an inquisitive nature on the needs of your audience and stops you from being anchored to pre-set assumptions about market conditions.

Expanding on this thought, launching in a new market should almost be analogous to a scientific experiment, in that every assumption made about the market is tested. This because on entry your market data will be limited, and as repeatedly mentioned it is not viable to simply extrapolate trends from your original market. Furthermore, conditions in the market are also extremely variable, as your competitors have an undetermined reaction to your entry. Considering the nature of the market is largely unknown and susceptible to large changes, it makes little sense to invest significant resources into constructing a detailed strategy on how to penetrate the market. It makes greater sense to set up operations to be as flexible as possible and have open channels of communication with potential customers and partners, so that you are positioned to adjust strategy as you gain insights into the market.

An experimental approach to business

In such an approach, you first need a list of assumptions that you would like to test; these assumptions should arise from your preconceived notions and preliminary market research. Your initial goal should be to determine the simplest and most inexpensive test to your assumptions, with proof coming in the form of actual market feedback. This because whilst detailed research is necessary to understand the market, due to variable conditions and the abundance of unknown unknowns, research has its limitations. Furthermore, after a certain point the effort required to gain additional data will not match the value obtained from the data acquired.

Once you have obtained this market feedback, you should gain insights into whether your initial assumptions are true or false. Hence why it is vital your organisation is set up to be flexible, to allow for easy response to the trends noticed within experiments. This approach presents the added benefit of creating an environment which is conducive to uncovering unexpected data and maximises overall learning.

This is an iterative process in that the insights gained from your first round of experimentation, should be used to adjust your model and refine your assumptions, after which the process should be repeated. This approach garners the greatest benefit when tests are designed to isolate response to each assumption as much as possible; minimising interference between separate assumptions in results.

5. Make sure you grow in a sustainable manner

65% of new businesses fail because of premature growth, thus, to stop yourself contributing to this statistic, before considering scaling your business, make sure you have an infrastructure in place which can support growth.

The framework stated in the previous section innately manages growth; as it launches a business at the minimum viable investment. For instance, this could refer to partnering with local businesses and utilizing infrastructure already in place rather than creating your own. This allows for tests to be performed in order to better understand market conditions at a comparatively small initial investment, whilst also allowing the organisation to easily adjust strategy in reaction to market feedback.

Alongside the capital requirements, in order to expand sustainably a company needs a team with shared values that are capable of supporting growth. Previously this article touched upon the clash of working cultures in different territories, however it skipped over the geographical issues which arise when trying to manage teams in two different locations. Whilst the advancement of communication technologies in recent years have significantly lessened this problem, it still poses its difficulties.

Hiring employees in a new location will consume the resources of your current business. Whether you are liaising between the locations yourself or whether, you have outsourced this responsibility to trusted executives, a restructuring will have to take place in your organisation. This is both to compensate for the resources which will be transferred to the new business and the additional resources that will be required by the organisation to support open channels of communication between its branches.

It is also important to note that many managers struggle with the transition required in management style as their organisation grows into a larger enterprise. The same traits which can be the reason for an organisations early success can be exactly what hinders the organisation in its later life. To do what is best for your organisation, you must be prepared to reinvent your own management style as your enterprise grows. To add to this point, you will most likely have individuals in your organisation that initially helped grow the business, but simply don’t have the capacity to take your business to its greater heights. In these cases loyalty must be shown to the organisation above the individual.

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