How should SMEs decide on the way to enter the international market for expansion
Rajendra Prasad Sharma
Trade, Import and Export for MSMEs: Going global is no longer the prerogative of big corporate houses alone. There are plenty of reasons for small and medium enterprises (SMEs) to cater to cross-border markets. Before embarking on an international expansion strategy, it is important to understand a firm’s preparation to engage in international business. Due to the saturation trend in the domestic market and dependence on a few key business accounts, most SMEs need to have international exposure to B2C markets. Going abroad is also a matter of prestige for SMEs. Emerging global competition brings ample opportunities in foreign markets and a natural perception of growth potential. Courageous enterprises eventually acquire new skills and technologies from their overseas endeavors to enable their competitiveness. In addition, international market expansion helps to distribute risks by diversifying the various cost and benefit structures of overseas market operations.
Market selection and entry mode are critical for successfully launching a product/service overseas. With as many countries globally as the number of bones in the body, an SME pays a heavy price to avoid due diligence on market selection and entry mode choice along with short selling and other unforeseen complications. Market research on size and growth, competition analysis, new product development, business environment, regulations, market access (infrastructure, Internet, retail landscape, and channel partners), and macroeconomic stability (economic and consumer-related factors) influence the market Can do. , sales and profit potential. Sometimes, seemingly similar countries offer vast differences in market potential. Once the SME knows the potential demand pockets, it needs to decide on the appropriate entry mode by balancing the risk and control of market operations to get there and enter.
market entry mode
Choosing the best foreign market entry strategy depends on investment versus control. The over-dependence of SMEs on foreign agents (channel partners) makes them lose control over their marketing strategies. They either lack the necessary resources or do not have the ability to take risks. Market access factors such as legal restrictions in the host country and availability of a distributor/partner also play an important role. Indirect exports require less investment and are also less risky. Whereas the traditional SMEs use the services of export management companies and look for the modern e-commerce route as a starting point. However, direct exports expose them to cultural, currency and commercial risks.
Contract strategies such as licensing, franchising or joint ventures are moderately risky. The product/service type also plays an important role in such decisions as some offerings require an efficient after-sales service and constant consumer interaction. In such cases, direct ownership would be more appropriate. However, 100% ownership is more time and money intensive and allows for greater control. Generally, SMEs must use different market entry modes for different markets as one size does not fit all. The choice of entry mode should depend on the market potential so that the potential rewards can be worth the huge investment.
key entry mode
Exports – Indirect and Direct
Exports can be either direct or indirect to end consumers. The latter requires intermediaries such as agents or distributors to sell and serve customers. Host country intermediaries allow the company to leverage local knowledge. Also, direct export enables the company to maintain a closer relationship with the consumer. E-commerce is a form of direct export with the disadvantages of trade barriers and vulnerability to tariffs, transportation costs, and exchange rate fluctuations. However, exports are the least risky and least profitable market entry mode.
Licensing and Franchising
In this case, a company allows another entity in another country to use its intellectual property in exchange for royalties. This usually involves giving the other party the right to use your name and to manufacture or sell your products. Franchisees are a form of licensing. It allows a new revenue stream and a foothold in the market with less time or money invested. However, without tight control over the licensee, the company is exposed to risks to the brand image and potentially creating a future competitor. The franchisor believes this will help them expand more quickly.
a joint business ,JV) means the formation of a new company with another partner. The venture can benefit from the partner’s infrastructure, local knowledge and reputation in the joint venture. It is a preferred entry mode, especially in emerging markets. In contractual methods of entry, it allows closer control of the business than licensing and franchising and can facilitate rapid expansion. However, it is important to ensure strategic goal alignment of both companies. A joint venture enables the sharing of business risks and rewards.
Mergers and acquisitions (M&A) allow the advantages of joint ventures but provide better control over the market. M&A provides instant access to the target company network without conflict of interest. With aligned strategic objectives, it creates a quicker route to market. However, M&A can be costly and risky compared to a joint venture. some SMEs
investing in horticulture
Since a greenfield investment requires a significant investment of time and money, it is the riskiest proposition among the entry methods for an SME. This path may be worth following only for a resource-rich firm with a strategic international business focus. However, setting up a wholly owned subsidiary can allow the firm to have complete control over the business and brand for the highest possible return in the future. However, it is a long game with many challenges, including recruiting people, meeting regulations, understanding the specifics of the market, and gaining knowledge of local customs.
SME businesses should not only follow the entry mode in a particular international market. They should take an incremental approach after deciding on the starting point. It is advisable to take stock of the available resources, i.e. experience, financial strength and risk appetite, and gradually increase the participation of the international market. A successful market entry strategy requires answering a number of questions regarding the product, marketing, location, timing and knowledge base of the SME. Questions include:
- Do products and promotions need to be localized or adapted to meet local culture, tastes and conditions?
- Does the firm need to develop completely new products? Or could standardized offerings expand to new markets?
The localization strategy needs to adapt its message to a particular language or culture. If entering a new market requires adoption of localized website content and social media and marketing campaigns, SMEs need to invest or a joint venture with a suitable partner.
- What is the awareness level of the product category and brand in the selected market?
- Is customer education on how to use the product necessary for success in the host market?
If the product category has a high awareness level, SMEs can skip indirect exports. After some direct exports, they should try to manufacture locally.
- Which location in the host country/market area will be the gateway to the foreign market?
- Do major cities in the host country provide the best starting points? Or would one field work best? Or, would a national launch in the host market be better?
- Should there be test launches in a few locations or would it be better to do blanket entry across the country at once?
- Will the first-mover advantage allow SMEs to set play rules and build brand loyalty? Will this be a high-cost, high-risk strategy?
- Does late entry allow SMEs to imitate a competitor or find a profitable niche?
- Have the SMEs done a thorough analysis of the market, business goals and risk appetite prior to entry?
- Is the entry strategy clear and well thought out with a wise choice of partners?
Once in the overseas market, continuous review of entry modes is essential as the ground reality changes rapidly. Knowledge is the power to stay ahead of local and global competition.
Rajendra Prasad Sharma is Professor and Head, MDP, Indian Institute of Foreign Trade, Kolkata Campus. The views expressed are those of the author.