Entering new geographical markets can be a great way to grow. In fact, according to our recent research it is currently the second most sought-out growth strategy among private company CEOs behind M&A. Expanding operations into new territories, however, can be risky and presents significant cost in terms of time and capital spent.
Before pursuing such a strategy, CEOs must carefully weigh the costs and benefits and establish a process by which to evaluate a potential move.
Before a company considers any expansion plan, it should make sure it’s financial and operational house is in order. Issues such as inability to manage a positive cash flow or conflicts within a management team could jeopardize a successful expansion and taking such a move on could further stress any issues already at hand.
At this stage of the evaluation, companies would be wise to consider the ways in which they might actually make the move, whether through organic expansion (opening a new office in another location), an acquisition of an existing company in the target market or a strategic partnership with a peer company in that market. If a balance sheet is strapped, a partnership of some sort may be the best way to more efficiently “test” a new market presence before spending the cash required or bringing on more capital to finance a full move.
Assessment of the company’s core strengths can help inform this decision. If an organization has established reliable sales channels or partners which operate in multiple markets, these resources might be ready and willing partners to help a company offer its products and services more broadly.
Selecting a market
Choosing a new market to move into is a bit of a chicken-or-egg scenario. Before a CEO decides he wants to take on new territory, he might already see reason for doing so and proof that it will work. Perhaps the company has started seeing demand from customers in a neighboring market traveling specifically to consume its goods or services. Alternatively, a company may simply have decided this is their best option for growth and will therefore need to strategically select the target of their expansion.
In the latter case, it is an exercise of determining which markets hold the most growth potential. A CEO might ask himself what markets resemble those he in which he currently operates and can most easily replicate his business model. He might also identify which markets have the least competitive presence and where he could easily capture market share. To this end, conducting a competitive analysis is crucial.
Analyzing the market
After selecting an appealing market, a company should figure out exactly which products and services it wants to offer there and also evaluate the existing customer base. Most significantly in this process, a company must understand why its current customers buy and make some well-informed assumptions about why its new customers might.
For example, if a third-generation restaurant equipment supplier has a loyal customer base in a tight-knit neighborhood, one assessment might be identifying whether local restaurants choose to do business with them because the establishment has had a long lasting presence and strong ties in the community or because their equipment is superior to competitors.
Upon finding the answer, a company should determine how this might resonate in the target market. In the case of the restaurant supplier, before setting up a separate location in a new area, it would be prudent to examine whether the same loyalty dynamics exist with a company already in operations there or whether there is room for a new player in town.
Only after considering the new potential customer base and its receptivity, can a company truly evaluate its potential competitors. It would also be of value to analyze growth rates in the new market, set expectations surrounding demand and suss out any factors that could serve as barriers to entry.
Developing an entry strategy
Determining the method of entry, put simply, whether the company will build or buy it’s way into the new market, is frankly a decision that should be made at the start of the process and based on available resources. Formalizing and cementing this strategy, however, is a vital next step.
Should an organization pursue an organic growth strategy, the first few decisions will center on employees, location and product. This includes making management and staffing decisions (Should you hire an outside manager who is familiar with the new market or move someone from inside who knows your product already?). If the business is a brick-and-mortar business, a physical location must be identified. In addition, a CEO and his team should determine whether the new market will require any new products or if all of the companies current services will be offered in the additional location.
Seeking out a merger, acquisition or partnership to move into a new market is a whole nother story, and a different article, but regardless setting a timeline for the entry and the associated deadlines leading up to the “ribbon cutting” is a vital practice to make sure everything goes according to plan.
One strategy to mitigate risk is to run a pilot project in the target market. The project should be significant enough to paint an adequate picture of what a large-scale rollout would look like but not too demanding or a strain on available resources.
While it may seem odd, a company looking to enter a new market should also prepare an exit strategy, acknowledging the possibility that the expansion does not succeed. While moving into an unknown market is of course a risk, if a business enters into the process in an educated and informed manner, runs the appropriate tests, and follows a structured, strategic plan, market expansion is often a great recipe for growth.