By Rajendra Prasad Sharma
Trade, import and export for MSMEs: Going global is no longer a prerogative of only the large corporate houses. Reasons are plenty for small & medium enterprises (SMEs) to cater to cross-border markets. Before undertaking an international expansion strategy, understanding a firm’s readiness to engage in international business is crucial. Due to saturation tendencies in the domestic market and dependency on a few key business accounts, most SMEs need international engagement in B2C markets. Going abroad is also a matter of prestige for SMEs. The emerging global competition brings ample opportunities and natural perception of growth potential in foreign markets. The daring enterprises eventually acquire new skills and technologies from their foreign forays enabling their competitiveness. Moreover, international market expansion helps distribute the risks by diversifying into different cost and profit structures of foreign market operations.
The Market Selection
Market selection and entry mode are crucial for successfully launching a product/service overseas. With as many countries globally as the number of bones in the body, an SME avoiding due diligence on market selection and entry mode choice pays a heavy price with low sales and other unforeseen complications. Market research on size and growth, competition analysis, new product developments, the business environment, regulations, market access (infrastructure, internet, retail landscape, and channel partners), and macroeconomic stability (economic and consumer-related factors) can impact the market, sales, and profit potential. Sometimes, seemingly similar countries present stark differences in market potential. Once the SME knows the potential demand pockets, reaching and penetrating there requires a decision on the appropriate entry mode by balancing the risk and control of the market operations.
The Market Entry Mode
Choosing the best foreign market entry strategy boils down to investment vs. control. SME overdependence on overseas agents (channel partners) makes them lose control of their marketing strategies. They either lack the required resources or the risk appetite. Market access factors, such as legal restrictions and distributor/partner availability in the host country, also play a significant role. Indirect exporting requires lesser investment and also is less risky. While the traditional SMEs use the services of export management companies and the modern ones find the e-commerce route as a starting point. However, direct exporting exposes them to cultural, currency, and commercial risks.
Contracting strategies such as licensing, franchising, or Joint ventures are medium risky. The product/service type also plays a crucial role in such decisions since some offerings require an efficient after-sales service and continuous consumer interaction. In such cases, direct ownership will be more suitable. However, 100% ownership is more intensive in time and money and allows more control. Usually, SMEs should employ different market entry modes for various markets since one size does not fit all. The entry mode choice should depend on the market potential so that the potential prize can be worth the hefty investment.
Key Entry Modes
Exporting – Indirect and direct
Exports can be either direct to end consumers or indirect. The latter requires intermediaries such as agents or distributors to sell to and serve the customers. The host country intermediaries allow the company to take advantage of local knowledge. At the same time, the direct exports enable the company to retain a close relationship with the consumer. E-commerce is a form of direct exporting with disadvantages of trade barriers and tariffs, transport costs, and vulnerability to exchange rate fluctuations. However, exporting remains the least risky and the most petite rewarding market entry mode.
Licensing and Franchising
In this case, a company allows another entity in another country to use its intellectual property in return for royalties. It generally involves granting a second party the right to use its name and manufacture or sell its products. Franchising is one form of licensing. It allows a new revenue stream and a foothold in a market with little time or money invested. However, without tight control over the licensee, the company remains exposed to the risk of brand image and potentially creating a future competitor. The franchisor believes this will enable them to expand more rapidly.
A joint venture (JV) refers to creating a new company with another partner. The enterprise can benefit from the partner’s infrastructure, local knowledge, and reputation in JV. It is a preferred entry mode, especially in emerging markets. Among contracting methods of entry, it allows for closer control of the business than licensing and franchising and can facilitate rapid expansion. However, ensuring both companies’ strategic goal alignment is crucial. A joint venture enables the sharing of business risks and rewards.
Merger & Acquisition
Mergers and acquisitions (M&As) allow the advantages of the joint venture but offer better control over the market. M&A provides instant access to the target company networks without conflict of interest. With aligned strategic objectives, it creates a speedy route to market. However, M&A can be costlier and riskier than a joint venture. Some SMEs
Since a greenfield investment requires a significant investment of time and money, it is the riskiest proposition among the entry modes for an SME. This route may be worth pursuing only for a resource-rich firm with a strategic international business focus. Although setting up a wholly-owned subsidiary can allow the firm complete control over the business and the brand for the highest possible future returns. However, it is a long game with many challenges, including recruiting people, meeting regulations, understanding the market’s nuances, and gaining knowledge of local customs.
The SME businesses must not just follow any particular international market entry mode. They should adopt an incremental approach after deciding on a starting point. It’s advisable to take stock of available resources, i.e., experience, financial strength, and risk-taking capacity, and gradually increase the international market involvement. A successful market entry strategy requires answering a range of questions about the product, the marketing, the location, the timing, and the knowledge base of the SME. The questions include:
- Do the product and promotion need to be localized or adapted to meet local culture, tastes, and conditions?
- Does the firm require to develop entirely new products? Or the standardized offerings can extend to the new markets?
Localization strategy needs to adapt its message to a particular language or culture. If entering a new market needs localized website content and adapting social media and marketing campaigns, the SME needs investing or a JV with a suitable partner.
- What is the awareness level of the product category and the brand in the selected market?
- Is customer education about using the product essential for success in the host market?
If the product category has a high awareness level, the SME can skip indirect exporting. After a couple of direct exports, they should look at trying to manufacture locally.
- What location in the host country/market region will be the gateway into the foreign market?
- Do major cities in the host country offer the best starting point? Or would one region work best? Or, will a national launch in the host market be better?
- Should there be a test launch in a few locations or a blanket entry in the entire country at a time will be better?
- Will a first-mover advantage allow the SME to set the play rules and build brand loyalty? Will it be a high-cost, high-risk strategy?
- Does the late entry allow the SME to imitate a competitor or find a profitable niche?
- Has the SME conducted a thorough analysis of the market, business goals, and attitude towards risk before the entry?
- Is the entry strategy clear and well-thought-out, with a wise choice of partners?
Once in the foreign market, a continuous review of the entry mode is necessary since ground realities change quickly. Knowledge is the power to stay ahead of local and global competition.
Rajendra Prasad Sharma is Professor & Head, MDP, Indian Institute of Foreign Trade, Kolkata Campus. Views expressed are the author’s own.