Four Questions to Determine if Your International Expansion Strategy is on Target
By Alex Evans and Andrew Rees, [email protected]
The sluggish American economy has many retail executives looking abroad to jumpstart growth. But varying regional consumer preferences, competitive and cultural differences, and increased management and operational challenges require tough choices when determining which countries to enter at the expense of other attractive markets. Establishing a successful international growth strategy requires a series of trade-offs to identify which markets you target first and how you enter these new regions.
Because it’s rare that one prospective market will receive a high score across all of your market entry criteria, senior executives typically need to select a new region by evaluating a series of trade-offs among the final list of countries being considered. The four most common trade-offs are:
Trade-off 1: Market size versus market growth
Market size is a key consideration, as larger markets typically have slower GDP growth than some emerging nations. France and Italy are among the 10 largest countries based on GDP, but are also among the slowest growing of the IMF’s Top 50 largest economies. By contrast, Brazil, Russia, India and China (known collectively as the BRIC markets) are alluring prospects due to the size and growth projections of their economies.
Companies need to decide the priority of near-term market opportunity versus long-term growth potential. Entry into a large market with relatively low growth may require company leaders to evaluate success over the long haul, not the next fiscal year.
Trade-off 2: Market growth versus market risk
Larger, more mature economies such as Germany and Canada receive high marks for ease of doing business, but have relatively modest annual growth. BRIC markets have significantly faster economic growth, but the business terrain can be more difficult to navigate. Still another group of smaller, business-friendly markets with more than 7% GDP CAGR – including South Korea, Malaysia and Thailand – possess their own advantages and challenges.
Trade-off 3: Global brand consistency versus tailoring to local appeal
Once a company identifies a new country, key issues to address include consumer demand generation, competitive positioning, channel strategy, regulatory issues and the supply chain.
Defining a branding strategy internationally will depend on the strength of the existing brand, local brand awareness and local preferences. To decide, companies should conduct in-market primary consumer research to better understand how the brand will be best received by new consumers.
Faulty assumptions that a successful blueprint in one country can replicate growth in another can be costly.
Wal-Mart Stores has had mixed results with its international expansion efforts. The company’s Wal-Mart de Mexico has become Mexico’s biggest retailer, and it has also established a significant market position in many other countries. But not even the world’s largest retailer is immune to missteps. In 2006, Wal-Mart sold its 85 stores in Germany at a loss of approximately $1 billion and also pulled out of South Korea the same year. The retailer’s challenges in these countries included not fully understanding cultural norms and or tailoring the shopping experience (layout and product selection) to customer needs.
Other retailers are launching entirely new stores to reach untapped demographics, such as H&M’s plans to launch a new store brand, called “& Other Stories,” in select European countries that are reportedly targeting affluent women.
Trade-off 4: Speed-to-market and cost efficiency versus control
The most effective distribution strategy depends on multiple factors, and examples of different models include:
- Shop-in-Shop: Clothing and apparel provider Christian Dior distributes its products through licensed distributors, manufacturers and exclusive boutiques. The company distributes and markets its products internationally in Asia, Europe and the United States.
- Owned Retail: Furniture manufacturer IKEA sells its products in more than 300 company-owned stores in 35 countries. Additionally, the company is also using the franchising model to establish retail operations in new regions.
Building bridges to new markets
Unfortunately, many companies build a market expansion framework using faulty assumptions that would later collapse under the weight of inadequately understood market dynamics. “Standing pat” can also incur opportunity costs that can leave companies at a significant disadvantage vs. more aggressive competition. A hesitation in market entry can give cede first-mover advantages to global competitors and make it much harder to enter regions later that already have entrenched competitors.
Because international market opportunities are increasingly pivotal to growth, companies that have the ability to analyze and enter new markets quickly can have a significant advantage over those who hesitate. Equally important, successful global organizations will embrace a new level of flexibility and agility to adapt to new market opportunities and evolve as these countries mature and grow.
Alex Evans is VP of L.E.K. Consulting; Andrew Rees is VP, and retail and consumer products practice leader of L.E.K. Consulting. Please contact L.E.K. at [email protected] for additional information.
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