The European crisis is generating opportunities for companies to look for new business abroad. This article depicts a five-step framework to help companies design their market entry strategy.

Most companies do not have a market entry strategy when looking to expand their business. In fact, according to Freek Vermeulen, Associate Professor of Strategy and Entrepreneurship at the London Business School, most companies do not have a strategy at all.

Now, having no strategy might be better than having a bad strategy.

I remember the bank consortium I used to work with in Spain a long time ago. The biggest names of the industry gathered to launch a new mobile payment system. Their strategy – they claimed they had one - seemed to be invest as much money as possible into a new technology platform and then run a pilot in Valladolid to blow everything up faster. When I asked, “why Valladolid?”, their said that the market conditions there were the toughest in Spain and, I quote, “if it works in Valladolid, it will work everywhere”. After throwing a humongous amount of time, effort and resources into a useless pilot, they realised that there was no demand and the project was discontinued. I would guess that their next idea was to invest in R&D for a new ice cream “that does not freeze” and run a pilot in Alaska.

Joking aside, the European crisis is generating opportunities for companies to look for new business abroad. On the one hand, buoyant emerging economies are luring companies located in stalling economies and on the other hand, financially sound companies have an opportunity to acquire cheap assets in countries in crisis.

Before you jump into a plane to do business in China, Brazil or Gambia or to acquire distressed assets in Spain or in Ireland, I would recommend that you do a little bit of homework first. The following 5-step framework might help you realise a bonanza from your decisions.

1. Understand your corporate strategy

If you don’t have one, then it is time to write one. Your corporate strategy identifies your parenting skills. Parenting skills provide a competitive advantage. Your parenting skills cascade down throughout your internal organisation and are the basis of value creation. Make sure that you understand the scope of your parenting skills and how exportable they are. For example, if one parenting skill is your brand, understand the limits of brand recognition in new markets.

According to Julian Birkinshaw, faculty member in Strategic and International Management at the London Business School, your corporate strategy is articulated around the following five pillars:

1. Basis of value creation
2. Parenting skills
3. Scope modification
4. Internal organisation.

2. Have a location strategy

“If one does not know to which port one is sailing, no wind is favourable.”
- Lucius Annaeus Seneca.

It is pretty obvious isn’t it? So why do I keep on receiving so-called purchase mandates to look for targets “anywhere in Europe”, with loose or contradictory criteria such as “has a good recognised brand but having financial difficulties”. Usually, the companies sending those types of request tend to be looking for targets in the range of tens of millions but never want to pay a cent for assessment. Why should they? Their business development strategy is a joke and they will probably fail anyway so it is best for them to save a few thousand Euro up-front. At VC-A we do not accept those types of mandates.

Serious companies on the contrary, will understand the value added by experienced advisors. Advisors’ reports help them understand the sources of comparative advantage derived from setting up new locations. According to Michael Porter, those fall into the following four categories:

1. Strategy and companies rivalry context
2. Factors status
3. Related industries and subsidiaries
4. Demand mindset.

3. Have a viability plan

Many companies will skip steps 1 and 2 to focus on the viability plan only to realise that either the location was not right or that there is no fit with their organisation.
That was the case of our consortium and their pilot in Valladolid. Interestingly, the cost of external professional services to establish a viability plan is much higher that the cost of dimensioning the addressable market.

Recently, one of my customers, a US company, preferred to save €20k on a market analysis and went directly into negotiations with a large wholesaler to enter the Spanish and Portuguese market. In his view, with only a few % of market share, given the size of the market, he was going to make millions and it was “OBVIOUS” that he would at least recover their investment. After more than one year of negotiations, time, efforts and expenses far in excess of €20k to secure the distribution contract, both parties realised that there was NO demand for their products in Spain and Portugal.

The viability plan shall cover the following:

1. Legal
2. Financial
3. Industrial / Business
4. Aids / Grants.

4. Think of a marketing strategy

Short-term decisions shall be aligned with long term vision taking into account their impact on the business and on the market.
Remember that setting up an internet business to sell fish might be a good idea from advertising, market sizing and IT perspectives, but it is a dreadful idea from a logistic and CRM point of view, therefore think across functions.

Draw and fill a 2X2 matrix. Label the columns “Internal” and “External” and the rows “Strategic Decisions” and “Tactical Decisions”. Marketing decisions will have an impact on the treasury, the production, the human resources, the logistic and the systems.

5. Design the market entry strategy

You must be thinking that you have already worked hard enough through steps 1 to 4 and I am telling you that you have not even yet started to design the “Market Entry Strategy”?
Now you may start to understand why so few companies have a Strategy and why strategy consultants are so expensive. It is because designing a comprehensive strategy is not only complex but also time and resources consuming. To be complete the Market Entry Strategy shall be customised at each location and address the following 9 areas:

1. Decide on the “buy” or “make”
2. Define the product positioning
3. Define your customer segments
4. Select your markets
5. Define your offering mix
6. Choose your communication and distribution channels
7. Define your pricing strategy
8. Define your brand strategy
9. Try to protect yourself with licences or patents.

Pfff! Too much work and you don’t feel like paying for external advice? Then follow the strategy of this international Catalan construction company hit by the real estate crisis in Spain. Close your offices abroad, file for bankruptcy to default on your payments, slash 75% of your workforce and focus on your home market to pickup the crumbs.

At least, you will be entitled to claim that you do have a Strategy.