Expanding business operations to a foreign country is a sure way of tapping into a new market, broadening your customer base and consequently, earning more profits. Although globalization and free trade continues to open up international borders and give businesses a greater incentive to go multinational, establishing a profitable business in a new country may not be as easy as it seems. The failure of American retailer Walmart in Germany is a good example of what can go wrong for businesses entering foreign markets.
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As an entrepreneur or business owner looking to penetrate a foreign market, here is a complete guide on how to do it successfully.
1. Have The Right Reason
What is your reason for moving into a new market? Is it to earn more profits, gain access to a low-wage workforce or move closer to raw materials? Whatever the reason, it should be of strategic importance to your business. But, if you are moving into a foreign market simply because your competitor just moved, you could be headed for failure.
2. Identify The Right Country
Create a list of all the countries you wish to enter, and then conduct an extensive research on the economic, political and social environments in these countries. Find out whether the political climate is conducive for business growth. How about tax laws? Will your business part with a huge junk of its profit in the form of taxes to the local government? Look at industry situations, too. Are there any dominant firms that make it impossible for new businesses to compete? Or, is the local labor force skilled enough to meet your workforce needs? Finally, evaluate whether the local market is in need of your product. Don’t enter a country mainly because it has a large population, because you may not be able to convert it into a wide customer base.
3. Choose The Right Entry Strategy
There are not less than five strategies you could employ in breaking into a new country. They include franchising, partnering, acquisition, mergers, licensing, direct exporting and foreign direct investments. Each of these strategies presents its own unique set of benefits and challenges, so it is important to select one that perfectly suits the nature, size and financial strength of your business. Below is a brief description of some of the common entry strategies:
Franchising: Involves giving a business in your target country the right to use your business model and brand for a specified period of time. Franchising is perfect for reputable businesses with models that can be replicated easily.
Acquisition: Instead of starting from scratch, you can acquire an established business with a substantial market in your target country, and rebrand it.
Merger: If an acquisition is too expensive for you, then you can find combining with another company that operates in your potential market a cheaper option.
Direct exporting: Suitable for manufacturing firms, direct exporting involves sending your goods to the market you wish to enter and appointing agents who can sell them for you. The strategy is very cost-effective when the country you are entering has a free (or relatively free) trade agreement with your country.
Joint ventures: if you adopt this strategy, you will need to team up with another business in your country and, together, set up operations in the new market.
If you can’t find a suitable entry strategy, you may need the help of a business consultant.
4. Have An Exit Strategy
Even after getting everything right, your business may still fail to grow according to plan. Unforeseen factors such as changes in government policies and security crises may take a toll on your business. And this is exactly why you need an exit strategy. You need to, for instance, determine whether you will sell off the business or simply shut the business and call it a day. If you will be hiring locals, decide whether to put them on short-term or long-term contracts. The last thing you want after a business fails is employee lawsuits.
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It is important to learn from the success or failure of multinational companies, especially the ones that operate in your industry. The step to cross national boarders for business is one that could steer your business to bumper profits or leave your pockets hurting. Follow these steps carefully and your business may just be the newest billion dollar company in town.
Why do you think Walmart failed to successfully grow in Germany? Can you think of any other companies that failed to grow? Tell us your thoughts in the comments section below.