Growing a business cross-border must be part of a sustainable long-term strategy. It is not enough to take advantage of a favourable exchange rate or to simply follow where others have had success. Yet even with a tough economic climate and competition fiercer than ever, Ernst & Young see high-performing companies focusing proactively on a number of strategies to take advantage of new market opportunities. Here are some of the lessons learnt.
Achieve real understanding of your potential customers
High-performing companies approach new markets by gaining a real understanding of their target customers. 34 It is like a thread that runs through their operations, determining not only what and where they sell, but where they focus their production and how they enter and operate in new markets. Going beyond the figures helps businesses develop a stronger appreciation of the real nature of the opportunities and risks – it is also the most important enabler of successful innovation in high-growth markets.
While all new geographic markets are complex to understand, this holds true in particular for today’s high-growth economies, where income levels and purchaser preferences are constantly changing. To keep abreast, there is no alternative to making regular visits and really getting to know the infrastructure, people and buying styles and, of course, the competition. By embedding themselves into the environment early in the process, senior decision-makers can establish important networks with government, fiscal and regulatory authorities, embassies and local trade associations. On-the-ground help through distributors, agents and service providers who are already there cannot be over-estimated.
Look beyond the BRICs to next wave of fast growth economies
Traditional markets in the US and Europe remain important and continue to provide a useful stepping stone for many businesses embarking on an export strategy. Indeed many high-performing businesses are focusing on a regionalisation strategy where they expand from an existing successful base into adjacent markets.
However, the economic advantages in high-growth markets represent a considerable incentive. Ernst & Young has identified the top 25 rapid growing economies 35 in its Rapid Growth Markets Economic Forecast, which in addition to highlighting the continued significance of the BRICs shows that countries in Eastern Europe and Africa such as the Ukraine, Poland, Nigeria and Ghana have been amongst the world’s fastest growing economies over the past ten years.
Many of these markets are experiencing significant urbanisation and businesses are increasingly finding that a focus on cities rather than countries is becoming a significant factor in export success. In China, for example, there are eight ‘second tier’ cites with an average population of 6,890m (in 2010) and forecast annual average GDP growth of 7.7% to 9.1% from now to 2020. Such cities are currently experiencing a real rise in wages and an expanding middle class, making them potentially very attractive as specific city targets for UK exports.
Companies need to reflect these changing demographics in their market strategies.
Innovate initially around your existing products
High-performing companies focus initially on innovating around their existing products. They seek to get further up the value curve and secure better prices for their efforts both by capturing better margins via product design and by increasing marketing spend to establish and protect valuable brand and customer franchises. Often their products are tailored further to reflect local tastes in a range of markets.
Increasing product ranges is also an important success factor – with 30% of high performers increasing their range by more than 20% in the past two years.36 Co-developing products alongside suppliers, or acquiring competitors with complementary products, can help companies to boost their market share and also achieve substantial cost savings. Ernst & Young are increasingly seeing companies collaborate with others, sometimes even with their competitors, to develop new products and technologies.
Be flexible with your choice of business model
Businesses with a track record of exporting successfully tend to be flexible in their approach to market entry, with a focus on speed of activation and integration into the wider operation.
While some economies are putting in place better governance and security for foreign investors, others remain restrictive in the business model options. High-performing companies always ensure the underlying business model is tailored to the local business environment, recognising that each market approach may be different.
Although joint ventures between multinationals and entrepreneurs in high-growth markets can be a powerful combination, they require a more defined structure than other business arrangements. Many companies have found to their cost that having an ineffective sales or distribution partner in rapid-growth markets can easily spoil the chances of success, no matter how innovative the product. It is vital for UK businesses to be rigorous in terms of partner selection, carrying out extensive due diligence on potential partners and ensuring relationships are founded on a firm commercial basis. Other models may provide a lower risk option in the early stages.
Approach talent attraction and retention with equal intensity
To compete in high-growth markets, UK businesses need access to high-quality employees with cultural awareness and relevant language skills in addition to their technical expertise. Here, the battle for the best people is intense and wage rates are increasingly competitive.
High-performing companies focus on filling technical and operational roles early on to ensure a speedy start-up and only compromise on that speed to ensure they attract the talent they really need. They rate diversity of experience more highly than nationality or ethnic origin and are positive about moving resources into new markets – technical experts in particular. Marketing, sales and, increasingly, finance people tend to be hired locally.
It is important to be agile in the development and deployment of staff. Using shared service centres or outsourcing key operational functions may provide additional flexibility in entering a range of markets and allow businesses to move more quickly than might otherwise be the case.
Share your detailed market plans with stakeholders
The ability to fund growth is generally determined by the confidence of stakeholders. High-performing companies take their stakeholders with them by sharing more detail on the potential of their innovation – and the progress they are making with it. They communicate more openly and frequently about their new market strategy and give much greater information on both market entry and product development, including problems that are being encountered.
Growing a business cross-border is not without risk and some of the biggest growth is to be had in some of the more high-risk markets. Working with stakeholders to identify the degree of risk that they are prepared to bear can be a pivotal aspect of market choice.
Maintain a long-term strategic view
Entering new markets can be costly and getting full pay-back may take time. For some, exporting is unlikely to reap great financial rewards in the short-term.
Ernst & Young’s recent report, What lies beneath, revealed that almost a third of the 900 CFOs asked about their experience of entering high-growth economies said the costs, time spent or risk was higher than expected.37 While CFOs need to retain oversight at every stage of the investment, a long-term vision is equally important, including strategic goals for the investment to evolve over time.
While the costs may be painful at first, with GDP growth rates consistently stronger in high-growth markets, the long-term outlook remains very positive despite the occasional bout of volatility. With the right mind-set, approach and commitment in place and a clear long-term strategy, new market entry or expansion offers exciting opportunities for growth.