Assessing A New Foreign Market For Market Expansion
Many consumer brands seek expansion outside of their domestic markets to increase mostly their profit but the reasons for expansion can be numerous. International expansion has become increasingly easier due to less restrictions on local borders and the development technology that can facility international expansion. Such as the expansion of many foreign brands into the Chinese market.
There can be several drivers for market internationalization be identified according Yip (2003) that can determine the reason for market expansion. The first driver is competitive drivers. This can be that competitors are expanding into new markets that are growing very fast or are closely related to the domestic market. A company must react on these competitive drivers to not loose in the long-run their position in these markets but also in their own domestic market as there is an increasing interdependence between markets and countries.
A second set of drivers are costs drivers. Expanding into new markets can create economies of scale that are enabled by entering markets that can offer significant growth in volume. Which can result in an economies of scale effect that can lower production costs and enable a company to stay also competitive in their domestic market.
A third set of drivers are market drivers. Market drivers help in selection the right market for expansion. If a company expands to a market with similar customers the cost of expanding will be significantly less than expanding to a new market where the customer needs vary a lot of the domestic market. This can range from the cost of localizing packaging material in a new language to manufacturing a new set of product features that are only used by a specific local market. A market that has global customers makes the cost of transferring marketing and branding assets significantly lower.
A final set of drivers are government drivers. This can range from trade policies to technical standards according to governmental requirements on products. Expanding to a market that has similar intellectual property rights and technical requirements to a company’s domestic market reduces the time and cost significantly when expanding to a new market.
According to Ghemewat (2001) companies that are seeking to expand outside of their domestic markets should consider distance. He identified four types of distance: cultural distance, administrative and political distance, geographical distance and economic distance. These types of distance can be evaluated by assessment models such as PESTEL (political, economic, social, technology, environment and legal when evaluating the opportunities for a company to expand into a new market.