Strategizing footprint expansion

With increasing competition and saturation in home markets, expansion of footprint abroad is a business critical strategy for many companies – MNCs and SMEs alike. The selection of expansion countries or regions requires detailed analysis, planning and in-depth knowledge. Market attractiveness needs to be viewed in the context of countries rather than larger regions, and it is not simply enough to select one or several countries or regions; it is of significant importance to prioritize. During preliminary analysis and screening to match the company and country needs, there are several macro-environmental factors to be monitored; this article outlines them.

The diagram above exemplifies factors that were identified as general, critical components for geographic market evaluation. Your business may require additional or adjusted categories to evaluate market attractiveness. These include social, political, economic, financial and commercial considerations as well as psychographic, legal, technological and environmental factors.

Social

Social tendencies impact the demand for types of products and services. Broadening tastes, religion, leisure time, attitudes to foreign products and other prevailing social norms and practices (e.g. compliance) can all influence market planning. An ageing population may imply a smaller and less-willing workforce and thus, increased labor costs for your company. Besides demographic structure and population growth, the size of the population itself is a crucial factor. At the same time urbanization impacts economic growth and consumption.

Environmental

The general move towards more environmentally friendly products and services is affecting demand patterns as well as creating business opportunities. Ethical consumerism and heightened awareness around climate change mean certain business (like hybrid cars) may flourish while others could see their public perception tarnish (bluefin tuna, sweatshops, taxes being imposed on air travel). New entrants can benefit from this trend and present a selling point for international firms to enter into new markets.

Political

The government’s degree of intervention in the economy impacts everything from the quality of infrastructure to the health and education of the workforce. The risk of confiscation, corruption, social unrest, historical disagreements, taxation discrimination, tariff barriers, subsidies and the spectrum of goods and services a government wishes to merit or demerit are political factors with big implications for businesses.

Legal

Before making the leap into a new market, study the legalities that will determine potential profitability. These include trade agreements, price controls, import tariffs and restrictions, taxation, competition laws, product bans, Sunday closing laws and green policies. There are also employment laws, consumer laws and safety legislation to contend with and to keep abreast of. Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be developed) and demand (e.g. if the law affects the likelihood of customers buying the good or using the service). Possible restrictions of full foreign ownership should be considered as well.

Economic

New markets should be appraised based on where they are on the economic cycle - prosperity, recession, depression or recovery. A recession affects price determination and inflation may provoke higher wage demands from employees and raise costs. Consumer confidence, disposable incomes, currency and exchange rates would also be affected. Wealth (i.e. GDP per capita) and its development determines the type of products and services that are in demand.

Another economic aspect of high relevance is technology. Technological shifts affect customers, suppliers, channel members, marketing activities and also business processes as practices can be automated and products can be made more cheaply and to a better standard. Technology can also determine barriers to entry, minimum efficient production levels and influence outsourcing decisions.

Financial

Primary analyses often neglect the financial circumstances of the targeted economy. Exchange rates, for example, influence the attractiveness of the target market, especially for investments in foreign currencies but also if repatriating profit to the home country is planned. These factors as well as interest rates have an impact on investments in the targeted market. In case of high fluctuations many businesses prefer to be paid in hard currencies. Therefore, its availability should be considered when planning an expansion.

Commercial / company specific factors

Your strategic analysis should also include psychographic factors regarding your customers. These are their collective beliefs, values, attitudes, traits, interests, hobbies and lifestyles. Are they congruent with the country you have set your sights on?

The characteristics of the sector you operate in will be one of the key factors that will influence your decision of where to expand. Is specific in-country infrastructure required to guarantee a soft landing in a new market? What is the competitive situation in your sector? How intense is the competitive rivalry?

It is important to keep in mind that companies should choose to expand into markets where the macro environment complements its present business, and not simply force entry for the sake of expansion.