What it takes to enter new markets now
Opportunities for market expansion are plentiful but extra due diligence is a must
5 minute read
- Companies that aim to expand in today’s fast-changing environment may need to enhance their market analysis and planning
- Gaining a thorough understanding of customer behavior, competitive market dynamics and risks is essential
- A robust market analysis can enhance decision-making and allow for risk mitigation
For companies with strong cash reserves or access to capital, today’s economic environment may offer promising opportunities to expand. In fact, 37% of middle market executives said they plan to do so in the next 12 months, according to research recently released by the National Center for the Middle Market (NCMM).
When expanding into new markets, successful entry requires a thorough understanding of a market, the potential competitive barriers and risks a company might face, and the tools to mitigate those risks. In the current environment, companies may need to develop a deep understanding of local economies, as well as public health and demographic trends.
Expansion into new markets can be a significant driver of growth. The DNA of Middle Market Growth, a recent report from the NCMM, found that many fast-growing businesses share a focus on seeking new customers and moving into new territories. Among companies rated the most innovative, 22.9% were expanding into new markets with the introduction of new or improved products and services; more than 20% of their revenue came from such offerings.
However, it is important to lay the groundwork for expansion carefully. “Expansion into new markets can be unpredictable,” says Fabiola N. Brumley, vice chairman of business banking at Bank of America. “Thorough due diligence can help you anticipate challenges and reduce costly mistakes.”
How key economic indicators show a new market’s potential
Sources: Bureau of Labor Statistics, Investopedia, Bureau of Economic Analysis, OECD
Enhancing market research
Making an informed decision to enter a new market requires in-depth research into regional trends as well as trends affecting your targets — whether they are consumer or business-based — on a frequent and ongoing basis. “Economic benchmarks such as jobless rates, housing starts, population trends, personal savings rates and consumer confidence can be telling indicators,” says Brumley.
At the same time, businesses need to understand how those key economic indicators have influenced demand for their specific products and services historically and in today’s W shaped recovery. B2B firms may also benefit from analyzing trends among their customer’s customers. A wholesale manufacturer of high-end furniture, for example, would need to understand both trends in retailers’ behavior and the habits of the end-customer. Such an analysis could reveal a need to shift gears to, say, more moderately priced products.
It is also important to consider whether changes in demand are short-term or long-term. An uptick in sales brought by a weather-related emergency like a hurricane may not endure as long as demand tied to ongoing circumstances, such as the coronavirus situation. “You have to pivot accordingly,” says Brumley.
No matter how much opportunity exists in a new market, it is essential to analyze the competition thoroughly. In today’s more global and virtual environment, potential rivals may be based both within your industry and target market — and in other fields or locations thousands of miles away.
Evaluating potential competitors’ financial might is essential, especially if rivals are bigger and have the muscle to withstand such tactics as a pricing war. “It’s really important to understand the ‘What if?’ scenarios,” says Brumley.
Bear in mind that your competition may arrive through the adoption of new and accelerating technologies. Consider whether you can take advantage of these technologies or if they may shake up your industry in a way that replaces your product or service.
“Expansion into new markets can be unpredictable. Thorough due diligence can help you anticipate challenges and reduce costly mistakes.”
As you consider entering new markets, it is important to evaluate your company’s internal capabilities thoroughly, making sure you have both the talent and operational efficiencies needed for success. One office desk manufacturer expanded its product line to more than 100 products by streamlining digital marketing, warehousing and distribution in order to reduce costs and focus on innovation, noted the NCMM study.
For companies expanding into unfamiliar foreign markets, it may be especially important to find tools to mitigate risk. When dealing with new customers, offering financing terms may be risky. In those cases, companies can engage with financial institutions to mitigate risk through the use of commercial letters of credit. Brumley points to a company entering new markets in Africa that had goods seized at the border because it hadn’t secured nor minimized its payment risk. The use of trade financing tools such as letters of credit could have avoided that crisis.
Ultimately, businesses can turn to a variety of advisors for help navigating the risks involved in entering a new market. Apart from bankers, attorneys, and accountants, that might also include commercial insurance agents, economic development experts and public health officials. Says Brumley, “Understanding what’s happening to the health and wellness of the community you’re entering and how that could impact your ability to sell and recruit talent there is important.” When you’re expanding into new markets, you can never have too much information.
- Consumer trends
Fabiola N. Brumley | Vice Chairman of Business Banking, Bank of America