Predictors Of Success When Entering A New Market

Success depends on dividing your internal environment into two components - "doing the right thing" and "doing things right".  The former is the business strategy and the latter is operations.

Nevertheless, as long-term survival will depend on "doing the right thing" - a thorough assessment of your current business strategy, taking into account all the present and predicted changes in your external business environment is necessary. This review should be carried out under five headings:

1. Activities - now and in the future - Perhaps your company will add "design" to its list of activities. Perhaps you will cease manufacturing and rely on imports or contract manufacture by a third party
   
   
2. Markets - now and in the future - Existing markets, new market segments or new geographical markets
   
   
3. Products - now and in the future - Existing products or line extensions or new-to-the-company or even new-to-the-world products
   
   
4. Competitive strategy - What is your competitive strategy now?  Can you define it?  Does it need reviewing?
   
   
5. Competitive advantage - Do you know what makes your company different and better than its direct competitors?  Is that attribute something that new customers will value as highly?
   
   

Uppermost in the mind of many manufacturers whose markets have been hit hard by the global financial crisis, is the desire to diversify and enter new market segments using their existing manufacturing expertise and equipment. 

Often they are advised that they need to conduct a market study to determine such factors as size, growth rates, profiles of current suppliers, margins, barriers to entry, etc. Such studies are time consuming and expensive and can only be justified if the market segment under consideration is large, complex and still growing rapidly.

It is so much easier to enter a growth market, as the following example illustrates:

Here we have a rapidly growing market although, as the figures in column 3 indicate, the percentage growth is declining year by year from 100% in Year 2 to 50% in Year 5.

Even when Supplier 3 enters the market in Year 4, the sales of Suppliers 1 and 2 continue to increase even though Supplier 1's percentage market share declines from a high of 56% to 34% in Year 5. Likewise Supplier 2's percentage drops from 50% to 30%. In contrast, Supplier 3 immediately grabs 25% market share and increases that to 36% in Year 5.

Supplier 3 is "permitted" to take 36% of the market because this pie is growing very rapidly and whilst the market shares of Supplier 1and 2 continues to decline, their sales continue to rise.  Under this scenario a thorough market study might well be justified.

But how many market segments are you aware of where the total pie is continuing to grow vigorously? 

And what happens when a new supplier attempts to enter a barely growing, static or declining market? Any sales that the newcomer makes will reduce the market share and the number of units sold by the existing suppliers. If Supplier 3 attempts to enter this market with a "me too" product, invariably the market entry tactic will be price. Customers will relay that new price to Suppliers 1 and 2 and ask them to meet it - which they will - as they have no alternative.

The only way Supplier 3 can gain a share of the market supplied by Suppliers 1 and 2 is through innovation - most probably product innovation. Supplier 3's offering needs to be perceived by customers as being both different and better.

Now you don't have to conduct an expensive and thorough market survey to determine your product's chances of success. For one thing, past growth rates, past supplier margins and profitability are largely irrelevant. In the current economic situation, you cannot extrapolate the present and future from the past.

What you can do is to take your different and better product to the key customers in this segment and determine whether there is a need for your innovation and what customers might anticipate paying for it. If it's a substitute product, all the better. Diffusion will be quicker. Only then should time and other resources be spent on defining the market parameters. And really the only key number that you need to know, is whether there are sufficient potential sales and margins to justify the investment required to put it on the market.

Reduce competition wherever possible. Two possible strategies are to:

• Use existing distribution channels
  
  
• Manufacture the product but market it through an existing supplier
  
  

The relative size of the market is important. If you need to sell 100 units per annum for the product to be viable, and the size of the total market is 500 units, your product will have to be very significantly better in the customers' eyes. On the other hand, if the total market is 10,000 units, your sales target represents just 1% and the product does not have to be so highly differentiated. 

Another key factor is the number of customers. It is far easier to enter a market with 1000 customers than it is one with 10. With 1000 customers, the need for product differentiation is less as there is bound to be a sub-segment of the total market that is disenchanted with some aspects of their current supplier's performance.

Lastly, there is the number of suppliers. A market with 50 suppliers is easier to enter than one with 5. There is a much greater chance of slipping in under your rivals' radar.

There is no doubt in my mind that a truly differentiated product provides the best chance of diversification success.

If the potential to be different and better with the product is limited, the next place to look is the supply chain. How can IT be used to increase responsiveness to customer demand?

The table below will help you quantify the attractiveness of the market that you are considering entering:

Factors 1 - 5 relate to the market; 6 - 12 to your product.

In all factors, the higher the rating the better. However, the lower the scores on factors 1 - 5, the greater the need for your product to be truly "different and better" and to score highly on factors 6 - 12.

One final point. Never forget that whilst you are contemplating paddling in someone else's pool, someone else may have designs on yours! TLC towards your current customers has never been so important.

Buy Graham Haines’ Audio Seminar CD from the Resource Centre:

Being Different & Better Than Your Competitors

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