Going global

Despite global market uncertainty, international expansion remains an important growth strategy for many. However, successful execution is not based on market size and growth characteristics alone. It is predicated on having a robust investment case and a fit-for-purpose market entry strategy, both of which must be underpinned by a detailed understanding of the market dynamics and key drivers of success. In this article, CIL explores how to plan for going global.

An international expansion strategy can present an effective way for businesses to serve new clients and new markets. The investment rationale that sits behind this strategy must be based on a company’s specific requirements. An understanding of these requirements is essential for developing cohesive and effective strategies, as they determine which markets are most attractive and how best to enter them. For example, international expansion offers an attractive growth pathway, by allowing businesses to:

• Escape market headroom constraints like high penetration, competitive intensity and price pressure
• Access large, high-growth markets with significant whitespace, demand, and low competitive intensity
• Serve demand from existing ‘anchor clients’ abroad, which can support revenue visibility and market testing
• Realize operational and cost efficiencies that can drive improved margins across the business
• Mitigate risk for businesses exposed to market cyclicality, seasonality, political or regulatory risk

Evaluating market attractiveness

The challenges and opportunities that underpin a successful international expansion strategy are unique to each business. They can be complicated and difficult to identify, and they are often overlooked in favor of less relevant or more generic considerations.

A successful approach to international expansion planning goes beyond evaluating obvious commercial factors, such as market size, growth and competitive landscape. It should include a detailed understanding of the market context and rationale for international expansion. One must also consider:

• Value creation rationale: will international expansion result in benefits beyond top-line revenue, such as operational synergies, technology sharing or cross-sell opportunities?
• Value proposition potential: does the market structure and dynamics support the business’s value proposition?
• Local market dynamics: are local regulations, norms, and tendencies favorable to the company’s offering? If not, can it adjust?
• Market entry pathways: what level of investment is required for effective market entry? Which strategy is best suited to ensuring sustainable success and achieving the investment case – an organic, inorganic (i.e. M&A) or a strategic partnership approach?

Case study: the importance of a robust market entry strategy

The US is a large and highly attractive market opportunity for many European businesses, but favorable market dynamics alone won’t guarantee a successful international expansion. For example, CIL recently worked with a leading beauty product brand to demonstrate the importance of a robust market entry strategy.

For the UK-based provider, the US was identified as an attractive market. Its value proposition, based on product functionality, was found to resonate within the US, despite different cultures and market trends.

Despite being well-positioned for market entry, our client’s initial performance in the US was underwhelming. This was largely due to a broad, multi-channel distribution strategy that was designed to emulate its approach in the UK and did not account for the need to build a brand reputation in the US.

After a detailed review, the decision was made to terminate existing distributor relationships in favor of a more focused approach. The company subsequently established a strong brand presence through a limited number of strategically selected retailers. As a result, the US now accounts for more revenue than the UK.

Case study: challenging market entry pathway

CIL recently supported a US supplier of specialty MRO products in assessing the feasibility of European expansion. The business sells into industrial facilities utilizing a direct-to-end customer go-to-market model to maximize margins.

Europe was identified as a potentially attractive expansion opportunity based on the size of the market, similarity to the US, and strong indicators of interest in the business’s value proposition within key end sectors. Our analysis determined that the best market entry strategy would be to acquire an equivalent provider and leverage its infrastructure and end-customer relationships.

However, CIL’s research revealed a scarcity of like-for-like acquisition targets due to the structure of the European market, which is dominated by a highly competitive distributor channel. This left our client with three strategically undesirable options for market entry:

1. To acquire a specialist distributor that operates an unfamiliar business model focused on high volume sales with a low margin (contrary to its existing high margin, direct-to-customer MRO model).
2. To move up the value chain and acquire a manufacturer that sells exclusively through the distributor channel and does not have end-customer relationships.
3. To enter the market organically by building its own infrastructure and establishing manufacturer and end-customer relationships, requiring significant investment and time to produce material results

While the European market was highly attractive the lack of a desirable market entry pathway ultimately led the company to prioritize other growth opportunities.

CIL works closely with private equity and management teams to support the growth strategies behind hundreds of exciting businesses each year. We use an evidence-based approach that enables our clients to maximize growth potential in new and existing markets. Find out more.