Speaking European: Key strategies for entering new markets
ESCP-EAP professors Davide Sola and Jerome Couturier on the basics of European expansion
ESCP-EAP is both a high-level school of management with international scope and a large-scale European institution. Its objective is to contribute actively to the development of a European economic culture.
Two ESCP-EAP professors, the school’s UK Director Davide Sola and Jerome Couturier, have researched the ways UK firms develop globally to sustain and develop their strategic positioning, as well as to renew their sources of competitive advantage.
Once companies have decided to enter a market they have a number of options available. Sola and Couturier identify these as greenfield investment, merger and acquisition and strategic partnership:
- A greenfield investment means investment in a new commercial office, manufacturing plant, distribution facility or other physical company-related structure. A direct investment of the firm, it normally entails 100% ownership and full managerial control
- An acquisition (or merger) takes place when one company purchases a majority interest in another, by stock purchase or exchange. It is one of the most used strategies because it gives instant access to sought-after resources (plant, distribution channels, knowhow and so on) and of course complete control over its management. The risk of failure attached to this strategy is very high, they point out
- A strategic partnership is a formal alliance including joint ventures, licensing agreements, distributorships or agency contracts between two commercial enterprises, usually formalised by one or more business contracts, where they mutually participate in activities like advertising, branding or product development. Typically the motivation behind forming a strategic partnership is that each partner possesses one or more business assets that will help the other
They have found that in many instances, the decision on how to enter a market is based on key drivers specific to the local market:
- Market growth. Find out how demand in that market is evolving. It is normally measured through a three to five year CAGR (compound annual growth rate)
- Degree of market consolidation in your industry sector. A market is very consolidated when a few players control more than half of the overall sales
- Customer/distribution consolidation indicates how fragmented the demand is of an industry sector both on the distribution side and the end customer base. A customer base is very consolidated when few customers buy most of the product or services within an industry sector
- Product/customer fit measures the level of adaptation required to the existing product portfolio in order to be marketable in the new market. There is perfect fit when the existing product portfolio requires only minor adaptations in design, labelling, packaging etc
- Political, legal and economic (PLE) context. How stable and supportive of economic development and freedom are the legal and economic systems of the target market? The PLE is very favourable when a foreign investor can freely choose any option to enter a market, for example there are no restrictions on maximum amount of shareholding