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Entering a new market can be an excellent opportunity for organic growth. While many market strategists generally agree that factors such as timing, scale relative to the competition, and the ability to leverage complementary assets are the keys to successful new market entry, most experts believe that for every successful market entry, about four fail.  The costs of miscalculation can be extensive. How can you reduce your risk?

Knowledge Reduces Your Risk to Enter a New Market

New markets provide opportunities for growth.

Be smart about how you enter a new market.

One of the biggest reasons for failure is relying too heavily on an inside view. All too often executives believe that a company’s skills are more relevant then they actually are, or that the potential market is bigger than it actually is.  Walking through some considerations and questions can help you prepare.  While this is a good start, it may not be enough.

The concept of reconnaissance or recon, that is exploring of a new area to gain information, aptly applies to entering a new market. The purpose of recon learn everything you can in order to improve your odds of success.

Even if you don’t have the resources to conduct extensive research, there are five affordable ways you can come up the learning curve and do recon:

  1. Read all the publications-both online and off-that cover the market.
  2. Attend as many industry trade shows and conferences as you can over a 9-12 month period.
  3. Contact other companies you do business with. They may already be in this market and may be able to provide some insight.
  4. Consider hiring an industry expert to serve as a consultant or join your board.
  5. Explore being a subcontractor to a prime contractor in the market.

When Failure Is Not an Option

reference class

Create a reference class to increase your odds new market entry success.

If you cannot afford the cost of failure consider investing in creating a reference class. A reference class allows you to play the probabilities. It is comprised of a set of companies that made similar decisions in the past to use as a reference point. This approach allows you to counteract the tendency of many decision makers to fall into the “confirmation trap”: seeking information that confirms their hypotheses.

A reference class can also be used to estimate the size of a market. Estimating a market’s potential size typically involves categorizing customers into a number of segments and then using pricing and elasticity assumptions to estimate the percentage of buyers in each category the company might capture.

Too often companies are overly optimistic about initial market estimates regarding size and growth rate. In addition, they often forget to include the life cycle stage of the market in their calculation. Your reference class can be a useful way to improve estimates of market size by serving as a benchmark. You can use your reference class to set reasonable bounds on market share. If for example the reference class attained only a 3 to 5 percent market share, that may be an important data point in your decisions.

The broader your reference class, the more likely you’ll have a realistic idea of the costs associated with attaining various market share levels. Cost estimates far below the realized costs of the reference class should make decision makers think again.

What do you need to create a reference class? A broad reference class of at least five (more is better) similar entry decisions in the past enables you to analyze more outcome possibilities. A company often doesn’t have enough reference cases internally. In this instance you can leverage the experience other companies and industries to construct a reference class.

Tips for constructing and leveraging a reference class:

  • Review what factors are most relevant for success
  • Identify and select entrants in other industries involving as many of the most important factors as possible. It’s important to uncover both successful and failed entries so that the reference class approximates the distribution of actual outcomes. The greater the overlap with the experience of the industry in question, the more valuable each example will be for the reference class. It can often be useful to reach out across different industries.
  • Once you create the reference class, use it to identify the key determinants of successful market entry and answer these types of  critical questions:
    • Which product attributes and business models have succeeded in the past?
    • Were the winners superior marketers?
    • Did they have outstanding distribution systems?

Because the cost and risk of market entry is high, creating a reference class is worth the effort. The approach allows you to combine both the inside view and outside view to improve your odds of market entry success.  What else can you do to improve your odds of success?

Selecting a strategy is critical for successfully entering a new market

Guidelines to successfully enter a new market.

Improve Your Odds of Market Entry Success

You’ve answered the questions to help you prepare for entering a new market. You’ve completed your recon.  Is there anything else you can do to improve your odds of success?  Research by McKinsey suggests there are six factors that predict success:

  1. Entering at a minimum efficiency scale
  2. The relationship of your current portfolio of products and services to the intended market
  3. Strong complementary assets
  4. Order of entry – (such as first mover, fast follower or laggard)
  5. Industry life cycle stage
  6. Degree of technological innovation

Regardless, entering a new market generally means taking a chance. There are some ways you can minimize your risk:

  • Use Affiliates: Affiliates are entities that send customers to you in exchange for a commission. A reason for using affiliates is that they may have solid footing in a market you’re trying to gain access to. Affiliates can earn as much as 15% of every purchase.
  • Mine Second and Third Tiers.  Second and third tier markets present solid new market opportunities and support factor 2. When looking at these groups, look for cluster opportunities that might suggest an untapped market by your company. Your next new market could be hiding inside your own business.
  • Tackle A Niche: A niche represent a small but profitable segment of a market suitable for your offer. One approach to entering into a niche is to partner with a company with complementary products/services that are in the targeted niche (factor 3). This can be a very cost effective approach for small firms.
  • Buy into it. This is an age-old tactic. This can be a good reason for a company to acquire another company.

As part of taking the leap into a new market, it’s important that you understand the market, the requirements to serve that market and how your offer creates value for the market. This means you are going to need to invest some time and money. This work is paramount to your success. Look for ways to shorten your learning curve about a new market with the above suggestions.  Contact us to discuss your strategy, to conduct your recon, and to develop your go-to-market plan.

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