By Rodney Johnson

Prescient Consulting Inc.

Entering new markets is a task virtually all serious enterprises must do at one point or another. It is a difficult task, and can be a painful one, full of false starts, stops, and quick withdrawals. It is not the event that is to be dreaded, however, being one of the key signs of business success in our age of globalization, but the problems created by time and distance that routinely accompany it. Getting risk management help as early on in the process as possible will go a long way to minimizing problems later on.

Fortunately or unfortunately, the tougher markets seem to be the lucrative ones - perhaps they are the lucrative ones because they are tough to enter and are therefore somewhat insulated from competition. This means companies seeking real profits in new markets must find a way to manage the associated risks in doing so since they cannot afford to ignore lucrative markets just because they may be tougher to enter. Managing the risks means identifying them one by one, getting to know them (if only to be more comfortable with them) and making a plan to minimize their impact on the business. Managing the risks doesn't mean erasing them. Most of the risks involved with market entry are business systemic risks that cannot be solved, only managed. They are often the same risks a company faces doing business in the home market, only made more complicated and potentially painful by the distance issues. Communication problems, cultural problems, principal/agent problems, legal differences, and oversight and control issues, all act as multipliers for regular business risk making everything more difficult and more risky.

Risks Related to Indirect Entry
Smaller companies often choose to enter new markets in an indirect way - with someone else representing their interests. This means these companies partner, choose distribution channels, designate OEM manufacturers, etc. then recede partially or wholly from the picture. Indirect market entry is usually chosen when it doesn't make much economic sense to open a subsidiary in the new market due to small market size or lack of expected sales. Smaller companies often give out the duty and some of the benefits of creating market space to a local representative who has promised to create a place in the market for the product.

Intellectual property protection becomes issue number one as monitoring of the product and the target market agent are difficult. Maintaining control of all trademarks, copyrights, and other intellectual property is an immediate issue. How does a company know what is going on when they are not looking? If the distribution channels chosen are not trustworthy they may make parallel products, play with prices, or introduce fakes into the channels, themselves. Once the company has braved the tough times to establish the market, counterfeits, and parallel products spring up as a direct result of that success.

How does a company know who will be a good partner and who won’t be? Many companies are not who they say they are. They don't have the background, experience, or financial resources they purport to have. Many times, a partnership is created after only a PowerPoint presentation and a few emails. Furthermore, a target market partner may be who they say they are, and be strong, but later, when no one is looking, head out in a direction the principal company hasn't sanctioned.

Most of the problems of indirect entry can be solved by first doing a thorough due diligence of the target market partner the company will work with. Partnering should be followed up with regular checking of the market activities of the partner and surveys of the market itself, looking for violations of the company's intellectual property. A third-party may be needed to watch the partner or distribution channels and regularly report back on sales volume, brand-related activities, pricing, media coverage, etc.

Problems with Direct Entry
Direct market entry is favored by large and medium-size companies who want more control over their brand, expect a higher return in the market per dollar invested, and have more startup resources. The risks associated with directly entering a market are no less frightening, and revolve around directly operating in the new market. Direct entry means opening an office or factory and the associated investment levels are much higher.

In direct entry finding good information, training, or intelligence on basic and fundamental issues like law enforcement, economic system, political uncertainty, labor union militancy, and workforce capability come into play. Any one of which can derail what would have otherwise been a great market opportunity. Due diligence is just as important here as it was in indirect entry. Performing due diligence checks on landlords, lenders, partners, channels, and suppliers is a must. Due Diligence doesn’t just mean financial due diligence, it often means finding out if the factory exists at all, if it is owned by the people who say they own it, and if it has the capabilities it is supposed to have. It means actually checking out the bullet points in the presentation, and all the claims made in emails.

Performing pre-employment vetting on new hires at all levels is important to ensuring the company is hiring who it thinks it is hiring. Performing a needs assessment and making a crisis management plan up front will ensure the design of your offices and manufacturing facilities is done in a proper way before the cement goes down. Finding reliable companies to provide facilities guards, security training, and executive environmental acclimatization are key to ensuring the new organization doesn't fall prey to theft, fraud, or even violence.

Get Help Early and Often
The moral of the market entry story is that companies must exercise diligence and foresight in addressing market entry risks before they spiral into full-blown problems. In doing so, companies should not attempt to go it alone. Knowledge of the local market and security environment is invaluable.