Why companies decide to enter foreign markets: decision-making

Why companies decide to enter foreign markets and how to do it

11 minutes

There are any number of reasons why companies decide to enter foreign markets.  

The decision must be guided by solid reasons that lay down durable basic foundations and based on a complete analysis of the internal situation (that of the company at the time of the decision) and the external situation (market conditions at the time of the decision). 

Now is clearly a favorable time for the global expansion of companies, and specialized magazines like Entrepreneur say that right now there are key opportunities for international expansion.

However, to be successful, this strategic step has to be taken correctly. In this article we’ll discuss the reasons why companies decide to enter foreign markets and some keys to doing so successfully.

Why companies decide to enter foreign markets: decision-making

The five reasons companies decide to enter foreign markets

Opening up to new target customer groups

Sometimes, companies have exhausted all the possibilities for growth in their native market. This is one of the main reasons why companies decide to enter a foreign market where they hope to expand their potential customer base.

Improving revenues

The strategic decision to enter a foreign market is often also driven by the search for higher revenues. In other words the natural consequence of reaching a larger customer base is obtaining a greater number of sales and by doing so improving revenues.

Optimizing brand recognition

Successfully entering a foreign market provides irrefutable proof of the quality of a company’s services and products. Companies expanding their business beyond their borders may be looking to improve their global brand image.

Minimizing the risk of doing business in a single market

When companies operate in a single market, they are exposed to that market’s fluctuations. National economic crises or seasonal ups and downs commonly have a profound impact on those companies’ ability to do business. Broadening the scope and entering foreign markets reduces this kind of risk, so that the revenues from one location offset any possible slackening business in other areas. 

Extending product life cycles

Designing and implementing new products is a costly process for companies. For many business models, once a market has been saturated with that product, it’s hard to keep generating profits with it. Expanding into foreign markets makes it possible to extend a product’s life cycle without necessarily incurring the costs of creating a new product. 

How to enter foreign markets

Choose the right market

Not all markets are right for all companies, and choosing the market is key to success. 

Some of the factors to keep in mind when making this decision include the size of the market (how many potential customers may be waiting in the market chosen), the possible penetration of competitors in the same market, and where the target market is (at what stage of development and at what point in the cycle) economically, socially, and politically. Ideally, all these criteria will be aligned in favor of making the right decision.

Decide on the strategy

Some of the most common strategies followed by companies to enter a foreign market include:

  • Export: the direct sale of products or services in a foreign market. There is minimal risk involved compared to other strategies but it requires the cooperation of intermediaries.
  • Concession: permission given to a foreign company to sell products or services. In return, the concessionaire pays a fee.
  • Franchise: a step further than a concession, in that the franchisee is given greater responsibility in the chosen foreign market to act on behalf of the company that has decided to internationalize. In return, the franchisee has to follow strict standards (quality, marketing and branding, etc.).
  • Joint venture: creation of a new company that includes in this case one foreign and one local owner. Responsibilities and benefits, among other important issues, need to be explicitly and thoroughly spelled out.
  • Direct investment: the company decides to invest in setting up a subsidiary in another country, either by starting from scratch or by acquiring an existing company.

Adapt to the market

When making the decision to approach new foreign markets, companies have to get to know their new target and align themselves with its needs and specificities.

This includes everything related to the customs and preferences of the new location, which often determine tastes for the product or service itself or for the way it is advertised or sold.

In any business expansion plan, taking into account the native language of the new location will also be crucial.

Companies looking to operate successfully in several markets should consider developing multilingual communication that not only caters to the preferences of their new customers but also avoids misunderstandings.

In this regard it is extremely important to have access to high quality translation and interpreting services such as those offered by SeproTec, guaranteeing fast, accurate, affordable, and properly localized translations for the new target customers of companies deciding to make the  leap and expand internationally.

The secrets to successfully entering foreign markets 

There are many reasons why companies decide to enter foreign markets, but they all involve a desire to broaden horizons and create opportunities for success.

Ensuring success is hard. But there is a key basic tenet that all successful processes have followed: know the market you’re going to do business in and adapt to it. 

Correctly using the local language stands out as pivotal in this process, so companies don’t fall behind potential local competitors who know how to communicate effectively with their potential customers.

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