A deeper look into how to strategically plan your next potential export market.
In my last contribution, I emphasised the significance around the decision-making process used to select your initial export markets and the danger in getting it wrong. In particular, I stressed how an improperly chosen export market based on short-term and opportunistic foundations can be severely damaging for most businesses.
Some of the negative consequences included short-term harm such as the waste of resources, cashflow and time, opportunity cost, and a general apathy towards future export development. The longer-term consequences were grimmer, and included a downgrade and depreciation in the value of your brand or company in a future potential trade sale.
Be analytical not opportunistic
It is absolutely critical to any business wanting to avoid these adverse results that the strategy they adopt to choose their export markets is based on analytical and well-crafted plans rather than opportunistic propositions that come along from time to time or market to market. My own company, a global skincare brand with distribution in 29 countries, is beset with such earlier examples of export markets opened hastily out of opportunistic motives ranging from a pressing need for cashflow all the way to “it would be exciting to travel there!”. But as our company matured and we took on private equity funds and recruited experienced sales executives, we began to develop and execute more sophisticated and analytical models that would help us optimize our new market selections and hone in on the ideal markets to start exporting to.
There is no perfect way to choose an export market and more often than not most initial export markets will come about unexpectedly, for example through a direct international approach from a trade show or export marketplace such as alibaba.com. Another common method to commence exporting is the obvious progression to expand to your closest international neighbor. I refer to this as the proximity method.
The proximity method
However the proximity method is mostly only effective when a bordering country shares an overwhelmingly similar retail and ethnic culture to your home market. For instance concerning US companies, Canada would be an obvious choice to first expand to owing to that country’s similar retail landscape and English-speaking majority. In Australia it would be New Zealand, a market many Australian exporters are already exporting to. However with New Zealand’s limited market size and population, it is the attraction of our South East Asian neighbours which really captures burgeoning exporter’s interests. Countries such as Singapore and Hong Kong seem an obvious starting choice, and many Australian exporters look to these countries as an initial export step to significantly growing their international revenue streams.
But are these seemingly basic steps towards building an Asia Pacific footprint the wrong method in establishing a sound international business? Should we not be evaluating our regional neighbours on the exact same basis as we would evaluate any other new export market, all at the same time? A new market is a new market after all, even if the flight there is shorter.
The answer lies in adopting an approach that evaluates not only the resources that a company requires to succeed in a market, but also the strategic value inherent in an export market to your company overall. It might just be for some companies that it is more resourceful and profitable to establish a full management and marketing presence in New Zealand as it is to appoint a distributor in a number of countries in Asia. Or it might be more valuable to skip the smaller regional export markets altogether and focus all your resources on one export market to you of the greatest strategic value and sales opportunity. The strategy should differ for each company, but the approach to finding the optimal answer does not need to.
4-Quadrant Macro-economic Model
One such effective method used by my company to help determine this in a quantitative and graphical way is the 4-Quadrant Macro-economic Export Market model. The 4-Quadrant Macro-economic Export Market model is a simple analytical tool. It integrates the two main elements essential to exporting in order to help companies determine the markets that are most suitable to their specific strategic objectives by plotting them on a simple grid divided into four quadrants. Each quadrant can represent an alternate strategy in your export plan, such as “Over Invest in these Markets”, or “Maintain Support”, or “Divest from Market”. By assigning values to each one of these two elements for each export market, you can then easily create a basic chart that incorporates as many markets as you want to consider, and ranks them against each other according to your company’s own preferences. The two main elements that I use are:
- Market Strategic Alignment (y-axis, or vertical axis); and
- Market Sales Opportunity (x-axis, or horizontal axis).
The next step is to allocate a value to each element. You can do this by ranking each market from one to 30 for example, in order of importance according to the relevant element. A more effective version would be to break down each element into a number of components, which will always be specific to your own company’s strategic objectives. For example, for my company, a consumer goods skincare company, the components that would be most influential in determining a market’s Strategic Alignment to our export objectives would be:
- Retailer Suitability– does the market possess retailers similar to our local retailers where our brand sells most successfully?
- Profitability– how profitable can the market be, taking into consideration such things as retail pricing of similar competitors and the number of intermediaries required to enter the market?
- Country Suitability– how ready is the market for our product or service, for example politically or regulatory-wise?
Other components to consider for this element could be Competition, Market presence value or First Mover Advantage value. You can put a numerical value on any strategic objective in order to plot it. Similarly, the components most influential for my company with regards to the element of Sales Opportunity are the following:
- Population Concentration– How many major cities exist in the market that make it an attractive opportunity?
- Disposable Income– How high is the average person’s disposable income that would enable them to afford my product? This would eliminate Third World countries that have large populations but very few people that could afford our product.
- Size of Skincare Market– What is the actual size of the relevant product market compared to other markets? This would differ no matter what the size of the population is, depending on the specific’s country’s desire for your product/service.
In order to measure each component you can use a ranking or point system based on simple rules you can set up to distinguish each market from another. Then you can assign each one of these components a weighting depending on how valuable each one is to you. In other words if profitability in a market is my most influential component of the Strategic Alignment element within a market, than I would assign it a value of 50 percent, and the other two components 25 percent each.
Finally you can then sum up the value of each component by first multiplying the weight by each component value, and then adding them all together to arrive to one sum value for each of the two elements. List the value of each of the elements in two columns next to each other alongside their markets, and establish a median point (refer to Diagram A). This will be where two axes cross over. Finally plot each of the two numbers along your horizontal (x) and vertical (y) axes and analyse into which quadrant they fall (see Diagram B).
The 4-Quadrant model is a quick and very effective exercise in helping you fit all of your strategic objectives into one process that spreads your tactics over several market opportunities and graphically and precisely helps you establish which markets accurately align with your overall company interests. It is also enormously useful for companies who currently have several existing export markets and want to use an efficient process to allocate and balance resources for each market during their budget process. However the model is limited to the fact it is based on number crunching, and more often than not export can be just as much an art as a science. Nevertheless the exercise will adequately assure your Board and partners that you have undertaken a diligent and disciplined approach to export evaluation, and that you have the science part well covered!
