Having established your company in a specific market, your attention may turn to new horizons.
Diversification sounds appealing. It’s a great way to grow sales, minimize risk and increase enterprise value. For owners intending to sell their companies, market diversification and well-defined paths to a larger accessible market can push up multiples by millions of dollars.
If you think you’ve uncovered a new opportunity to broaden your customer base and generate additional revenue, it’s easy to get carried away by the excitement of wanting to make your new vision a reality.
But many companies make mistakes when creating a new market strategy. As you can imagine, some of them can be costly and even harmful to the brand you’ve worked so hard to establish. Worst case, you end up with a damaged brand in the new market and your chances of ever getting in again are lost.
Have you done your Customer Due Diligence?
Unlike commercial due diligence that focuses on segment size, growth rates, pricing, margins and trends, Customer Due Diligence exists to assess the customer base. This includes things like future customer spend and loyalty, identifying opportunities to improve the customer experience, and understanding from customers what they consider to be the most important trends and disruptors.
You should understand the customer’s hierarchy of decision-making attributes when considering a product or service. Customer Due Diligence is a growing field in private equity because PE firms know that new acquisitions fail most often because the revenue stream was misunderstood. Understanding why this is important is key for an effective new market strategy.
Who are the top players and how do you compare?
In most instances there are other players in the target market. Have you assessed where they stand relative to each other and the position you will take?
Some key areas that are often overlooked are channel power, price power and customer loyalty (switching costs). These companies lead in your target market for a reason. At the same time, they could also be stagnant. As an example, not selling their products to customers the way they really want to buy because they are locked into their traditional intermediaries.
The cost of changing models is too high until a new competitor changes the game. In markets where the power is in the channel, it’s time to get close to the customers to uncover possible competitive advantages. In industries where the real power tends to be with intermediaries, manufacturers can lose their deep and predictive understanding of what their customers want.
A SWOT analysis is a basic, often used business decision-making tool and is comprised of four elements: Strengths, Weaknesses, Opportunities and Threats. It’s important to identify each if you’re looking to create a case for why you should diversify.
One of the biggest mistakes you can make is not taking the time to understand what it will take to succeed in a new market of your choosing.
What distribution model is the best fit?
In a traditional two-step distribution model, you have the producer, wholesaler and resellers (distributors, dealers, retailers). In a one-step model you have producers and resellers. These systems have worked well for many businesses. But there are alternatives, such as direct distribution where the manufacturer sells directly to the end-user without intermediaries.
It’s crucial that you have a clear and in-depth understanding of what model your potential competitors are using when entering a new market. Additionally, you will want to know how the consumer wants to purchase and/or consume your product or service in the future. In recent years, many B2B companies have entered competitive markets with direct distribution and done quite well reducing delivered cost, being more agile, really “learning” the customer and taking share. At the same time, in other industries, value-add distributors are crucial to delivering performance, service and customer loyalty.
Again, this choice begins with a deep understanding of consumer behavior. If you don’t deliver and service your product the way your target audience wants, or if a potential competitor already “owns” the preferred planned channel to market, you’re going to encounter some challenges on the way to achieving your desired level of success.
Do you have a holistic pricing strategy to protect your current business?
Entering a new market or channel often means extending current products or introducing similar ones. This is natural and good, but it also allows resellers and customers from one channel or segment to easily make price comparisons with products the company sells through another channel or segment. It’s common for these pricing decisions to be made in company silos.
Unfortunately, studies have shown that this is generally detrimental to the long-term profitability of a company due to uncontrolled or reactive pricing decisions. It is critical that before entering a new market or channel, where direct comparisons of products can be made, or where the products are the same, that a process of price harmonization occurs across the broader businesses.
A smart price strategy will enhance margins, eliminate channel conflict (and thus customer and reseller confusion) and, most importantly, get your sales forces on board and pulling in the intended direction, versus resisting or even working against the new market or channel.
When the process of collecting accurate data and organizing it is done well; you build relevant, dependable analytics for your organization. These data points will become a key component in the development of your ideal pricing structure for your products or services and will provide the baseline market intelligence for future product introductions.
Is your organization aligned for entry?
Expert marketers understand the importance of being prepared to launch a campaign aimed at their target audience. If the team isn’t coordinated and aligned for entering a new market, the marketing messages can easily become disjointed, leading to sub-par results.
Alignment extends far beyond internal marketing and top down authority. You need to look closely at whether you have the right people and systems in place. If you just launch and hope for the best, then there’s a good chance your venture into a new market will fail.
New market entries, even with the best data, are fluid situations. Do you have the right leaders? Are they strategic or tactical? Are they effective leaders and decision-makers in ambiguous situations? Do they have a track record of quickly learning and succeeding in new businesses?
Pricing can be the most fluid when entering a new market. Do your leaders possess the financial skills to understand the impact of their price decisions on overall profitability? Do they have a good grasp of working capital?
Organizational alignment is critical. Are there new credit requirements, lead time expectations, business system requirements, inventory requirements, design changes? Do the managers in charge of these functions understand the business objective and can they deliver on their responsibilities?
You must prepare your team, create new systems, get your financials in order and ensure that your organization can handle the additional workload involved. You may need to hire new people and purchase additional tools and resources, so also be aware of this.
Clear financial projections on what you will gain from entry
Have you determined exactly what you serve to gain from entering a new market?
When it comes to financial matters, it is often best to be conservative with your projections. Under-promise and over-deliver – that should be your motto. Where did the data come from? Does the new market require a change in average margin expectation? Go deep: What data went into the assumptions underlying the financial projections? Does the new business align with your strategic objectives?
If the numbers don’t make sense, then there’s no point in rushing to market. Take time and get clear on what you can realistically accomplish by diversifying.
Making missteps upfront may not cost you anything when entering a new market. But over the long haul, the costs can mount.
Don’t be in a hurry to get into a new market. Do your research. Look at the data. Get your teams collaborating and talking to each other. Create alignment in your organization before moving forward with your new venture. And make sure you understand the likely strategic and financial outcomes!
Are you looking to learn more about business strategy? Check out our blog post: Straight Talk on Business Strategy.