Market entry cases are a recurring theme in the management consulting
This is because consultants will frequently deal with market entry when working on real projects – which in turn means they are likely to base interview case studies on recent market entry work.
Releasing new products and entering new markets is fundamental to growing any business over time. Thus, CEOs across all sectors will be consistently confronted with market-entry issues - many of which then prove complex enough to mean bringing in the consultants!
Whilst this article will aim to give you a clear overview of market-entry theory and methods, a fully exhaustive treatment is impossible here. For a comprehensive view of market-entry and related issues, your first stop should always be our MCC Academy course.
Market entry: definition
So, what exactly is market entry?
In very simple terms, it’s exactly what you would expect: the process by which a company enters a new market.
In practice, things are a bit more complicated. However, the fundamental principle that the company is getting itself into a novel situation remains. Market entry scenarios (and implicitly market entry cases) can be divided into the following broad categories:
Geographical scenarios: when a company is trying to introduce a product in a new geographical region. An example of this would be Red Bull moving into the US market.
Product diversification scenarios: when a company is introducing a new product to an existing market. The attempts by Xerox to sell computers to their customers is one such instance.
New customer segment scenarios: when a company targets a new segment of an existing market with its products. For example, if Old Spice made a fragrance for women.
Covert Market Entry Cases
As mentioned, because market entry cases are interconnected with growth, you might come across an ‘incognito’ market entry case, where a consideration of market entry is necessitated to solve the initial problem.
This means you might come across a question - such as “How can Heineken increase its revenues?” - which is not explicitly about market entry, but for which any one of the market entry scenarios could be applied.
Old fashioned market entry frameworks can be hard to adapt to these trickier “hybrid” cases.
This general problem where idealised frameworks encounter complex cases is why we at MCC always teach you how to structure your answers for yourself - so
that you can logically break down the questions you are given and deal with any market entry
aspects in a flexible manner to fit the particular scenario.
What to consider when thinking about market-entry?
A typical market entry case might sound like this:
Ecobank is a South African bank looking to expand by moving into the Congo? Should they do this?
So, how should we tackle it?
As always, the most important thing to remember is that each unique case requires its own unique approach, tailored specifically for the situation at hand.
However, there are a few elements that recur in most market-entry cases and that are helpful when tailoring our analysis. Thus, we need to consider:
- The Market
- The Company
- Strategies to enter the market
We’ll give a brief primer on each of these three elements over the
rest of the article.
The first step for a company in any market entry scenario is to understand the market it’s engaging with.
In the real world, businesses continuously engage in market research, using different techniques in order to appreciate their market context.
For an example of how this then applies in a market entry context, McKinsey recommends having a reference class of previous entrants to similar (and sometimes different) markets. By doing so, companies can analyze the results of this class of previous entrants and draw better conclusions regarding the potential outcome of their endeavor.
McKinsey give the Segway as a case of failed market entry that could have been prevented. The company failed to anticipate that Segways would be confined to running on pavements rather than roads. Ultimately, they sold only 6000 units in its first 21 months as opposed to the 10,000 per week they had predicted.
If the sellers had evaluated a reference class including not only vehicles such as automobiles, fuel cell cars, hydrogen cars, but also technologies that were dependent on infrastructure like high-definition television and telephones, then Segway’s market entry might have been more successful.
However, these studies take time and money, so companies have to consider carefully what areas to inquire into.
In the same way you, in your case interview, need to think through what questions you want to ask about the market.
An unstructured, “laundry list” approach, where you just ask whichever questions come to mind will most likely irritate the interviewer. In the real world you need to be efficient when gathering expensive-to-acquire data, so asking efficient questions in the interview will be strong evidence that you can do so when it matters as well.
1.1. Market size
The first thing to determine is the size of the market being targeted. In some interviews this might be given to you as an existing figure. However, you will often have to estimate market size (read in our article on estimation).
For example, imagine a company producing confectionery wants to expand its ice-cream business into the city of Milan. Before it does so, it needs to evaluate the potential client base.
You might start by guessing the population of Milan and then dividing it into people who are lactose intolerant (and therefore cannot eat ice-cream) or people who do not like ice-cream and people who are not lactose intolerant and do like ice-cream. You can make the assumption that each category is about 50% of the total population (remember to sense-check later). One segmentation might look like this:
Of course, there will be more than one way to segment and you will have to determine which one is most appropriate for your case. In the example above, for instance, you could have opted for a segmentation based on the age of population. As discussed in our full-length article on segmentation, make sure always to use a MECE segmentation scheme.
1.1.1. The Market Cycle and Growth
Market size is seldom static. Once you have determined (or have been given) the market size, you will have to understand how it will change over time – that is, you need to determine the market growth rate.
For example, a tech company seeking to launch a new smartphone can calculate current global demand for handsets, but will also need to factor in likely future demand as consumers in developing economies become wealthy enough to afford to buy.
Typically, the interviewer will be able to provide you with information on market growth on request.
A market goes through several phases and usually, the further along in its life cycle it is, the less likely it will be for the company entering it to make profits.
Therefore, a market early in its life cycle presents more opportunities for entrants. For example, Apple registered huge revenues with its pioneering entry into the smartphone market.
Normally, a company should avoid entering a declining phase, as this means that consumer demand for a certain service or product is dwindling or new alternatives have rendered it obsolete.
However, fast-growing markets also experience severe shakeouts – which means that, after a period of massive expansion, one of consolidation generally follows. At this stage, bigger, stronger companies use their resources to acquire or get rid of weaker ones.
Additionally, the first mover’s advantage – that is entering a certain market before the competition does – will not always translate to higher profits.
Rather, there is a high chance that companies entering later will learn from the mistakes of the first movers. Later entrants will then leverage that negative experience into improving their product, which will likely lead to higher profits.
While Google’s position as the search engine might seem perennial, in fact it climbed to the top by learning the does and don’ts from pioneers like Altavista and Ask Jeeves.
1.2 Market dynamics
Economist Michael Porter argued that, to understand a market, you need to understand the various forces that can put pressure upon it and how they function. He divided these up into five forces:
- Buyers’ power
- Suppliers’ power
- Threat from substitutes
- Threat from new entrants
- Industry rivalry
Porter’s idea can be captured visually as follows:
Let’s look at what each of them means and how they interact with one another and the market as a whole.
1.2.1 Buyers’ power
The main things you need understand about buyers when entering a new market are:
How many there are
Whether the products they are purchasing are generally available (commodities) or unique
These factors are significant in establishing the influence that buyers can have on the market. As Porter explains, there are a few scenarios in which buyers’ power is high. These include:
When buyers purchase in bulk, their purchase power is concentrated. For example, large soft drinks manufacturers purchasing aluminum cans have the upper hand because they buy in bulk and can dictate the price.
When the products they purchase are not differentiated and therefore can be sourced from multiple suppliers. For example, in the steel industry, the product is virtually identical and can be bought from many manufacturers.
When the products purchased make up a high fraction of the cost of the buyers’ own product. Naturally, in this scenario, the buyer will be very conscious about the price, as it will impact their own pricing as well. For a car manufacturer, the more expensive the steel the car is made of, the more expensive the car. This will mean suppliers will have to keep prices low to attract any purchases in the first place.
1.2.2 Suppliers’ power
The same three factors are equally important when considering suppliers:
How big they are
Whether they are dealing in unique products or commodities
These also determine buyers’ power in the market. According to Porter, buyer’s power is high when:
There are only a few suppliers and they are concentrated. Again, the soft drinks market is a perfect example of how a few major players can dictate prices. Companies that bottle soft drinks have very little choice when determining their suppliers and must accept the price they dictate.
Suppliers offer a differentiated product and/or the switching costs to a different product are high. Where a school’s entire teaching infrastructure is built around Google Classroom, associated costs will make them reluctant to switch to a different product.
Suppliers are not forced to compete with other products. For instance, furniture manufacturers can choose whether to make tables out of steel or aluminum, which keeps in check the prices of companies producing each metal.
For a detailed analysis of the power of buyers and suppliers, check out the Marketing 101 and Strategy 101 sections of the MCC Academy .
1.2.3 Threat from substitutes
The existence of substitutes or alternatives to products will also determine the profitability of a market. The existence of one or more substitutes can cause the industry to plateau and eventually decline.
For example, cash is a potential substitute for credit cards but presents a low threat to the credit card industry since it is to be expected that technological advances will eventually render it obsolete.
However, mobile pay platforms such as PayPal and TransferWise might eventually cause credit card usage to decline and with it the industry.
1.2.4 Threat from new entrants
The potential entry of new players in the market can also lead to its destabilization.
For example, with the arrival of the iPhone, the mobile phone market had to re-prioritize to face the new threat. Nokia , an industry giant, then holding 51% of the market, failed to do so, nearly went bankrupt and was eventually acquired by Microsoft.
However, market destabilization is highly dependent on the type of industry and the barriers that are set in place for those wishing to enter. The size of these barriers determines whether new players will have a hard or an easy time on the market.
For example, the pharmaceutical industry is very profitable, but has a high barrier for entry in the form of regulatory practices. New medicines need to be tested thoroughly, in turn leading to long delays and high manufacturing costs.
Alternatively, the food market has relatively low barriers to enter, hence the constant emergence of new food trucks and delis.
Let's have a closer look at some of the main barriers to entry in a market, as identified by Porter:
Entry to certain markets is impeded by high initial costs, which may be difficult or impossible to recover. These take the form of capital expenditure for new facilities, R&D and advertising, but also come from coming up against economies of scale.
In other words, incumbent companies might have concentrated so many resources (in production, research, marketing etc.) that they will be able to produce at minimal cost.
Additionally, companies new to a market may incur other costs related to a steep learning curve, which incumbents will not.
An example of a market with high-cost entry barriers is the computer manufacturing industry, where the costs or research and development are very high.
In certain industries, market entry will be made difficult by brand loyalty, where new companies will have to incur significant costs to overcome the inertia of customer loyalty.
In the soft drinks world, players like Pepsi and Coca-Cola dominate the market and have well established brands. Market entrants will need to differentiate their product in some way – such as Dr Pepper’s emphasis on its unique flavor.
3. Access to distribution channels
New companies will need access to means of distribution, which can prove difficult if competitors monopolize them.
The only way out in some situations would be for the new entrant to create its own distribution network, which may prove very costly and negate potential profits.
Timex is an example of a company which met with such high distribution costs that it had to develop its own network.
4. Government regulations
Governments may restrict access in the case of certain markets by requiring licensing (such as in the alcohol industry) or limiting access to raw materials.
Legislation can also indirectly deter market entrants through environmental legislation or safety regulations, as we saw above for the pharmaceutical industry.
1.2.5 Industry rivalry
One of the most important things to understand when considering market-entry is potential competition and degree of market fragmentation.
There two paradigm kinds of market are:
In a fragmented market, there are many players and each controls a small portion of the market. Typically, barriers for entry are low and the market is very competitive if players don’t differentiate between their products.
The retail clothing market is a good example of a fragmented market. There are many brands, with none really having monopoly of the market and offering similar types of apparel, which sparks competition. Raw materials are also easy to source and available from many sellers.
Below is a pie-chart showing a hypothetical fragmented market:
In a concentrated market, there are few players controlling most of the market, usually with high barriers for entry. Players might engage in price wars or, alternatively, try to control a specific segment of the market. The soft drink market is a good example here again.
Here’s what concentrated markets typically look like:
It is important to understand what competitors do well and what they specialize in, since you will have to analyze them in comparison to your client’s company.
A good idea is also to look at what share of the market your competitors control, so that you have a realistic idea of what market share your company can hope to gain.
Customers are possibly the most important factor when considering market-entry, since they are at the center of most of company strategies.
You should get a good grasp of who the customers are in the proposed market, how they behave and what they look for.
This crucial information will then be used in conjunction with information you have about the company to determine whether the market is a good fit (see below).
You will likely also need to segment the market appropriately to determine where the company should operate, given its strengths and weaknesses.
For example, if your client is a domestic European airline known for low prices seeking to expand operations to service North American routes, you will most likely target customers looking to travel on a budget.
2. The Company
As a consultant, after you've understood what kind of market you’re dealing with, you must turn your attention to the client. There are three aspects you should consider:
Essentially you want to understand the company’s brand, what it’s good at and how it’s perceived by customers.
For example, Coca-Cola is a top player in the soft drinks industry, with extensive experience producing and selling soft drinks. Its very strong brand image means customers generally consider it to be number one fizzy drink.
The value proposition
Here, you will want to determine what value the company needs to bring in order to enter its proposed market, as well as what skills are necessary to enter it and whether the company possess them.
Then you will want to determine whether the company’s brand and values are in line with those of its targeted consumers.
For example, a new energy drink company might struggle in targeting the Californian market, where a large fraction of consumers are very health conscious.
Similarly, Starbucks failed to penetrate the Australian market because, for Australians, Starbucks' offerings were simply too expensive. Furthermore, customers had a strong preference for smaller, local alternatives.
Capabilities and targets
Crucial here is what the company’s objective is and whether it would be able to compete in the proposed market. Would the costs of entering the market still allow for profitability?
Say a new soft drinks company wants to enter the global market and sets a market penetration target of 20% in the first year. However, the top two companies in the industry each hold close to that percentage of the market. This clearly wouldn’t be a realistic objective.
Here, information about previous attempts to enter the market from companies with similar profiles would be useful for comparison. Again, the interviewer can provide this information.
3.Strategies to enter
If, after evaluating these two main criteria, you decide that market entry is the right thing to do, you then need to consider your entry options.
There are three main possibilities:
Enter the market organically
Merge with, acquire or conduct a joint venture with another company already in the market
Enter through a distributor
Let’s have a look at the pros and cons of each of these systematically – just like consultant!
Pros: Although this means that you will enter the market without any prior contact with it, you will be in complete control over the strategy you formulate and how the company operates.
Cons: Organic entry will require significant capital expenditure – you need to make sure that your company has the capabilities (financial and otherwise) necessary for this effort. It will also be much slower than the other two options.
Uber launching on the Chinese market is an example of such organic entry.
M&A or JV
Pros: The advantages of acquiring an existing player in the market would be that the company still retains control and it is a fast way of penetrating the market. The situation would be similar in the case of a merger, although control would be more equivocal. A joint venture would also be a quick route to entry, entailing even lower costs.
Cons: The disadvantage of a merger or acquisition would be the potentially high costs of the process, as well as the ability to fully integrate the two companies and take advantage of any synergies between them. In the case of a joint venture, the main disadvantage would be the possibility that the two companies will not see eye to eye on strategy and operations and therefore will not work well together.
Many law firms choose the M&A route to gain quick access to markets by partnering with local firms.
Selling through a distributor
Pros: If you decide to sell through a distributor you will reduce costs whilst accessing the distributor’s existing network and connections.
Cons: You will have very little direct control over strategy and operations and there will be less opportunity for you to prioritize your product if the distributor is acting on behalf of more than one company.
For example, Apple chose to use IStyle as a distributor to enter the Romanian market rather than build its own distribution chain from scratch.
Formulating a strategy
Once you’ve decided that your company needs to go through with market-entry and have decided which option to go with, you will need to determine your actual strategy.
Bear in mind that, depending on which of the three options you choose, there will be more or less scope to implement this strategy. For now, let’s assume that you’ve decided to enter the market organically.
Three key things you’ll have to consider when devising an actual marketing strategy are:
This means you’ll start off by breaking up the population of a target market into consumer groups. This can be done in several ways, such as:
For example, Starbucks, trying to enter the Italian market, might divide the population as follows:
In this case, we have opted for a need-based segmentation that will allow you to take the next step, which is target your customer group.
There are several elements to consider here:
Size – is the segment we want to target big enough and will it generate the revenue that the company is looking for?
Profitability – how profitable is the targeted segment?
Growth – is the segment of the market chosen growing or shrinking?
Fit – does the segment fit with what the company offers and its strengths?
A company could, of course, choose to cater to the entire market but this would be difficult and generally undesirable. Think of Nokia again, who couldn’t figure out what its customer base was after the emergence of smartphones and got ‘stuck in the middle’, trying to do everything and eventually losing its position.
Let’s say Starbucks has decided to target the segment of regular drinkers since, it’s both the most profitable (pretty much everyone in Italy frequently drinks coffee) and fastest growing.
Taking all these factors into consideration and learning from its mistakes in Australia, Starbucks has decided it can’t compete with local coffee shops in price and wants to instead position itself as a premium coffee seller. As such, it will further target the high-revenue consumers (who make over 35k a year) who drink coffee regularly – primarily time poor business people who will benefit most from Starbucks' fast, quality service.
This article is a great primer, and gives you a solid introduction into to the key ideas around market entry theory. As such, it should be immediately useful when practicing market-entry case studies.
However, if you want to perform in top level interviews, you are going to need more detailed knowledge and to learn how to apply it. In particular, you will have to deal with more complex cases, where market entry overlaps with other concerns.
This is where generic frameworks fail most notably. They might (perhaps) cover simple, idealized cases, but real-life scenarios are never so clear cut – and navigating this complexity is how consultants earn their fees! So, in order to cope with tough questions in interviews for top firms, you need to be able to cope with realistically complex, unique cases.
The MCC Academy is your ideal tool here! It is a structured course that will provide you with all the detailed knowledge you need in order to solve these more demanding cases, including business fundamentals in its Case Interview Foundation and Building Blocks sections.
You will also need to practice seriously to form the mental muscle memory necessary to quickly structure and solve cases. Our extensive case library and meeting board give you the opportunity to practice both individually and with other applicants.
Work with the Pros
However, while practicing with peers is useful, there’s only so far you can get when neither of you has any real consulting experience.
The best way to practice is with a real consultant, and our coaching program provides you with a way to do just that! It is designed to give the best possible interview preparation and feedback by MBB consultants with at least two years of experience in the field.
All of this prep that’s required might seem like a lot to take in – especially if you are working or studying at the same time. Fear not, though! Our comprehensive mentoring program will streamline everything for you!
It is the full package, making most efficient use of your time by having an MBB consultant plan and oversee your entire prep–from planning your CV and cover letter to learning business fundamentals, through to final case practice.