Determine the market potential with 6 questions
Conquering a new market as an international medium-sized company
Investing in a new market requires high professionalism of the management. The basis for decision-making must be a meaningful analysis of potential. This includes “quantitative” data, but even more so “qualitative” information about the entrepreneurial opportunities to exploit the identified potential. The SANET ASEAN ADVISORS in Bangkok have developed a clear concept for the content of a Market Potential Analysis.
For international medium-sized companies, macroeconomic data are only of limited use when deciding on a market investment. Much more concretely, figures on the sales and earnings development of the industry, customers, and competitors as well as local “sweet points” or “roadblocks” for new market participants help with the decision.
The Sanet advisory group in Bangkok has developed six questions that a potential analysis must answer.
Question 1: How are my industry and market participants developing in the target market?
For the evaluation of the own chances, the development of the own industry and its customers are of high importance. Interviews with industrial associations, publications in trade journals and statistics of relevant government authorities give the best picture. In any case, a potential analysis should answer these questions:
- What is the total size and development of production and revenue of the industry in the last 3-5 years? Are there conclusive forecasts for the mid-term future?
- How are the sales markets and customers of my industry developing in the target country? So, who are the potential customers and how are they developing on revenue and earnings?
- How have the sales and earnings of potential TOP customers in the market developed in recent years?
- What percentage of the total market is accessible to me? In Thailand, for example, 50-60 % of the customers of machine builders are exclusively focused on cheap imports from China. The market for western companies is limited to the 30-40% of users who value high quality, precision, and reliability of the machine.
Question 2: How are my competitors positioned and how are they developing?
Strong local production reduces the market opportunities of importers. If international competitors dominate, it is important to determine their success criteria and strength. In any case, the following questions must be answered:
- What market share do local competitors have? What about their sales and profit development?
- How are international competitors positioned? Do you have your own sales entity or even production in the target market? What distribution services do they provide themselves and where do they work through local partners? If their own sales force is not established in the market, how do they organize the support of your key customers?
- How has the sales and earnings development of the international competitors been over the last few years? If they are not present with their own entity, it is important to determine how the sales of their local sales partners have developed. With which customers are my competitors already represented or where do they offer gaps?
- Does the market share of my competitors correspond to that in other countries where we compete with them? What conclusions does this allow for regarding our own sales opportunities?
It is a positive thing when competitors grow and make good profits. This points to a growth market that is worth entering. If, on the other hand, the market stagnates and profits fall, this indicates a predatory market. Market entry is likely to be expensive and protracted.
An investor needs to know and understand the local set-up of his competitors. If they are represented in the market with their own company or even produce there on-site, then your own chances of being successful via importers or even “remote-controlled” sales from other regions are reduced. One may not be able to avoid a direct presence in the target market.
Many companies that service South East Asia from China, for example, make this bitter experience even when their own products are superior.
Question 3: How do imports and exports of comparable products develop?
The customs classification of the company’s own products and a related research with the customs authorities can be used to determine how imports and exports of relevant products develop in the target market.
- If imports are high and strongly and increasing, this indicates that local competition is comparatively weak. At the same time, it is possible to see what tariff advantages disadvantages international competitors have in the target market. Tariffs can be used to determine specifically how these differences will affect pricing.
- Strong exports from the target market tend to indicate that there is strong local production. At the same time, however, rising exports also lead to the conclusion that, for example, a production location in the target market may be favorable and offers good opportunities for expansion.
Question 4: What are the framework conditions and market mechanisms in my industry?
For answering this question, statistics will no longer help. Only reliable field research, if necessary, also store checks, interviews with industry insiders and reliable legal information can only help to find the answers.
- Are there any special opportunities or risks in my industry? For example, is the strong automotive industry in Thailand predominantly Japanese dominated and how can we succeed in breaking into their supply chains? Are there any country-specific opportunities to consider?
- In the case of consumer goods, the potential analysis must provide information about access conditions, terms and target groups of the retailers to whom I want to sell my products. The question of whether the potential customers import themselves or buy through preferred wholesalers also determines the sales strategy.
- How do the decision-making processes in my industry work? Is the decision made “top-down”, i.e. does the management initiative decide on the “whether” and the budget of an investment and commission the purchasing department with the procurement? Or does the decision develop “bottom-to-top”, i.e. the technically responsible persons define their requirements and then work towards an appropriate budget with management. The answer to this question is a clear set of instructions on which persons and functions one influences the purchase decision as a supplier.
- What are the technical approval and import rules for my products?
- Are there any restrictions, for example, on trading and services by foreign investors? As a foreign company, am I allowed to employ local employees or is this already an illegal and tax-relevant branch office? What models and set-ups are indicated for a legal and economically viable presence?
Question 5: How are decisions made in the industry?
In every country there are “sweet points” or “roadblocks” that can make a positive or negative preliminary decision for a supplier. If you don’t know them, you must opt for risky “learning-by-doing”. Here are some examples:
- In Thailand you can hardly get ahead without a local salesman. The visit of the sales manager from abroad is often seen as a sign of appreciation, but one would like to give the signature to a fellow countryman. “Buy Thai from Thai” is a familiar word in almost all industries. The local salesperson, with whom the customer can also maintain social contacts, is an absolute “sweet point”.
- A lack of local presence is usually the end of the sales negotiation. For example, who installs and maintains a machine? Who helps with troubleshooting? If the answer is that this is done by personnel stationed abroad and that they will be flown in, the customer usually lapses into “gasping”. If he then learns about the hourly rates and the flight costs for such an operation, the conversation is at best continued as a courtesy. A lack of 24-hour service on site is usually the absolute “roadblock” to success.
Finding out these mechanisms is not possible with “Dr. Google”. Well-prepared surveys or interviews by local consultants are the means of choice here.
Question 6: What do I learn from the potential analysis? What are the recommendations for action?
Of course, numbers and their plausibility or relations among each other help to determine the quantitative potential.
However, a good potential analysis should also provide information about the qualitative potential – i.e. information about the chances of tapping this potential. This includes options concrete measures:
- Recommendations for the legal set-up. Should one enter the market via contractual partners or directly. Which legal requirements does one have to observe in both cases?
- Which services should one offer on-site? How important is a permanent contact and cooperation, for example with the R&D department of the customer? What expectations does the market have for preventive maintenance, repair, and spare parts supply?
- What USP should one communicate to the customers to show the superiority over competitors?
- How do I need to be staffed? How do I install a local sales management and how do I integrate it into my sales system?
A potential analysis for a market entry must therefore not only provide data material, but also determine “soft facts” as a basis for decision-making, which presuppose local knowledge and entrepreneurial experience. A good potential analysis contains elements of a feasibility study. It is It is precisely for this purpose that the Sanet Group in Bangkok has earned itself an excellent reputation for almost 20 years now.