How do SMEs succeed in entering the international market?

More than ever, small and medium-sized enterprises (SMEs) need to develop a business model that strengthens their competitive position and remains resilient in the future. The reason for this is the well-known global challenges with sometimes disruptive upheavals. These include

• climate change as a result of the use of fossil fuels,
• scarcity of resources due to the depletion of raw material deposits,
• the shortage of skilled workers as a result of demographic change,
• fragmented supply chains and
• other crises such as the coronavirus pandemic or military conflicts.

Paradoxically, the StaRUG, which came into force on January 1, 2021, exacerbates this situation. At least to the extent that it places new and stricter requirements on the management of corporations for structured early crisis detection and downstream measures for preventive crisis management. Management must act in a much more prudent and forward-looking manner and constantly put the existing business model to the test.

In my view, SMEs should strengthen their competitive position above all by reducing dependencies. I mean dependence on individual markets and on specific customer groups. One way to do this is to reduce risk by internationalizing the company.

Of course, this is a big, challenging step. But it is certainly feasible, even if you are not a large corporation, a medium-sized global market leader or a hidden champion with its own staff department pursuing strategic (sales) goals at great expense. This is because SMEs can call in external, experienced specialists to formulate sales targets and develop internationalization strategies in order to strategically plan their international market entry.

Whether with or without external advice: as a medium-sized company, you should proceed in four steps when developing and implementing an internationalization strategy:

1. Step 1: Analyse your actual and target positioning

The first step in an internationalization strategy is to carry out an actual/target analysis of your positioning.

The actual analysis

The description of the actual state of your business model should identify its strengths and weaknesses. This can be achieved, for example, with a carefully conducted SWOT analysis that is based on both quantitative and qualitative aspects.

Quantitative questions
The quantitative part of a business model analysis compiles the figures on the customer structure and product portfolio and thus prepares the qualitative part of the analysis. To analyze the existing sales channel and customer structure, I recommend a classic ABC classification, which can be created quickly and is extremely helpful in the decision-making process.

The procedure is as follows: The customers (either as a whole or per country) are divided into three main categories according to their annual purchasing volumes in euros: A are the most important customers, B are important customers (but with less turnover than A) and C are less important customers in terms of turnover. If there is a higher four-digit number of customers, a fourth category D should be added for the smallest customers (low turnover, few orders p.a.).

The analysis of your product portfolio combines the results of a Pareto analysis based on turnover (or sales) with the respective contribution margins: Using the sales shares of the individual programs or variants, the products that contribute 80 percent to total sales are extracted. To rank these products, the respective contribution margins (levels 1 to 4, where possible) are added to the table.

Qualitative questions
The qualitative part of the business model analysis should provide information on at least three questions:

1. Where do we stand in the market?
2. What sets us apart - especially as a medium-sized company?
3. What unique selling points (USP) do we have?

The last question is perhaps the most difficult to answer, as unique selling points can be drawn from various areas. These include

• patents or innovations of existing products,
• High customer benefit (for example, measurable in customer satisfaction via rating portals)
• Industrial design or form factor,
• image and lifestyle as well as
• an unbeatable price-performance ratio.

The target analysis

The target analysis defines medium and long-term corporate goals in alignment with the planned innovations and investments. It revolves around two core aspects:

1. What positioning are we aiming for?
2. And how do we want to achieve it?

Point 1 describes the market position that you want to (and can) achieve as a medium-sized company in the respective foreign markets. Goals could be, for example, a leading position in terms of price, innovation or among competing brands, other goals could be to establish yourself in a niche or in a broad market.

Point 2, on the other hand, concerns the strategies for implementing those goals. The focus here is on the evaluation of various forms of market entry tailored to the respective foreign markets. The benchmark will always be the requirements of your prospects and customers. You should therefore carry out appropriate customer surveys at an early stage.

Step 2: Carry out a market and competition analysis.

The second step on the path to international market entry is a market and competition analysis. The aim is to compare your own actual and target positioning with the national and international competition. Recognized tools such as the Portfolio Matrix from the Boston Consulting Group and the McKinsey portfolio are useful here. Such tools summarize results in a clear structure and thus support the decision-making process.

Build country clusters

To compare your own positioning with the international competition, you should first of all build country clusters. Possible clusters could be Central Europe, Southern Europe or Eastern Europe, the Anglo-Saxon markets or China, whereby further and/or different classifications are useful depending on your needs.

Research

You should then carry out detailed market and competition research, which covers various factors. The most important factors certainly include

1. Markteintrittsbarrieren,
2. die jeweiligen Bedarfe von Kundengruppen,
3. nötige Investitionen sowie
4. einschlägige Megatrends.

Market entry barriers
The SWOT analyses of the country clusters must also include the market entry barriers, in particular

• general framework conditions (laws, regulations, taxes, ESG requirements, stability of the economy, etc.),

  .),

• Incoterms (terms of payment and delivery, transfer of risk, arbitration),

• Approvals (certifications, registrations, guarantee, warranty, etc.),

  Certifications (certifications, registrations, guarantee, warranty, etc.)),

• trademark and patent protection,
• standards (DIN, CE, ANSI/USA, SAC/China, etc.),
• trademark and patent protection,

• labor law (employment contracts, occupational health and safety laws, remuneration, notice periods, prohibitions on discrimination, equality requirements, etc.) and

  employment law.) and

• service levels (multilingual order processing, availability, complaints handling, EDI connection, omnichannel fulfillment, on-site customer service, etc.).

Needs of customer groups
The SWOT analyses of the markets targeted as part of internationalization abroad must also include a precise needs analysis of the respective customer groups, whereby the customer groups are to be distributed across the individual sales channels.

Necessary investments
The SWOT analysis should also take into account the investments required to enter the foreign market, for example for

• personnel (sales, order processing, after-sales service, accounting, etc.),

  in the foreign market.),

• Packaging (special packaging for sea and air freight, theft protection, etc.),
• marketing (website and print material in local language, country-specific advertising and customer approach, social media communication etc.) and
• marketing (website and print material in local language, country-specific advertising and customer approach, social media communication etc.).) and
• products (special solutions, variants for the respective foreign market, etc.).

Relevant megatrends
And finally, you should map all megatrends that are likely to influence the existing and future business model on a timeline, as well as all disruptions and changes to the political framework that are foreseeable at the time the concept is created. The effects of such megatrends on strategic goals, markets and customer needs must be quantitatively and qualitatively recorded in order to be able to compare them with the internationalization strategy.

Start an iterative process

The research on the market and competition is an iterative process that subjects the planned product, price, service and growth strategy of the SME to constant review and adjustment. However, such a review process does not have to permanently tie up operational capacities. All that is required is sustainability by the management and a monthly comparison.

The latter can be updated using a customized checklist created in Excel. Of course, this can also be organized and tracked using a specialized tool such as Falcon. The internal marketing department of the SME should be responsible for updating the review process. If there is a lack of capacity, this can be carried out by an external party who regularly takes on the task.

Step 3: Define your development strategy.

In the second step, you analyzed the potential of your target markets in comparison with the relevant competition. On this basis, in the third step you can define a development strategy to realize your targeted positioning in the respective foreign market. When defining this development strategy, which is designed to last several years, you should proceed in three steps:

Set the sales and earnings targets as an absolute target

First, set the absolute (not country-specific) sales and earnings targets. To do this, break down the domestic and international sales and earnings targets defined in your company's overall strategy. The management can then record these as milestones in the form of absolute targets.

Define target countries for market entry

In a second step, define the target countries for market entry by mirroring the foreign targets with the SWOT analyses of the country clusters. A useful tool for prioritizing the target countries is the well-known Action Priority Matrix. Divide the matrix into four clusters along an impact axis and an effort axis:

1. Quick Wins (high potential, low effort)
2. Major Projects (high potential, high effort)
3. Fill-Ins (low potential, low effort)
4. Thankless Tasks (low potential, high effort)

Enter the foreign markets that are suitable for a market entry in the corresponding fields by categorizing the foreign markets according to the impact and effort of a market entry. You can determine the impact and effort with specific data. For example, you could quantify the impact as sales potential in millions of euros, the expenditure in millions of euros or in the expected time required. Alternatively, you can have the impact and expenditure qualitatively assessed by market experts.

For a market entry, only the first two categories come into consideration, i.e. the quick wins and the major projects:

• First and foremost, of course, are the foreign markets categorized as quick wins or low hanging fruits, which promise high sales and good results despite low expenditure.
• In second place are the major projects markets with high sales potential, but which are associated with high costs and/or high barriers to entry. Such markets can often only be tapped by means of specially developed solutions. To do this, you need to have staying power (financially) and stamina.
• You can, however, eliminate the other two clusters, which are not suitable for market entry due to their low potential and possibly high costs.

Determine a ranking of the target markets

In the last step, you create a ranking of the target markets by prioritizing the markets in the first category, the quick wins. Criteria for prioritization result from a transaction cost analysis, i.e. a final comparison of costs and benefits or sales and earnings potential of the individual target countries. Based on this data, the management can then make the final decision on whether to enter the target market and thus internationalize.

Step 4: Implement your market entry strategy.

When implementing your market entry strategy, it is advisable to proceed using a step-by-step plan that works with different forms of market entry. An example:

Creating a base in Central and Western Europe
First, you need to create a solid base in Central and Western Europe with an export share of at least 30 percent. The step beyond your home market already requires an adaptation and expansion of the sales organization, customer service and (international) order processing. However, within the EU, the market entry requirements are transparent and the market entry costs are manageable.

European expansion
Expanding into Eastern Europe requires a springboard strategy. Market entry in Southern Europe serves as preparation for the leap into Latin America. In Eastern Europe, concepts for emerging markets (emerging countries such as China, India, Indonesia, etc.) can be tested.

Tapping into key markets overseas
Finally, market entry takes place in the large key markets such as the USA, China, India or Brazil. This is usually done first via local sales partners. Once the sales structures are in place and the brand is established, you can take the next step of setting up an independent sales organization.

Conclusion

Entering key international markets opens up diverse sales opportunities. SMEs that take advantage of these can strengthen their position by reducing dependencies: on individual markets, but also on singular customer groups. However, the opportunities and risks of such a venture abroad should be carefully weighed up. This is because an international market entry can only succeed for an SME in particular with a far-sighted and long-term strategy.

If SMEs lack the resources (especially human resources) to develop and implement such a market entry strategy independently, they can work flexibly and on a project basis with an expert, whether in individual phases or during implementation as a whole.