Most companies focus their international expansion efforts on markets with evident existing demand for their products or services. But through a series of more than 100 interviews with executives and multinational organizations, the authors found that it is also possible (and potentially quite profitable) to expand into global markets without clear signs of demand. The authors outline three strategies that have helped firms around the world successfully launch into such markets: Start with a small initial investment, find creative ways to introduce local customers to an entirely new product category, and pivot the business to meet local needs. While entering a new region without existing demand is risky, a bit of patience and creativity can help companies preempt competition and find – or create – substantial long-term demand.
When it comes to choosing new markets to enter, the safe bet is to focus on regions with visible, existing demand for your products or services. Hyundai, for example, only entered China when the Chinese auto industry was already growing about 20% per year. Amazon waited to venture into India until the country’s e-commerce sector was growing at 35% per year. And Uber launched a motorbike taxi service in Indonesia after the success of local rivals Gojek and Grab demonstrated the popularity of similar services in the region.
Clearly, this strategy can be effective. But there is also a downside: When the potential of a market is no longer a secret, stiff competition is inevitable. That’s why some companies choose to take a different approach to international expansion. Through a series of more than 100 in-depth interviews with leaders at multinational organizations, we found that while many firms focus their efforts on markets with strong existing demand, it is in fact possible to launch successfully in a new market that has almost no evident demand – and if done right, this can be a highly effective approach to sidestep competition and establish a strong market position early. Specifically, we identified three strategies:
Without clear evidence of strong market potential, companies must make educated guesses abound how demand is likely to change over time. For example, a political shift or technological innovation might suggest that a certain economy or sector is likely to grow, social trends might indicate a coming change in consumer behavior, or a rising middle class might create new interest in certain products or services. Depending on an organization’s level of confidence in these assumptions, it may make sense to test out a market with a small initial investment before making a larger commitment. Taking baby steps makes it possible to validate a new market, learn about its idiosyncrasies, and adjust accordingly…without going bankrupt in the process.
For example, when Italian luxury brand Zegna opened its first store in China, the country seemed to be an improbable source of growth. At the time, a Zegna suit cost three times the average annual salary of a Beijing resident, suggesting that demand would be miniscule. Nevertheless, the company opened a few small stores, making it the first Western luxury goods company to expand into China. These stores operated at a loss for five years, but because its initial investment was small, Zegna could afford the losses. The company patiently continued to experiment and build up their local operations and talent base, even bringing managers from Italy to train Chinese staff who had no experience with distributing these kinds of luxury goods.
With essentially no competitors, Zegna was able to build a well-known brand among China’s elite. At the same time, the Chinese market steadily evolved. Rapidly growing upper and middle classes generated increased demand for Zegna’s upscale clothing, while a relaxation of restrictions on foreign companies eliminated the requirement to partner with local distributors, further enhancing Zegna’s ability to profit from the market. In response to these market shifts, other luxury brands’ interest in the Chinese market grew, but Zegna had a major advantage due to its established customer base and well-trained employees. In 2010 – less than 20 years after Zegna first entered China – it was one of the top five luxury apparel brands in the country, accounting for 50% of all luxury menswear sales. Today, one-third of Zegna’s global revenue comes from China, in large part due to its early, measured entry into the market.
Similar strategies have been effective around the world. When the Israeli company Teva Pharmaceuticals first expanded into the U.S., the American drug market was dominated by brand-name medicines. There was limited demand for generic alternatives, especially not from a small foreign startup like Teva. Nevertheless, the company made a small initial move: It provided less than 10% of the upfront capital to form a 50/50 joint venture with a U.S. partner, W.R. Grace, that was interested in Teva’s technologies and expertise. This minimal investment enabled Teva to gain a foothold in the American market, and it quickly paid off when a change in U.S. regulations eased the approval process for generic drugs and spurred a market boom. The U.S. is now the world’s biggest generic drug market, and Teva’s early entry helped the company to become a market leader despite its limited resources.
Introduce New Product Categories
While it’s often easier to sell a product if your customers are already familiar with similar products, there’s a lot to be gained if your company manages to be the one to introduce people to an entirely new category of products. That means first understanding the local market and then developing a novel value proposition that will resonate with local customers.
For example, when Italian cruise line Costa Cruises first entered the Chinese market in 2006, most Chinese tourists had never even heard of cruising – ships were thought of only as a means of transport. But Costa identified an important market trend: a growing interest among Chinese elites in anything that felt novel, foreign, and in particular, European.
The company launched just one small, 1,000-person ship in Shanghai to test out the market (exemplifying the start small strategy, too). While such a relatively small ship might not have gotten much fanfare in the U.S. or Europe, where travelers were more accustomed to cruising, its novelty and foreignness ignited excitement among Chinese customers. Costa offered a brand-new vacation experience: comfortable guest rooms, international cuisine, Italian opera performances, wine-tasting classes taught by European sommeliers. It was a huge hit. Since then, many other cruising companies have entered the Chinese market, but Costa’s early entry and effective branding have enabled it to maintain a strong position.
Of course, not every venture will be an immediate success. When Indonesian food distributor Tolaram first entered the Nigerian market with its instant noodle product Indomie, the company initially struggled to gain traction. Many customers in Nigeria had never eaten or even seen noodles, and so the product’s popularity in Asia failed to translate to this new market. Tolaram soon realized that without existing demand for noodles, a new approach was necessary: The company focused its marketing on Indomie’s low cost and nutrition, which resonated with a customer base that was low-income and interested in healthy foods. Despite its rocky start, Indomie has now become a household name in Nigeria, and accounts for more than 70% of the country’s instant noodle market.
Pivot To Meet Existing Demand
Of course, not all pioneers benefit from favorable market shifts or a warm response to a novel type of product. LinkedIn, for example encountered scarce demand when it first entered China. The company initially offered the same professional networking site as it did in other countries – but despite its success elsewhere, the majority of Chinese users found the entire idea of the site strange and unappealing. Displaying resume-like profiles on a social media site made people uncomfortable, and in a culture that emphasized building relationships before doing business, using public profiles to facilitate business through weak ties felt unfamiliar and inappropriate. At the same time, regulatory restrictions on social platforms made it increasingly challenging for LinkedIn to operate.
In response, LinkedIn shifted the focus of its China operations from the site’s primary social function to its recruiting features. Chinese customers were familiar with other job-hunting sites, and LinkedIn’s global network of top companies and recruiters offered an advantage that competitors couldn’t match. LinkedIn realized that it was much better positioned to meet this existing demand than to create new demand for its core product among consumers who were lukewarm on the very concept of a professional social network. So, earlier this year, the company announced it would shut down its social service in China and instead launch a new job application site.
Of course, only time will tell if this shift will pay off. But at least on paper, it seems to align a lot more closely with the cultural and regulatory landscape of the Chinese market, as well as with the ways in which LinkedIn’s limited customer base had already been using the app. If you’re having trouble getting new customers to adapt to you (but the market still seems worth pursuing), you might be better off pivoting your business to meet them where they are.
Entering a new market without existing demand is risky. That risk deters many global companies, who would rather pursue markets with greater certainty and a higher chance of immediate returns. But with a bit of patience and creativity, it is possible to venture into an untapped market and find – or create – substantial, sustainable demand. Whether you just dip a toe in with a small exploratory investment, leverage your brand’s unique features to establish an entirely new product category, or pivot your own business to more effectively meet the needs of local customers, a seemingly demand-less market may have more potential than meets the eye.
originally posted on hbr.org by Lele Sang and Karl Ulrich
Lele Sang is Global Fellow at the Wharton School of the University of Pennsylvania. She is co-author of the book Winning in China: 8 Stories of Success and Failure in the World’s Largest Economy (Wharton School Press, 2021).
Karl Ulrich is CIBC Endowed Professor at the Wharton School of the University of Pennsylvania. His research is focused on innovation, entrepreneurship, and design. He is co-author with Lele Sang of Winning in China.