Market entry strategy does not mean entering a market

Entering a market is a means of last resort. Market entry strategy does not at all imply entering a market. This is one the greatest strategy errors made in business.

Strategy Study W0 6

Have the easier options been eliminated?

This is one of the most important considerations. When considering market entry cases, most consultants forget that no company or CEO wants to take on the effort and work of entering a new country. It is too much effort.

What they actually want is exposure to the profits. Entering the market is one way of capturing the profits, but not the only way. With this in mind, you open a world of possibilities and smarter market entry strategy.

This is explained in much more detail in this podcast.

When a CEO elects to enter a market via M&A, he is implying that 3 forms of alternative, easier, quicker, cheaper and less risky paths to capture the profits from the market have failed:

(1) Outsourcing

(2) Licensing

(3) White-labeling

LAB’s CEO wants to enter the market. Yet, they must only consider an acquisition, brownfields or Greenfields entry when one of the above three has failed.

So how could the bank go about these three options?

Analyzing the options

(1) The bank does white labeling: they produce financial lending products that are sold by the DFIs under the DFI brand to entrepreneurs. We will discuss the DFIs in much detail later. They are the existing independent retail branch network used by the client to distribute its financial products.

(2) The bank does another form of white-labeling: they offer credit guarantees to banks so that retail banks can offer loans to entrepreneurs and LAB will cover a percentage of the loss incurred by the bank. It’s a type of insurance.

(3) The bank licenses its technology to other banks in the US serving this market:If the bank supposedly understands the market so well that they can enter the market and win in the market, which is the underlying reason for wanting to enter the market, why not license the approach, technology etc., to help other financial institutions enter the market? It’s an indirect way of capturing the profits from the market.

(4) The bank’s Mexico operations could run key parts of the functions for a US bank serving the US market: In this example of outsourcing, LAB is receiving profits from the US market without entering the market.

We have to prove all the options above and their variations are worse than direct entry.

Otherwise, why enter the market directly when the alternative allows the bank to capture profits from the market, without incurring the risk of entering the market?

Or we can simply prove that direct entry does not work, and the next phase would be to explore the alternatives to enter the market.

It is very unlikely this has been done because very few people think about market entry as a mechanism to capture profits from a market without entering a market.

Our first data

Linked to this, a lot of the banking clients’ decisions are governed by the expectations of their primary shareholder. We will be provided the following information to commence the study:

(1) The act of government under which the Secretariat of Finance and Public Credit chartered the bank.

(2)  We will have access to the banking clients’ audited financials going back 5 years along with the auditors unsealed notes. For each audited page of the financials, there are on average 3.4 pages of notes.

(3) Audited financials of the DFIs

(4) Government projections on sector job creation in the US, Mexico, and 3 other Latin American countries

We only, however, have access to them when we arrive on-site in a few weeks.

What is the cost of creating a job?

This is another consideration.

The banking client is doing all of this to create jobs. That is their mandate – which we will confirm via the acts of government.

How much does it cost them to create one job and what is an acceptable cost?

Is it fine to spend $100, $150 or $300 to create one job? What must the salary be in that job and what must be the loan amount provided to the entrepreneur and what must be the interest charged?

Must all loans create jobs?

If a loan is paid back in full and creates fewer jobs is that better than a loan product with some defaults that creates lots of jobs?

Will there be a huge manpower requirement to track all of this? Or will they rely on self-reported data? Are the compliance costs baked into the cost of the loan?

Calculating the return on the loan

If it costs $1,000 to create one job is the return, beyond the immediate return of the loan repayment with interest, measured via (Option 1) the taxes the recipient provides to the government OR (Option 2) via the trickle-down multiplier?

Option 1

For example, in option 1 if taxes paid by that borrower amount to $740, do we say the loan lost ($1,000 – ($1,000 – $740) – (cost of providing the loan))?

Option 2

If $740 in taxes was paid but the borrower spent $2,300 buying supplies, food and material that created jobs in the economy, do we measure that multiplier effect?

Is it good that $2,300 is much larger than the $740 in taxes?

This is a tough one. The banking client wants to measure option 2 which will produce a higher number.

Thinking about all the possible losses across the different segments and sectors make us believe that cross-subsidization is an initial hypothesis.

The only logical reason to enter the US will be to cross-subsidize lower returns or losses in Latin America.

Does the job creation mandate apply in the USA?

Job creation is not the prevailing mandate of the bank in the USA. Profits are. Mexican presidents don’t get elected by touting job creation in the US. Or do they? Many South East-Asian governments have remained in power by creating the proper visa channels and protections to allow their citizens to work in foreign countries.

Yet, job creation is the prevailing mandate in Latin America. That job creation costs money since the banking client is trying to fulfill an institutional void.

In other words, Mexicans setting up businesses in the US actually benefit Mexico more than it benefits the US, provided the Mexicans in the US are funded by LAB, who can move the profits back south.

It is crucial to remember these differences in the mandate between the US and Mexico as the study progresses.

Remittances?

Is this a modern take on remittances?

It is, with the exception that in the traditional format, workers send money back to families and here they are paying back a foreign loan to a national government.

There is a problem with the trickle-down multiplier mentioned earlier. It will create a bigger number but none of the additional money goes to LAB – it goes to the government in the form of taxes.

Therefore, LAB still ends up with a loss despite the newly measured impact on the economy.

Does the government and investors of LAB want to accept this loss just to help the broader economy?

I think not. If they did, the bank would not be looking for higher margin businesses in the US. They would be okay with losses in Mexico as long as those losses subsidized meaningful job creation.

QUESTION(S) OF THE DAY: What is the right way to measure the costs of creating a job and what are the trade-offs in that method?

We answer this question, additional reader questions and discuss more issues raised in this article on the accompanying episode on the Strategy Skillspodcast channel on iTunes, Spotify, Acast and Google Android Podcasts. This is the world’s #1 ranked business strategy podcast channel.

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