The industrial coatings market has been showing exponential growth, which is expected to continue in the upcoming years. Experts see the spurt of the global building and construction activities as driving forces, especially in developing countries across Asia Pacific, Latin America, Eastern Europe and the Middle East. As one of the key supplying markets, the United States has shown rising exports, with Canada and Mexico as their largest export markets in the industry, accounting for two-thirds of all United States’ coatings industry exports in 2013, followed by China, the United Kingdom and Japan.
Recent internationalization activities and approaches within the industrial coatings industry are strongly associated with developing countries. Studies suggest that large players operating in the market are increasingly interested in establishing alliances with regional organizations of developing countries located in Asia Pacific, Latin America, Eastern Europe and the Middle East. To boost market entrance and benefit from recent opportunities, more market leaders are venturing into businesses across those economies. As a result, the market for industrial coatings is especially thriving in countries such as India and China, which are witnessing a major increase in civil construction activities. Industries such as automotive, shipbuilding or wood manufacturing are also attractive target segments within those regions.
As developing countries offer interesting market opportunities, more companies are considering further expansions of sales activities within those regions. Nevertheless, companies need to be aware of significant differences between the single markets in the Asia Pacific. Therefore, to ensure sustainable growth and profitability, companies aiming to enhance their global market presence should choose their internationalization approach wisely. Knowing the correct individual target markets, as well as understanding the market environment and differentiation potential, is crucial for successful internationalization. Opportunistic behavior can lead to success in the short run, but sustainable internationalization via opportunistic decision making is only successful by chance.
Homburg & Partner has dealt with internationalization strategies for medium-sized businesses as well as large key players for many years, and not only for the industrial coatings market. Within this context, we realize that many companies internationalize too quickly and without due consideration. Once the legal and administrative circumstances are set, sales only has to sell – this is the prevailing opinion of many company leaders. In our opinion, this results in two scenarios: either sales does not sell or sales sells opportunistically. The latter implies that sales runs the risk of acquiring customer projects that do not fit the company.
In this article, we address the second phenomena and illustrate an approach to avoid opportunistic growth in foreign countries.
Companies not only expand abroad due to attractive investment conditions, but also due to favorable competitive environments or to reach ambitious sales targets. Medium-sized companies, with sales between $100 and $200 million, of which 15 percent are generated by 10 or more growing and shrinking foreign sales subsidiaries, are not uncommon. They are typical examples of opportunistic growth. According to the motto “once the legal and administration circumstances are set, sales only has to sell”, foreign subsidiaries are established one after another. Unfortunately, a rushed internationalization approach involves multiple risks:
- Increasing complexity: For example, how should R&D projects be prioritized for 10 equal foreign subsidiaries? It is possible that important resources for profitable projects are blocked because the country head wants to write its own success story.
- Increasing risk of dissipation: How should sales be organized in 10 foreign subsidiaries? Is it worth it to create a new sales entity or should sales be organized by a “Fly-In Model”?
- Ambiguous Key Performance Indicators (KPIs): Which KPIs are suitable to measure success? Are sales increases the right KPI or the relative contribution margin? And, what criteria determine which KPI to use?
- The relative profitability is likely lower than the profitability in the domestic country: Normally, foreign subsidiaries are less profitable than the domestic organization. This is mainly due to the fact that the foreign subsidiary’s strategy is not well-developed, and price reductions are given to realize sales.
These four examples of risk underlie the danger of rushed internationalization, which can harm the company permanently, in addition to potential cultural and reputational losses. Therefore, existing risks have to be minimized beforehand. For a well-functioning internationalization model, we recommend a six-stage phase model (Figure 1). Moreover, it is important to add the right portion of pragmatism and to consider the learning progress over time. In colloquial speech, one says “In hindsight one always knows better”, thus, the “knowing better” is anticipated. In order to meet those requirements, two fundamental principles underlie internationalization: the principle of continuous learning and the principle of anchor clients.
Phase 1: Identification and Operationalization of the Right Target Markets
For successful internationalization, it is crucial to know which markets are attractive and their corresponding potential. In our course of business, we often deal with companies that lack the analytical basis to identify the right target markets; one relies on gut instinct without analyzing and interpreting evaluation criteria such as growth, potential and competitive intensity. Therefore, in the first step, we advise conducting an exact analysis. Thereby, we recommend finding the right balance between detail and pragmatism. Correcting fundamental mistakes at a later stage usually comes at a higher expense. In the second step, the target markets will be segmented, which means they are sorted by equal characteristics. This allows for an individual customer approach which, in comparison to a common customer approach that is often phrased as “From now on, we are also present in Asia”, increases the likelihood of success considerably.
Phase 2: Conduct a Market and Customer Interview
Once the relevant customer groups have been pre-segmented, it is necessary to understand each customer segment’s needs. Hereby, different perspectives should be considered. On the one hand, relevant customer needs have to be determined, for instance, purchase criteria and unfulfilled desires. This creates the basis to formulate benefit arguments, or the value proposition. On the other hand, customers’ willingness to change and willingness to pay should be identified to ensure the right definition of a pricing strategy and to create realistic chances for market entry.
Phase 3: Determination of Targets and Mission
After the right target markets have been selected and the customer analysis has been conducted, targets have to be determined. The internationalization approach should be based on specific, measurable, accepted, realistic and terminated criteria – the so-called SMART criteria. Thereby, one is forced to systematically determine targets and, at the same time, increase the target acceptance within the organization. Internationalization approaches often fail because the team is not sufficiently integrated. Therefore, the developed internationalization approach should be given a slogan – the mission statement. The mission statement consists of one or two sentences that illustrate the internationalization targets and additionally enables clear communication. Thus, it should be bold, simple and catchy. Overall, the better the organization’s target and mission communication, the higher the acceptance and motivation within the organization.
Phase 4: Identification of Anchor Customers per Segment and Collection of Experiences
Finally, and now we are dealing with the most important phase of our approach, the first pilot will be launched before addressing the broad market. This should be done quickly but not hastily. With a manageable target customer list – for now, five to 10 test balloons are enough – a number of strategically less-relevant customers will be contacted. The goal is a quick sales closure. At this stage, the pace should not be neglected, as the first deliveries are supposed to be started so the learning progress can pick up speed. The learning progress cannot be simulated and hence, it is of high relevance. A complementary approach is to address existing customers of the domestic organization. With those customers, a sales closure can be easier due to the existing reference. The customer type is not crucial; it is more important to close sales and to establish oneself in the new market. The first customers, the so-called anchor customers, will help in furthering market coverage, as they facilitate the learning curve and serve as customer references.
Phase 5: Execution of Strategy Checks
Based on the collected experiences and the insights generated by the market analysis, customer segmentation and customer interviews, the internationalization strategy should be assessed and considered for the final time. Once this is done, one can address the other customer segments sequentially. Among others, important questions are: “Have we identified the right target segments for our product group? Do we have the right arguments at hand to convince them? Do customers understand the added value of our offering? Do we know and understand our market environment and its dynamics? Are we able to establish and train the sales team? Will our strategy be successful? Is it possible to plan for success?” If all those questions have been answered with “yes”, the market entry strategy finalization has been achieved. Afterwards, the pricing strategy can be aligned and sales can start.
Phase 6: Sustainable Implementation
If the pilot phase has been terminated successfully and the strategy has been finalized, the broad market coverage can be initiated. Experiences from the analysis and pilot phases lay the foundation for an optimized customer approach. The aim is to create product awareness in the broad market and thereby increase customer demand. Within this context, the gained anchor customers can be utilized as multipliers. Regular result tracking, especially at the beginning of the market coverage, is advisable. Therefore, special emphasis should be placed on selecting the right KPIs. On one side, the increased market share, or in other words volume growth, can be used as a KPI, for instance in a present fast-growing market. On the other side, the specific margin, the relative contribution margin, could be the most suitable KPI. In the end, selecting a single or group of KPIs depends on the strategy. However, regular control and budget rotation should be gradually implemented to ensure sustainable systematic management and continuous learning.
Once strategic parameters are in place, one could assume that sales only has to sell. Far from it! The involvement, strategic trainings of sales staff and permanent support are crucial success factors to ensure long-term success. We explicitly suggest to involve sales early in the strategic considerations and to make use of their experiences.
Systematic Internationalization and Opportunistic Growth
Currently, the market conditions offer favorable opportunities for additional internationalization of sales. In order to circumvent the previously named risks, the internationalization approach should be well-considered without losing the required flexibility in the market. By allocating resources to attractive target markets and by having a clear strategic orientation, unnecessary complexity and the risk of dissipation can be avoided, whereas profitability and sustainability can be increased. Moreover, the collected experiences during the pilot phase, as well as the established anchor customers, serve as the basis for solid growth and for building customer loyalty.
The positive circumstances offer excellent chances for successful internationalization and organic growth. However, the logical sticking point is that systematic internationalization and opportunistic growth do not contradict each other; instead, they should be mutually dependent.
For more information, visit www.homburg-partner.com.