New market entry provides potential opportunities for organizations to grow. But penetrating a market and establishing a new business is fraught with complications and failure. Attempts at entering a new market often fail, in fact, research suggests that for every successful market entry about 4 fail. The reasons for such high failure rates involve timing, scale, competition, capabilities, and predominantly irrational decision making.
The decision to successfully enter a market necessitates detailed analysis. These critical decisions often get flawed by Cognitive Biases—the systematic errors in the way people process information—resulting in huge financial implications.
Cognitive biases distort executives’ perception regarding their firm’s capabilities, potential market, and competition. These biases trigger misleading beliefs in executives—such as, their existing capabilities are in line with what’s required in the future, or that the market entry move will go unnoticed by the competitors. Removing biases out of decision making is an arduous task, as not many executives are able to identify the biases that manipulate their planning and decision making processes.
Cognitive biases damage a firm’s market entry planning and decision making processes. Market entry analysis requires a robust methodology. A 2-step methodical approach helps executives understand the Psychology of Market Entry Analysis and eliminate cognitive biases from their crucial market entry decisions:
- Develop a Reference Class
- Remove Bias from Decisions
Develop a Reference Class
While making such critical decisions, most executives count on their gut and consider only their company’s inside view. This approach is misleading and prevents them from developing an outside perspective based on previous market entry experiences, and assessing opportunities against certain success parameters.
Executives can utilize a reference class—group of similar decisions that other firms have taken in the past that provide valuable benchmarks for decision making. A reference class of should be thoroughly evaluated in terms of circumstances that warranted those decisions and the outcomes that those decisions leveraged, to generate empirical predictors of success.
The approach saves the decision makers from falling into the “confirmation trap,” which urges them to seek information that confirms to their hypotheses only. It also drives the analysts to explore more options and data. Companies in various sectors understand the importance of drawing a reference class, while some don’t consider looking at the experience of outside companies worthwhile and encounter failures as a result.
In preparing a reference class, executives need to explicitly review 6 key factors that serve as predictors of successful market entry. These predictors of market entry success help the executives decide whether to go ahead or drop their entry decision.
- Size of entry relative to minimum efficient scale
- Relatedness of the market entered
- Complementary assets
- Order of entry
- Industry lifecycle stage (more on this can be found here: Consolidation-Endgame Curve)
- Degree of technological innovation
Remove Bias from Decisions
Biases in corporate decisions are a product of behavior, training, culture, and human nature. These biases deviate the executives from thinking rationally, and prevent them from organizing and analyzing data properly. Executives need to work on identifying, labeling, and eliminating biases from their decision making process.
Removing cognitive biases objectively leverages improved chances of success for the organizations; this entails targeting the following 5 core issues:
- Value Proposition
- Market Size
- Market Share and Revenue
Interested in learning more about removing Cognitive Biases in Market Entry Analysis? You can learn more and download an editable PowerPoint about the Psychology of Market Entry Analysis here on the Flevy documents marketplace.