Expanding abroad presents several challenges for German businesses. However, understanding potential obstacles to entry, combined with careful planning, can help minimise risks and better capitalise on opportunities.

In this article, you will learn what barriers to entry are, some common examples, and how to overcome them.

What’s in this article?

• What are market entry barriers?
  
• Examples of market entry barriers
  
• How German businesses can overcome market entry barriers
  

What are market entry barriers?

Entry barriers can make it difficult or impossible for businesses to enter a new market. The nature and extent of these obstacles vary greatly by industry, competitive situation, and geographic region. Market entry barriers can be economic, legal, structural, or cultural.

Expansion hurdles play a key role in the strategic planning of enterprises seeking to enter additional sectors. They influence not only the costs and risks of market entry strategies but also the potential profitability and long-term success. Therefore, it is important to identify possible roadblocks early and develop appropriate solutions to overcome or circumvent them.

Examples of market entry barriers

German businesses wishing to expand internationally must carefully consider likely barriers to market entry. Below is a selection of typical examples:

Political and economic uncertainties

Political instability is a major hindrance to successful market entry. Changes in government, unanticipated changes in legislation, or social unrest can abruptly change the operational environment. Recent trade restrictions, import tariffs, or subsidy cuts can also significantly affect the profitability of a foreign investment.

Economic uncertainty also complicates planning and prosperous market entry. One difficulty is volatile exchange rates, especially for firms with revenues or expenses denominated in foreign currencies. A devaluation of the local currency can reduce profits, while an appreciation makes products or services less competitive. Rising inflation rates can also have a negative impact, reducing consumer purchasing power.

High capital requirement

Some markets require significant investments in manufacturing facilities, storage capacity, or marketing efforts. These investments are necessary to build the infrastructure to effectively enter the arena. Building such an infrastructure can involve high initial costs depending on the field and target region. This can be a significant financial burden, especially for start-ups and smaller businesses. Entering the market or surviving the early stages can be difficult without sufficient capital resources or substantial financing.

Technological challenges

Expanding into fresh sectors usually brings technological challenges for organisations. Growth typically increases the complexity of administrative and technical processes. Updated software solutions, system integrations, and adapted data processing are required to manage resources efficiently, as well as inventory or customer information. Different technologies and standards can make it difficult to standardize systems and procedures, especially in multinational businesses. Furthermore, some markets and industries call for specific technical expertise to adapt to regional conditions.

Strong competition

A market with strong competitors can make it difficult for emerging enterprises to gain presence and sustain their position. Established businesses usually have a solid customer base, brand recognition, and efficient operations. In addition, they often benefit from economies of scale. This means they have lower production costs due to their size and market standing. As a result, they can offer their products at lower prices or use larger marketing budgets, further strengthening established players and brands.

Regulatory and legal hurdles

Organisations must often meet stringent regulatory requirements before entering a fresh market, especially in highly regulated fields. In the pharmaceutical industry, for instance, businesses must undergo extensive regulatory steps and clinical trials to ensure the safety of their products and obtain the necessary approvals. This can take years and be very expensive. In the financial services domain, breaking in requires compliance with numerous obligations, such as data protection regulations and anti-money laundering measures. In the food industry, businesses must ensure that their items meet local hygiene standards and are correctly labelled. As a result, additional certifications and approvals are often needed.

Cultural barriers

Cultural differences are another obstacle when entering new arenas. They can lead to misunderstandings and affect the acceptance of goods or services. These differences affect language, values, norms, consumer habits, and behaviours, which can vary widely from region to region. Those who fail to consider cultural differences risk miscommunication and lack of interest. In the worst case, cultural faux pas can damage an organisation’s image. For example, symbols or brand logos could evoke positive associations in one market but might be harmful in another.

Brand loyalty

When customers in the target sector strongly associate with established brands, it is tough for fresh entrants to gain presence. Consumers tend to be emotionally attached to certain brands and hesitant about alternatives. The challenge for a budding business is to overcome this loyalty and gain customers’ trust, which can be a long process.

Access to distribution channels

Market access can be difficult when incumbents dominate key distribution channels in the target region. These businesses often have long-standing relationships with retailers or online platforms that give them preferred visibility in physical shops or e-commerce. Furthermore, large players often have contracts or exclusive agreements that give them preferential access to specific distribution channels.

How German businesses overcome market entry barriers

The following is a selection of prospective solutions to overcome the barriers to market entry mentioned above.

Political and economic uncertainties

• Market analysis: Detailed expansion strategies need to assess the target market’s political and economic stability. Risky areas can be identified early on.
  
• Financial security: Businesses can reduce their risk by using hedging instruments. These can be specialised insurance or financial products that protect against unexpected sector fluctuations and economic losses.
  
• Risk diversification: An operation must not become too dependent on individual markets. Diversifying potential risks involves expanding across several geographies or sectors.
  

High capital requirement

• Gradual expansion: Businesses can start with smaller submarkets to minimize investment.
  
• Collaboration: Partnerships or joint ventures enable cost sharing.
  
• External financing: Firms can use venture capital, grants, crowdfunding, or other financing options to raise extra funds.
  

Technological challenges

• Continuous training and development: Businesses need to train their employees to meet the new requirements.
  
• Technical support: Seeking technical support from specialised partners could be beneficial as this allows you to outsource or automate specific processes. With Stripe Payments, you can accept transactions worldwide and offer local payment methods to your customers. Stripe Tax can also help you expand by automatically collecting taxes worldwide and giving you centralised access to all the documents you need for tax refunds. And with Stripe Connect, you can quickly build a profitable and scalable payments operation for your marketplace or platform. Connect offers your customers a variety of regional checkout options anywhere in the world. It also enables any business model to automate instant payouts, financing, corporate credit cards, or sales tax calculation and collection.
  

Strong competition

• Niche strategy: Before the actual expansion, it is important to conduct an industry analysis that includes competitor profiles. Businesses planning to enter the arena can use this analysis to focus on a segment neglected by the competition.
  
• Product differentiation: Organisations can also differentiate themselves from their competitors through specific products and services. This requires unique selling propositions (USPs).
  
• Collaboration: Businesses can partner with community-based brands when entering additional markets instead of competing.
  

Regulatory and legal hurdles

• Market analysis: Regulatory and legal conditions should not surprise businesses when they enter a market. As part of the market entry strategy, the sector analysis must contain all necessary licences, certifications, permits, consumer protection regulations, and import restrictions.
  
• Consultation: It is a good idea to seek advice from professionals familiar with the target area. For instance, local law firms can help businesses comply with legal requirements.
  

Cultural barriers

• Local expertise: It is advisable to involve area-specific consultants in the planning process to understand the cultural nuances of a target sector. Additionally, employees who are familiar with the culture can be more involved.
  
• Product adaptation: Goods and services can then be adapted to regional preferences and practices.
  
• Marketing adaptation: Communications need to be tailored to the market’s specific characteristics, including the design of advertising campaigns.
  

Brand loyalty

• Test offers: By offering discounts, free samples, or special promotions, businesses can get noticed and ultimately win over customers.
  
• Target group–specific marketing: Influencer or referral programs can help reach targeted audiences.
  

Access to distribution channels

• Alternative sales channels: Businesses can open up alternative sales channels, such as relying on direct online sales or setting up their ecommerce platform. This allows them to reach their customers without intermediaries.
  
• Exclusive distribution partnerships: Partnering with smaller, domestic distributors is possible.