Internationalization in the Paints and Coatings Industry

Risk and Strategy

The industrial paint and coatings market is showing increasingly growing momentum, which is expected to continue in the coming years. Particularly the surge in global construction and building activities in developing countries in Asia-Pacific, Latin America, Eastern Europe and the Middle East is regarded by experts as an accelerating force for the market. Recent internationalization activities and approaches in the industrial paint and coatings industry are strongly related to developing countries. Research shows that major players in the market have an increasing interest in forming partnerships with regional organizations in developing countries in Asia-Pacific, Latin America, Eastern Europe and the Middle East. In order to accelerate market entry and take advantage of existing opportunities, many leading players in the market are investing in these economies. As a result, the industrial paint and coatings market is growing more strongly, particularly in countries showing major momentum in the construction sector, such as India and China. The automotive, shipbuilding and wood production industries in these regions can also be described as attractive market segments.

Turkish paint and coatings companies are becoming increasingly active in international markets day by day. For example, three Turkish paint manufacturers took their place among the top 80 paint and coatings companies worldwide in 2016. Many companies are aware of the opportunities in developing Türkiye (particularly in the construction sector) and the surrounding regions.

As a result, both the ratio of Turkish companies' export sales to total sales and the total number of countries to which exports are made are increasing. Furthermore, both the incentives given by the country to reach its 2023 export targets and the increase in foreign entry into the Turkish market are making internationalization the number one agenda item for senior executives. Since developing countries offer attractive market opportunities, most companies are considering further increasing their sales activities in these countries. However, companies should be cautious about the differences among individual markets within Asia-Pacific. Companies aiming to increase their presence in global markets must choose their internationalization approaches wisely in order to achieve sustainable growth and profitability. Knowing the right target markets, as well as recognizing the market environment and differentiation potential, is of critical importance for expanding into new markets. An opportunistic approach may achieve short-term success, but achieving sustainable internationalization through such opportunistic decisions can only happen by chance.

Homburg & Partner has been developing internationalization strategies for many years, not only in the industrial paint and coatings market but also for mid-sized companies in other markets. In this context, what is observed in many companies is internationalization that occurs very quickly and without careful planning.

Sales should be made after legal and administrative conditions have been established. This is a common view among many company executives. However, in our view, this situation gives rise to two different scenarios: the first is that sales do not materialize, and the second is that sales materialize in an opportunistic manner. In the second case, there is a risk of winning projects that do not fit the company's strategy. In this article, we explain the second scenario and exemplify an approach that avoids opportunistic growth in foreign countries. Companies expand into foreign countries not only because of attractive investment conditions, but also due to favorable competitive conditions and the desire to achieve appealing sales targets. It is not unusual for mid-sized companies with revenues between 100 and 200 million $ to generate 15% of their turnover from subsidiaries in 10 or more growing or shrinking foreign countries. These are typical examples of growth through an opportunistic approach. For example, foreign subsidiaries have been established one after another according to the principle "Sales should be made after legal and administrative conditions have been established." Unfortunately, this kind of hastily formed internationalization approach involves many risks: Increased complexity: For example, how can R&D projects be prioritized for 10 different foreign markets? Country managers, in order to write their own success stories, may have blocked the use of significant resources that could have been allocated to profitable projects.

Increased risk of loss: For example, how can a sales organization be established for 10 foreign subsidiaries? Is it worth setting up a new sales unit, or should sales be organized via the "fly-in model" (flying in from headquarters)?

Unclear KPIs (Key Performance Indicators): Which KPIs are suitable for measuring success? Are increases in sales or relative contribution margins the key performance indicator? Also, which criterion explains the use of which KPI? Relative profitability is likely to be lower compared to profitability in the local market: Foreign subsidiaries generally generate lower profitability than the local organization. This is because the strategies of foreign subsidiaries are not well defined and price discounts are given solely to make sales happen. These four risk examples underscore the dangers that can fundamentally harm companies through rapid internationalization, including possible cultural and reputational losses. For this reason, existing risks must be mitigated beforehand. We propose a 6-stage model for a well-functioning internationalization approach. Afterward, it is important to incorporate the right degree of pragmatism and take the learning process into account over time. In everyday language, this is referred to as "Hindsight is always 20/20," so "knowing better" is expected. In order to meet these requirements, two principles should be emphasized in internationalization: the principle of continuous learning and the principle of anchor customers.

Stage 1: Identifying and Working the Right Target Markets

For successful internationalization, it is necessary to know which markets are more attractive and what potential they hold. In our studies, we frequently encounter companies lacking an analytical basis when identifying their correct target markets. Some carry out this step by relying on instinct, without analyzing evaluation criteria such as growth, potential, and competitive intensity. For this reason, we recommend conducting a full analysis in the first step. In other words, we recommend finding the right balance between detail and pragmatism. This is because correcting fundamental mistakes at later stages brings higher costs. In the second step, target markets should be segmented and organized according to equal characteristics. Compared to a general customer approach, which can often be exemplified by the phrase "From now on, we are also present in Asia," a specialized customer approach has a much higher chance of success.

Stage 2: Conducting Discussions with the Market and Customers

After the pre-segmentation of relevant customer groups is completed, it is necessary to understand the needs of each customer segment. At this point, different perspectives should be taken into account. On one hand, relevant customer needs, such as purchasing criteria and unmet expectations, should be identified. These findings form the basis for formulating benefit arguments and the value proposition. On the other hand, in order to correctly define the pricing strategy and successfully achieve market entry, customers' willingness to change and willingness to pay must be identified. Stage 3: Determining Goals and Mission Once the right target markets have been identified and customer analyses have been conducted, goals should be set. The internationalization approach should be grounded in what are also defined as SMART criteria: specific, measurable, accepted, realistic, and terminated (time-bound). Therefore, while striving to set goals systematically, these criteria also support increasing the comprehensibility of the goals by the company organization. Internationalization approaches often fail because organizational integration is not sufficiently achieved. For this reason, the internationalization approach should be given a slogan - a goal definition. The goal definition consists of one or two sentences that exemplify the internationalization goals and, in addition, enable clear communication. Thus, it should be striking, simple and memorable. In general, the better the corporate goal and the purpose of communication, the higher the internalization and motivation within the company organization.

Stage 4: Identifying Anchor Customers and Compiling Experience

Finally, at the most important stage before addressing the entire market, we are at the point of testing our approach with pilot customers. This stage should be carried out quickly but should not be rushed. With a manageable target customer list, contact will be made with strategically less relevant customers – for now, five to ten pilot balloons are sufficient. The aim here is to close the sale quickly. At this stage, without losing pace, as the first feedback starts coming in, the learning process can also gain speed. Since the learning process cannot be simulated, it is of high importance. The company's existing customers in the local market should be approached with an integrative approach. With these customers, closing sales may be easier due to existing references.

The type of customer is not very important; what matters much more is closing the sale and gaining a foothold in the new market. The first customers, in other words the anchor customers, will help expand market coverage because they contribute to the learning curve and serve as references in the market. Stage 5: Conducting Strategy Checks

With the insights based on market analysis, customer segmentation and customer feedback, and the experience compiled, the internationalization strategy should be evaluated and reviewed one final time. Once this is completed, it can then be applied sequentially to other customer segments. As with others, the key questions are as follows: "Did we correctly define the target segment for our product group? Do we have the right arguments to persuade them? Do customers understand the added value we offer? Do we know and understand our market environment and dynamics? Do we have the ability to build and train sales teams? Will our strategy be successful? Is it possible to plan for success? If all these questions are answered with "Yes," then the finalization of the market entry strategy has been achieved. After this, the pricing strategy can be aligned and sales can begin.