Exporting.pptx

ENTRY MODES By Ana Maria Gaviria EXPORTING Palacio  CONTENTS Major Motives to start exporting Distinguish between indirect, direct and cooperative export modes Describe and understand the five main entry modes of indirect exporting: export buying agent broker export management c...

ENTRY MODES By Ana Maria Gaviria EXPORTING Palacio  CONTENTS Major Motives to start exporting Distinguish between indirect, direct and cooperative export modes Describe and understand the five main entry modes of indirect exporting: export buying agent broker export management company/export house trading company piggyback Describe the two main entry modes of direct exporting: distributor agent Discuss the advantages and disadvantages of the main export modes Export is the most common mode for initial entry into international markets. Sometimes an unsolicited order is received from a buyer in a foreign country, or a domestic customer expands internationally and places an order for its international operations. This prompts the firm to consider international markets and to investigate its growth potential. Exporting is thus typically used in initial entry and gradually evolves towards foreign-based operations. In some cases where there are substantial scale economies or a limited number of buyers in the market worldwide (e.g. for aerospace), production may be concentrated in a single or a limited number of locations, and the goods then exported to other markets. Table 2.1 provides an overview of the major internationalization motives. They are differentiated into proactive and reactive motives. Proactive motives represent stimuli to attempt strategy change, based on the firm’s interest in exploiting unique competences (e.g. a special technological knowledge) or market possibilities. Reactive motives indicate that the firm reacts to pressures or threats in its home market or in foreign markets and adjusts passively to them by changing its activities over time. PARTNER MINDSHARE Is a measurement of the strength of a relationship in terms of trust, commitment and cooperation. There is a strong and proven correlation between mindshare levels and how willing an export intermediary is to place one company brand in front of another, or how likely the intermediary is to defect. Mindshare also expresses itself very clearly in sales performance. Intermediaries who have high mindshare will typically sell more than those with low mindshare. Mindshare can be broken down into three drivers (Gibbs, 2005): Commitment and trust Collaboration Mutuality of interest and common purpose. Exporting can be organized in a variety of ways, depending on the number and type of intermediaries. As in the case of wholesaling, export and import agents vary considerably in the range of functions performed. Some, such as export management companies, are the equivalent of full-service wholesalers and perform all functions relating to export. Others are highly specialized and handle only freight forwarding, billing or clearing goods through customs. TYPES Indirect Direct Cooperative Export Export export This is when the This usually occurs when This involves manufacturing firm the producing firm takes collaborative does not take direct care of exporting agreements with care of exporting activities and is in direct other firms (export activities. Instead, contact with the first marketing groups) another domestic intermediary in the concerning the company, such as an foreign target market. performance of export house or The firm is typically exporting functions. trading company, involved in handling performs these documentation, physical activities, often delivery and pricing without the policies, with the product manufacturing firm’s being sold to agents and INDIRECT EXPORT A manufacturer uses independent export organizations located in its own country (or third country). Such an approach to exporting is most likely to be appropriate for a firm with limited international expansion objectives. This method may also be adopted by a firm with minimal resources to devote to international expansion which wants to enter international markets gradually, testing out markets before committing major resources and effort to developing an export organization.  1. Export buying agent INDIRECT 2. Broker EXPORT 3. Export Management company/export house MODES 4. Trading company 5. Piggyback EXPORTING BUYING AGENT Is a representative of foreign buyers who resides in the exporter’s home country. This kind of agent is the overseas customer’s hired purchasing agent in the exporter’s domestic market, operating on the basis of orders received from these buyers. Since the export buying agent acts in the interests of the buyer, it is the buyer who pays a commission. The export commission house becomes a domestic buyer. Easy way to export to the exporter’s perspective. BROKER The chief function of a broker is to bring a buyer and a seller together. The broker is a specialist in performing the contractual function, and does not actually handle the products sold or bought. For its services the broker is paid a commission (about 5 per cent) by the principal. The broker focuses on one or two products. The distinguishing characteristic of export brokers is that they may act as the agent for either the seller or the buyer. EXPORT MANAGEMENT COMPANY/EXPORT HOUSE Are specialist companies set up to act as the ‘export department’ for a range of non-  competing companies. Advantages The EMC conducts business in the name of each manufacturer it represents. By carrying a large range… can spread their selling and administration costs over more products and companies, reduce transport costs because of the economies involved in making large shipments of goods from a number of companies. useful in markets that might prove difficult to penetrate knowledge of local purchasing practices and government regulations They deal with the paperwork Gain experience at a lower cost Disadvantages The export house may specialize by geographical area, product or customer type (retail, industrial or institutional), and this may not coincide with the supplier’s objectives. So the selection of markets may be made on the basis of what is best for the EMC rather than for the manufacturer. As EMCs are paid by commission, they might be tempted to concentrate upon products with immediate sales potential, rather than those that might require greater customer education and sustained marketing effort to achieve success in the longer term. EMCs may be tempted to carry too many product ranges and, as a result, the manufacturer’s products may not be given the necessary attention from salespeople. EMCs may carry competitive products that they may promote to the disadvantage of a particular firm. Manufacturers should therefore take care in selecting a suitable EMC and be prepared to devote resources to managing the relationship and monitoring its performance. As sales increase, the manufacturer may feel that it could benefit from increased involvement in international markets by exporting itself. However, the transition may not be very easy. First, the firm is likely to have become very dependent on the export house and, unless steps have been taken to build contacts with foreign customers and to build up the firm’s knowledge of its markets, moving away from using an EMC could prove difficult. Second, the firm could find it difficult to withdraw from its contractual commitments to the export house. Third, the EMC may be able to substitute products from an alternative manufacturer and so use its existing customer contacts as a basis for competing against the original manufacturer. TRADING COMPANY Trading companies are part of the historical legacy of colonial days and, although different in nature now, they are still important trading forces in Africa and the Far East. Although international trading companies have been active throughout the world, it is in Japan that the trading company concept has been applied most effectively. In Japan: The seven biggest are Mitsubishi Corporation, Mitsui & Co., Sumitomo Corporation, Itochu, Marubeni, Toyota Tsusho and Sojitz. SERVICES OFFERED…  Shipping, Regarding the financial  warehousing, services:  finance,  guaranteeing of loans,  technology transfer,  the financing of both accounts  planning resource receivable and payable, development,  the issuing of promissory notes,  construction and regional  major foreign exchange development (e.g. turnkey transactions, projects),  equity investment and even  insurance, consulting, direct loans.  real estate and deal-making in general (including facilitating investment and joint ventures).  Manage counter-trade (barter) PARTS  Carrier is either Rider: piggybacking the export- paid through a inexperienced SME. commission The carrier: Is a large company which operates in certain foreign (agent) or acts as a markets and is willing to act on distributor, who behalf of the rider that wishes to buys the product export to those markets. and acts as independent. PIGGYBACK: AN ABBREVIATION OF ‘PICK A-BACK’, I.E. CHOOSING A BACK TO RIDE ON. IT IS ABOUT THE RIDER’S USE OF THE CARRIER’S INTERNATIONAL DISTRIBUTION ORGANIZATION. CARRIER Advantages Disadvantages the firm can get the product quickly Will the rider maintain the quality of (someone already has it). the products sold by an other firm? Low-cost way to get the product If the carrier develops a substantial because the carrier firm does not have market abroad, will the rider firm to invest in R&D, production facilities or develop its production capacity, if market testing for the new product. necessary? The firm can broaden its product range without having to develop and manufacture extra products. RIDER Advantages Disadvantages Riders can export giving up control conveniently without having to establish their own over the marketing distribution systems. of its products Lack of They can observe carefully how the carrier handles the commitment on the goods and hence learn from the carrier’s experience part of the carrier WELL SUITED TO MANUFACTURERS THAT ARE EITHER TOO SMALL TO GO DIRECTLY INTO EXPORTS OR THAT DO NOT WANT TO INVEST HEAVILY IN FOREIGN MARKETING. DIRECT EXPORT MODES: THE MANUFACTURER SELLS DIRECTLY TO AN IMPORTER, AGENT OR DISTRIBUTOR LOCATED IN THE FOREIGN TARGET MARKET. DISTRIBUTOR (IMPORTERS) Independent companies that stock the manufacturer’s product. They will have substantial freedom to choose their own customers and price. A distributor will purchase at a specific price and will be compensated by the difference between its purchase price and its resell price to the customer. The distributor category is broad and includes more variations, but distributors usually seek exclusive rights for a specific sales territory and generally represent the manufacturer in all aspects of sales and servicing in that area. AGENTS Agents may be exclusive, where the agent has exclusive rights to specified sales territories; semi-exclusive, where the agent handles the exporter’s goods along with other non-competing goods from other companies; or non-exclusive, where the agent handles a variety of goods, including some that may compete with the exporter’s products. An agent does not purchase the product from the exporter. Represents an exporting company and sells to wholesalers and retailers in the foreign market. The agent does not normally see the product They cover rare geographic areas and have sub-agents assisting them. The commissions that agents receive vary substantially, depending upon services performed, the market’s size and importance and competition among exporters and agents. THE ADVANTAGES OF BOTH AGENTS AND DISTRIBUTORS… They are familiar with the local market, customs and conventions, have existing business contacts and employ foreign nationals. They have a direct incentive to sell through either commission or profit margin but, since their remuneration is tied to sales, they may be reluctant to devote much time and effort to developing a market for a new product COOPERATIVE EXPORT MODES/EXPORT MARKETING GROUPS Export marketing groups are frequently found among SMEs attempting to enter export markets for the first time. Many such firms do not achieve sufficient scale economies in manufacturing and marketing because of the size of the local market or the inadequacy of the management and marketing resources available. Example: Furniture and clothing companies The cooperation between the manufacturers can be tight or loose. In a loose cooperation, the separate firms in a group sell their own brands through the same agent, whereas a tight cooperation often results in the creation of a new export association. Such an association can act as the exporting arm of all member companies, presenting a united front to world markets and gaining significant economies of scale. FUNCTIONS COOPERATIVE EXPORT MODES exporting in the name of the association; consolidating freight, negotiating rates and chartering ships; performing market research; appointing selling agents abroad; obtaining credit information and collecting debts; setting prices for export; allowing uniform contracts and terms of sale; allowing cooperative bids and sales negotiation. SUMM ARY HOMEWORK What aspects must be taken into account when selecting an intermediary? Hollensen (2019) pages 340-345 Explain the process of evaluating international distribution partners? (Matrix in figure 10.4) pages 345 – 346 Hollensen (2019)