When a company starts doing well in its local market and has a good quality product to offer for a competitive price, the next obvious step becomes internationalisation. As the saying goes 'the world has become a small village' and due to rapid growth of information and communications technology, the markets of the world are available for a firm with a sound strategy and plans for expansion into the international market.
There are many ways a firm can choose to internationalise, the easiest of them being exporting. Exporting allows a company to sell its products and services to buyers in foreign markets without the difficult requirements of FDI.
Despite the many obvious advantages to exporting, small firms often find the process of selling outside of their local market overwhelming as the need for change and dynamism arises, as well as the establishment of a new learning curve for serving international markets. Small firms often encounter stumbling blocks and many of them give up on exporting, this may be avoided by the formulation of an export strategy which can serve as a guideline for the company and allow it to avoid mistakes.
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This report will examine the different export strategies which are available to a firm internationalising for the first time. It will look at different types of strategies available, the advantages and disadvantages brought about by these strategies and will provide examples of firms that have benefited through the successful implementation of such strategies.
The first part of the report will introduce the topic of exporting. It will cover the risks and opportunities of exporting and the characteristics of exporters in terms of revenue, leadership personality, market position and export intensity.
The second part will examine steps in the process of formulating an export strategy and give examples of steps taken by different companies to internationalise for the first time.
The third part will talk about the different export options available; DIRECT SELLING, INDIRECT SELLING, E- COMMERCE. This part will talk in detail about each of the available options, give examples of firms that have used these different methods and analyse the advantages and disadvantages of these different methods of internationalisation.
Exporting: Risks and Opportunities and Characteristics of Exporters
There are many strategic advantages to be gained through exporting. As a firm grows in its domestic market it will continue to face increasing competition and as a result it may need to look outside its local market in order increase its sales revenues and obtain economies of scale. Exporting also delivers to companies the advantage of diversification and reduces its reliance on the home market, for example Sony in Japan faces vigorous competition from the market leader Matsushita and exporting allows it to alleviate the problem of excess capacity in the domestic market. [DRS - International business]1
Despite the many advantages offered by exporting there are also a vast number of challenges associated with the process. Many SMEs are intimidated by the mechanics of doing business internationally and its requirements. Often, companies internationalising for the first time become discouraged as they encounter difficulties in dealing with foreign clients and their expectations and methods of conducting business. Another risk of exporting comes from the loss of control especially when dealing with intermediaries.
Taking into account both the risks and the opportunities, one finds that certain factors make some firms more likely to export than others. These factors include the market position of the company, the quality of its products, market share and entrepreneurial skills of the company leader. Research has shown that although the likelihood of a firm internationalising increases with rise in sales revenues, the percentage of sales coming from exports is not related to the size of the company, as both small and big companies engage in exporting i.e. from the single Tanzanian Tinga Tinga Artist who sells his art to galleries in the United States to multibillion dollar companies like Boeing and Nokia.
The formulation of an export strategy
In order for a firm to gain maximum benefit from the opportunities and avoid pitfalls of exporting it needs to have a clear export strategy. Daniel, Radebaugh and Sullivan's International Business describes four main steps in the formulation of a successful export strategy as outlined below:
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1. The firm must assess the opportunities available to it by analysing its export potential and determine whether a market exists for its goods or services.
2. Expert counseling should be attained as in the case of Grieve, which is an SME in Illinois, USA where the president of the company used a conference organised by the U.S government to learn about Asian markets.
3. Market Selection; the firm must select one market in which to gain experience.
4. Formulation and implementation of an export strategy; the benefits and risks of different export strategies must be analysed, a business plan drawn up and strategic and operational goals must be declared clearly.
Another important factor that cannot be ignored is the building of relationships with customers and distributors.
There are three main channels available to a firm looking to internationalise:
DIRECT SELLING - This refers to the process whereby a company located in one country sells its products to a buyer in another country directly through sales representatives, distributors or retailers.
INDIRECT SELLING - The process of indirect selling is where a company sells the product intended for export to an intermediary who then takes on responsibility to supply it to buyers in the international market.
E- COMMERCE - This is a form of direct selling that is done via the electronic medium of the internet.
When looking to internationalise for the first time a company must consider and analyse each of these options to find out which will be most compatible with the long term vision of the firm.
Exporting directly is the best option to gain maximum profit and long term growth. It is however, also the most challenging form of export since the firm has to handle the entire process of exporting from doing market research to building relationships with clients and collecting payments. The exporting company needs to have sufficient knowledge to sustain its international growth and protect its resources and needs to be aware of factors such as exchange rate fluctuations, cash flow rotation and interest rates variation.
Some advantages of direct selling have been described as follows:
One of the main advantages of exporting directly is that the margin taken by intermediaries is eliminated thereby allowing the exporting firm to increase its profit margin.
Extra funds obtained through elimination of intermediaries allows the firms to expand further, produce larger volumes and therefore obtain economies of scale faster than if they were to export through indirect channels.
Exporting directly allows firms to establish their brand name in the international market. Firms, whose priority is the building of their brand name and image such as Levi's or Virgin, direct export is the best option since they can create a worldwide brand image.
Also for companies that would not want to release patented information or impart technical know-how exporting directly is more suitable as they would have more control and be able to protect their technical expertise.
It also worth noting that, when a company exports directly they make contacts in international markets which can open up new opportunities which the firm may have been unaware of as well as being able to build closer relationships with their clients, which in turn would help the management be more aware of the needs and requirements of their customers. This can help them to upgrade their level of service and also obtain new clients.
As with anything else direct selling also has its share of disadvantages:
The greatest disadvantage of exporting directly is the high level of risk associated with this as well as higher capital requirements as compared to exporting indirectly.
When exporting for the first time a company must choose one market in which to gain experience. If the firm is exporting directly to one market and any natural disasters strike or if there is political unrest within that particular country/market the company can face major losses especially if the company deals in products which are perishable.
There are many factors to consider when exporting directly and knowledge of the market is of extreme importance. Failure of the company to understand the market can have a catastrophic impact on its future.
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Many buyers also do not trust companies which are new to exporting, as a lot of SMEs try to internationalise and then fail. Clients prefer to deal with seasoned exporters who have a history of reliability and this makes it difficult for a small company to start exporting directly.
Finding reliable buyers in international markets is another common problem. If a buyer commits fraud or refuses to pay it may be very laborious for the SME to track them down and this can be a serious threat.
This refers to a method where the exporting company either engages the services of an intermediary like the Malaysian company EMC Ventures to sell its products to overseas markets, or it sells the goods to the intermediary who then exports the goods for sale in international markets as in the case of trading companies such as OLAM International.
The best thing about exporting indirectly is that all complications associated with the process of exporting are transferred to the intermediary and the producing company is alleviated of the worry and hassle of dealing with the international clients directly.
The exporter is also protected in case of any political unrest or natural calamity that might occur as intermediary companies often have diverse markets to which they supply products. This ensures that a market is always available for the exporter's products.
Capital requirements are also much lower when exporting indirectly and this may be a key factor for a company looking to internationalise for the first time. It may not have enough capital and knowledge to directly pursue international customers and indirect selling can be a very suitable approach in this case for example farmers in Tanzania sell their agro commodities to trading companies such as HS Impex who then take on responsibility to clean, process and repackage it for sale in international markets.
For small and medium sized enterprises that are expanding cash flow problems are quite common and indirect selling allows these small businesses to receive cash on receipt and on the spot returns which they can reinvest further.
When exporting indirectly the risk factor is also reduced as Export Trading Companies and Export Management Companies will be responsible for the transportation and sale of the finished product in foreign markets and these companies generally have vast experience dealing with international transactions which protects the exporting firm from default on the part of buyers.
Furthermore the management of the company that is looking to export does not need to have all knowledge of exporting, as is the case with the coffee farmers who sell their product to OLAM.
Exporting companies may receive a lower price for their product when they choose to export indirectly as the intermediary companies will also have a margin.
The bargaining power of the exporter is also reduced as intermediaries have other sources to obtain the goods and may force the first time exporter to accept a lower price for its products.
For some products especially within the technology fields there is also the danger that technical knowhow may be leaked.
The exporter loses most control over its product once it has passed it on to an intermediary and this can impact the rate of growth of the company.
The company' brand name may not be established as some trading companies will repackage the goods before exporting.
When exporting indirectly a firm may fail to recognise the actual end users of it products and may therefore be unable to fulfill the changing requirement of today's consumers in the future.
Small and medium sized enterprises may want to expand into international market but may lack the sufficient funding to establish a global sales network in which situation direct selling over the internet becomes an ideal solution, as found by exporters in Costa Rica who found online shops to be a good way to get more sales at a higher profit margin [Internet marketing in Exports]2
The power of e commerce allows even the smallest company to reach the entire global market using even the most limited resources. It is a great option for companies who have good quality products which have international demand.
Firms can make their website available in several languages and therefore reach a wide target market.
E-commerce also allows for easy exchange of data with both suppliers and customers and websites can be designed to obtain fast feedback about new products. EDI is supported delivery of information is faster and cheaper and levels the playing field of competition [A.J Campbell]3
Products sold through websites have a reputation of being priced lower since the company may reduce its costs of operating offices and employ fewer staff. Consumers who may not be able to pay the prices offered in their markets may opt to order the same products online as can be seen by the trend of Cancer patients in the US importing medicines from Canada via the internet.
If a company looking to internationalise for the first time is looking to do so via the internet, one of the factors which will affect its growth is the establishment of its brand name. If the brand name is not well known then it may be difficult for the company to direct traffic to its website.
The firm would also need to have sufficient capital to advertise its website and make sure that it can generate enough interest in the global market. E-commerce companies can do very well but it generally takes a long time for the companies to be recognised and trusted.
There is also the issue of some cultures such as Asian companies who prefer to do business on a person to person basis and may not be eager to deal with a website without a face.
Also as Calabrese, the president of Grieve Corporation, found out response time is of key importance when receiving enquires over the internet. The clients may have queries which the website does not address and care needs to be taken have a team in place to respond to all enquiries promptly. Failure to do so will discourage many buyers to take their business elsewhere.
The issue of fraud over the internet is another barrier to exporting through this method as some customers in international markets may find it challenging to trust websites to keep their information secure and ensure the product reaches them.
Hackers pose a threat to companies operating in this mode and can cause companies with little experience to face great problems.
Since direct exporting, indirect exporting and E-commerce all have various benefits as well as shortcomings, it would be fair to conclude that different methods are right for different firms depending on factors such as:
1. Availability of capital
2. Knowledge of the market
3. Marketing and operational capabilities
4. Importance of preservation of technical know-how
A firm will choose its export strategy based primarily on its resources and awareness of its market. If the firm's leaders are well aware of the market they want to export to then direct export may be a feasible option otherwise it is much easier and a lot less risky for the SME to pursue exports through an indirect approach. This is because all responsibility involved in the mechanics of exporting is taken care of by the intermediary.
The need for preservation of its core competence in technical areas would also be an influencing factor for some firms operating within dynamic industries and firms such as Grieve do not export through intermediaries but rather go for direct selling. If the company does not have the capability to establish an international sales network it may choose to export using E-commerce.