Se21 Chapter 7 Export Entry Modes

Sales, exports and international marketing (SE21)

Chapter 7

Export entry modes 

1

7.1 Introduction

Choice between using direct and indirect exporting organizational forms involves: 1. cost of performing functions 2. transaction costs of organizing activities or contracting with others. Figure 7.1 shows how a foreign manufacturer may use both direct and indirect forms of export. Exhibit 7.1 shows how mid-size German companies provide 1/2 of business turnover, provide 4 out of every 5 private sector jobs, 20% of exports through finding niche markets, doing heavy R&D, and taking a long-range view 2

3

7.2 Indirect export

Uses independent organizations in the producer’s own country. A given company may both use indirect export and also have a dependent organization (e.g., export department) in the company working with independent marketing organizations. 7.2.1 Marketing organizations Merchants take title (ownership); agents do not.

4

7.2.2 Home country based merchants

Export merchants: do all steps except product & package modification; not available in all markets; deal primarily in staple commodities (page 278); may be more powerful than client companies. Trading companies: a type of export merchant. Various types in various countries: Table 7.1. Japanese general trading companies (Sogo Shosha): large and do more functions; arrange and provide financing; are supply and demand rather than production or user-oriented. (Exhibit 7.2 gives an example.) Jardine Matheson trading company: text and Figure 7.2. Chinese trading companies: Exhibit 7.3. Export desk jobber/export drop shipper/cable merchant: buy and sell primarily raw materials; do take title but not physical possession

5

piggyback marketing definition Low cost market entry strategy in which 2 or more firms represent one another's complementary (but non-competing) products in their respective markets.

6

7.2.3 Home country based agents Export commission house: essentially becomes a domestic buyer; easy but exporter has little control; not usually long term. Confirming house: assists overseas buyers; pays exporter. Resident buyer: can build up long term relationships. Broker: primarily finds buyers for sellers and vice versa. Export management company (EMC): acts as exclusive export department for several allied but noncompeting manufacturers; functions like part of manufacturer for overseas buyers; uses manufacturer's letterhead; some act more like distributors (merchants), others like agents. Manufacturer's export agent: operates in own name; doesn't provide as many services (no advertising and financing, for example). 7

7.2.4 Evaluation of independent marketing organizations

Advantages: inexpensive to start; foreign expertise; build up volume quickly; good for out-of-the-way markets. Potential drawbacks: may not provide enough marketing effort; take some of profit; may drop a manufacturer.

8

7.2.5 Cooperative organizations Piggyback marketing: Company A marketing the product of Company B through Company A's channels; may use the brand of B or A, or a private label (see Figure 7.2); easy, low risk way to begin exporting. Exporting combinations: associations to promote exports of member's products or to serve as export cartels. Cartels may be for market domination, international commodity agreements to stabilize prices, or to promote exports (sometimes under special laws allowing cooperation). Exhibit 7.4 discusses some legal cartel arrangements, “privileged companies.” 9

7.3 Direct export

To importer or buyer in foreign market a manufacturer may use more than one approach. Exhibit 7.5 provides a "stages model" of export development, that does appear to hold true, independent of firm size.

10

7.3.1 Home-country-based department Built in export department: does actual seeing or directing of selling, but support functions (advertising, logistics, credit) are done by other departments; easiest to establish; may have problems getting support from other units and in carrying out technical functions. Separate export department: self contained and largely self-sufficient in advertising, logistics, etc.; little conflict in daily operations, but may be competition for resources. Export sales subsidiary: provides unified control; profit center; can more easily allocate orders and supervise traffic management; ease of financing; wider product line; tax advantages in some countries.

11

7.3.2 Foreign sales branch

Provides control, service, dedicated staff for your products; costly. Handles all of sales distribution and promotion in a designated market area. 7.3.2 Storage or warehouse facilities. Used when inventory in foreign markets is necessary or profitable. May be for one country or regional.

12

7.3.4 Foreign sales subsidiary

Has greater autonomy, because of foreign incorporation and domicile. May have tax and business practices advantages (but taxes are not the only reasons for establishment). 7.3.5 Traveling salespersons Functions: selling activities, customer relations, information gathering. May act as demonstrator or tutor. Balance costs versus benefits; consider required volume to support.

13

The travelling salesman problem is an optimization problem. Therefore it is not sufficient to find an arbitrary solution. Instead, one is interested in the best solution. The travelling salesman problem is quite simple: a travelling salesman has to visit customers in several towns, exactly one customer in each town. Since he is interested in not being too long on the road, he wants to take the shortest tour. He knows the distance between each two towns he wants to visit. The picture shows two possible tours for an example with five cities. For such a small example the problem is easy to solve. But examples with 100 or 1000 cities show that a systematic search for a solution is very expensive. So far, nobody was able to come up with an algorithm for solving the travelling salesman problem that does not show an exponential growth of run time with a growing number of cities. There is a strong belief that there is no algorithm that will not show this behaviour, but no one was able to prove this (yet). But one was able to prove that the travelling salesman problem is a kind of prototypical problem for a big class of problems that show this exponential behaviour. This is the reason why many research groups are interested in the travelling salesman problem, since techniques, developed for this problem, can be transferred to other problems of this class.

14

Some travelling salesman-clips:

http://nl.youtube.com/watch?v=SXJDb95P1_0 http://nl.youtube.com/watch?v=n6TccGP9LOM http://nl.youtube.com/watch?v=2Y-HP-qG4e0 http://nl.youtube.com/watch?v=zUBxZqozriY

15

7.3.6 Evaluation of dependent organizations

Benefits: full return on sales, protection from neglect, gain knowledge, permanency, protect goodwill, costs decrease with volume. Potential drawbacks: costs and risks, may be difficult to obtain specialized knowledge, volume may be slow to build. Conditions making dependent organizations preferable: see the 4 bullets on page 300.

16

7.3.7 Foreign based distributors & agents/representatives

A distributor is a merchant who takes title (ownership of goods). An agent is a representative, who does not take title. In direct exporting, use of exclusive agents or distributors is easiest and least costly; also has potential for development. Steps in process of selecting a foreign representative: draw up a profile of what is needed, locate and evaluate prospects, choose. Elements to consider in the profile of a potential distributor or agent are shown in Table 7.2. Franchise gives holder the right to use brand name and trademark under certain conditions; given for a specific territory. 17

18

7.3.8 Relations with foreign-based distributors and agents Foreign representative legal agreements are extremely important. The book provides a list of typical required provisions (pages 304-305). Need agreement on exclusive rights, competitive lines, termination. Selecting a foreign representative: a key decision; some guidelines are provided in the text (pages 305-306).

19

7.4 The Internet and e-commerce Internet and World Wide Web impact all phases of business. Still used more as a source of information, than as a place to buy. Communication is immediate; distance does not impact cost. Advantages: low capital investment; small size of company not a problem; updates easy and immediate; translation may be less expensive; reliable; provides audit trail. E-commerce growing rapidly. Cellular telephone ownership overseas and access are an important indicator of future Internet behavior in many countries. Business functions that can be performed on the Internet: see bullets in text on page 309. Some of problems with B2B: no substitute for face-to-face contact; varying levels of access; possible imposters and misuse. Government regulations vary widely from country to country. Exhibit 7.6 shows how Nestlé uses the Web in many ways.

20

A typical, traditional supply chain See also: Some aspects and impacts of e-commerce explained.pdf 21

From traditional to e-business

22

Future of e-business

23

7.5 Gray market exporting Gray market channels are those, which have not been authorized by the exporter: see Figure 7.3. They mean, however, a legal importation of genuine goods. Also called parallel imports. Undercut authorized dealers may not provide service, may not retain brand image or reputation, may create problems between manufacturer & authorized dealers, may disrupt manufacturer’s global strategy. Both reactive and proactive actions, which manufacturers may take, are listed on page 313.

24

25

Summary Whether exporting directly or indirectly, treat exporting as a bundle of very important relations. See bullets on page 314.

26