1.0 Executive summary
This report details subject of exporting which includes the reasons why companies internationalize and the measures the should undertake before pursuing export strategies.
The systematic approach have been discussed in detail. We have talked about the two export strategies available in any organization pursuing the export strategy. We have also talked about the different types of direct and indirect exporting(which are the two main strategies of exporting, indirect and direct exporting). The benefits that the organization gain from pursuing them and how best to go about them. They have been discussed in detail , every advantage comes a disadvantage they have talked about the pitfalls that come with pursuing the strategies.
Exporting strategy in general has been discussed . I have used a small company based in the United States to discuss the benefits and drawbacks of exporting.
Mainly the information in this report was from text books. Also through the discussion with fellow colleagues, debates also contributed to the information gathered in the report. The internet through the world-wide web also made contribution to the information contained in the report.
Exporting refers to strategy of producing products or services in one country (often the producers home country) selling and distributing them to customers located in other countries. Many organizations use exporting as an entry strategy . It is flexible and in the case where the product is not doing well due to the changes in the environment the firm can easily put out without incurring sufficient costs.
Exporting is one of the cheapest and less risky ways of internationalizing. Internationalizing business refers to the performance of trade and investment activities by the firms across the borders.
There are many ways that can lead a firm to internalize. The main reasons are:
To seek opportunities growth through market doors diversification, substantial market potential exists outside the home country.
To earn high profits, for many types of products and services market growth in mature economies is sluggish or flat
These are some of the main reasons why most companies internationalize or export their product. At a broadest level firms internationalize or export to enhance competitive advantage.Cavusgil et al (2008 p5,p17)
4.0 THE SYSTEMATIC APPROACH TO EXPORTING
According to Cavusgil et al (2008, p.391-394) There is need for an organization to have a systematic approach before exporting the goods and services. The more experienced managers use a systematic approach to improve the firms prospects for successful exporting by assessing potential markets, by organizing the firm to undertake exporting, acquiring appropriate skills and competences and implement export strategies. The following steps are taken and examined in detail:
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4.1 First step: Asses global market opportunity
Managers will assess the firms readiness to internationalize, then choose the most appropriate country market and partners. The look at the readiness of the firm and its products. Tools like CORE (Companies readiness to export available online at global edge) are undertaken. Managers will assess the most attractive markets , potential distributors and identifies the industry market potential. Visiting promising countries is a significant approach because managers are able to understand the Customers needs, competitive environment and other external factors.
4.2 Second step: Organize for exporting
Managers make decisions about what degree of the firms involvement, resources to be committed and the type of domestic and foreign intermediaries to hire, what sort of time-table the firm should pursue to achieve export goals and objectives.
4.3 Third step: Acquire skills and competences
The firm acquires skills and competences to handle export operations. It trains staff and engages appropriate facilitating firms (such as freight forwarders, bankers and international trade lawyers) The reason as to why companies do this is because of the complexity of export transactions. The company can either launch a new product or use the adaption strategy when opportunity countries vary in terms of infrastructure; finance in the customer purchases hence the need for managers to gain internationally oriented capabilities.
4.4 Fourth step: Implementing exporting strategy
Here managers will make decisions about product adaptation, marketing communities; pricing and supporting foreign subsidiaries and intermediaries. Product adaptation is the modifying a product to suit the needs and tastes of buyers in the target market. A good example is when Microsoft company in Germany, it must ensure that the software is written in Germany. Market adaptation refers to modifying advertising , selling style, public relations and promotional activities to suit individual markets, this of course will depend on the target market, the nature of the product and the firms position in the markets relative to competitors.
Identifying and analyzing the four steps available to the organizations (which is known as the systematic approach) will help it decide which export strategy to pursue. They are to main strategies available namely direct and indirect exporting. The both have their advantages and disadvantages . it is important to understand and asses them. Firms selection on which strategy to pursue should be relative to the products or services. Certain products may be favorable with direct exporting while others will not.
5.0 EXPORTING INDIRECTLY
With this approach a company engages intermediaries located in the firms home market. The intermediaries or intermediaries or firms are capable of finding foreign markets and buyers for its products. Export trading companies (EM’s), export trading companies (ET’s), international trading consultants and other intermediaries can give the exporter access to well contracts. Yet the export can still retain considerable control of the benefits of exporting, such as learning more about foreign competitors new techniques and market opportunity.
The following are the independent organizations within the exporters domestic market, these are;
Domestic-based merchants (export) who take time hire to the products and sell abroad
Piggy-banking, this is where the exporter uses the overseas distributing facility of another facility
Co-operations organizations, these act on behalf of a number of products and are partly controlled by the producers of primary products such as fruit nuts export through co-operative organizations
Domestic-based export agents who sell on behalf of the exporter, these are usually paid on commission. Jobber(2007,p.956)
5.1 Advantages of exporting indirectly
Indirect exports don’t require a lot of organizational effort , staff workers . even if a company operates on export department, it emphasis only on a small number of employees, as the main work is carried out by foreign trade partners who have obtained an order.
Indirect exporting can relatively move out of the market if it turns out that it does not match its goals and objectives.
5.2 Drawbacks of exporting indirectly
During exporting, not all goods and services can be sold on the international market. Technically complex goods for example plasma screens, computers and some gadgets will not be suitable for indirect exporting.
Although in the of indirect export exit to foreign market demands small financial and human resources it is not always effective in the long run. It leads t de-minimizing returns. Trading partners try to get maximum profits from their services as mediators. This leads to the rise of transfer of goods and services to a retailer with small profits for the enterprise. Besides the latter cannot acquire its own experience in foreign market has no information on the wishes of clients the behavior of competitors and general economic conditions in individual countries.
Not all the brokers are usually the optimum market potential and opportunities for marketing. This allows in miscalculations and mistakes in various actions they undertake. This affects the income of producers or exports of goods. A good example is where certain foreign markets are not optimal goods that may be offered to exporters. The price can be set without taking into account specific parts of the market.
The company exporting indirectly is deprived of direct communication with the end uses. This includes transition to other forms of work in the markets. Advantages and disadvantages of direct and indirect exports CBS (Anon n.d.)
6.0 EXPORTING DIRECTLY
This approach is the most ambitious and difficult. The exporter handle every aspect of the exporting process from market research and planning to foreign distribution collections, substantial commitment of management time and attention is required to achieve good results. However this approach maybe best way to achieve high profits and growth with reasonable assistance and guidance from the department of commerce, state trade offices freight forwarders, international banks and other service groups.
6.1 TYPES OF DIRECT EXPORTING
Companies usually use agents and distributors in some or all of their exports abroad. It has been estimated that over 60percent of US companies go for some or their export activity. In the European firms figures it rises to 70percent. Agents may be exclusive, where the agreement is between the exporter and the agent alone; semi-exclusive, where the agent handles the goods along with other non-competing goods from companies ; or exclusive, where the agent handles a variety of goods, including some that they may compete with exporter products.
Distributors are different from agents , the take hire to the goods and payment ( to the distributors) is according to the differences between the buying and selling prices rather than commission. Distribution are only appointed when after-sales service is required to they are more likely to posses the necessary resources than agent.
The advantages of both agents and distributors are that they are acquainted with local market, customs and conventions, existing business contracts and foreign nationals. They have a direct incentives to sell through either commission or profit margin, but since their remuneration is tied to sales they way be reluctant to devote much time and effort to developing a market for a new product. Also the amount of market feedback may be limited as the agent or distributor may see themselves as a purchasing agent for customers rather than selling agent export.
6.2 Domestic-based sales representatives
Since he is a company employer he has direct control of activities. When the company is not comfortable with the way agents and distributors are handling their product they can engage a sales representative to performance most of the activities.
Company employs will apply more commitment to the customer; which may seem absent in the distributors and agent consequently they are often uses in industrial markets where there are a fewer large customers that require close contract with suppliers and where the size of orders justifies the expense of foreign travel.
6.3 Overseas sales/marketing office or subsidiary
This is a bigger customer commitment in this choice than using domestic-base sales representatives. The major concern with option is the huge amount of investment required . however, the exporter may be seen to be an indigenous supplier, this improves the chances of achieving market success. In some markets, where access to distribution channels is limited selling direct through an overseas sells office maybe the only feasible way of breaking into the market. The sales office or subsidiary acts as a center for foreign based sales representatives, handles sales distribution and promotion and is a customer service center.
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6.4 The internet
Companies can now export directly to customers through the global reach of the internet. By creating a website overseas consumers are aware of the firms products and can order directly. The internet is not only on demand to market but also used as a useful research tool. Sites like the international growth offer skills and resources for specific industries for example system and computing services companies. Jobber(2007,p.957-959)
6.5 Advantages of direct exporting
Through direct export target management and the control of sales become possible which is unrealistic on the case of direct export
The exporting company establishes the direct contact with a foreign partner and not only operates through its own foreign trade companies abroad but also has the best opportunities for direct participation foreign transaction.
Direct export is applicable to a wide range of goods and services. By exporting a larger number of financial and human resources is covered than in the case of indirect export
The advantage of direct exports are especially apparent in the export and supply of company products and services, the sales of which would not have been possible through foreign trade companies and export firms. This applies, above all to those goods and services that have a small degree of standardization and high-line scheme.
6.6 The main drawbacks of direct exporting
While direct exporting is applicable to a wider range of goods and services, for certain goods and services direct export is considered inappropriate in the same way as indirect. This applies to goods that are due to short work life and cannot or unlike be exported; goods which may be associated with high transport costs, goods which require complex after sale service which cannot by resellers
Direct export is fraught with difficulties for enterprises of economic kind, such are those associated with deterioration of exchange rates. If the rate of domestic or currencies of third countries increases in markets
However compared the indirect exporting, the exporter must dedicate more time, Personnel and Corporate Resources in developing and managing operations. Advantages and disadvantages of direct and indirect exports CBS (Anon n.d.)
7.0 THE EXPORT STRATEGY
International transactions that involve the exchange of product are home based international trade activities, such as global, sourcing, exporting and countertrade. Here we are concerned about exporting and its advantages and disadvantages available for the firm.
For us to understand the advantages and disadvantages we will discuss a company in brief and talk about what benefits and drawbacks exporting provides.
Vellus product. Inc, a small company in the USA that makes gloaming products such as customized shampoos, conditioners, brushing sprays and detangles. According to the Doherty(the president of the firm) shampoo for the people don’t work well on pets because animals skin is more sensitive than humans and easily irritated.
Vellus first export sales was to a Taiwanese importer who purchased $25,000 worth of products to sell at Taiwan toy shows. The word was “I started calls from people around world” says president.
Vellus has become quite familiar with the cultural aspects of various regions. Cavusgil et al (2008, p.381-382)
7.1 The exporting advantages available for Vellus
Since Vellus is a small organization which has the potential to grow, exporting will increase its overall sales, improving market share and general profit margins that are often favorable than the domestic market. A good example in relation to Vellus, a Taiwanese importer who purchased $25,00 worth of products and many knew the product and the demand for the product increased. Increase in demand results into growth in market share which would later increase sales volume.
Building up on the above advantage would add on to say increase in market share and demand would mean Vellus producing on a a large scale hence increasing economies of scale and reducing cost per unit of manufacturing.
Exporting will diversify customer base, reducing dependency on home markets. To date, Vellus has exported its products to Australia, Canada, China, England, Norway and South Africa roughly half of its revenues come from exporting. From this we can say Vellus has diversified customer base in different countries and has also reduced its dependency on domestic market as half of its revenue has come from foreign markets.
Exporting also stabilizes fluctuations in sales associated with economic circles or seasonality demand. For example Vellus can offset declining demands at home due to economic recessions or unforeseen environmental factors by refocusing efforts to other countries doing good in their economy.
If Vellus faces high risk in foreign markets such as foreign currency fluctuations, unstable political environment into what is happening in the Ireland now where the economy has taken its turn to the worst, or decrease in demand for its product it can withdraw from the market. Exporting minimize flexibility and maximize risk.
Since Vellus does not require a physical presence when pursuing an export strategy in foreign markets there is a lower cost of entry. Vellus can use exporting to test new markets before committing great resources through foreign direct investment.
7.2 The drawbacks of exporting
Since exporting does not require a firm to have physical presence in a foreign market (in contrast FDI) , Vellus has fewer opportunities to learn about customers, competitors and other unique aspects of the market. Although Vellus has acquired information about some cultural aspects in some markets it may lack the full details which can be important in decision making. Having general knowledge of the target would prove dangerous as significant aspects such as what drives customers specific demand, however do our customers look at our competition and what policies government is pursuing.
Exporting requires the firm to inquire capabilities and dedicate organizational resources to properly conduct export transaction. For small firms like Vellus limited resources can limit the way would conduct the export strategy. Exporting requires management to put more time and effort to learn about freight for forwarders, documentation, foreign currencies and new financing methods. The acquisition of such capabilities can put a strain on small businesses like Vellus who might not have the required resources and competencies to meet them.
Compared to other entry strategies exporting is much more sensitive to tariff and other trade barriers as well as fluctuations in exchange rates. Into trade barriers Vellus might find it difficult to export to European markets due to unfavorable conditions( barriers) that apply if you are not in Europe or a member of the European union(EU). In relation to the exchange rate we will give an example: the US dollar gained 12% against the Euro and 15% against the Yen. This led to a slow growth of US exports harming those firms that rely heavily on exporting for generating international sales. Exporters run the risk of being priced out of foreign markets. Cavusgil et al (2008, p.389-391)
The role of small medium sized enterprises (SMEs) in exporting is growing. In the United States SMEs have less than 500 employees although in Europe and elsewhere where firms may have fewer than 500 employees to qualify SMEs.
Many governments have undertaken aggressive campaigns to help SMEs to become exporters. The world bank assists SMEs to develop their business skills. SMEs do not require large export markets they mainly carter for niches.
Exporting in general has risen in recent years because its seen as a less risky and most flexible entry strategy.
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