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Developing Export Strategy 1/3

Your company should develop a method of market entry.This section explains foreign market entry issues such as finding and developing trade leads, exporting directly and indirectly, pursuing international bid opportunities, managing and motivating distributors, promoting your product and traveling overseas.

Each of the general categories listed below come with their own unique trade-offs between financial risks, product control and organizational goals.

The indirect methods of market entry usually require less marketing investment, but you could lose substantial control over the marketing process. Direct exporting may necessitate larger capital investment in marketing, but your degree of control over export strategies is greater. Corporate presence is an option for companies with successfultest marketing.

Direct Exporting
You can sell directly to customers in foreign markets by opening an export sales department, which creates an opportunity to establish a closer relationship with the overseas market and buyer. In addition to selling directly to your targeted market, you may also use an export manager to handle other sales approaches. In some countries where you cannot sell directly to the end-user, you must use a local agent or representative. This is true in the Middle East, Central America, and in some Asian countries.

Other direct exporting options include using a variety of export intermediaries.

Manufacturer's Representatives or Sales Agents
Generally, representatives or sales agents refer to a person responsible for closing the sale and taking orders on a commission basis. They do not take financial responsibility or collect payment for the sales, and they assume no risk or responsibility for the product. Their primary interest is to make the sale, whereas it is your responsibility to check credit and arrange payment terms. A representative will want a contract from you for:

  • Guaranteeing territory

  • Exclusivity

  • Method of compensation

  • Term of service

  • Representation of the product line for a definite period of time

In most instances, representatives will be servicing both domestic and import accounts, as well as selling complimentary lines that do not compete and they utilize the product literature and samples that you supply.

There is some controversy over the term agent. Depending on the country, the term carries a rather broad interpretation of legal responsibilities involving the agent's independent activity to contract on your behalf without your instruction. Avoid using the term agent. Any contract should clearly indicate legal authority of the representative to obligate the firm.

Foreign Distributors/Importers
Foreign distributors purchase the product and are always responsible for payment of the goods. They assume financial risk and generally provide support and customer service They often buy to fill their own inventories and typically carry a range of non-competitive, but complementary products. Beware, some distributors have been known to buy products they purposely don't sell to check competition.

Distributors should maintain adequate facilities and staff for after-sale service. Investigate this option if your product requires maintenance or spare parts. Payment terms and length of contract are usually initiated with a short trial period. Territory exclusivity is normally required by distributors.

Overseas Retailers
Selling directly to a foreign retailer relies mainly on traveling sales representatives. Another distribution alternative uses overseas buying offices of domestic retailers. These buyers can also be a practical source of foreign distribution for American manufacturers. Print-based selling techniques using catalogs, product literature, and brochures can also reach the marketing base of foreign retailers and they reduce the cost of traveling.

Product sales are usually limited to consumer goods that can be sold at a lower price, reflecting the absence of a representative's commission. It is recommended that you sell to the retailer at a price flexible enough to allow you to pay a representative in the future. In general, stores are more willing to select the service of a representative who places the order for them, and services their account with follow-up channels of communication.

Central Trade Offices and Trading Companies
Buying offices or central trade offices are often divided into industry groups that buy for the whole country in some of the few remaining controlled market economies. China is the largest controlled economy that maintains trade and buying offices, often called Foreign Trade Corporations. They may buy for the whole country or for regional groups and provinces. Chinese trade organizations do most of the negotiating and contracting, which reduces the risk of bargaining with lower level officials who do not have ministry approval.

Native to Japan, general trading companies, called "Sogo Shoshas", set market trends for Japan's internal and external trade. These companies can be a valuable resource for businesses who want to participate in the Japanese market. Major trading companies usually have offices in the U.S., however, they may have to send a sample to Japan for final approval. Allow time for product transportation and evaluation.

Indirect Exporting

While direct exporting may be a profitable method of foreign market entry for some businesses, sale by the exporter through an intermediary may be a better alternative to the complex tasks and risks involved in direct exporting.

Domestic Intermediary

Export Management Company (EMC)
An Export Management Company (EMC) functions as an "off-site" export sales department, representing your product along with various non-competitive manufacturers. EMCs search for business for your company and usually provides the following services:

  • Perform market research and develop a marketing strategy

  • Locate new and utilize existing foreign distributors or sales representatives

  • Function as an overseas distribution channel or wholesaler

  • Take title to the goods and operate on a commission basis

Note: EMCs may or may not take title to the goods, depending on the arrangement between the EMC and the manufacturer. In addition, they must balance the product lines they represent.. Product diversification is essential to protect against radical foreign market changes and maximize economies of scale.

Export Trading Company (ETC)
Export Trading Companies (ETC) are very similar to.EMCs. The ETC is more likely to take title to the product and pay you directly, but like an EMC, they can also act as an export department. Usually, there is less responsibility on the part of the ETC towards the supplier and they tend to be demand driven and transaction oriented.

There is legislation that promotes the use and formation of an EMC or ETC by providing the EMC/ETC with immunity from prosecution from antitrust regulations. It permits banks to invest financially in EMCs/ETCs and reduces restrictions on trade financed by financial institutions. Officially, an ETC is a legally defined entity under the Export Trading Company Act , with specific responsibilities and obligations. In contrast to an EMC, an ETC is very difficult to set up. There are special certifications and requirements, along with detailed paperwork.

An example of an ETC is Mitsui; they buy and sell goods on their own behalf for their clients. Before deciding to use an EMC or ETC, consider the following pros and cons.

Advantages of Using EMCs/ETCs

  • Faster foreign market entry in terms of first recorded sales.

  • Better focus on exporting, as most firms give priority to their domestic problems.

  • Lower out-of-pocket expenses.

  • Opportunity to study the methods and potential of exporting.

  • Expertise in dealing with the details of exporting, as well as its strategies.

Potential Disadvantages of Using EMCs/ETCs

  • Loss of control of the export strategies and quality control of after-sales service.

  • Competition from the EMCs/ETCs other products.

  • Reluctance of some foreign buyers to deal with a third party intermediary.

  • Added costs and higher selling prices because of gross profit margin requirements of the EMC/ETC, unless the economies of scale can be used to off-set this factor.

  • Possibility of the EMC/ETC neglecting the client's product in favor of other products that might be more profitable and easier to sell.

Overseas Intermediary

Licensing
Licensing offers the advantages of rapid foreign market entry and reduced capital requirements to establish manufacturing facilities overseas.

A license is a contract to identify what part of the licensor's trademarks, patents, designs, copyrights, and know-how are being licensed.

Important considerations:

  • Protect trademarks and intellectual property by securing proper patent and trademark registration before signing a licensing contract.

  • Make sure agreements are not in violation of the host country's existing trade/product regulations or restrictions.

  • Don't wind up as competitor to your own product by having your own design or know-how licensed in a foreign marketplace where you are already exporting.

Although the major disadvantage of licensing is the possibility of losing control over manufacturing and marketing, sometimes you can learn much more from your licensees by giving attention to original product improvements.

Franchising
According to AZ Franchises.com , the franchise industry accounts for approximately 40% of all retail sales in the U.S. Despite the recent slowdown, global expansion has occurred in nearly every world region. Most companies already have successful domestic operations, with the most popular franchises occurring within the restaurant and retail sectors.

Franchise agreements tend to give the franchiser more control over marketing, since it is the company's reputation and existing market relationship that adds value to the product. With almost any overseas arrangement, distribution approaches must incur expenses to support foreign marketing such as advertising. However, the overall investment by franchisers is much less than for company-owned sales outlets.

McDonalds and Coca Cola are prime examples of success. Japan, Europe, Australia and Asia are increasing their franchise development. Canada is also a high-ranking country for goods sold through franchise outlets, largely due to its location. The United Kingdom claims over 2500 franchise operations.

Contracting
Agreements with foreign manufacturers to produce your product, as opposed to exporting, are referred to as contract manufacturing. As an easy foreign market entry method since your manufacturer is already producing your product for their domestic market, it can also be the initial instrument used to create a subsidiary company overseas. Although it is a method of indirect distribution to foreign markets, it does not address sales and marketing issues of the finished product.

Important considerations:
How much intellectual knowledge should you deliver to the manufacturing firm to make contracting possible?

  • Quality control at overseas production facilities.

  • Lack of control over geographical, cultural or economic conditions.

  • Third party disclosure of confidential product information.

In contrast to licensing, contract manufacturing accommodates company management roles in the foreign operation. However, they will have to interact with entirely new management, whose first language is probably not English. Regardless of these disadvantages, the contracting manufacturer will have knowledge of the foreign market as well as the business and political contacts to facilitate market entry.

Other Intermediaries

Piggyback Marketing
A company that already has an export distribution arrangement established may need to provide other goods or services to supplement the product. Permitting another company to market your product or service along with its own is called piggyback exporting. This type of exporting works well with accessory type products (computer hardware/software) or follow-up services where a third party adds value to the distribution system by offering a more complete solution to the foreign market.

Export Merchants
These remarketers purchase and then re-package products (usually under their own label) to establish exclusive markets and customers. The main disadvantage of using export merchants is that you could lose control over product pricing and marketing in overseas markets. The territories the remarketer's products reach out should be tracked to avoid interference with current export activities.

Corporate Presence
Entering a foreign market by establishing an overseas presence requires careful planning and legal guidance. Corporate presence decisions that involve the establishment of a foreign subsidiary as the primary method of selling overseas are on the rise for both small and large companies. However there are alternative approaches to foreign distribution.

Alternative Distribution Approaches

Joint Ventures
Joint ventures bring together two companies from different countries with similar goals to establish a market entry and a distribution network. Each partner brings specialized skills that make significant contributions to manufacturing and distribution capabilities.

Unique features of joint ventures:

  • Joint ventures can be equity or non-equity partnerships.

  • In some countries, a joint venture is the only way a company can set up operations.

  • Host country laws often require a native citizen to have a percentage of ownership.

  • Both partners make substantial investments into the venture.

Unlike licensing, joint ventures require a direct investment for management, technology transfer, training, and foreign relations. However, in a joint venture agreement, your company is in a position to expand resources, export experience and market knowledge while spreading the risk and laying a distribution framework. There are also several forms of tax advantages or waivers offered by foreign countries for joint ventures.

Strategic Alliances
Strategic Alliances is a broad term used to refer to alternative alliances, other than joint ventures or subsidiaries. An alliance is a form of presence overseas that represents more than a simple buy/sell agreement. It has a well structured purpose, shared management strategies and financial goal. Companies that form strategic alliances do not necessarily create an independent business organization. For example, a strategic alliance may take the shape of any one, or combination of the following agreements:

  • Intellectual/Technology sharing

  • Cross-licensing

  • Distribution arrangements

  • Equity

  • Product development coordination

Many small businesses view strategic alliances as an alternative to capital intensive investment approaches to foreign market entry.

Subsidiaries
In contrast to joint ventures, subsidiaries guarantee control over all decisions involving marketing and production. Their technologies, patents, trademarks, and know-how have the maximum protection available under the host country's laws.

Subsidiaries are treated the same as host company operations in terms of benefits, regulations and taxes. There are favored places in the world to consider for jointly or wholly owned subsidiaries and manufacturing facilities. Factors to consider range from low labor costs and government regulation to tax and economic incentives.

Expert legal advice is recommended to determine true advantages of the subsidiary agreement within the laws and customs of the host country.

Finding Trade Leads
After deciding your export methods, you need to develop leads to opportunities with end users, distributors, and potential joint venture partners and representatives. If the buyer or end user is readily identified, this is simple. However, sometimes it is necessary to identify leads for the required buyers, distributors, representatives, or joint ventures. These are often available from a variety of government, public and private databases, programs, and electronic resources, such as Promotion Service Centers, and the Trade Information Center of the Department of Commerce (DOC) at 1-800-USA-TRADE.

Government agencies and sources are available from federal, state and local agencies. Private agencies and sources include chambers of commerce, business associations, trade shows, and traditional media sources. Electronic sources, including the Internet, represent the newest, fastest growing, and potentially most promising mechanism.

Government Agencies and Sources
The primary avenue for leads in the government sector is from agencies of the Federal government such as the Department of Commerce (DOC). The DOC coordinates services, publications and trade shows. Additional sources are available through state and local governments, although not as extensive. Many of these services are available at little or minimal charge. For California exporters, Trade Promotion Service Centers can provide counseling and resources to help you find trade leads and distributors. Most of the government sector activity is confined to the federal level, particularly the DOC. Also, other agencies may be more appropriate resources for your product and should not be neglected.

United States Department of Commerce (DOC)
The Department of Commerce (DOC) identifies and qualifies leads for potential buyers, distributors, joint venture partners and licensees from both public and private sources. In addition to its own product, country, and program experts, the DOC utilizes an established network of commercial officers located in countries that represent 95% of the market for U.S. products.

Up-to-date lists and specific dates are available from the nearest Commerce district office. You can also contact the Export Promotion Service, U. S. Department of Commerce office at14th Street and Constitution Ave., N.W., Washington D.C.; telephone (202) 482-2505 or 1-800-USA Trade.

United States Department of Agriculture (USDA)
The Foreign Agricultural Service (FAS) of the Department of Agriculture (USDA) is responsible for collecting, analyzing, and disseminating information about global supply and demand, trade trends, and market opportunities. FAS seeks improved market access for U.S. products; administers export financing and market development programs; provides export services; carries out food aid and market-related technical assistance programs; and provides linkages to world resources and international organizations.

FAS utilizes an organization of embassy officers and attaches, trade officers, analysts and marketing specialists to provide a wide range of services. The
U.S. Exporter Assistance - Partners and Trade Leads program is very useful to grow a business.Visit their web site for more information about their services.

United States Agency for International Development (USAID)
The Agency for International Development (USAID) is responsible for the majority of the U. S. Foreign economic assistance programs. As such, it offers a conduit for the export of U.S. services and goods. Opportunities are available for the export of commodities, expertise, and equipment. Additionally, the use of USAID funds overseas opens avenues for the purchase of U.S. goods and services.

United StatesTrade Development Agency (USTDA)
The Trade Development Agency (USTDA) is an independent government agency that funds feasibility studies, analyses, and training programs in emerging overseas markets and Eastern Europe. Its contracts have to be assigned to U.S. companies. TDA activity is primarily oriented to determining the viability of markets available for U.S. exports. This provides opportunities for analysts, consultants, and managers. Additionally, those involved in the program obtain a "leg up" on competition through the development of market expertise and contacts.

State and Local Governments

Many state and local governments will provide assistance to potential exporters although this will vary by locality and product. There is often a specific alliance between certain state and local governments and specific overseas counterparts such as "sister cities." Services often include:

  • Trade Leads: usually available from agencies of state and local governments. For more information contact TradePort.

  • Mission Planning Assistance and Introductions: frequently available at the state level in conjunction with trade shows arranged to showcase a variety of goods and services native to that state.

  • Promotional Assistance: many state and even local governments realize the benefits to their economies by promoting exports. Some of them fund printed and electronic materials, host trade shows and support trade missions.

  • Existing Contacts: as with other government agencies, a database of previous contacts and interested parties are maintained by state and local government agencies from their prior activities.

Most of the government sector activity is confined to the federal level, particularly the DOC. Other agencies may be more appropriate resources for your product and should not be neglected.

Private Agencies and Sources

Existing business relationships and associations provide another avenue to making export connections and obtaining leads. These include:

  • Banks and other financial Institutions: most larger banks and financial institutions are now multi-national, have correspondent relationships with overseas counterparts, or maintain a department to handle foreign financial transactions. These can frequently provide leads and introductions to overseas markets.

  • Business Colleagues, with existing relationships and firsthand experience may give personal recommendation or introductions to prospective representatives, buyers, or distributors.

  • Trade and Industry Associations are an excellent opportunity to share information and contacts with those having similar interests.

  • Trade Shows and Missions to not only share information with other exporters, but provide the opportunity for direct contact with interested buyers, representatives, distributors.

  • Export Seminars: oriented towards exporting offer yet another opportunity to meet like-minded and experienced producers as well as develop additional expertise.

  • Chambers of Commerce are normally involved in trade shows and missions. and they maintain a database of contacts for those interested in U.S. exports. Frequently, they maintain "sister" relationships with overseas chambers in se they place ads in trade journals.

  • Trade Directories: Publications such as Trade Directories of the World by Croner Publications provide lists of trade associations and facilitate contacting established entities interested in exports/imports.

  • Brochures and Catalogs: exhibiting your company and/or products not only provide information but can also promote through a variety of other sources such as trade shows, catalog shows, and direct mail or contact with buyers, distributor, or representatives.

  • Telephone Books: can often be obtained through an embassy or banking contact if a specific target market has been selected.

  • Posters and Billboards: in many countries, particularly Latin America, posters, billboards, and ads on buses, taxis, and sports arenas serve well to advertise the benefits and availability of your product.

  • Foreign Trade Association Newsletters: the correspondence available from overseas can also provide leads regarding perceived needs and requirements in those markets.

  • Miscellaneous Contacts: sometimes contacts can be made through unexpected sources such as freight carriers, shipping agents, airlines, commodities brokers, port authorities, and others can be a valuable source of information, contacts, and leads.

Television and Motion Pictures
Television and motion pictures can serve to elicit interest in several ways:

  • Direct advertising reaches a broad market quickly.

  • The display of your product in a successful motion picture or television production can provide not only exposure, but also demand.

  • Current methods of telecommunication permit the interactive review of products and their features with potential leads.

Electronic Media
Electronic formats have the potential to accommodate all and replace many of the existing ways to locate leads. Electronic access to all previously listed government and private services, events, publications, and foreign associations is available.

Finding An Overseas Representative
Once you've determined that you want to export directly, instead of indirectly, you must decide if you want to sell through an agent (often called appointee) or a distributor (also called dealers, jobbers, wholesalers, and sometimes even retailers). There is a substantial difference between the two categories both legally and functionally. It is often difficult and expensive to unwind from established relationships, therefore it is important to carefully determine the correct connection for your exporting efforts. Once this is made, you need to locate, select, screen, and reach an operating agreement with your contact.

  • Decide if you need an agent or distributor.

  • Compile a list of possible representatives for each market.

  • Contact potential representatives describing your intentions.

  • Evaluate each potential representative's reputation, capabilities, and financial status.

  • Draft and execute agreement.

A thorough analysis of your needs and requirements, as well as a comprehensive search, evaluation, and selection are critical to the success of your marketing effort.

Agent or Distributor?
The decision whether to use a distributor or an agent is a substantial one and vital to the nature of your overseas efforts. The success or failure of your export effort will depend upon this decision. Consultation with your legal counsel, the practicalities of your export requirements, and the traditions of the country you are exporting to will have substantial bearing on your decision.

Representation of any kind in a foreign country is much like a marriage, it can be easy to get into but often difficult and expensive to terminate. If you are not confident in your selection of a representative, sell directly to retailers or other end users until the right one is located.

Use an Agent if:

  • It is the accepted distribution method in the country you are exporting to.

  • You do not need to maintain inventory in the foreign country. For example, if you manufacture custom or capital equipment, sell services, or can have inventory shipped direct for individual orders, you probably do not need to keep stock and maintain a distributorship program in the foreign country.

  • You want to maintain direct control of the sales of your products overseas. Since agents sell the product on behalf of the exporter, they must sell it at the exporter's price, under specified conditions, and with prescribed representations.

  • You intend to benefit from corporate identity and intend to conduct business under your own name.

Use a Distributor if:

  • It is the accepted distribution method in the country to which you are exporting.

  • You need to maintain inventory on the foreign country and do not want to maintain your own distribution network.

Compile Potential Representative List
Once you've determined that you will use a representative, you must locate possible candidates to act on your behalf. These are available either through government sponsored or private sector programs, databases, business contacts, and a host of other methods. One of the best sources that can minimize your search efforts is the DOC Agent/Distributor service. If your product has 51% or more U.S. made content, the DOC will send your product literature to the specified foreign country, conduct a search, and prepare a report identifying up to six foreign prospects who have examined your literature and expressed interest.

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