Lecture 6.pdf
- 1. ENTERING AND WORKING IN INTERNATIONAL MARKETS Exporting and Global Sourcing
- 2. The strategy of producing products or services in one country (often the producer’s home country) and selling and distributing them to customers located in other countries Exporting as an Entry Strategy § Exporting is associated with low risk, low cost, and high flexibility § Most firms prefer it as their primary and/or first foreign market entry strategy § Popular strategy with SMEs § Trade, trade deficits, and trade surpluses are related to exporting
- 3. Exporting as an Entry Strategy • World exports has grown exponentially • Exporting is part of firms’ internationalization portfolio, even if they have extensive international operations • MNEs - U.S. – 3/4 of the total value of exports from the U.S. = large manufacturing firms • SMEs- other countries- more than 90% of exporting firms in most countries are SMEs with fewer than 500 employees
- 4. Why export? § Flexibility - The exporter can enter and withdraw from markets fairly easily, with minimal risk and expense § Complementary - It can complement more sophisticated joint venture or FDI strategies as firms begin to export from their foreign locations to other countries
- 5. International Sales Intensity of Typical U.S. Industries Industry Average International Sales in the Industry (as percentage of total sales) Example Firm in the Industry Example Firm’s International Sales (as percentage of total sales) Energy 59% Exxon Mobil 66% Information Technology 57 Advanced Micro Devices 78 Materials 53 Corning 72 Industrials 45 Caterpillar 59 Healthcare 37 Abbott Laboratories 69 Consumer Discretionary 35 Mattel 40 Consumer Staples 34 General Mills 28 SOURCES: PATTI DOMM, “SHRINKING DOLLAR COULD BOOST THE MARKET AND MAKE THESE STOCKS BIG WINNERS,” CNBC, JULY 24, 2017, www.cnbc.com ; Forbes, “The Global 2000,” 2017, www.forbes.com •; Hoovers corporate profiles, 2018, •www.hoovers.com
- 6. Services are Exported as Well • Examples: Architecture, education, banking, insurance, entertainment, information • Many pure services cannot be exported because they cannot be transported • Retailers offer their services by establishing retail stores abroad, via FDI Retailing requires direct contact with customers • Overall, most services are provided to foreign customers via entry strategies other than exporting, especially FDI
- 7. Exporting Advantages 😎 Disadvantages 🙄 Increase sales volume; improve market share Fewer opportunities to learn about customers, competitors, and other aspects of foreign markets Generate better profit margins Firm must acquire and dedicate new capabilities in international sales contracts and transactions, international financing methods, and logistics and documentation All of the above can strain organizational resources Increase economies of scale Diversify customer base Stabilize sales fluctuations Minimize market entry costs Firm is exposed to tariffs, other trade barriers, fluctuating exchange rates Minimize risk Maximize flexibility Leverage the capabilities of foreign distributors
- 8. A Systematic Approach to Exporting
- 9. Export Intermediation Options • Indirect exporting: Contracting with an intermediary in the firm’s home country to perform all export functions, often an Export Management Company or a Trading Company. Common among firms new to exporting • Direct exporting: Contracting with intermediaries in the foreign market to perform export functions, such as distributors or agents. They perform downstream value-chain activities in the target market • Company-owned foreign subsidiary: Similar to direct exporting, except the exporter owns the foreign intermediation operation; the most advanced option
- 10. Alternative Organizational Arrangements for Exporting
- 11. Sources of Export Financing • Commercial banks • Distribution channel intermediaries • Buyers • Suppliers • Government assistance programs Airbus is Europe’s leading exporter of commercial aircraft
- 12. Types of Exporting Intermediaries § Foreign distributor: Based in the foreign market. Works under contract for the exporter, takes title to, and distributes the exporter’s products in a national market or territory, often performing marketing functions such as sales, promotion, and after-sales service § Manufacturer’s representative: Contracted by the exporter to represent and sell its merchandise or services in a designated country or territory § Trading company: Engages in import and export of a variety of commodities, products, and services § Export management company (EMC): Based in the home market. Acts as an export agent on behalf of a client firm
- 13. Finding Foreign Intermediaries • Country and regional business directories • Trade associations that support specific industries • Government departments, ministries, and agencies charged with assisting economic and trade development • Commercial attachés in embassies and consulates abroad • Branch offices of certain foreign government agencies located in the exporter’s country • Freight forwarders and trade consultants with specific knowledge about the exporter’s target markets • Trade fairs • On-site visits
- 14. Working with Foreign Intermediaries • The exporter relies on intermediaries for much of the marketing, physical distribution, and customer service activities in the export market • The exporter should cultivate mutually beneficial, bonding relations; respond to the intermediary’s needs; demonstrate commitment; and build trust • Intermediaries prefer handling good, profitable products, and desire various types of support
- 15. Developing relationships with intermediaries • Cultivate mutually beneficial, bonding relationships • Respond genuinely to intermediary needs • Build solidarity by demonstrating solid commitment, remaining reliable, and building trust • To create a positive working relationship, the exporter should be sensitive to the intermediary’s objectives and aspirations
- 16. Foreign intermediaries expect exporters to provide: • Good, reliable products, with a ready market • Products that provide significant profits • Opportunities to handle other product lines • Support for marketing communications, advertising, and product warranties • Payment method that does not unduly burden the intermediary • Training for intermediary staff and visitation of the exporter’s facilities • Establishment of after-sales service facilities- training of local technicians and supply of replacement parts
- 17. Buyer-seller relationships Relational exchanges The relational approach to channel selection involves building a committed relationship between a seller and a buyer (Day, 2000). The partners benefit from lower uncertainty, increased efficiency and lower transaction costs Long-term orientation: short-term sacrifices for the sake of possible benefits in the future (Anderson & Weitz, 1992) Transactional exchanges Discrete exchanges that involve limited communication between the buyer and the seller and a narrow relational content (Dwyer et al., 1987). Firms gain more flexibility regarding the sales of products, as well as short-term opportunities to be exploited. Source: Nyu, V., Nilssen, F., & Kandemir, D. (2022). Small exporting firms’ choice of exchange mode in international marketing channels for perishable products: A contingency approach. International Business Review, 31(1), 101919.
- 18. Common Dispute Areas with Intermediaries § Compensation arrangements § Pricing practices § Advertising and promotion practices and the extent of advertising support § After-sales service § Return policies § Adequate inventory levels § Incentives for promoting new products § Adapting the product for local customers
- 19. Criteria for Evaluating Export Intermediaries Intermediary Dimension Evaluation Criteria Organizational Strengths • Ability to finance sales and growth in the market • Ability to provide financing to customers • Management team quality • Reputation with customers • Connections with influential people or government agencies in the market Product-Related Factors • Knowledge about the exporter's product • Quality and superiority of all product lines handled by the intermediary • Ability to ensure security for patents and other intellectual property rights • Extent to which intermediary handles competing product lines
- 20. Criteria for Evaluating Export Intermediaries Intermediary Dimension Evaluation Criteria Marketing Capabilities • Experience with the product line and customers • Extent of geographic coverage provided in the target market • Quality and quantity of sales force • Ability to formulate and implement marketing plans Managerial Commitment • Percent of intermediary's business consisting of a single supplier • Willingness to maintain inventory sufficient to fully serve the market • Commitment to achieving exporter's sales targets
- 21. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Global Sourcing Procurement of products or services from suppliers located abroad for consumption in the home country or a third country Also called global outsourcing, global procurement or global purchasing; it amounts to importing. Involves a contractual relationship between the buyer and the foreign supplier, in which the performance of a specific value-chain activity is subcontracted to the firm’s own subsidiary or to an independent supplier.
- 22. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Sourcing for Typical Smartphone
- 23. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Drivers of Global Sourcing 1. Technological advances in communications, especially the Internet and international telephony. 2. Falling costs of international business. 3. Entrepreneurship and rapid economic transformation in emerging market countries.
- 24. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Two Key Decisions Regarding Global Sourcing 1. Decision 1: Outsource or Not? Decide whether each value-adding activity should be conducted in-house or by an independent supplier. Known as the ‘make or buy’ decision. Firms usually internalize activities that are part of their core competence or that involve the use of valuable intellectual property. 2. Decision 2: Where in the World Should Value-Adding Activities Be Located? Firms configure their value-chain activities in specific countries to cut costs, reduce transit time, access favorable factors of production, and access competitive advantages.
- 25. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Example of Worldwide Value Chain Configuration 1. BMW employs more than 60,000 factory personnel at 30 sites in 14 countries to manufacture its vehicles. 2. The Munich plant builds the BMW 3 Series and supplies engines to other BMW factories abroad. 3. A plant in South Carolina makes 350,000 vehicles per year. 4. A plant in NE China makes cars in a local joint venture. 5. A plant in India makes BMWs for the Asia market. 6. BMW configures sourcing to minimize costs (e.g., by producing in China), access skilled personnel (by producing in Germany), remain close to key markets (by producing in China, India and the United States).
- 26. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Nature of Outsourcing and Global Sourcing Blank Value-adding activity is internalized Value-adding activity is externalized(outsourced) Value-adding activity kept in home country A Keep production in-house, in home country B Outsource production to third- party provider at home Value-adding activity conducted abroad (global sourcing) C Delegate production to foreign subsidiary or affiliate(captive sourcing) D Outsource production to a third-party provider abroad (contract manufacturing or global sourcing from independent suppliers) Sources: Based on B. Kedia and D. Mukherjee, “Understanding Offshoring: A Research Framework Based on Disintegration, Location and Externalization Advantages,” Journal of World Business 44, No. 3 (2009), pp.250-261; Information Economy Report 2009 (New York: United Nations, 2009); World Investment Report 2004 (New York: U N C T A D, 2004).
- 27. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Choices in Outsourcing Value Chain Activities
- 28. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Benefits of Global Sourcing • Cost Efficiency, due to lower wages abroad, leading to improve profitability. • Ability to Achieve Strategic Goals – Faster corporate growth. – Access to qualified personnel. – Improved productivity and service. – Business process redesign. – Increased speed to market. – Access to new markets. – Technological flexibility. Retailers source their products from China and other countries worldwide
- 29. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Risks in Global Sourcing • Lower-than-expected cost savings. • Environmental factors, such as exchange rate fluctuations, trade barriers, and labor strikes. • Weak legal environment, which can affect protection of intellectual property. • Inadequate or low-skilled workers. • Overreliance on suppliers. • Risk of creating competitors. • Erosion of morale and commitment among home- country employees, due to outsourcing jobs.
- 30. You can reach me at: valeria.nyu@nord.no Any questions? Thanks!