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Direct Exporting
Entering a new market is one of the most important decisions a company will make. Deciding upon its entry method may depend upon its success or failure. There are many different market entry methods, and this is complicated further by considering different international markets. It is these markets that this essay will focus upon. The entry method will determine the level of involvement in international markets. Entry methods range from simply making the products available to export, if anyone is willing to do so, to the furthest extreme when your most important market is outside your domestic market. The author recognises that both products and services can be exported, but has chosen to base his writings upon products.
Considering Exporting
The main reason companies begin to export is to increase profit. If this is not possible, then it is not worth considering. Other reasons include expanding operations in foreign markets because the domestic market is saturated. If further expansion is not possible in your home market, or if your competition is accumulating your market share, you may need to look abroad to recoup your profits. It may also be a way of extending the product life cycle, as every product has the opportunity to start the cycle again. Domestic competition may be very strong, and the costs of marketing at home could far outweigh the costs of exporting to a market with less intense competition. Some may choose to export as a natural progression from their current success in their domestic market.
If competitors are making similar moves, your company does not want to be left behind. Enquires from other markets may also encourage you to look further afield. Less developed countries may find use of your old stock, as their technology could be behind your domestic market. It is also a good way to dispense of excess stock, as they may not be able to afford or even need the newer technology. Running your factories to capacity encourages greater economies of scale, so goods that can’t be sold ‘at home’, can be sold in foreign markets. Testing the sales of your product in another market allows you to analyse certain issues. For example, safety controls may be less strict in certain countries, or pollution regulations may prohibit testing in your own country.
Once a company decides what it wishes to export and why, there are still a number of factors it should consider before choosing the best method?
- What does the company want to gain from exporting?
- Is exporting consistent with other company goals?
- What demands will exporting place on the company’s key resources; management and personnel, production capacity, and finance – and how will these demands be met?
- Are the expected benefits worth the costs, or would the company resources be better used developing new domestic business?
Exporting can play anything from a very small, to a very large part in your company. The answers you give to the above questions will help you decide the part exporting will play in your organisation.
Doole and Lowe, 1999, have compiled this illustration to show the differing levels of involvement in International Marketing.
- Wholly-Owned Subsidiary
- Company Acquisition
- Assembly Operations
- Joint Venture
- Strategic Alliance
- Licensing
- Contract Manufacture
- Direct Marketing
- Franchising
- Distributors and Agents
- Sales Force
- Trading Companies
- Export Management Companies
- Piggyback Operations
- Domestic Purchasing
Most companies stumble across exporting by accident. Electro-X, an electrical automation company from Denmark, made its first move into exporting through unsolicited inquiries, and only its second agent was found by coincidence, while on holiday (Albaum, 1999). Although many companies start international marketing on a small scale, they often climb the ladder as they grow with experience and build up a network of contacts. Companies may start at different points on the ladder depending on why they are entering the international market.
Indirect Exporting
Those entering the exporting scene for the first time will find this method the most simple and least risky. The manufacturer does not deal with the complexities of exporting, but they hand the responsibility elsewhere.
There are many organisations set up exclusively to buy your goods, then ship them and sell them abroad. This method is great for the short term, as finance is readily available, but once the goods have left you, you may loose complete control of where, when, how and to whom they are sold.
There are four main methods of indirect exporting:
- Export Merchants
- Export Management Companies
- Export Commission House
- Piggyback Marketing
Export Merchants
The first time some companies consider exporting was after they had found out that their product was already being sold in a foreign market. Independent people or organisations can take it upon themselves to purchase goods, then take on the task of exporting, marketing and distributing them into a foreign market. Although this method does not seem like an export strategy, it does help the company to consider the prospects of exporting. It also acts as guidance when it comes to measuring the possibility of success in certain foreign markets, although this information will be hard, if not impossible to obtain from the re-seller. This method, more than any other has little control over the sales. In 1991, Branch stated that “It is unwise to permit branded products to be sold in this manner as the risk of losing control of the quality and brand image is serious”.
More recent writers may disagree with this opinion as certain indirect exporting methods have improved their service tremendously, and their world-wide networks makes them an acceptable export strategy. Albaum stated in 1999, “There are reasons for the small or inexperienced firm producing a branded or specialised product to seriously consider utilising an EMC (Export Management Company)”. Tesco has indirectly exported Levi Jeans from USA, to resell in the UK. This form of grey marketing degrades branded items, but may ideal for inexpensive commodities. Some companies may wish to sell excess stock to anyone wishing to purchase it, whether it is sold in Manchester or Mongolia.
This is not a good long term strategy as the merchant is free to choose what to buy, where to buy it from and the price of each purchase. Many organisations are multinational, and loosing the trade of one supplier will not be a major blow. They will undertake all marketing and selling costs, but will often limit the types of products they sell. Concentrating on items such as commodities, where the manufacturer is not easily identified, and it requires no specialised knowledge, therefore requiring little selling effort, and no service requirements. It is also ideal for unstable economies, such as India, where over 70% of exports are indirectly sold in this manner (ft.com, 1998).
Large export merchants called Export Trading Companies (ETC) have a long history. Popular in Africa and Asia, especially Japan, they can act as an export department for manufacturers or take the title to the product for themselves. They may play a part in areas such as “shipping, warehousing, finance, technology transfer, planning, resource development, construction and regional development, insurance, consulting, real estate and deal making in general” (Albaum, 1999). Some producers have set up their own ETC’s, which can be organised along multiple or single product lines, including competing products.
Export Management Companies (EMC)
Although Export Management Companies are independent firms in themselves, they act as the exclusive export department of many companies. They transact business in the names of the businesses they represent or in their own names, and operate for a commission or salary (www.irbc). Unlike export merchants, they have long term relationships with the manufacturer. Many EMC’s specialise in certain products or foreign markets, so their knowledge and networks of foreign distributors serve the manufacturers well. A further advantage that EMC’s have over other methods is they will not sell competing products, and therefore their network of contacts will only see your product.
This is one of the quickest ways to enter foreign markets, and is recommended for those who have no export department, or those just testing the waters. EMC’s working on commission will do their utmost to sell your product including their own research, advertising and promotion. Some EMC’s offer a shipping and forwarding agent service, legal advice and financing assistance.
Savings will also be made on shipping expenses by combining different orders. Manufacturers voice concerns about losing control over foreign sales, although some EMC’s will offer regular reports on foreign progress, and will not proceed with certain actions such as advertising and servicing, unless prior approval is given. In larger quantities, this method is more expensive than direct exporting, but EMC’s do the hard work for you.
Export Commission House
These are representatives of foreign buyers in your domestic country, in order to gain orders placed by their employers. They are paid commission on the goods they purchase and send, and there is a close relationship between them. The export house will scan the market for the required goods, and may invite bids. This is an ideal way to clear final stock, or ‘one-off’ exports as the finance is quickly available. Unfortunately this is only a short term tactic, and again you loose control of your products. Packaging, and labels may need to be adapted, but otherwise it’s generally a domestic sale, with no shipping involved.
Piggyback Marketing
This is an arrangement in which “one manufacturer or service firm distributes a second firm’s products or services” (www.hhtconsult). Companies who receive large contracts, may be asked to provide items they don’t produce, therefore they will subcontract from another manufacturer. These products will then be ‘piggybacking’ onto the main bulk of products, with the sales, marketing and shipping already catered for. It is an ideal way to be associated with prestigious companies, and it may lead to further purchases from the carrier or foreign purchaser. It is also an ideal method for companies in undeveloped countries to enter cultivated markets (Terpstra and Yu, 1990). Markets which have barriers to entry, may also use this technique as a faster way to market penetration. Problems occur when the manufacturer and carrier disagree on issues such as marketing, technical support and servicing, as both companies want what is best for their products. Also once companies start under these arrangements, it may be hard to develop exporting in other ways, due to contractual agreements and lack of experience.
Other Indirect Options
Other indirect exporting methods include the Manufacturer’s Export Agent. Similar to an EMC, but they operate everything under their own name, ideal for testing new products, although they will take credit for your work and they offer less services than an EMC. Although not common in all parts of the world, a Confirming House aids the overseas purchaser by confirming orders already placed, then paying the exporter after the goods are shipped. All contact would go through the house, and this is ideal for countries with less regulated credit conditions. A Resident Buyer acts in a very similar way to an Export Commission House, but works for numerous companies who want continuous contact with their foreign supplier. This allows the manufacturers to build a long term relationship with the purchaser.
Direct Exporting
Companies who take a more direct approach to exporting may choose to transport the goods into a foreign market themselves. This proactive approach gives the company greater controls on issues such as the finished product, the selling and marketing methods used and the markets it wishes to enter. It is a long term strategy that can produce higher profits, as third parties are less involved or not at all. It gives the exporter a great deal of information about the processes involved and the markets it is entering. They can therefore quickly adapt products to market changes. It also allows relationships to be built directly with the customer, and maybe even the consumer.
Although the advantages are obvious, this method requires definite long term commitment, due to the costs, time, effort and resources it takes up. Tariff barriers may dramatically increase your costs, quota systems may limit your exporting potential and additional taxes, are just a number of systems that protect the domestic company. Personnel experience is essential, and even a change in organisational structure is recommended “to support more complex functions” (www.hhtconsult). Choosing the right channels to use could also have a dramatic effect on the success of your exports. These channels include:
- Domestic Export Departments
- Foreign Based Distributors and Agents
- Foreign Sales Branch
Companies will probably choose to use a number of different strategies, depending on each market they decide to enter. Most companies will have their own domestic export department, regardless of other methods used.
Domestic Export Departments
Described as “the most cost efficient, but among the least effective methods of exporting” (www.tradedata), this strategy includes either being directly involved in making foreign sales, or just co-ordinating all exporting activities. A basic arrangement may comprise of an export department, added onto the present organisational structure. Export sales staff will then provide the orders, and expect other parts of the company to perform their job with exports in mind. This can be difficult for certain areas such as the marketing department who have little knowledge of the foreign market. They along with other departments will prefer to focus upon their domestic market, for which they have greater knowledge, and therefore exporting will take a back seat. Albaum, 1999, states that this method is suitable for small amounts of exporting, and usually typifies those firms whose “management philosophy (is) not oriented toward growth in foreign business”.
This has been highlighted by many other writers, who generally suggest that management attitudes and commitment to international expansion are crucial for success (Cavusgail and Naor, 1989). Those dealing with larger amounts of exports may have a fully integrated export department including areas such as marketing and sales. This solves the problem of too much domestic focus, although clashes will now occur when the company decides where to allocate resources.
Personal visits direct to the customers are a necessity, if close relationships are to be built. Although new technology allows us to communicate faster, “faxes, e-mails, and internet advertising is no substitute for direct and personal contact (www.tradedata). This is just another reason why some companies move their exporting departments completely away from their domestic operations, and become self sufficient. They may be closer to all their appropriate contacts, including customers, banks, freight forwarders and so on. These Export Sales Subsidies allow the company to measure its exporting performance, as it has no dealings with other departments and it’s own set of management.
Foreign Based Distributors and Agents
There is a distinct difference between agents and distributors, although they are sometimes wrongfully used interchangeably. A distributor is a customer of the manufacturer, who purchases the goods and earns their profit through a profit margin when it’s resold. An agent is a representative of the manufacturer who earns commission for finding foreign purchasers of the manufacturers goods. Although agents are independent, they could work exclusively for the manufacturer, selling only their goods. Some agents work semi-exclusively, for a number of non-competing manufacturers, but others are non-exclusive, and they sell a range of goods including competing items.
As they are usually residents of the target market, they have a vast amount of preferential knowledge, and have probably built a network of contacts. They can offer services and support to customers that couldn’t be offered from your home market.
Carefully choosing an agent or distributor will play a large part in your prosperity. Certain issue must be taken into consideration:
- Size of Sales Force
- Sales Record
- Territorial Analysis
- Product Mix
- Facilities and Equipment
- Customer Profile
- Promotional Thrust
Research carried out by Yeoh and Calantone in 1995, suggests that commitment and financial strength are the two most important criteria in the foreign distribution selection process. A contract guards the rights of both parties on issues such as what products and territory they can and cannot sell in. Although agents and distributors can offer greater services than domestic export departments, they will take a larger slice of your profits, and can be hard to control.
Foreign Sales Branch
A successful agent or distributor will build up such custom that a foreign sales branch is needed. This is no reason to ease them out of a job, on the contrary, with their local knowledge and connections they could head the department. This is especially relevant in countries where a proportion of staff must be residents of the foreign country (Doole and Lowe, 1999). Establishing an office on foreign territory will give you closer supervision over your sales.
They will be able to handle all sales, distribution and promotional work, storing products and spare parts for increased efficiency and speed. The work of a Foreign Sales Branch can be compared to a foreign distributor, except it is owned and ran by a domestic manufacturer. It gives the customer reassurance that you are interested in long term relationships, and the ease of access should increase sales. The cost of establishing such an office will need to be covered by the sales in that country, with a view of maintaining and increasing further profits.
The Best Policy
After discussing all the options available to exporters and their advantages and disadvantages, I find it impossible to say that any one method is the best. A great number of factors can effect the different entry methods you decided to take, and many questions need to be asked of each company, as discussed earlier, before they decide on the right option for themselves. Some suggest that strategies chosen for exporting will have a greater effect than the actual product, “Experience has shown that a company’s success in foreign markets depends less on the unique attributes of its products than on its marketing methods”.
This author can only conclude that every possible exporting method has a part to play for certain companies. Every method had been tried, tested and has succeeded, therefore it must be successful in certain circumstances. I disagree with the hypothesis that it is better for a company to adopt a direct exporting policy, rather than opt for indirect exporting, as there are too many variables to consider. I do agree with Doole and Lowe, 1999, when they state that “there is, however, no ideal market entry strategy and different market entry methods might be adopted by different firms entering the same market and/or by the same firm in different markets”.
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