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How can government improve the business climate? - The Manzella Report | The Premier Source For Global Business And Economic News

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Strategic Options for Global Expansion

By John Manzella Friday, January 01, 1999

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In order for lenders to obtain a full appreciation of the exporters m indset, it is im portant to understand som e of his/her considerations prior to obtaining an ov erseas order. One of the first issues confronting an exporter is deciding what m arkets to pursue. In doing so, exporters should determ ine each country s m arket size, its rate of growth, U.S. m arket share and whether that m arket share is increasing or decreasing. In addition, he/she should calculate whether or not the firm can be com petitiv e in the selected m arkets. Trade barriers (tariffs, as well as standards, regulations, quotas, labeling requirem ents, etc.) in each selected m arket m ust be identified. If excessiv e, these barriers m ay m ake the exporters product too expensiv e and lim it his/her exports. If the barriers are deem ed m anageable, the next step would inv olv e inv estigating whether any v ested interests can bar the exporters product from the m arket. The exporter m ust also conduct research to becom e inform ed about com petitors products, prices, distribution m ethods and com m itm ents to after-sale serv ice, as well as target custom ers. If intense com petition exists, the exporter m ay decide to look at sm aller m arkets that m ay be unattractiv e for m ultinationals, but big enough for a sm all firm . Sensitiv ity to foreign cultures is not only polite, its good business. As a result, the exporter also m ust be concerned with the custom ers culture and tastes. If the products and designs will not suit the target m arket, the exporter will need to m ake changes or choose another m arket. In addition, other factors to be considered include the degree of foreign intellectual property protection, env ironm ental standards, an understanding of the legal sy stem and how it works, and the com prehensiv eness, or lack of, com m ercial legislation. The absence of civ il, com m ercial and crim inal codes can be a m ajor constraint. And confusing and burdensom e bureaucratic requirem ents can tie up v aluable tim e. As a result of the effort up to this point, it is not uncom m on for the exporter to grow fatigued, giv e up, or abandon the objectiv e. There are m any strategies from which a com pany can choose to expand internationally . These include direct exporting, indirect exporting, establishing a joint v enture or strategic alliance in a foreign m arket, acquiring a firm through direct inv estm ent, or licensing technology abroad. In order to understand the exporters needs, it is im portant for lenders to grasp these strategies. The benefits and risks associated with each m ethod are contingent on m any factors, including the ty pe of product or serv ice, the need for support, and the foreign econom ic, political, business, and cultural env ironm ent the exporter is seeking to penetrate. The best strategy will depend on the firm s lev el of resources and com m itm ent, and degree of risk it is willing to incur. A num ber of questions m ust be answered before com m itting to a particular strategy . Experienced international executiv es often say the com pany contem plating international expansion m ust be v ery fam iliar with the env ironm ent it is seeking to penetrate and understand how to do business there. What it will take to be successful, to staff appropriately , integrate distribution, finance operations, and rem edy currency risks should be analy zed ahead of tim e. A prim ary concern frequently expressed is the need to know how to term inate an agreem ent if the arrangem ent does not work. Additionally , seasoned executiv es indicate it is essential to determ ine the potential for political risk and the propensity for business disruption in each country under consideration. How can gov ernm ent im prov e the business clim ate? What should entrepreneurs be doing today ? Will dev eloping countries dev alue their Related Articles currencies? John Manzella Strategic Alliances and Foreign Speaker Dem Investment Opportunities -o

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Indirect Exporting
Should the client decide not to get inv olv ed in exporting, he/she m ay consider selling the product to an interm ediary located in the United States. Indirect exporting dem ands little or no knowledge of foreign m arkets. The adv antages to sm all- and m edium -size firm s are that indirect exporting requires less international experience, less com m itm ent of resources, and less risk. In addition, firm s often can enter foreign m arkets m ore quickly through indirect exporting. The disadv antages include less control ov er the m arketing of the product, less inform ation about the buy ers and generally less profit because of the greater num ber of interm ediaries inv olv ed. These interm ediaries include foreign buy ing agents, brokers and agents, export m anagem ent and export trading com panies, piggy back m arketing, and foreign trading com panies. Foreign buy ing agents, also known as com m ission agents, are locators and purchasers of m erchandise for foreign firm s or gov ernm ents. They are com pensated by the foreign entity . Brokers and agents, also known as im port-export brokers, act as independent interm ediaries who facilitate international transactions by coordinating activ ities of buy ers and sellers of particular products. Brokers and agents receiv e com m issions based on the v alue of the transaction. In som e instances, a broker or agent m ay prefer to keep the identity of the buy er or seller confidential to prev ent com prom ising his/her

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position in future dealings. In this case, the broker or agent would retain ownership of the m erchandise for a lim ited period of tim e, receiv ing his/her com pensation from the final price of the product. In som e instances, a broker or agent will prov ide docum entation, labeling, packaging, and m arketing serv ices. Both export m anagem ent com panies (EMCs) and export trading com panies (ETCs) serv e as indirect exporting interm ediaries by prov iding export-related serv ices. EMCs act as the export departm ent for one or sev eral m anufacturers of non-com petitiv e products, pursuing ov erseas orders in the nam e of the m anufacturer. A long-term contractual relationship ty pically exists between the EMC and m anufacturer. Most EMCs can be v iewed as m anufacturers sales representativ es for export. Com pensation packages v ary . EMCs m ay receiv e a com m ission based on sales, a com bination of retainer plus com m ission, or they m ay purchase and m ark-up the product for export. They usually specialize in particular products or country m arkets and work closely with well-established networks of foreign distributors. They are fam iliar with the necessary form alities in packaging, docum entation and shipping. ETCs ty pically act as independent brokers, international distributors or wholesalers, with no long-term obligation to the m anufacturer. ETCs take title to the m erchandise, pay ing the m anufacturer directly . Both ETCs and EMCs can prov ide im m ediate access to foreign m arkets and are used extensiv ely by m any sm all businesses. Piggy back m arketing is an arrangem ent in which one m anufacturer or serv ice firm distributes another com pany s product or serv ice abroad. The m ost com m on exam ple is when a m anufacturer com plem ents its product line with other non-com peting, ancillary products, such as TVs and VCRs. Foreign trading com panies, also known sim ply as trading com panies, were im portant in the colonial m ov em ent and still are im portant today . Trading com panies are v ery popular in Japan and to a lesser extent in Korea, Taiwan, China, Germ any , the Netherlands, Sweden, England, and the larger Latin Am erican nations. They tend to focus on a particular m arket or product line. Dealing with a trading com pany is sim ilar to dealing with a dom estic distributor. Term s m ay include a lim ited or exclusiv e territory inv olv ing one, sev eral or all foreign countries. The m anufacturer m ay be expected to m aintain a certain lev el of support in inv entory , turnaround tim e, adv ertising, packaging, pricing, and financing. In turn, the trading com pany norm ally will agree to achiev e a certain lev el of export sales in a specific tim e period.

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Direct Exporting
Direct exporting offers sev eral adv antages ov er indirect m arketing. These include: Partial or full control ov er the foreign m arketing strategy , including distribution, pricing, prom otion, and product serv ices; Direct and unadulterated feedback from the foreign m arket, allowing the m anufacturer im prov ed insight and the ability to respond faster to changing m arket conditions to alter or im prov e the product; Better protection of tradem arks, patents and goodwill; and Fewer interm ediaries with which to share profits. Although direct exporting inv olv es greater risk, it often y ields greater profits. Generally , it is the best choice for com panies that expect international business to produce a significant portion of their profits. Before com m encing the export program , it is im portant to adv ise the exporter to m eet with potential end-users, distributors, agents, and U.S. gov ernm ent trade representativ es, including U.S. Export Assistance Centers (USEACs), (see Chapter Fiv e). It is just as im portant to dev elop a first-hand insight into the country as it is to build a distribution network. Before com m itting significant resources, the exporter should test the m arket in order to determ ine product receptiv ity . Foreign priv ate sector im port channels usually include direct sales, distributors, sales agents, and retail distribution. Direct sales to m ost foreign retail establishm ents, corporations, institutions or gov ernm ent agencies inv olv e contractual term s and conditions often sim ilar to those in the United States. Distributors, also known as im porting distributors or foreign distributors, play an im portant role for m any U.S. exporters. Distributors in dev eloping countries, for exam ple, tend to purchase less sophisticated and less expensiv e products to com plem ent their preferred, m ore expensiv e and sophisticated lines, which they then distribute, acting as agents for foreign firm s. Factors that should be considered when choosing a distributor include the following: regions cov ered, lines handled, track record, rapport with local banks, after-sales serv ice, firm size, knowledge of product, lev el of cooperation, reputation, relations with local gov ernm ent officials, willingness and ability to inv entory , conditions of facilities, and av erage percentage added to product price. A com m on m ethod of selling is through agents who solicit business in the foreign country on behalf of their U.S. principals. Foreign sales agents, like U.S. sales representativ es, do not take title of the goods. This m ethod is well suited for the sale of capital goods directly to end-users. Contracts between exporters and agents in m ost countries usually are not subject to gov ernm ent regulations. Howev er, the exporters relationship with the agent should be clearly defined so it is not m isconstrued by the foreign gov ernm ent to be an em ploy ee-em ploy er relationship, which could subject the exporter

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How can government improve the business climate? - The Manzella Report | The Premier Source For Global Business And Economic News

to tax and labor law obligations. The agent relationship can be v ery beneficial depending on the exporters interests. Dev eloping a close working relationship between the exporter and the foreign sales representativ e is crucial. Personal contact is v ital to dev eloping a foreign business relationship. Sim ilar to a distributor, the factors that should be considered when choosing an agent are regions cov ered, lines handled, knowledge of product, track record, size and quality of sales staff, after-sales serv ice, reputation, lev el of cooperation, length of contract, and com m ission required. On the downside, U.S. firm s m ust also be aware of the com m itm ent they incur when signing an agent or distributor agreem ent. Foreign regulations are different and can be m ore difficult to sev er. Ov er the past decade, foreign m arketing techniques and distribution channels hav e becom e m ore sophisticated. Although sm all m om -and-pop retailers still dom inate m any foreign sectors in term s of num bers, larger retail chains and discount stores are play ing an increasing role in the distribution of products to consum ers. For exam ple, in Mexico and in m any other dev eloping countries, large retail chains hav e been established. Many of them hav e adopted Am erican-sty le m arketing techniques, such as autom ated checkout sy stem s. This has resulted in m ore efficient business operations and m ay require a reassessm ent of the agent/distributor expectations.

Joint Ventures and Strategic Alliances

A joint v enture is a cooperativ e business v enture established by two or m ore com panies. Prior to com m encing operations, partners usually allocate resources, consign risks and potential rewards, and delegate operational responsibilities to each other while preserv ing autonom y . Upon com pletion of the project, the joint v enture is usually disbanded. Howev er, it also m ay be a perm anent relationship, m aintaining, for exam ple, a long-term production schedule. An international joint v enture enables a firm to establish a m arketing or m anufacturing presence abroad with the assistance of a local foreign partner. The partner m ay prov ide knowledge of gov ernm ent workings, regulations, internal m arkets and distribution know-how. This knowledge m ay be particularly v aluable to an exporter in unfam iliar territory . A strategic alliance is sim ilar to a joint v enture in m any way s y et v ery different. An alliance m ay be form ed when one organization grants another the authority to exploit technology , research and dev elopm ent knowledge, m arketing rights and so forth, but does not create a separate entity . A ty pical exam ple of a strategic alliance is the basic m anufacturer foreign independent sales representativ e relationship. To solidify this inform al arrangem ent, a handshake or sim ple written agreem ent m ay suffice. A strategic alliance, often less form al, is a prelim inary step to creating a joint v enture. Consequently , both allow a com pany quickly to respond to a changing env ironm ent and contribute com plem entary strengths to seize opportunities quickly . In som e foreign m arkets, such as China, a joint v enture with a Chinese partner m ay be the only legal way to enter the m arket, except under v ery special circum stances. A sm all com pany with lim ited capital and m anpower, and the need to reduce and share risks, m ay find a joint v enture an ideal entry strategy in an ov erseas m arket. By utilizing the m anagem ent skills, experience and knowledge of the foreign m arket by the local partner, a firm significantly can reduce its learning curv e and share its risks with a partner that has a sim ilar agenda. A joint v enture is also safer than a full-scale acquisition should an unfam iliar host gov ernm ent legislate adv erse policies affecting foreign inv estm ent. Or, as a result of social unrest, the host country becom es em broiled in v iolence, resulting in property dam age and the disruption of business. Many sm aller com panies fav or joint v entures ov er other m ethods of expansion because they allow com panies to target the exact activ ity for which they are looking rather than tie up capital in areas in which they hav e no interest. And from a tax perspectiv e, partners can form a structure so their incom e crosses the fewest possible borders. While there are significant potential adv antages associated with joint v entures, there are also lim itations. For exam ple, in a ty pical joint v enture the profits are shared. Additionally , there are m any factors that can lead to disagreem ents between the partners, such as a dispute ov er efforts and m arketing strategies, differences in m anagem ent philosophies, etc. The ability to com prom ise and work together is essential, regardless of cultural differences. A com plaint often heard by v eteran executiv es is that m any sm aller com panies do not inv est the necessary lev el of com m itm ent to understanding the culture or dev eloping a strong personal relationship with their joint v enture or strategic alliance partners abroad. This, m any say , is key to a successful partnership. From the outset, the lev el of com patibility between potential partners is difficult to assess. Many auto analy sts speculated that the joint v enture between Toy ota and General Motors that created New United Motors Manufacturing, Inc. in the United States in 1 9 84 would not succeed due to differences in m anagem ent sty les. It appears, howev er, that the analy sts predictions were wrong. Conflicts can often arise with regard to interests in second m arkets. For exam ple, assum e a U.S.Mexican joint v enture in Mexico sells its fabrics to Argentina. Should the U.S. partner wish to establish a second joint v enture in Argentina with an Argentinean partner, the second joint v enture would com pete with the first. This can, and has, resulted in m any disputes. Jerald Blum berg, Executiv e Vice President for DuPont, Wilm ington, Delaware, believ es its im perativ e to hav e an operating and m arketing presence in the m arkets one wishes to pursue. He stated that DuPonts ly cra spandex business,

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one of the com pany s m ost global businesses, has 7 0 percent of its sales outside the United States. We operate 1 0 plants in 1 0 different countries, and no region or country is fav ored. There is no hom e region. Im portantly , he said the business is able to prov ide custom ers with the product they need, when they need it, any where in the world. The com pany has sought joint v entures and alliances as a way to expand abroad. Many tim es wev e found this to be the safest, best and m ost practical way to establish a presence and credibility in em erging and ev olv ing m arkets, Blum berg said. Howev er, this approach m ay not work in places like Russia, where operating m anufacturing plants and an understanding of the consum er are lim ited. Blum berg claim s a div erse business team who can serv e custom ers in local m arkets is v ital. It is sim ply not possible for a cadre of expatriates from the hom e country to m aster the language and cultural differences in this div erse world.

Licensing Technology
Through a strategic alliance or joint v enture, a U.S. producer m ay wish to license its technology , know-how or designs to a foreign com pany for use in a geographic area for a lim ited period of tim e. This m ay include patents, tradem arks, production techniques, and technical, m arketing and m anagerial expertise. Licensing is particularly attractiv e to sm all- and m edium -size firm s because it affords international expansion while significantly lim iting risks. It rarely requires capital inv estm ent and neither requires the parties to work closely together nor dem ands continuous attention. Generally , sm all firm s do not hav e the expertise, staff or resources to satisfy requirem ents dem anded by other m ethods of expansion. In m any cases, licensing is the only v iable strategy for any size firm to securely enter a foreign m arket that lacks hard currency , sev erely restricts the repatriation of profits and foreign direct inv estm ent, m aintains unreasonable trade barriers, and/or is econom ically or politically unstable. As with each m arket-entry m ethod, licensing has its disadv antages. For exam ple, the licensor loses control ov er the quality , distribution and m arketing policies, as well as the essential support serv ices em ploy ed for the purpose of selling the product or technology . If com pensation is based on sales v olum e, the licensor m ust rely on the honesty of the licensee to report units sold. Additionally , earnings are usually less than those prov ided by m ost other entry m ethods. A ty pical licensing agreem ent m ay call for an up-front fee, roy alties based on a percentage of future earnings, and consulting and training assistance. Many licensing agreem ents ev olv e into joint v entures, while som e joint v entures or strategic alliances are ev entually conv erted to sim ple licensing agreem ents when one party s interests div erge from the original purpose.

Foreign Acquisitions
Through foreign direct inv estm ent, a com pany can acquire an interest in another firm located abroad. This decision is often part of a com pany s long-term strategy to strengthen its foreign presence. Most often, a com pany will com plete a foreign acquisition once a m arket is prov en, usually after y ears of exporting or when a high degree of success has been experienced through a preexisting joint v enture. The degree of ownership desired is often a choice of whether the foreign operation is to be wholly owned (either as a branch or separate subsidiary ) or partially owned. If the inv estor or group of inv estors desire controlling interests, the stock purchase will range from 51 to 1 00 percent. If the com pany is successful, the rev enue generated can often exceed profits obtained through other ty pes of international expansion m ethods. Controlling interests will prov ide full authority ov er all policies, including m arketing strategies, financing, cost cutting, expansion program s, production, and quality control. A foreign acquisition can also position the inv estor to accept host gov ernm ent incentiv es. Although the greater degree of control m ay allow the new owners to dictate m anagem ent policy , trade experts often adv ise clients to respect and v alue the input prov ided by existing m anagers. A v ery successful acquisition strategy is one where the new owners study preexisting m anagem ent sty les and seek to understand what m anagem ent thinks of proposed policy changes, and then incorporate this input. Nationalist consum ers tend to fav or goods produced in their country . As a result, it som etim es m akes sense to establish a m anufacturing presence in the host country through an acquisition to achiev e this benefit. In addition to this, both acquisitions and joint v entures allow for m ore effectiv e serv icing of products in distant m arkets, often leading to m ore satisfied custom ers. Many Japanese autom obile m anufacturers, for exam ple, serv ice the European m arket through their m anufacturing facilities in the United Kingdom . The sav ings in response tim e and shipping costs alone can m ake this ty pe of v enture worthwhile, ultim ately benefiting the custom er. Establishing a foreign base to serv ice a particular region is also beneficial for cultural reasons. For exam ple, its predicted that m ore U.S. com panies operating in Mexico will use the country as a base to serv ice sm aller Latin Am erican countries. The cultural affinity am ong the Mexicans and Central and South Am ericans can m ake assim ilation less difficult and sales easier. Foreign acquisitions usually require an abundance of resources, and the exposure to risk is considerably higher, as com pared to other m ethods of foreign m arket entry . As a result, large com panies are usually better suited for this ty pe of

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undertaking. Changes in gov ernm ent policy can subject these resources to great risk. For exam ple, transfer risk, arising from adv erse gov ernm ent policies can restrict the transfer of capital, pay m ents, products, technology , and persons into or out of the host country . Operational risk can constrain the m anagem ent and perform ance of local operations in production, m arketing, finance, and other business functions. These ty pes of risks, and others, can financially ruin a foreign acquisition.

This appeared as Chapter Five in the book Trade and Finance For Lenders , 1999.

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About The Author John Manzella

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John Manzella, a world-recognized author and speaker on global business, competitive strategies, and today's new economic realities, is editor-in-chief of The Manzella Report, and president of Manzella Trade Communications, a strategic communications, custom media and public affairs firm.

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