Introduction to Exporting - Part 6

CHAPTER 6 ENTERING YOUR TARGET MARKET

 

Understanding Entry Strategies

Developing a market entry strategy simply means finding the best methods of delivering your goods to your market and of distributing them there. Or, if you’re exporting services, it means setting up ways to obtain and manage contracts in the foreign country.

Working Out Your Entry Strategy

Based on your market research, you’ve chosen the most promising markets for your product or service. Using what you know about these markets, you next decide which entry method best suits your needs. Some factors to consider are:

• How is business conducted in your target market and industry sector?
• What are your company’s export strengths and weaknesses?
• What is your company’s financial capacity?
• What product or service are you planning to export?
• How much service and after-sales support will your customers require?
• What trade agreements or barriers apply to your target market?

Methods of Market Entry

The traditional means of market entry fall into several broad categories; direct exports, indirect exports, partnerships and acquisitions/investments. We’ll examine each of these and then look at the question of intermediaries— agents, distributors and other go-betweens.

Direct Exports

This varies depending on whether you’re selling products or services. For products, you market and sell directly to the client. For services, you negotiate, contract and work directly with the client. Direct exporting has advantages because it can:

• Give a higher return on your investment than selling through an agent or distributor;
• Allow you to set lower prices and be more competitive; and
• Give you close contact with your customers

It also has disadvantages, because:

• You don’t have the services of a foreign intermediary, so you may need longer to become familiar with the market; and
• Your customers or clients may take longer to get to know you, and such familiarity is often important when doing business internationally

Indirect Exports

Again, your approach depends on whether you’re selling products or services. For products, you market and sell to an intermediary such as a foreign distributor. You can also retain a foreign agent or representative who does not directly purchase the goods. For services, you contract with an intermediary who then negotiates and contracts on your behalf. For many new exporters, an intermediary may be the best way to enter a market.

Partnerships

A solo entry into a foreign market may not always be the best approach for an exporter. You might find it advantageous to partner with a local company whose strategic position complements or enhances your own. A well-structured partnership can benefit both parties in the following ways:

• Your partner can complement your capabilities and provide the local expertise, insights and contacts that may make the difference between success and failure.
• Each company focuses on what it does and knows best.
• Both partners share the risk.
• You can pool ideas and resources to help keep pace with change.
• You can approach several markets simultaneously.
• Your partner may provide technology, capital or market access that you might not be able to afford on your own.
• Partnerships may help resolve problems related to professional accreditation, movement of personnel across borders, and tax and legal status.
• Combining the technical and financial strengths of two businesses can make both more competitive— a big advantage in today’s highly competitive global market.
• You develop a partnership strategy in three steps. First, decide whether or not partnership can work for you. If your needs can be satisfied in-house, a partner may not be necessary. If you need financing, you may be better off looking for investors. But if you require special expertise or a local market presence, then a partnership might work very well. Define the form, structure and objectives that a partnership must have to suit your needs. To do this, evaluate your company’s goals, its ability to achieve them and where you need help in doing so. Then identify how the partnership must work in order to fill in those gaps. Find a partner who meets these criteria and who will be a good fit with your company. There are several different forms of partnerships. The major options are:
  Licensing—is the grant of rights to another business so that it can legally use your proprietary technology and/or intellectual property; for example, to allow a Chinese company to manufacture a product of your design and sell it in China. It usually doesn’t involve granting all the rights to the property—in the example above, the license might be for the Chinese market but not for the Indian.
   
  Franchising—is a more specific form of licensing. The franchisee is given the right to use a set of manufacturing or service delivery processes, along with established business systems or trademarks, whose use is controlled by the licensing agreement.
   
  Cross-Licensing—each firm licenses products or services to the other for sales purposes. Cross-manufacturing is a type of cross-licensing in which companies agree to manufacture each other’s products. It can also be combined with co-marketing or co-promotion agreements.
   
  Co-Marketing—carried out on the basis of a fee or a percentage of sales, co-marketing lets you and your partner take advantage of each other’s existing distribution networks and domestic markets.
   
  Co-Production—this arrangement involves the joint production of goods, enabling your business to use its skills and resources to best advantage. It can also provide cheaper manufacturing through economies of scale.
   
  Joint Venture—the two businesses each contribute capital to a newly created corporation that they operate together, or the local businesses enter into a general partnership agreement and operate the joint venture as a partnership.

Using the expertise of lawyers, accountants, bankers and other professionals is vitally important when setting up any type of partnership. All parties must be absolutely clear on who holds which rights and which responsibilities.

Acquisitions and Investments

A partnership isn’t the only way to tap into the resources of a foreign company. Acquiring a firm in your target market, or making a substantial investment in it, can achieve the same results and help you with your market entry in several important ways.

• You immediately gain access to the local market, which speeds up the process of expanding sales and promoting company growth. This can also lead to sales in other countries.
• It allows you to take advantage of the local firm’s assets to increase your competitiveness in that particular market. These assets can include patents and other intellectual property, resource availability, access to capital, specialist expertise, proprietary technology and product differentiation.
• You may enjoy lower operating and production costs in your foreign operation than at home. This can stem from easier access to supplies, lower labor costs and lower transportation costs.

Selling to Foreign Governments

Foreign governments can present a rich source of contracts for exporters in sectors ranging from environmental technology to aerospace. It brings foreign government buyers and exporters together by assisting with the negotiation and execution of contracts.

Intermediaries

While you may be sure that the direct-exporting route is best for your company, don’t be too quick to jump on a plane and start knocking on doors. Think first about using an intermediary, because the right one can save you an enormous amount of time and money. They come in several types; agents, representatives, trading houses and distributors.

Agents and Representatives

Agents and representatives aren’t exactly the same. An agent secures orders from foreign customers in exchange for a commission. A representative is a specialized agent who operates within a specific geographic area and who sells related lines of goods or services.

Both may be authorized to enter into contractual sales agreements with foreign customers on your behalf. Normally you pay them a commission only when they sell your product or service.

An agreement with a foreign agent or representative immediately gives you a presence in your target market. This is usually less costly than setting up your own direct sales operation. Your representative can also make more frequent sales calls than you probably could. Finally, such an arrangement gives you control over the product or service and its price—an important advantage.

Good foreign agents or representatives can help you in many ways. They can research markets, advice on financing and transportation options, clear goods through customs, provide access to potential customers, make collections, and supply information on local business practices, laws and cultural traditions.

Trading Houses

Trading houses are domestic intermediaries that market your goods or services abroad. A full-service trading house handles a great many aspects of exporting, such as market research, transportation, appointing distributors or agents, exhibiting at trade fairs and preparing advertising and documentation.

Some act as principals or export merchants, buying products outright from domestic suppliers, while others act as agents, selling on commission. Some specialize in specific industry sectors, while others focus on particular foreign markets.

If you prefer not to sell directly to foreign customers or worry about finding a foreign intermediary, you might consider using a trading house.

Foreign Distributors

Unlike agents, distributors actually purchase your product or service and resell it to local customers. Often, they set the selling price, provide buyer financing and look after warranty and service needs.

A bonus is that the distributor can usually provide aftersales service in the foreign market. On the other hand, using a foreign distributor may reduce your profit margins and result in a loss of control over your product and/or price.

 

Choosing an Intermediary

You can obtain information about potential intermediary from trade associations, business councils and banks. Talking with other domestic exporters or potential foreign customers also can help you identify prospective agents or distributors.

Once you’ve developed a list of candidates, you should visit the market to meet them. Talk to several firms and then carry out your due diligence to make certain they’re reputable.

You can also protect yourself by entering into a limited term trial agreement. If the foreign intermediary does not meet your expectations, you can find an alternative once the trial period is over.

To evaluate a prospective intermediary in detail, use the checklist below. Be sure to tailor it to your company’s particular needs and the characteristics of your chosen market.

Size of Sales Force

• How many field sales personnel does the agent or distributor have?
• What are its short- and long-range expansion plans, if any?
• Will it have to expand to accommodate your needs properly? If yes, would it do so?

Sales Record

• Has its sales growth been consistent? If not, why not? Try to determine its sales volume over the past five years.
• What are its sales objectives for the next year? How were they determined?

Territorial Analysis

• What territory does it now cover?
• Is it consistent with the coverage you’re looking for? If not, is it willing and able to expand?
• Does it have any branch offices in the territory you wish to cover? If so, are they located where your sales prospects are greatest?
• Does it plan to open additional offices?

Product or Service Mix

• How many product or service lines does it represent?
• Are they compatible with yours?
• Does it represent any of your local firms? If so, which ones?
• Would there be any conflict of interest?
• Would it be willing to alter its present product or service mix to accommodate yours, if necessary?
• What would be the minimum sales volume needed to justify handling your lines?
• Do its sales projections reflect this minimum figure?
• From what you know of the territory and the prospective agent or distributor, is its projection realistic?

Facilities and Equipment

• Does it have adequate warehouse facilities?
• What is its method of stock control?
• Does it use computers? Are they compatible with yours?
• What communications facilities does it have?
• If servicing is required, is it equipped and qualified to do so? If not, is it willing to acquire equipment and arrange for training?
• If so, to what extent will you have to share these additional costs?
• If necessary, would it be willing to inventory repair parts and replacement items?

Marketing Policies

• How is its sales staff compensated?
• Does it have special incentive or motivation programs?
• Does it use product managers to coordinate sales efforts for specific lines?
• How does it monitor sales performance?
• How does it train its sales staff?
• Would it be willing to share expenses for sales personnel to attend seminars?

Customer Profile

• What types of customers is it currently in contact with?
• Are its interests compatible with your lines?
• Who are its key accounts?
• What percentage of its total gross receipts do these accounts represent?
• Principals Represented
• How many principals does it currently represent?
• Would you be its primary supplier?
• If not, what percentage of its total business would you represent? How does this percentage compare with other suppliers?

Promotional Thrust

• Can it help you research market information?
• What types of media does it use, if any, to promote sales?
• How much of its budget is allocated to advertising?
• How is it distributed?
• Would you be expected to share promotional costs? If so, how will this amount be determined?
• If it uses direct mail, how many prospects are on its mailing list?
• What printed material does it use to describe its company and the lines it represents?
• If necessary, can it translate your advertising copy?
• Does it have its own website?