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International Business Strategy, Management

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Title: International Business Strategy, Management


1
International Business Strategy, Management
the New Realities by Cavusgil, Knight and
Riesenberger
  • Chapter 13
  • Exporting and Countertrade

2
Overview of Foreign Market Entry Strategies
  1. International transactions that involve the
    exchange of products Home based international
    trade activities such as global sourcing,
    exporting, and countertrade.
  2. Equity or ownership-based international business
    activities Include FDI and equity-based
    collaborative ventures.
  3. Contractual relationships Include licensing and
    franchising.

3
1. Exchange of Products
  • Global sourcing Strategy of buying products and
    services from foreign sources. Also known as
    importing, global procurement, or global
    purchasing.
  • Exporting Strategy of producing products or
    services in one country (often the producers
    home country), and selling and distributing them
    to customers in another country.
  • Countertrade Refers to a transaction in which
    all or part of the payment is received in the
    form of products or commodities.

4
2. Equity or Ownership-Based IB Activities
  • Typically involve foreign direct investment (FDI)
    and equity-based collaborative ventures.
  • In contrast to home-based international
    operations (e.g., exporting), the firm
    establishes a presence in the foreign market by
    investing capital and securing ownership of a
    factory, subsidiary, or other facility there.
  • Collaborative ventures include joint ventures in
    which the firm makes similar equity investments
    abroad, but in partnership with another company

5
3. Contractual Relationships
  • Usually licensing or franchising
  • The firm allows a foreign partner to use its
    intellectual property in return for royalties or
    other compensation.
  • Franchising is common in retailing. McDonalds,
    Dunkin Donuts, Century 21 Real Estate, and many
    others have used franchising to internationalize
    worldwide.

6
Factors Relevant to Choice of Foreign Market
Entry Strategy
  1. The goals and objectives of the firm, such as
    desired profitability, market share, or
    competitive positioning
  2. The firms financial, organizational, and
    technological resources and capabilities
  3. Unique conditions in the target country, such as
    legal, cultural, and economic circumstances, as
    well as distribution and transportation systems
  4. Risks inherent in each proposed foreign venture
  5. The nature and extent of competition from
    existing and potential rivals
  6. The characteristics of the product or service to
    be offered to customers in the market (e.g.,
    glass, yogurt, tires, copy machines)

7
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8
Exporting
  • The firm manufactures in one country (usually the
    home country) conducts marketing, distribution,
    and customer service activities in a foreign
    export market.
  • Export channels
  • Independent distributor or agent, or
  • Firms own marketing subsidiary abroad
  • Exporting is low risk, low cost, and flexible.
  • Popular among SMEs.

9
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10
Services Are Exported As Well
  • Examples architecture, education, banking,
    insurance, entertainment, information.
  • However, many pure services cannot be exported
    because they cannot be transported.
  • Retailers offer their services by establishing
    retail stores abroad, that is, via FDI. This is
    because retailing requires direct contact with
    customers.
  • Overall, most services are delivered to foreign
    customers via entry strategies other than
    exporting.

11
Advantages of Exporting
  • Increase sales and profits
  • Increase economies of scale
  • Diversify customer base, reducing dependence on
    the home market
  • Stabilize fluctuations in sales associated with
    economic cycles or seasonality
  • Low cost entry strategy
  • Minimal risk
  • Maximal flexibility
  • Develop useful foreign relationships

12
Disadvantages of Exporting
  • Requires firm to acquire new capabilities and
    redirect organizational resources
  • Sensitive to tariffs and other trade barriers
  • Sensitive to exchange rate fluctuations
  • Compared to FDI, firm has fewer opportunities to
    learn about customers, competitors, and the
    marketplace

13
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14
A Systematic Approach to Exporting
  • (1) Assess Global Market Opportunity. Screen for
    the most attractive export markets identify
    qualified distributors Estimate industry market
    potential and company sales potential.
  • (2) Organize for Exporting. Assess company
    resource needs. Establish timetable for
    achieving export goals. Decide on distribution
    strategy.

15
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16
Indirect versus Direct Exporting
  • Indirect Exporting Contracting with
    intermediaries in the firms home country to
    perform export functions, such as an Export
    Management Company (EMC) or a Trading Company.
    These intermediaries assume responsibility for
    finding foreign buyers, shipping products, and
    getting paid.
  • Direct Exporting Contracting with
    intermediaries located in the foreign market to
    perform export functions, such as distributors or
    agents. They perform downstream value-chain
    activities in the target market.

17
Company-Owned Foreign Subsidiary
  • Handles downstream value-chain activities, such
    as marketing, physical distribution, promotion,
    and customer service activities, directly in the
    market.
  • Preferred method if
  • target market is big
  • target market is complex
  • firm needs to closely control local operations
  • firm needs to control its intellectual property

18
A Systematic Approach to Exporting (contd)
  • (3) Acquire Needed Skills and Competencies. Gain
    new capabilities in areas such as product
    development, distribution, logistics, finance,
    contract law, currency management, foreign
    languages, cross-cultural skills.
  • (4) Implement Exporting Strategy. Devise needed
    on-the-ground tactics. Adapt products and
    marketing as needed.

19
Export Documentation
  • The official forms and other paperwork required
    to
  • transport exported goods and clear customs.
  • Quotation or pro forma invoice issued on request
    by potential customers to advise a potential
    buyer about the price and description of the
    exporters product or service.
  • Commercial invoice actual demand for payment
    issued by the exporter when a sale is concluded.
  • Packing list indicates exact contents of a
    shipment, particularly when there are many goods

20
Export Documentation (cont.)
  • Bill of lading basic contract between exporter
    and shipper. Authorizes the shipping company to
    transport the goods to the buyers destination.
  • Shipper's export declaration lists the contact
    information of the exporter and the buyer, full
    description, declared value, and destination of
    the products being shipped. Used by governments
    to collect statistics.
  • Certificate of origin the "birth certificate" of
    the goods being shipped, indicating the country
    where the product originated.
  • Insurance certificate protects the exported
    goods against damage, loss, pilferage (theft)
    and, in some cases, delay.

21
Incoterms (International Commerce Terms)
  • A system of universal, standard terms of sale and
    delivery.
  • Commonly used in international sales contracts
    and price lists to specify how the buyer and the
    seller share the cost of freight and insurance,
    and at which point the buyer takes title to the
    goods.

22
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23
Methods of Payment
  • Cash in Advance. Risky from the buyers
    standpoint Unpopular with foreign buyers Tends
    to discourage sales.
  • Open Account. Exporter simply bills the customer,
    who is expected to pay under agreed terms at some
    future time. Best between buyer/seller with an
    established relationship.
  • Letter of Credit. Contract between the banks of
    the buyer and the seller. Essentially risk-free.
    Immediately establishes trust between the parties.

24
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25
Sources of Export Financing
  • Commercial banks
  • Distribution channel intermediaries
  • Buyers
  • Suppliers
  • Government assistance programs (e.g.,
    Export-Import Bank, Small Business Administration)

26
Sources of Information to Identify Potential
Intermediaries
  • Country and regional business directories such as
    Kompass (Europe), Bottin International
    (worldwide), Japanese Trade Directory, as well as
    Foreign Yellow Pages.
  • Trade associations such as the National Furniture
    Manufacturers Association or the National
    Association of Automotive Parts Manufacturers.
  • Government ministries and agencies such as
    Austrade in Australia, Export Development Canada,
    and the U.S. Department of Commerce.
  • Commercial attachés in embassies and consulates
    abroad.
  • Branch offices of government agencies located in
    the exporters country, such as JETRO, the Japan
    External Trade Organization.

27
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28
Countertrade
  • An international business transaction in
  • which all or partial payments are made in
  • kind rather than cash. Similar to barter.
  • Used when conventional means of payment are
    difficult, costly, or nonexistent.

29
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30
Examples of Countertrade
  • Caterpillar received caskets from Colombian
    customers and wine from Algerian customers in
    return for selling them earthmoving equipment.
  • Goodyear traded tires for minerals, textiles, and
    agricultural products.
  • Coca-Cola received tomato paste from Turkey,
    oranges from Egypt, and beer from Poland, in
    exchange for Coke.

31
Nature of Countertrade
  • Accounts for between 10 and 1/3 of all world
    trade.
  • Common in large-scale government procurement.
  • Occurs mainly when a developing country cannot
    obtain sufficient hard currency.
  • Enables developing-country firms to generate
    otherwise unobtainable sales.
  • Risky (e.g., may involve inferior goods,
    hard-to-price goods leads to price padding
    complex, cumbersome, and time-consuming)

32
Types of Countertrade
  • Barter Direct exchange of goods without any
    money.
  • Compensation deals Involve payment both in goods
    and cash.
  • Counterpurchase Seller sells its product at a
    set price for cash, but also agrees to buy goods
    from the buyer.
  • Buy-back agreement. Seller agrees to supply
    technology or equipment to construct a facility
    and receives payment in the form of goods
    produced by the facility.
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