Week 6 - Exporting Modes

What are the different types of exporting?

Different modes depending on number and type of intermediaries: • Direct - firm takes care of exporting activities and is in direct contact with first intermediary in foreign market. • Indirect - manufacturing firm does not take care of exporting activities; another domestic company performs these activities. • Cooperative - agreements with other firms concerning performance of exporting functions

Advantages of agent/distributor.

- familiar with local market, customs and conventions. - existing business contacts & employ foreign nationals. - direct incentive to sell through commission - may be reluctant to spend time developing a market for a new product

Advantages and disadvantages of piggybacking for the rider.

Advantages • Export conveniently without having to establish own distribution system • Learn from carrier's experience through observation Disadvantages • Control is given up over marketing of products • Lack of commitment from carrier could lose opportunities

Advantages and disadvantages of piggybacking for the carrier.

Advantages • Firm can acquire a product to fill up exporting capacity immediately (someone already has it) • Does not have to invest in R&D, production facilities etc. • If successful may be candidate for joint venture/acquisition Disadvantages • If the carrier develops a substantial market abroad, the rider may develop its own production capacity • Rider may not maintain same quality level of products if not selling them directly.

Advantages and disadvantages of using export management company.

Advantages • Much lower overall costs • Far wider exposure of firm's products in foreign markets Disadvantages • EMC may carry competitive products • Paid by commission so may focus on products with immediate sales potential rather than those that might require effort and education of customers • May specialise in geographic area, product or customer type that does not align with company objectives. May work in interest of the EMC rather than their client. • May carry many products and manufacturer's product may not be given necessary attention by salespeople.

What is a broker? What are the key aspects of this type of export mode?

An agent based in the producer's home country whose function is to bring buyer and producer together, and is a specialist in performing the contractual agreement, in exchange for a commission. Does not handle products. Commonly specialises in a product/type of product (therefore not really practical for most firms). May act as agent for buyer or seller.

What is a cooperative export mode/ export marketing group (EMG)?

An export marketing group occurs when multiple firms (usually SMEs who do not achieve sufficient scale economies in manufacturing and marketing) work separately on upstream functions but cooperate on downstream. Can be loose (selling through same agent) or tight (creating a new export association) Usually used with complementary products/product lines

What is an agent?

An independent company that sells on to customers on behalf of the manufacturer. Usually it will not see or stock the product. It profits from a pre-agreed commission (5-10%, depending on range of services performed, market size and importance) paid by the manufacturer. May be exclusive (rights to specified sales territories), semi-exclusive (handles other companies' non-competing goods) or non-exclusive (variety of goods, including some competitors). Sells to wholesalers or retailers, manufacturer then ships directly to buyer and handles financing arrangements.

What terms are usually found in an agreement with a foreign representative?

Generally: • Cannot sell in higher price than agreed without manufacturer sign-off • must maintain confidentiality about manufacturer activities • Manufacturer is liable for wrongs to third parties committed by agent Other things to be considered: • Exclusive rights? • Specific territories? • Right to handle competitor's products too?

What is a distributor?

Independent company that stocks the manufacturer's product. They will have a substantial freedom to choose their own customers and price. They profit from the difference between their selling price and the buying price from the manufacturer. They have exclusive representation of the manufacturer within their market. Some operate their own wholesale and retail establishments, warehouses and repair/service facilities.

What is an export buying agent? What are the key aspects of this type of export mode?

Indirect mode in which a representative of foreign buyers who resides in the producer's home country and offers the buyer services such as finding sellers and negotiating prices, in return getting a commission from the buyer. Benefits: • Easy way • Prompt payment • No concerns about physical transfer of goods • Little credit risk Drawbacks: • No control over marketing/selling of product • No information/understanding of foreign market

Define indirect exporting. Who is this mode most appropriate for?

Manufacturer uses independent export organisations located in its own country (or third country). Like a domestic sale - firm not really engaged in global marketing. Most appropriate for firms with: • Limited international expansion objectives • Want to dispose of excess production • Want to start trying new markets before committing major resources.

Issues that can be encountered with export management groups.

SME managers prefer to act independently, and EMGs can only succeed by sharing common goals

How to choose an intermediary.

Search for suitable candidates by: • Asking customers/potential customers • Obtaining recommendations from instititions (e.g. trade org, govt.) • Poach a competitor's agent • Advertise in suitable trade papers Then profile ideal candidate & evaluate candidates based on: • Knowledge of product & local markets • Experience and expertise • Required margins • Credit ratings • Customer care facilities • General ability to promote product successfully

What is an export management company?

Specialist company set up to act as 'export department' for a range of non-competing firms, conducting business & negotiating with buyers in the name of each manufacturer it represents; everything is subject to the buyer's confirmation. They deal with necessary documentation and have knowledge of local purchasing practices/ govt regulations. EMCs spread shipment, admin and transport costs due to economies of scale achieved by making large shipments from many firms.

Define: partner mindshare.

The level of mindshare that the manufacturer product occupies in the mind of the export partner. The higher the mindshare, the more likely the intermediary will put the brand in front of another. Good mindshare depends on a combination of: • commitment and trust • collaboration • mutuality of interest and common purpose • perceived attractiveness of product offering.

What is a direct export mode?

The manufacturer sells directly to an importer, agent or distributor located in the foreign market.

What is the piggyback export mode?

The rider (an export-inexperienced SME) uses the carrier's (a large international organisation) international distribution organisation. Enables carrier to fully utilise established export facilities and foreign distribution. Carrier is either paid by commission (like an agent) or buys the product outright and acts as an independent distributor. Typically used for complementary products. Branding and promotion handled by either carrier or rider depending on whether brand is well established/important to product.

What is a trading company?

Undertakes shipping, warehousing, insurance, consulting, financial services (e.g. guaranteeing loans, handling foreign exchange transactions etc) Also manages counter-trade (products sold in exchange for other products) Practice from the colonial days - still very common in Japan

What is exporting?

When the firm's products are manufactured in domestic or third market and transferred directly or indirectly to the host market. Most common in early phases of internationalisation, triggered by unsolicited orders or by customers expanding into foreign markets.

What are the different types of indirect export modes?

• Export buying agent • Broker • Export management company/export house • Trading company • Piggyback

What are the functions of a tight export marketing group?

• Exporting in the name of the association • Allowing cooperative bids & sales negotiation •Allowing uniform contracts & terms of sale • Setting prices • Obtaining credit information & collecting debts • Appointing selling agents in foreign market • Market research • Consolidating freight, negotiating rates, etc.

Risks from using indirect export modes.

• No control on how the product is marketed and sold in the foreign country (e.g. inappropriate channels, high/low price), can lead to poor reputation. • No contact/info on foreign market potential for international expansion. • Limited effort may be devoted to developing the market, therefore opportunities may be lost.

Methods of support and motivation of intermediaries.

• Significant local advertising and brand awareness development by supplying firm. • Regular visits and telephone calls to agent or distributor • Regular meetings of agents or distributors arranged and paid for by supplying company • Competitions with cash prises etc. for intermediaries with highest sales • Provision of technical training to intermediaries • Feedback schemes • Briefings about supply firm's current activities

Advantages of tight export marketing groups

• Taking advantage of economies of scale • Reaching markets more effectively • Better representation of interests • More stable prices • Reducing selling costs (joint shipments, lower shipment costs) • Creating a strong brand name

What are the most important criteria for evaluating international distributor partners? What method can be used to do this?

• The performance of the distributor partner (turnover & market share; profits for manufacturer; network to potential customers) • The general attractiveness of the market where the partner operates (market size; market growth rate) Use a partner performance/market attractiveness matrix to evaluate.