By Bhadresh Bundela
An SME contemplating global expansion needs to take two strategic decisions i.e. which markets to enter and how to enter the market chosen. Depending upon the competitive strength of the firm and market opportunities, the selection of the product or services to be offered in the international market and the target markets is being made.
Market Identification and Selection:
Any firm wanting to internationalise its operations may adopt either a reactive or a proactive approach to market identification as described below:
Reactive Approach to Market Identification:
Most firms internationalize as an unintended response to an international marketing opportunity in the form of unsolicited export orders. In doing so, the positive stimulus in terms of increased profitability, turnover, market share, or image leads to catering to overseas markets as a repeat activity. A firm takes up overseas marketing on a regular basis. Consequently, international marketing becomes an integral part of the firm’s marketing strategy.
Systematic Approach to Market Identification:
However, a systematic proactive approach is generally adopted by larger companies in selecting international markets. Since a firm ahs limited resources, it has to focus on a few foreign markets. Besides, proper selection of markets avoids wastage of the firm’s time and resources so that it can concentrate on a few fruitful markets. A firm has to carry out preliminary screening of various countries before a refined analysis is carried for market selection.
The approach to enter into international markets can range from minimum investment with infrequent and frequent exporting to large investments of capital and management in order to capture and maintain a permanent, specific share of world markets. Depending upon the firm’s objectives and market characteristics any of these approaches can be adapted.
Very often, entering international markets is not a matter of choice but of necessity to stay competitive in new and established markets. An executive involved in global marketing operations should have a thorough understanding of various entry modes. The major modes of entry into international markets adapted by firms are discussed in detail.
PRODUCTION IN THE HOME COUNTRY
There are two possible ways of tapping overseas markets basing your operations in the home country. These are (a) indirect export and (b) direct export.
1.1 Indirect Export
The simplest form of indirect export one can think of is sales which are effected from the country when the foreign visitors purchase goods and in the process add to the foreign exchange earnings of the country. Foreign department stores or firms that have branch offices locally or agents who make purchases on behalf of their parent offices abroad also lead to one form of indirect export. Though resulting in foreign exchange earnings to the country, they are not the result of any deliberate effort on the part of locals to promote exports.
The most important means of indirect export is through merchant exporters/export houses where the manufacturer entrusts the job of selling his products abroad to the specialist agencies which normally do engage in manufacturing.
Advantage of using an Export House / Merchant Exporter
Exporting through merchant exporter/export house can confer the following advantages:
1. The manufacturer avoids the problems of direct exporting such as investment of resources, collecting market intelligence, setting up of export department etc. and is served with instant foreign market knowledge.
2. Since the operational cost of export house / merchant-exporter will be spread over several parties, going through them will result in saving in unit cost.
3. In case the export house works on commission basis, there is possibility of expansion of exports, since there is incentive for the export house to expand sales.
4. In view of the fact that the export house will be effecting consolidated shipments there is a possibility of reduction in unit freight.
5. The reputation of export house will enable the manufacturer to get better representation for his products abroad. In case the export house is selling complementary products, sales might increase.
Disadvantage of using Export House / Merchant Exporter
1. The export house/merchant exporter, in order to earn more through commission, may take on too many unrelated lines resulting in the producer getting neither the expertise nor the attention he is looking for.
2. There is a possibility, under this arrangement, of the manufacturer continually depending on the export house and not developing export expertise himself.
3. There is also a possibility of both the manufacturer and the export house lacking personal involvement in the export business since either party may drop the other at any moment.
4. In view of the fact that the export house will be pushing the product abroad on its own name and reputation, the foreign customers may not associate the product with the manufacturer at all. This danger is more if the export house uses its letterhead and brand name.
Another form of indirect export is the consortium approach i.e., a limited number of manufacturers of the same product joining together and exporting it on a cooperative basis. In this type of arrangement, export management function is performed for several firms at the same time. There is closer cooperation and control as compared to merchant exporter or export house. Export orders will be procured on a joint basis and distributed amongst the constituent units. The individual units will be permitted to use their own letterheads and brand name. This arrangement confers more bargaining power on the consortium since the parties coming together can bargain over a position of strength. As in the case of exporting through export house, there is a possibility of saving in unit freight on account of consolidated shipment. Under-cutting is reduced to a great extent and all economies of scale associated with joint operation can be reaped.
The greatest disadvantage of consortium approach is that for this approach to succeed there should be perfect understanding among the members and each one should put in his best. As is well-known, cooperation can succeed only to the extent the individual members want it to succeed. Misunderstanding may arise over main issues and the presence of unscrupulous members is enough to spoil the business or the entire consortium.
Direct Export
When a manufacturer engages in direct export he takes more risks but gets more returns. More than anything else, direct export means more involvement for the manufacturer, more control and more expertise with the firm.
FOREIGN MANUFACTURING
There are various reasons for a company to go in for foreign manufacturing. Some of them are:
1. High cost of shipping of product to the export market;
2. Tariffs and non-tariff restrictions in the importing country;
3. Nationalist feelings in the country concerned not favouring import products;
4. Large size of the country, particularly regional groupings justifying
establishment of manufacturing facilities in that country/region;
5. Greater scope to be in constant touch with the changing requirements of the
foreign customer which is particularly true of fashion goods;
6. Lower production costs due to availability of cheaper/plentiful factor(s) of
productions and
7. Advantages of acquiring an existing foreign product with all his facilities
Foreign manufacturing can take one or more of the following forms:
1. Assembly
2. Contract manufacture
3. Licensing
4. Joint Venture and
5. Wholly-owned foreign production (100% ownership)
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