Module 3.2 - International sales

Module 3.2.
ENTERING FOREIGN MARKETS
Theory and tipps
NESsT
2018
Project co-funded by the European
Union funds (ERDF and IPA)

The objectives of this course are
• to provide an understanding why companies are growing internationally
• to provide an understanding on which strategies may be used to grow
internationally
• To provide a critical approach to risks and mitigation techniques before
going international
Entering foreign markets

What is international marketing?
1

Marketing is the societal process by which individuals or groups obtain what they need or
want through creating, offering, and freely exchanging products or services of value with
others (Kotler)
What is marketing?
Product Price
Place Promotion
4Ps

… the process of planning and conducting transactions across national borders to create
exchanges that satisfy the objectives of individuals and organizations
What is international marketing?

• How will my idea, good, or service fit into the international
market? Is there a demand for it?
• Should I obtain my supplies domestically or from abroad?
• Looking inside: Is there a specific knowledge or technology
that my company can use to develop something new?
• Be aware of the gap between the compelling value
proposition and the actual demand!
• What marketing adjustments are or will be necessary? (4Ps)
• What threats from global competition should I expect?
• How should I enter the global market?
Some key international marketing questions

Motives behind going
international
2

Entrepreneurial characteristics
• Able to take risks and try out new and uncertain products, services and market
• Able to see new combination – will to act to develop new combination
• Attitude – are they rational?
• Ability to know the proper time
• Childhood/personal environment
• Educational level
• Age of managers
• International orientation
• Life and professional experiences
• Travelling and time spent abroad
• Language skills
• Innovativeness and creativity
• Flexibility
• Commitment
• Persistence
• Risk perception

Internal (Proactive)
– Profit and growth goals / advantages
– Unique product
– Technical Advantage
– Exclusive information
– Tax benefits
– Economies of Scale
– Internal Change agents (Enlightened management, New management,
Significant internal event)
– Foreign market opportunities / market information
Motives for Internationalisation I.

External (Reactive)
– Competitive pressure
– Overproduction
– Decreasing domestic sales
– Saturated domestic markets
– Unsolicited foreign orders
– Proximity to international customer/psychological distance
– Network (Suppliers, Distributors)
– External Change Agents (Demand, Other firms, Distributors, Banks, Chambers of
commerce, Export agents, Government activities)
Motives for Internationalisation II.

External
– Cost of raw material
– Access to external sources of finance
– Distribution system
– Proximity of export markets
Internal
– Company size
– Product
– Technology
– Management
Determinants of successful internationalization

Strategies for going
international
3

Where to grow?
What should the company
consider while choosing the right
location?
• What internal resources my
company has and where do I
have the opportunity to exploit
my company’s internal
resources?
Where my company can…
• exploit its ownership specific
advantage?
• create a monopolistic
advantage over others?
• can create entry barriers for
others?
What value does the market
offer to my company if we make
an entry there?
• Can we gain access to
resources/assets/knowledge?
• Can we gain access to
distribution network?
• Can we save transaction cost?
• Can we cover more markets
afterwards?
• Is there any benefit from
establishing own production
facility?
• Is it enough with partnership
agreement?

Key features of the model:
• Firms gain experience on domestic market before moving to foreign
markets
• Foreign operations start in culturally and/or geographically close
countries and move gradually to more distant countries
– Firms tend to enter markets in successively greater psychic distance, in most cases
greater geographical distance
– Psychic distance: the sum of the factors that prevent the flow of information from and
to the market. These factors may be differences in language, education, business
practice, culture and industrial development
• Foreign operations start with traditional export activities and move
forward to more demanding operation modes (sales subsidiaries, etc.)
both at the company and the target country level
Uppsala Model of Internationalisation I.

No regular export
(sporadic export)
Independent
representatives
(export modes)
Foreign sales
subsidiary
Foreign
production and
sales
subsidiary
Market A
Market B
Market C
Market D
……..
Market Z
Uppsala Model of Internationalisation II.
Increasing market commitmentIncreasinggeographicdiversification
Foreign Direct Investment

No regular export
(sporadic export)
Independent
representatives
(export modes)
Foreign sales
subsidiary
Foreign
production and
sales
subsidiary
Market A
Market B
Market C
Market D
……..
Market Z
Uppsala Model of Internationalisation II.
Increasing market commitmentIncreasinggeographicdiversification
Foreign Direct Investment
Low control,
Low risk,
High flexibility
High control,
High risk,
Low flexibility

The stages of internationalization
• Uninterested firms
• management is not interested in exporting, would not even fill an
unsolicited export order
Stage 1
• Partially interested
• unsolicited orders or other stimuli continue overtime: management
responds but makes no effort to explore the feasibility of export
Stage 2
• Exploratory exporter
• management actively explores the feasibility of exporting
Stage 3
• Experimental exporter
• The firm exports on an experimental basis to psychologically close
countries
Stage 4
• Export evaluation
• the firm is an experienced exporter (to stage 4 countries) and adjusts
exports optimally to changing exchange rates, tariffs, etc.
Stage 5
• Export adaptation
• management explores the feasibility of exporting to additional countries that
psychologically are further away
Stage 6

The internationalization process of
firms is traditionally seen as driven
by experiential knowledge…
… it is by experiences that
uncertainties in international
markets are reduced…
… and the obstacles of foreignness
overcome.
In the internationalization process
firms move from one type of market
to another, either they are…
…moving from the domestic market
to the international arena…
…or they are moving from a mature
market to an emerging market…
… their previous experiences are
expected to decide their path.
The Stage view: To conclude

high 6. Acquisition:
wholly owned
subsidiary
Control&foreignmarket
presence
5. Joint Venture
4.
Franchising
3. Licensing
2. Direct
Exportin
g
1. Indirect
Exporting
low
Production at home Production Abroad
low Resource deployment high
Market Entry Mode Alternatives

Networks and advantages of them
• Enable access to the complementary assets
• Reduce psychic barriers
• Reduce liabilities of foreignness
• Enable reducing uncertainty in the market
• Enable locating opportunities
• Enable access to funding

Final Stage
The relation is institutionalized,
commitment taken for granted
since trust is high and uncertainty
low
Early Stage
Negotiation of sample/trial delivery,
investment of time to overcome
uncertainty and low experience.
Learning about each other to
establish trust and commitment
Development Stage
Cooperation experience reduce
uncertainty and distance.
Contract is signed or deliveries
are build up.
Long Term Stage
Experience of business give trust and
knowledge of routines. Adoptions are
extensive and commitments
significant.
Wider experience
Changed requirements
Insufficient resources
Lack of commitment
No real relationship, evaluation of
each other, experience is none or
low, uncertainly high, distance
large, adoptions non-existent
Pre-Relationship Stage
The evolvement of business relationships

Business relationships constitute the
core of the internationalization
process…
…business relationships may force
or enable firms to internationalize
their activities…
… focus is given to the development
of the firms business relationships
before and after the foreign entry,
rather than on the entry as such…
… it is in interaction with foreign
actors the firm learns about
international business activities…
… in the internationalization process
firms are connecting to different
types of foreign business
networks… AND THE MAIN
CHALLENGE IS TO REACH AN
INSIDERSHIP POSITION IN THE
BUSINESS NETWORK….
The Network view: To conclude

Agent vs. Distributor vs. Direct
channels
4

Independent sales people who represents, on a long-term basis, a
number of manufacturers whose products complement one another but
are not competitive.
When?
– Customers require personal selling but the market is not large enough
to support full-time company sales personnel.
– Gross margins are not large enough to support the cost of full-time
company sales personnel, but personal selling is requires
– The manufacturer is moving into new markets and wishes to penetrate
those markets quicker by using already established rep contacts rather
than an individual item.
– The manufacturer is new and does not have full-time sales personnel,
but customer require personal selling.
Agent

An independently owned and operated sales organization who takes
title to products, keeps them in inventory, provides for delivery and
credit, and may service products after the sale
When?
– The product is relatively standardized
– The unit value of the product is low
– The order size is small
– Gross margin is low
– Customer purchasing effort is low
– Frequent purchases are made by customers
– The market is decentralized and scattered
– Customer requires short lead times for delivery.
Distributor

When?
– Gross margin is high
– The purchase is significant
– The product is technically complex
– The buyer need both pre- and aftersale service
– The order size is large
– Product customization is required
– The product is subject to rapid technical change
Direct Channels

Typical Channel Configurations
Manufacturer
Industrial User
Manufacturer
Consumer
Originator
Consumer/
Industrial User
AgentAgentAgent
AgentIndustrial
distributer
Retailer
Wholesaler
Industrial
distributer AgentAgent
Retaile
r
Agen
t
Agen
t
Wholesaler
Retaile
r
Industrial
Products
Consumer
Products
ServicesProject co-funded by the European

Barriers, risks and mitigation
techniques when conducting
business in foreign markets
5

• Internal
• External
– Market risks
– Political risks
– Financial risks
– Other risks
Barriers and risks in entering foreign markets

Internal Barriers
Insufficient finances Insufficient knowledge
Lack of foreign market
connections
Lack of commitment
Lack of productive
capacity to dedicate to
foreign markets
Lack of foreign
channels of distribution
Management emphasis
on developing
domestic markets
Cost escalation due to
high export
manufacturing,
distribution and
financing expenditures

Commercial
Risks
Market risk
Transportation risk
Acceptance risk
Performance risk
Payment risk
Risk of rising prices
Political Risks
Political instability
Expropriation
Risk of convertibility &
Transfer delay
Financial Risks
Foreign exchange risk
Credit risk
Inflation risk
Interest risk
Other Risks
Legal risk
Contracting risk
Linguistic risk
External Risk Classification

Risk description Mitigation techniques
Market
risk
• Risks connected to the economic
circumstances of the country in which the
firms do their business.
• Choosing the wrong market to sell one’s
products/services or selling the wrong product
on a selected market
• Having bad timing for selling a certain
product/service
• Producing insufficient volume
• Gaining market knowledge (understanding
customer requirements and expectations)
• Conducting detailed market research and
analysis
Transportation
risk
• All threats that might occur during the
transportation of goods (partly / fully damaged
of lost goods)
• Identifying experienced freight forwarder
• Transport insurance should cover the possible
damages and loss of goods
• Can be done through insurances and
INCOTERMS (it identifies when responsibility
shifts from one party to the other in order to
make sure you start the insurance from the
right point)
Acceptance
risk
• It occurs when customer refuses to accept
delivered products due to disagreement on the
quality or based on different expectations in
importing country
• Parties can agree on quality inspections by a
neutral third party
• Letter of Credit (after the shipment of goods
and correct, timely presentation of the
documents, the exporter shall be paid)
Commercial risks and mitigation I.

Performance
risk
• Exported shipment may be rejected due to poor
quality of products. The biggest risk for the
importer is whether the exporter can supply the
contracted goods/services in the right quality
and/or quantity by the pre-arranged date.
• Detailed specifications should be documented
and included in sales contract
• Risks can be mitigated by bank demand
guarantee, whereby importer is as the
beneficiary will be insured in case the exported
will not be able to perform its duties specified
in the contract
Payment
risk
• The buyer refuses or unable to pay or any delay
of payment belongs under this risk.
• Via banks and insurances (Letter of Credit,
export insurance)
• Via government (Export credit agencies)
• Application for deferred Letter of Credit (upon
the correct presentation of documents after the
shipment, the issuing bank must pay
exporter’s claim)
• Exporter can also negotiate for more
favourable terms (down payment, payment in
advance)
Riskof
rising
prices
• Changes in prices that might affect business
(raw material purchases or purchases needed in
other operational activities such as oil price
changes, etc.)
• Forward contracts can help to overcome such
issues.
Commercial risks and mitigation II.

Politicalinstability&
Expropriation
• Political instability can lead to major losses to
both the exporter and the importer as neither of
the can directly influence such situations.
• Political risk cover among others war, civil
revolutions, civil war, imposed restrictions
(changes in legal code, tax code, high inflation,
devaluation of currency and expropriation.
• Political risks can be mitigated by applying for
guarantees from ECAs (Export Credit
Agencies). The risk has to unmarketable
(meaning longer than 2 years and is not
converted by private insurance). The cost is
highly dependent on the risk rating ECAs give
to a country (scale 0-7, where OECD countries
have 0 and the riskiest countries have 7).
Businesses conducted in OECD countries
cannot be insured by ECAs but by private
insurers.
Riskof
convertibility&
Transferdelay
• It is also possible that the currency paid by the
buyer cannot be transferred or converted to a
desired currency due to the lack of foreign
currency possessed by a country.
• Payment prohibition, a permanent interdiction of
payment to a foreign creditor, might arise of a
state to get control over its foreign currency
shortage.
• In case of transfer and convertibility risks
Letter of Credit could be used with the
confirmation by a third party or a bank in
another country.
Political risks and mitigation

Foreign
exchange
risk
• It arises due to the uncertainty of the future
value of a currency.
• It is the risk that businesses’ operations or an
export value will be affected by changes in
exchange rates or the fluctuation of a currency
value.
• An effective way can be to have decision of
settlements in home currency or a third counry
currenty strongly linked to the home one.
• Other measures may be costly: futures,
forwards, swaps, options, market hedges.
Creditrisk
• Credit risk may occur from the insufficient
creditworthiness of the buyer and its willingness
to pay.
• Prepayments, Letter of Credits, Bill of
exchange or export guarantees can help to
mitigate this risk.
Inflation
risk
• Inflation and its effects on commodity prices
shall be considered when doing business
globally.
• Price escalation clause should be included in
contract.
Interest
risk
• The mobility of international capital can cause
significant fluctuations in interest rates (debt
services, bonds).
• Forward rate agreements (the buyer of a FRA
obtains the right to lock in an interest rate at a
desired term at a future date) and swaps may
be used for this.
Financial risks and mitigation

Legalrisk
• International laws change often and can affect
fiscal law, tariff law, export/import restrictions.
• Ensure about clear understanding which
international law(s), dispute settlements are
applicable to the contract.  The exporter may
wish to impose choice of law and choice of
forum clauses, which state that disputes will be
settled under the exporter’s own national laws
and courts.
Contracting
risk
• Contracting risks refer to contrary and divergent
conditions in different types of contracts (sales
contract, freight forwarder, bank relation
contracts like Letter of Credits, etc).
• Critically reviewing contract conditions.
Linguisticrisk
• Miscommunications that arise between partners
due to different languages and cultural
backgrounds.
• Gaining knowledge on culture in exporting
country, in case of sufficient amount of export,
talent acquisition with needed language
knowledge.
Other risks and mitigation

Identification
of risk
Analysis
Risk
Assessment
Risk
Mitigation
Control and
Follow-up
Risk Management Process

Module 3.2 - International sales

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Module 3.2 - International sales

Similar to Module 3.2 - International sales (20)

More from szpinter

More from szpinter (9)

Recently uploaded

Recently uploaded (20)

Module 3.2 - International sales