External Expansion Limited

Wednesday, 14 May 2014


In previous articles we have been developing various external variables that affect international trade in macro-economic nature, and this one we will stop to explain the inner work and the paths which should perform a company to access international markets.

The choice of the form of access to foreign markets is a very important decision in international business strategy, as it will have direct effects on the results obtained in different countries because resources, risks, canal and control of the operations will be different for each type of option. One of the main issues to consider will be the distribution of products and this will require decide upon three aspects.

The first aspect is the length of the canal through we will distribute the products, and among them are located: the direct manufacturer distribution to final customers; the short indirect distribution that passes from producer to distributor and from the later to the final customer; and lastly the long indirect distribution that passes from manufacturer to a foreign branch office or representative, then the distributor and from later to the final customer. The direct distribution noted for having a high control of the product and extensive knowledge of the final customer in the foreign country, although the implementation cost can be very high. The short Indirect distribution is characterized by having a great control over the product, but less market coverage and high distribution cost. In the long indirect distribution, the control over the product is less in return for greater market coverage and lower distribution costs.

The second aspect is the coverage of the market in which we will assess if the distribution is exclusive would limit the number of intermediaries that work our products; if on the contrary, the distribution is selective would be used more than one distributor nonexclusive but in a few sales points; and if the distribution is intensive the product distribution would be used on so many sales points as possible for that the final consumer find the product an easy and convenient penetrating amply the market.

The third aspect is the interaction between canal members, where we can distinguish two ways: Push and Pull. In Push the manufacturer make an offer or promotion to the distributor to stimulate sales of the product, thereby pressing the distributor. In Pull the manufacturer makes offers or promotion on the final customer to stimulate that they go buy to the distributor.

There are factors that will influence one or other decision of the product distribution that are related to internal matters of the company, both by factors related to the product and the company itself. For it, we must weigh the positioning of competition in foreign markets that we will send our product. Will have to take account matters arising in the market and sorroundings, because it shall analyze consumer behavior and environmental factors. Finally, we must consider the availability of intermediaries with which work to introduce our product in the case of indirect distribution, either short or long.

Once decided one of these main aspects, we can enunciate as alternative to access foreign markets the following: direct export (direct sales, commercial agent, export e-commerce); indirect export (importer, distributor, wholesaler, trading companies); cooperation agreements (Piggyback, consortia and groups export, license, franchise, joint venture); and establishment abroad (delegation, commercial subsidiary, production subsidiary).

Direct export is useful in the early stages of internationalization and consists of selling directly to the end buyer located in a foreign market by developing any export activity without delegated to third parties. Difficulties will be the location of potential customers continuously, negotiate with them, ensuring good quality of service in terms of delivery times, replenishments, after sales services and customer loyalty for lack personal contact with them. Generally, companies are turning to this form in response to a specific order obtained at a fair or trade mission and can keep it in time because the potential number of customers is not very high, allowing remote address them by the company, and sometimes because operations are very high amount with a significant margin that allow the company to move to the destination country regularly. Also, if the product is very technical requiring high training for marketing their sale it can not be done by third parties, so direct export is performed. It is usual contact with a commercial agent who is dedicated to making mediation in international trade transactions for third parties (manufacturers, wholesalers and distributors), receiving remuneration which is usually in the form of commission without thereby get to assume the risk of operations.

Indirect export is characterized for having an operator or agent which is responsible for any and all activities related to export, but unlike the agent in the case of direct export , in this type of export assume responsibility for risk operations. Indirect export also occurs when the product sale to a domestic customer who decides to export it assuming the tasks of market research and export management. This is an interesting way to begin to positioning the products abroad, so must accurately identify those companies interested in exporting our products abroad establishing links and interpreting their needs, allowing a seamless integration of our process productive that it strengthen their trade relations to be more successful. It is important that the producer keeps well informed on trends in the destination markets to improve their strategies and its exporting customer, as well, this process could allow a chance to export directly in the future. This approach has the advantage of access to international markets without facing the complexities of direct export, but the main problem is finding the right broker with effective opportunities to place products abroad because sales success depends on it.

Cooperation agreements include the creation of a common trading between various production SMEs that share risks, responsibilities and potential benefits with one or more partners in common. This helps to define themselves as an alternative to entering international markets, but limited in its individual capacity of international marketing. However, in these agreements the different producing or companies join forces and resources complement each other to solve problems relating to the production and quality control, multiplying the individual capacities of those who make up this group. Also, companies can organize clustered advertising campaigns and promotion for a particular market at a lower cost and more easily than if they would try it individually. In many cases the competitors in national territory may be successful partners for the external market and provides them greater control over the operations that could be exercised over an intermediary. This type of agreement usually ends in merger or acquisition. There are several types and these include: the Piggy Back, the Consortia and Groups Export, the European Economic Interest Groupings, License, Franchise, Joint Venture, etc.

The establishment abroad take place in companies that already have an established exporting experience and want to create a permanent establishment in the foreign country where there are greater prospects for further growth. In this way, companies transfer part of their resources abroad, taking greater risks and commitments in international strategy. The reasons why companies decide established it is because obtain competitive advantages in production factors (the primary cause of offshoring and outsourcing), to achieve greater customer intimacy, eliminate capacity productive constraints, improve the conditions delivery and more control of trade policy, plus advantage in tax and benefit from regional integration agreements. The most popular forms of establishment abroad are the delegation, the commercial subsidiary , the production subsidiary and international franchise.

In our next article we will discuss in more detail the different actors, promoters and alternative for access to international markets.

For more information or require services related to this article, please contact through our website www.externalexpansion.net or directly our email info@externalexpansion.net.

Until the next article...

Leonardo Dufau

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