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How to Expand Your Business Globally

Global Marketing

Today's global market demands global action. However, like it or not, you're probably already competing globally - foreign-owned companies are competing with you in your "domestic" markets. You can turn global competition to your advantage by tapping markets and labour supplies across international borders yourself - a process that is simpler than you may believe. This guide will help you understand how to stretch your company's reach globally.

  1. What You Should Know Before Getting Started

    Why Compete Globally?
    Becoming involved in international trade can help your business:
    • enhance domestic competitiveness by finding less expensive suppliers
    • increase sales and profits
    • gain global market share
    • reduce dependence on existing markets and suppliers
    • extend the sales potential of existing products with relatively low development costs
    • stabilize seasonal or cyclical market fluctuations
    • enhance potential for corporate expansion

  2. Methods of Doing Global Business
    There are several methods you can use to enter a foreign market, including exporting, importing, licensing, joint ventures and off- shore production.

    If you have an existing business that creates a tangible product, exporting is the most common method. Start-up costs and risks are limited, and profits can be realised early on. If you are beginning a new venture, the other choices are options that may reduce some of the start-up risks.

    There are two basic ways to export: directly or indirectly.

    A. Direct Exporting
    In direct exporting, your company finds a foreign buyer and then makes all arrangements for shipping your products overseas. This method requires a lot of footwork and infrastructure and entails more risk, but the potential profit rewards are often higher.

    You can also choose to utilise Sales Representatives or Agents -
    Essentially, you hire foreign- based representatives or "agents" who work on a commission basis to locate buyers for your product, just as you would domestically or you can use a Distributor. You strike a deal with a foreign distributor, who purchases merchandise from you and resells it with a mark-up. The distributor maintains inventory and provides after-sales service to the buyer.

    B. Indirect Exporting
    Your company uses an export intermediary to perform most of the details of the export arrangement. Many small businesses choose this option, at least in the outset. There are several types of export intermediaries: Commissioned agents - These are brokers who link your product or service with specific foreign buyers, then allow the primary company to fulfil the order and handle packing, shipping and export documentation.

    Export Management Companies (EMCs) and Export Trading Companies (ETCs) - These companies operate in the country where the goods are to be exported. EMCs generally represent your product to promote it to other prospective overseas purchasers, while ETCs usually work according to demand, finding a need and sourcing your product for foreign buyers.

    Both types of companies usually take care of all aspects of the export transaction (including conducting market research, promoting your product overseas, accessing proper distribution channels, and locating foreign distributors), making them a viable option for smaller companies that lack the time and expertise to break into international markets on their own. EMCs and ETCs usually operate on a commission basis, although some work on a retainer basis and some take title to the goods they sell, making a profit on the mark-up.

  3. Your International Business Plan
    If you're already in business, you probably already have a business plan. If so, you'll need to amend it to include the specifics of international business. If not, you'll need to begin from scratch in order to define your company's present status, internal goals and commitment, in addition to seek financial help if you expect to pursue a bank loan or other types of investment.

    An international business plan should define:
    • why you're interested in global trade
    • what your import/export pricing strategy will be
    • who your potential export markets (or import sources) and customers are
    • how you plan to enter the foreign market
    • what additional costs (travel, shipping, marketing, sourcing) you expect to incur
    • what revenues your venture is expected to bring in
    • how you plan to finance your global expansion
    • what the legal requirements are to enter the markets that interest you
    • how you plan to transport the goods
    • whether you plan to pursue overseas partnership or investments

  4. Getting Ready to Go Global
    For your business to succeed globally, the principles are the same as to succeed domestically: You need to find a product that will fill a targeted need for the purchaser in export markets according to price, value to customer/country and market demand. Do you create a product for which there is a market overseas? Is there a product manufactured overseas, for which there is a market domestically?

    If so, you need to identify why your product will have a market overseas or why an imported product will sell domestically. What gives your product a competitive advantage for an overseas market? Who are the buyers for your product? Why would they buy from you? Take the following steps to determine the feasibility of your international business plan.

    A. Analysing Your Industry
    You need to identify where your industry is today and predict the trends and directions that it will take over the next three years. How competitive is your industry in the global market? To find out, consult the following resources:
    • Talk to people in the same business or industry, research industry-specific magazines and attend trade fairs and seminars.
    • Obtain import/export statistics from the Department of Trade and Industry.

    • Try to find market studies that have been conducted on your industry's potential international markets.

    B. Analysing Your Business's Capabilities
    If you have an existing business that you are planning to expand globally, you probably are already doing a few things right to have reached this point in your business. However, you'll need to assess your business's strengths and weaknesses to determine what approach to take to the international market. Ask yourself the following questions:
    • Why is your business successful in the domestic market? What's your growth rate? What are your strengths?
    • What products do you feel have export potential?
    • What are the competitive advantages of your products or business over other domestic and international businesses?
    • What are the needs that will be filled by your product in a foreign market?
    • What competitive products are sold abroad and to whom?
    • Is there an after-market for your product? Who will provide it?
    • What complementary goods and technologies does your product require?
    • What is the useful life of your product?
    • Is use or life affected by climate?
    • Will geography affect product purchase, for example, transportation problems?
    • Will the product be restricted abroad, for example tariffs, quotas or non-tariff barriers?
    • Does your product conflict with traditions, habits or beliefs of customers abroad?

    C. Selecting the Best Market to Enter
    If you're not sure where to do business, one good indicator is to find out where your domestic competitors have expanded internationally.

    Once you've identified several countries that you think have market potential for your product, you're ready to do serious market research.

    D. Market Factors to Assess
    Answer yes or no to the following questions to assess the potential of specific countries.

    1. Demographic and Geographic Factors
      • Is there sufficient population size, growth and density in the correct demographic region?
      • Is the climate compatible with your product?
      • Is the shipping distance economically feasible?
      • Is there a sufficient physical distribution and communication network?
      • Are the natural resources you may need available?

    2. Political Factors
      • Is the government amenable to trade with South Africa?
      • Is the country politically stable?
      • Does the government have heavy involvement in business?
      • Are there existing trade restrictions, tariffs, non- tariff barriers or bilateral trade agreements?

    3. Economic Factors
      • Is the economy sufficiently developed to support your product?
      • Is foreign trade a significant part of the economy?
      • Is the country's currency stable?
      • Is the per capita income and distribution of income sufficient to support your product?

    4. Social/Cultural Factors
      • What is the literacy rate and average educational level in the country?
      • Do the people have sufficient disposable income and a propensity to spend money on products similar to yours?
      • How is the market similar to and different from your domestic market?
      • Are there language and cultural barriers to doing business?

    5. Market Access Factors
      • Are there limitations on trade, such as high tariff levels or quotas?
      • What documentation will you need?
      • Are there local standards, practices and other non- tariff barriers?
      • What is the country's policy on honouring patents and trademark protection?

    6. Distribution and Production Factors
      • Are there intermediaries available, if you need them?
      • Are there sufficient regional and local transportation and storage facilities?
      • Is there labour available with the skills you may need?
      • What is local manufacturing conditions?
      • What are local labour laws?

    When you're determining which foreign market to enter, one of the key factors may be the existence or absence of tariffs and non- tariff trade barriers. Tariffs are taxes imposed on imported goods in order to raise the price of imported goods to the level of domestic goods. Often tariffs become barriers to imported products because the amount of tax imposed makes it impossible for exporters to profitably sell their products in foreign markets.

    Non-tariff barriers are laws or regulations that a country enacts to protect domestic industries against foreign competition. Such non-tariff barriers may include subsidies for domestic goods, import quotas or regulations on import quality. Countries with low trade barriers in place are usually not good choices for global trade.

  5. Forming Connections in Your Market
    Once you've identified the product or service you want to import or export and the country that interests you, you need to make business connections in the chosen market. That is, you're looking for companies, agents or distributors who are in search of the products you offer and that may be interested in doing business.

    You also need to determine whether you will handle your global business directly or choose an agent, distributor or intermediary to act on your behalf, and if so, you need to find someone qualified to do so.

    The following is a list of possible contacts:
    • International Chamber of Commerce
    • Consulates
    • Embassies
    • Foreign Trade Ministries
    • World Trade Centres Association (WTCA)
    • Foreign Industry Associations
    • Foreign Industry Publications
    • Trade Associations
    • Department of Trade and Industry
    • Domestic Industry Associations
    • Domestic Industry Publications
    • Institute of Export

    Once you've identified potential sources, contact them to seek specific product information, such as specifications, product samples and prices. Contact them by letter, fax, e-mail, telex or cable. At this point, it's best that you translate your business's own literature into the language of the country where you plan to do business. Although contacts at most foreign companies that do international business will speak English, when reaching out, it's best to communicate in your potential source's language.

  6. Pricing Your Product
    Pricing a product is always one of the most important parts both of marketing a product and making a business profitable, and, unsurprisingly, pricing a product for the overseas market is one of the most critical factors for entering foreign markets. Prices must be high enough to generate a reasonable profit, yet low enough to be competitive in overseas markets.

    Naturally, your cost of goods sold must include all the expenses to move product to the port of destination, which hike up the bottom line considerably, but don't forget that doing business internationally affects your overhead as well.

    Cost of Goods Sold
    In addition to the material and labour used in the manufacture of your product, you must consider:
    • Export packing
    • Forwarding
    • Container loading
    • Documentation
    • Inland freight
    • Consular legalisation
    • Truck/rail unloading
    • Bank documentation and collection fees
    • Wharfage
    • Dispatch
    • Handling
    • Terminal charges
    • Cargo insurance
    • Ocean freight
    • Bunker surcharge
    • Courier mail
    • Other misc.

    International Overhead Costs
    • Changes in product packaging
    • Promotional literature
    • Marketing and advertising
    • Sales salaries, bonuses and commissions
    • Foreign market research
    • Translation, consulting and legal fees
    • Foreign agent/distributor product information and training

    Once you've determine your break-even price based on the additional costs above, you're ready to set your prices. The selected pricing structure should be part of your market penetration objectives. Your goals will vary depending on the target overseas market. Ask yourself the following questions regarding pricing:
    • Are you entering the market with a new or unique product?
    • Are you selling excess or obsolete products?
    • Can your product demand a higher price because of brand recognition or superior quality?
    • Are you willing to reduce profits to gain market share for long-term growth?

    Obtain as much information as possible on local market prices as part of your market research. Overseas distributors and agents of similar products of equivalent quality can give you some insight.

    A. Quoting a Price
    The pro-forma (projected) invoice is the most commonly used document to give price quotations to potential customers. The quotation in a pro-forma invoice is usually considered binding, although prices may change prior to final sale. To prepare the invoice, you should give a detailed description of the product, an itemised list of charges and sale terms. The invoice should also indicate the period during which the price quotation is valid.

    B. Setting Terms of Sale
    You should be familiar with the common terms of sale used in international trade before preparing your pro-forma invoice. Terms of the sale that you should spell out include:

    Risk of Loss - This clause excuses the exporter from responsibility where a default in performance is caused by events beyond the exporter's control, such as war, acts of God or labour problems.

    Payment and Finance Terms - This describes when payment will be made, in addition to providing provisions for late payments, partial payments and remedies for non-payment.
    Warranties - In some cases, the importer will require the exporter to warrant that the goods meet certain standards of construction and performance.

    Acceptance of Goods - Frequently, the importer will insist upon the right to inspect the goods upon delivery. If the goods do not meet the standards set in the invoice, the importer can reject them.

    Intellectual Property Rights - Protection of the exporter's patents, trademarks or copyrights should be assured in the agreement, in particular since these protections are frequently eroded when goods cross international lines. Get this in writing instead of assuming that your product is protected.

    Dispute Settlement - This is always a good clause in any agreement of sale, but in an international agreement, it's especially useful. Spell out how and where any disputes will be resolved and which nation's law should be applied.

  7. Getting Paid
    One of your primary concerns in entering the overseas market is to be paid in full and on time. While the credit of a buyer is always a concern, you may have less recourse when it comes to collecting unpaid international debts, so you should exercise extra caution. Be sure that you and your buyer agree upon the terms of the sale in advance.

    The primary methods of payment for international transactions, ranked in order of most secure to the exporter to least secure, include:

    Payment in advance - This is the most desirable, but it's usually just an option when the manufacturing process is specialised, lengthy or capital-intensive and requires partial or progress payments.

    Letters of Credit (LC) - A letter of credit is an internationally recognised instrument issued by a bank on behalf of its client, the purchaser. The LC actually represents the bank's guarantee to pay the seller, provided the conditions specified on it are fulfilled.

    Documentary Collection (Drafts) - Documentary collections involve the use of a draft, drawn by the seller on the buyer, requiring the buyer to pay the face amount either on sight (sight draft) or on a specified date in the future (time draft). The draft is an unconditional order to make such payment in accordance with its terms, which specify the documents needed before title to the goods, will be passed.

    Consignment - In this arrangement, the importer only pays the exporter after the goods have been resold to another purchaser. Ownership of the goods remains with the exporter until the purchase conditions are satisfied. Consignment is very risky for the seller since there are no guarantees when or if the goods will be sold, and in the meantime, the exporter's capital remains tied up in inventory over which he or she has no control.

    Open account - This means that payment is due after the goods are manufactured and delivered (usually within 15, 30 or 60 days). This method is considered risky internationally because your recourses to collect unpaid debts are limited.

  8. Transporting Goods Internationally
    Once you've set terms of sale, the next variation between selling a product domestically and internationally occurs: how to transport the goods. One of the main differences between selling domestically and exporting is the documentation required. Providing proper documentation with your shipments is essential, if the goods are to arrive safely and on time.

    The use of an international freight forwarder (your shipper) is advised. The shipper's role is to act as an agent for the exporter in moving cargo to the overseas destination. These agents are familiar with the import/export rules and regulations of foreign countries, methods of shipping, and the documents connected with foreign trade. Freight forwarders can also help you with your order from the start by advising you on freight costs, port charges, consular fees, costs of special documentation and insurance costs as well as handling fees.

    Freight forwarders may also recommend the best type of packing for protecting the merchandise in transit and arrange to have the merchandise packed at the port or sealed in shipping containers. If you plan to take advantage of these services, be sure you figure these additional export costs into the price you charge your customer.

    When the order is ready to ship, freight forwarders should be able to review the letter of credit, commercial invoices, packing list and other documentation to ensure that everything is in order.

    Following are the paperwork documents that you may need to fill out in order to ship an order internationally.

    International Shipping Documentation
    • Commercial Invoice - This proves the exporter's ownership of the goods and promises payment. The description of the goods on the commercial invoice must correspond exactly to the description in the letter of credit or other method of payment. It's usually best to prepare a commercial invoice in English and in the language of the destination country.

    • Export License - You don't need a license to export goods, unless it's possible that export could threaten national security, affect certain foreign policies, or create short supply in domestic markets. To determine whether you need a license, check with the Department of Trade and Industry.

    • Shipper's Export Declaration (SED) - This is required for all shipments so that the Bureau of the Census can monitor exports. The SED must be presented to the carrier before the shipment departs.

    • Certificate of Origin - Although the commercial invoice may contain a statement of origin, some countries require Certificates of Origin. Certificates of Origin allow for preferential duty rates if the exporter's country has an agreement with the importer's country to allow entry of certain products at lower tariffs.

    • Export Packing List - This itemises the material in each individual package and indicates the type of package and individual net, legal, tare and gross weights and measurements for each package. A copy of the packing list should be attached to the outside of a package in a waterproof envelope marked "packing list enclosed."

      The list is used by the shipper or forwarding agent to determine the total shipment weight and volume and whether the correct cargo is being shipped. In addition, customs officials may use the list to check the cargo. The original packing list should be forwarded along with your other original documents in line with the conditions of sale.

    • Insurance Certificate - Most exporters insure goods for 110 percent of their value.

    • Inspection Certificate - Many foreign purchasers request that the seller certify that the goods being shipped meet certain specifications. This certification is usually performed by an independent inspection firm.

    • Dock Receipts - This document transfers shipping obligations from the domestic to the international carrier as the shipment reaches the terminal.

    • Bill of Lading/Air Waybill - Bills of lading and air waybills provide evidence to title of the goods and set forth the international carrier's responsibility to transport the goods to their named destination.


Resources:
Books
Morrison, Terri, et al., Dun & Bradstreet's Guide to Doing Business Around the World, Prentice Hall, 1997.
Nelson, Carl A., Import/Export: How to Get Started in International Trade, second edition, McGraw-Hill, 1995.
Salacuse, Jeswald W., Making Global Deals, Houghton Mifflin, 1991.
U.S. Department of Commerce, A Basic Guide to Exporting, NTC Business Books, U.S. Small Business Administration
Valentine, Charles, The Ernst & Young Guide to Expanding in the Global Market, John Wiley, 1991.

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