10 steps to successful exporting

8/7/2019 10 Steps to Successful Exporting

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Primary market research helps you fill in the critical gaps through direct contact with keyexperts, customers or other sources of information. Primary research frequently involves personalcontact techniques such as interviews and consultations and is best attempted after you havefamiliarized yourself with the potential market through your secondary research efforts.Contacting a Canadian Trade Commissioner at an embassy or consulate is an example of effective primary research.

The 10 Steps to Successful Exporting continues on the next page. Click to contine reading...

Part 2: Marketing Strategies for Successful International Marketing

Here are more of the key steps necessary to export your products or services successfully:

4. Devise marketing strategies for your target market.

International marketing is not the same as domestic marketing. Those who ignore this fact do soat their own peril. As successful as you may be at reaching your Canadian customers or clients,you must be aware that your international audience will frequently have different tastes, needsand customs. Good marketing strategies help the exporter understand and address thesepotential differences.

These strategies are captured in the international marketing plan, a flexible document that willlikely be reviewed, revised and modified throughout your exporting activities. Marketing is acontinuous activity and so is marketing planning because you can never know enough about your

customers and how to meet their needs.

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The basic marketing formula – the four “P’s” of product, price, promotion and place – is just thebeginning when it comes to international marketing. Your plan will need to address many other factors, such as payment (international transactions and currency exchanges), paperwork(increased documentation), practices (different cultural, social and business styles), partnerships(strategic alliances to strengthen your market presence) and protection (increased risks relatingto payment, intellectual property or travel) and many more. Understanding all these facets of international business will transform your marketing plan into marketing action.

5. Enter the market.

The research is complete and the export and marketing plans have been devised. You feel ready

to enter the market and are seeking the best strategy to reach potential customers. There are asmany market entry strategies as there are markets; however, these strategies can be looselygrouped into three categories. Direct exports, as the name implies, involve direct marketing andselling to the client. In a reasonably accessible market such as the United States, direct exportingof products or services may be a viable option. But in less familiar markets, with different legaland regulatory environments, business practices, customs and preferences, direct exporting maynot be an option. A local partner, for example, may be better able to manage these complexitiesand serve your potential clients better.

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Indirect exporting is frequently used to enter new markets. Businesses selling products enter into an agreement with an agent, distributor or a trading house for the purpose of selling (or marketing and selling) the products in the target market. Due diligence is critical when selectingan agent or distributor for indirect exporting. Western Economic Diversification Canada haspublished a valuable checklist on selecting a foreign agent or distributor in its publication Readyfor Export: Building a Foundation for a Successful Export Program. An adaptation of this checklistis found in Team Canada Inc’s A Step-by-Step Guide to Exporting (see below for moreinformation).

The third market entry strategy involves strategic partnerships with other companies or individualswith complementary skills and capabilities. A partner can often provide the insight, contacts andexpertise that fills the gap in your export readiness. A strategic alliance with a company selling acomplementary product or service can provide more effective market access, resulting in moreforeign sales in less time. As with indirect exporting relationships, contractual agreements withpartners must be stated in clear terms and, whenever possible, refer to Canadian laws for theprotection of the Canadian company.

Continue on to the next page for steps six through ten of successful exporting.

Part 3: Export Shipping, Financing & Regulations

Here are more of the key steps necessary to export your products or services successfully:

6. Get your product or service to market.

Every market has its own set of rules and regulations covering safety, health, security, packagingand labeling, customs and duties among other things. Additionally, these rules and regulationsmay vary depending on the product or service you are exporting. It is critical that you understandthe rules and regulations that apply to you before you ship your goods or open your foreignbusiness location. Product-based businesses with shipping requirements will benefit fromdeveloping a relationship with a freight forwarding company and a customs broker. Whether youare shipping by truck, rail, sea or air, the documentation will likely be extensive and potentially

confusing.

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The services provided by these businesses will assist you in determining the most efficient andleast risky options for shipping your goods across borders.

7. Explore financing options.

While there are overnight export success stories, most companies must be prepared to investboth time and financial resources to see the return on their investment and the subsequentsuccess. Consequently, financial stability and a secure cash flow are important during this period.In some cases, businesses can rely on their domestic sales to sustain their early export efforts. If this is not possible, it is a good idea to know what financing options are available. Exporters mustdevelop a financial plan to understand and address the diverse costs associated with exporting,complete with a two- to three-year cash budget to cover expenses and a capital budget. A capital

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budget is a cost-benefit assessment of your export objectives and serves as your operating planfor measuring expenditures and revenues.

8. Understand the legal and regulatory issues.

Exporting exposes Canadian businesses to unfamiliar laws and regulations. There are numerousinternational conventions, treaties and national, regional and municipal rules that can affect your

ability to operate successfully in foreign markets. Exporters may also encounter disputes withagents or distributors, clients or creditors. It is important to understand your rights and obligationswhen resolving disputes, selling goods or services and protecting intellectual property.

9. Put it into practice.

You have committed yourself to exporting. You have the skills and the resources to undertake thechallenge. You have researched the market and prepared your export plan, internationalmarketing plan and financial plan. Your market entry strategy is clear and the support system (i.e.freight forwarder, customs broker, financial lenders, legal advisors) is in place. You have gonethrough the export process step-by-step and feel confident that you have covered all the bases.Now, it is time to put all this skill and knowledge to use. The world is waiting for your product or service!

10. Let Team Canada Inc (TCI) help you along the way.

TCI is committed to helping businesses across the country thrive in global markets by offeringcomprehensive export information and services. These tools are designed to help bothexperienced exporters and potential exporters plan and implement their international businessventures from start to success.

Marketing Plan”Definition:

A marketing plan outlines the specific actions you intend to carry out to interest potentialcustomers and clients in your product and/or service and persuade them to buy the productand/or services you offer.

The marketing plan implements your marketing strategy. Or, as I put it in my article, "The Key toMarketing: Use a Plan", "the marketing strategy provides the goals for your marketing plans. Ittells you where you want to go from here. The marketing plan is the specific roadmap that's goingto get you there. "

A marketing plan may be developed as a standalone document or as part of a business plan.Either way, the marketing plan is a blueprint for communicating the value of your products and/or services to your customers.

Strategies for Entering and Developing International Markets

The process of penetrating and then developing an international market is a difficult one, which manycompanies still identify as an Achilles’ heel in their global capabilities. In fundamental terms, entering a

new country-market is very like a start-up situation, with no sales, no marketing infrastructure in place,and little or no knowledge of the market. Despite this, companies usually treat this situation as if it werean extension of their business, a source of incremental revenues for existing products and services. Twoaspects of the typical approach are particularly striking. First, companies often pursue this new businessopportunity with a focus on minimizing risk and investment—the complete opposite of the approachusually advocated for genuine start-up situations. Second, from a marketing perspective, many companies break the founding principle of marketing—that a firm should start by analyzing the market, and then,and only then, decide on its offer in terms of products, services, and marketing programs. In fact, it is far more common to see international markets as opportunities to increase sales of existing products and soto adopt a “sales push” rather than a market-driven approach. Given this overall approach, it is not

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surprising that performance is often disappointing. As was discussed in Chapter 1, profitability ininternational markets has lagged behind average firm profitability for much of the last two decades (the“foreign investment profitability gap”). This may well be because of what Ghemawat and Ghadar describe as “top-line obsession,” a focus on revenue growth rather than profitability growth.1 The link between this perspective and a view of international sales as incremental business is self-evident. And,after all, many firms enter new country-markets through the indirect channel of a local independentdistributor or agent, in which case the multinationals will not know their costs and therefore their operating profitability in the markets. Although more mature firms are altering the way they enter and penetrate new international markets, the mixed results in the post-2001 recession demonstrate that thisremains a challenging phase of internationalization.

This common mismatch between expectations and situational requirements stems, above all, from afailure to follow in international operations the marketing strategy process that is probably established inthe core domestic business. This may be because participation in the market is indirect (i.e., via anindependent local distributor or agent, rather than via a directly controlled marketing subsidiary). It alsooften reflects a lack of control over strategic marketing and a failure to think rigorously about how the business will develop over the course of several years. While it is true that certain distinctivecharacteristics of an international marketing situation demand a different approach to marketing, this isnot a reason for standards of strategic marketing management to be relaxed. This chapter will begin byexamining these unique international marketing challenges and then discuss, in turn, several phases of the

process of market entry and development, including the following:

• The objectives of market entry, which will have implications for the strategy and organizationadopted.

• The choice of market entry mode (i.e., the form of marketing organization through which thecompany participates in the market). Particular attention will be paid to the low-intensity modes of entrymost commonly favored in market entry situations.

• The marketing entry strategy, with a particular focus on the lessons learned from the strategiesof western multinationals in emerging markets.

• A framework for the overall evolution of an international marketing strategy.

What Is Different about International Marketing?

Most executives are quite clear that international marketing is different from home-country marketing,and most multinational companies insist that their senior managers have international experience on their resumés. Despite this pragmatic recognition of the uniqueness of the international marketplace, there has been little agreement over the exact nature of this distinctiveness. Although the question has been longand inconclusively discussed by academics and business analysts, agreement has been limited to the valid but rather obvious observation that international marketing, as opposed to marketing in a single country,takes place in an environment of increased complexity and uncertainty, in areas as varied as consumer behavior and government regulation. This suggests that the differences between domestic andinternational marketing are differences of degree rather than underlying differences of kind. In fact, thereare certain distinctive characteristics in international operations that, while they may not establishinternational marketing as a separate theoretical subdomain of marketing, nevertheless have a great bearing on managerial decisions. They are:

A Context of Rapid Business Growth and Organizational Learning

Penetration of a foreign market is a zero-base process. At the point of market entry, the foreign entranthas no existing business and little or no market knowledge, particularly with regard to the managerialcompetence necessary to operate in the new market environment. During the years after market entry,therefore, the rate of change in the country-specific marketing capability of the firm is likely to be greater than the rate of change in the market environment, and firm effects may dominate market effects in

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shaping strategy. This is particularly important given the business context, in which the generation of new business is of prime importance—rather than efficiency in managing a relatively stable business. Thisusually results in (a) entering the market via a partnership with a local distributor or other marketingagent rather than via a directly controlled marketing unit and (b) a relatively rapid sequence of changes tothe marketing strategy (such as new product introductions or expansion of distribution) or to themarketing organization (e.g., taking over marketing responsibility from the local distributor).

The Hierarchical Nature of Decisions

International market situations are multilevel in their decision focus, with a hierarchy of decisions fromcountry assessment and performance measurement decisions through to more traditional marketing mixallocations and programs. Thus, an executive responsible for a country in which the firm participates onlyfor revenue generation and not for production (a common situation) is simultaneously managing country-level trends in the economy or government, and marketing decisions such as the product range or pricelevel. In the domestic market, by contrast, these decision levels are addressed by separate specialists.

Managing a Multimarket Network

From the time a company enters its second country-market, it will inevitably be influenced by its previous experience. The greater the number of national markets in which a company participates, the

more likely it is to seek to manage them as an aggregated network rather than as independent units.Marketing strategy decisions in one country-market may in this case be made against extra-marketcriteria. For example, price levels may be set to minimize the difference among markets and to maintain a price corridor rather than purely to reflect local market conditions. Similarly, a multinational companymay subsidize price levels in one market for strategic reasons while recouping that loss in another market.This ability to leverage a global network is sometimes described as “the global chess game,”2 and it isincreasingly regarded as one of the key advantages enjoyed by a global firm relative to local players, partly because of the increasing globalization of firms and their consequent opportunities to integratenational operations. In practice, this frequently results in asymmetric competition in any single market,with different companies pursuing different objectives and setting different performance standards. Asdiscussed later in this chapter, it is possible that one company may be participating in the market simplyto learn, and it may therefore tolerate low profitability, while others are pursuing more conventional profit maximization goals.

Co-location of Strategic Marketing and Distribution Functions

A national distribution channel for an international corporation is usually responsible not just for thetraditional distribution functions,3 but it is the de facto branch of the company in that country with anexclusive agency for the territory and responsibility for marketing strategy. The distribution unit in thecountry-market, whether an independent organization or a wholly-owned subsidiary, has to manage astrategy for growth, and it will therefore be judged on organizational criteria including feasibility, level of desired risk, supportability, and control issues. By contrast, distribution management in domestic marketsis largely concerned with the implementation of preexisting marketing strategies such as communication platforms and target customer selection, and so the distributor is judged against efficiency or cost-minimization criteria. Although some more-established firms manage this trade-off with considerablesophistication, all too often the delegation of marketing strategy to what is essentially a distributionorganization results in underperformance, as nobody is in fact formulating a marketing strategy (this is

discussed at length in Chapter 5).

In practice, these unique characteristics mean that marketing strategy in the international arena changesrapidly as the business grows or fails to grow. Importantly, it is driven not only by market characteristics(the basis for marketing strategy in the pure or theoretical sense), but also by organizational development,as the economics and knowledge of the local marketing unit develop. Indeed, it is usually impossible toseparate the process of market development from the process of organizational development. It is possible, however, to identify commonalities across companies in this process of internationalization andso to describe the usual evolution of international marketing strategy. Such a framework has to begin by







recognizing that different objectives for market entry may produce quite different outcomes in terms of entry mode and marketing strategy.

Objectives of Market Entry

Companies enter international markets for varying reasons, and these different objectives at the time of entry should produce different strategies, performance goals, and even forms of market participation. Yet,companies frequently follow a standard market entry and development strategy. The most common,which will be described in the following section, is sometimes referred to as the “increasingcommitment” pattern of market penetration, in which market entry is via an independent local distributor or partner with a later switch to a directly controlled subsidiary. This approach results from an objectiveof building a business in the country-market as quickly as possible but nevertheless with a degree of patience produced by the initial desire to minimize risk and by the need to learn about the country andmarket from a low base of knowledge. These might be described as straightforward financial objectivesthat are oriented around long-run profit maximization in the country, so this internationalization strategycould be described as the default option.

The fundamental reason for entering a new market has to be potential demand, of course, but neverthelessit is common to observe other factors driving investment and performance measurement decisions, such

as:

Learning in Lead Markets

In some circumstances, a company might undertake a foreign market entry not for solely financialreasons, but to learn. For example, the white goods division of Koc, the Turkish conglomerate, enteredGermany, regarded as the world’s leading market for dishwashers, refrigerators, freezers, and washingmachines both in terms of consumer sophistication and product specification. In doing so, it recognizedthat its unknown brand would struggle to gain much market share in this fiercely competitive market.However, Koc took the view that, as an aspiring global company, it would undoubtedly benefit from participating in the world’s lead market and that its own product design and marketing would improveand enable it to perform better around the world.4 In most sectors, participation in the “lead market”would be a prerequisite for qualifying as a global leader, even if profits in that lead market were low. The

lead market will vary by sector: the United States for software, Japan for consumer electronics andtelecommunications, France or Italy for fashion, and so on.

The important point about such an objective for market entry is that it will change the calculus of themarket entry mode decision. If a company is to maximize learning from a lead market, for example, itwill need to participate with its own subsidiary and a cadre of its own executives. Learning indirectly, viaa local distributor or other partner, is obviously less effective and will contribute less to the company’sdevelopment as a global player, even if short-term profitability is superior because of the lower investment required.

Competitive Attack or Defense

In some situations, market entry is prompted not by some attractive characteristics of the countryidentified in a market assessment exercise, but as a reaction to a competitor’s move. The most common

scenario is market entry as a follower move, when a company enters the market simply because a major competitor has done so. This is obviously driven by the belief that the competitor would gain a significantadvantage if it were allowed to operate alone in that market, and so it is most common in concentrated or even duopolistic industries. Another frequent scenario is “offense as defense,” in which a company entersthe home market of a competitor—usually in retaliation for an earlier entry into its own domestic market.In this case, the objective is also to force the competitor to allocate increased resources to an intensifiedlevel of competition. In both cases, a company will have to adapt its strategies to the particular strategicstakes: rather than focusing on market development, the firm will set market share objectives and be prepared to accept lower levels of profitability and higher levels of marketing expenditure. This requires






different performance standards and budgets from the usual scenario of low-risk entry and long-rundevelopment, and the company’s control system must have sufficient flexibility to adapt to this. Theoverriding competitive objective should also be taken into account when considering whether and how to participate in the market with a local distributor or partner. Certainly, the low-intensity entry modes, suchas import agents and trading houses, would be inappropriate unless the local partner will accept the lower profit expectations.

Scale Economies or Marketing Leverage

A number of objectives result from internationalization undertaken as what is sometimes described as a“replication strategy,” in which a company seeks a larger market arena in which to exploit an advantage.In many manufacturing industries, for example, internationalization can help the company achieve greater economies of scale, particularly for companies from smaller domestic country-markets. In other cases, acompany may seek to exploit a distinctive and differentiating asset (often protected as intellectual property), such as a brand, service model, or patented product. In both cases, the emphasis is on “more of the same,” with relatively little adaptation to local markets, which would undermine scale economies or diminish the returns from replication of the winning model. To achieve either of these objectives, acompany must retain some control, so it may enter markets with relatively high-intensity modes, such as joint ventures. In particular, either franchising or licensing are business models naturally suited for therapid replication of businesses through expansion of units since both are centered on protected and

predefined assets.

Apart from these varied marketing objectives, it is also common for governments to “incentivize” their country’s companies to export, in which case the company may enter markets it would otherwise nothave tackled. In summary, given the rapid business evolution that has been identified as one of thedistinctive characteristics of international markets, it is reasonable to suppose that, for most companies,international operations will consist of a patchwork of country-market operations that are pursuingdifferent objectives at any one time. This, in turn, would suggest that most companies would adoptdifferent entry modes for different markets. More commonly, however, companies have a template that isfollowed in almost all markets. This usually starts with market entry via an indirect distribution channel,usually a local independent distributor or agent.

Modes of Market Entry

The central managerial trade-off between the alternative modes of market entry is that between risk andcontrol. On the one hand, low intensity modes of entry minimize risk. Thus, contracting with a localdistributor requires no investment in the country-market in the form of offices, distribution facilities, sales personnel, or marketing campaigns. Under the normal arrangement, whereby the distributor takes title tothe goods (i.e., buys them) as they leave the production facility of the international company, there is noteven a credit risk, assuming that the distributor has offered a letter of credit from its bank. Thisarrangement also minimizes control, however, since the international company will have little or noinvolvement in most elements of the marketing plan, including how much to spend on marketing,distribution arrangements, and service standards. In particular, it should be noted here that effectivecontrol over marketing operations is impossible without timely and accurate market information, such ascustomer behavior, market shares, price levels, and so on. In many cases, low-intensity modes of market participation cut off the international firm from this information, since third-party distributors or agents jealously guard the identity and buying patterns of their customers for fear of disintermediation. Suchcontrol can only be obtained via higher-intensity modes of market participation, involving investments inlocal executives, distribution, and marketing programs. This is truly a trade-off in that companies cannothave it all, but must find compromise solutions. The fact is that control only comes from involvement,and involvement only comes from investment.

Another vital distinction here is between financial risk and marketing risk. It is financial risk that isusually the major consideration at the point of market entry, and it is financial risk that is minimized bylow-intensity modes of market participation. However, this risk comes at the price of low control over business strategy, so that in fact marketing risk is maximized, with a local partner making all the



important marketing decisions. It is the desire for greater control over the business (i.e., to minimizemarketing risk) that explains the usual evolutionary pattern of increasing commitment.

The alternative modes of entry can therefore be distinguished by where each falls on the risk-controltrade-off (see Figure 3-1). In addition, there are a number of points that should be borne in mind abouteach.

Figure 3-1. The Market Entry Mode Decision

Export/Import and Trading Companies

Serving an international market through export/import agents, or trading companiessuch as the Japanese trading houses or the former British hongs in Hong Kong, is

attractive in that it offers both low financial risk and access to substantial local operating knowledge. It is particularly suitable for companies with little international experience since almost all internationaloperating functions are borne by the agent, including the costly and time-consuming requirements such as bills-of-lading, customs clearance, and invoice and collection. However, in addition to the low level of control, a couple of additional drawbacks should be noted. First, agents such as these operate on the basisof economies of scope, seeking to act as intermediaries for as many vendors as possible—they areservants of many masters. In many cases, therefore, the international vendor will be only a small

proportion of the agent’s business, so the vendor may end up feeling underserved by the agent, who, if acting rationally, will at any time devote the greatest attention to the vendor that offers the greatest totalmargin in a given period. Second, agents often operate on a commission basis, and they do not actually buy the goods from the international vendor, so there is a credit and cash flow risk that is not present indistributor arrangements.

“Piggybacking”

Although such arrangements are rarely featured in international business texts, many companies begintheir internationalization opportunistically through a variety of arrangements that may be described as“piggybacking,” because they all involve taking advantage of a channel to an international market rather than selecting the country-market in a more conventional manner. For example, a firm may be offeredsome spare capacity on a ship or plane by a business partner, or it may find that a domestic distributor isalready serving an international market and so grants a foreign distribution license that requires nothing

more than an increase in domestic sales. An example of this is the Italian rice firm F&P Gruppo, ownersof the leading Gallo brand, which entered Poland via their Argentinean subsidiary rather than direct fromItaly, thus leading to the rather bizarre situation of packets of rice with Spanish-language packagingcovered in stickers in Polish. The reason, it transpires, was that the Argentinean air force was importingfreight from Poland via regular flights, but it was sending over empty aircraft on the outward leg, a sourceof export distribution capacity that was bought by a consortium of local food companies.5

The most common form of piggybacking is to internationalize by serving a customer who is moreinternational than the vendor firm. Thus, a customer requests an order, delivery, or service in more thanone country, and the supplier starts selling internationally in order to retain the customer and increases its penetration of the account. This is particularly common in the case of business-to-business companiesand technology-oriented start-ups. Another common situation is when two companies in the sameindustry combine to use the same distribution channel for products that are not directly competitive, thus

obviating to some extent the financial disadvantage of establishing distribution when sales volumes arestill low. Thus, for example, Minolta piggybacked on IBM’s international distribution network, whichhelped Minolta achieve otherwise unaffordable distribution and helped IBM defray the cost of thedistribution network. Similarly, competitors in some industries, such as pharmaceuticals, routinely licensetheir sales and/or distribution to each other in markets where the competitor is better established and the products are not directly competitive.

When piggybacking via distributors or other comparable partners, the main disadvantage, in addition tothe obvious lack of control, is the greater marketing risk that comes from not having studied the market potential and structure. The likely result is a short-term boost in sales, since this was the nature of the

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opportunity, but a medium-term problem arising from the unsuitability of the country-market, which wasnot analyzed before entry.

In the case of piggybacking via a major customer, the dangers are quite different. In fact, the level of control is likely to be quite high, given that internationalization has occurred in the context of a preexisting interorganizational relationship. However, in these cases, the supplier firm oftenunderestimates the commitment required. To offer anything like the levels of service and customer relationship management to which the client is accustomed in the home market, it will almost certainly benecessary to establish an office, hire some local account managers, and establish a service operation for the customer’s local operations. In addition, further expansion beyond the entry account may prove to behampered by the fact that the products sold to that account were customized to the client in question andtherefore not immediately transferable to the wider market.

Franchising

Franchising is an underexplored entry mode in international markets, but it has been widely used as arapid method of expansion within major developed markets in North America and Western Europe, mostnotably by fast food chains, consumer service businesses such as hotel or car rental, and businessservices. At heart, franchising is suitable for replication of a business model or format, such as a fast-foodretail format and menu. Since the business format and, frequently, the operating models and guidelines

are fixed, franchising is limited in its ability to adapt, a key consideration in employing this entry modewhen entering new country-markets. There are two arguments to counter this. First, the major franchisersare increasingly demonstrating an ability to adapt their offering to suit local tastes. McDonald’s, for example, is far from being a global seller of American-style burgers, but it offers considerably differentmenus in different countries and even different regions of countries.6 In such cases, the format and perhaps the brand is internationally consistent, but certain customer-facing elements such as service personnel or individual menu choices can be tailored to local tastes. Secondly, it must be recognized thatthere are product-markets in which customer tastes are quite similar across countries. A businessinstalling and maintaining swimming pools, for example, is a prime candidate for franchising, as sourcingand operations remain key success factors and are more or less universal. This is an example of a business, like fast food, that is not culture bound and in which marketing knowledge (i.e., the product- or service-specific knowledge involved in marketing this particular offering) is at least as important as localmarket knowledge (i.e., the knowledge required to operate successfully in a particular territory). It is also

important to note that in such businesses, the local service personnel are a vital differentiating factor, andthese will obviously still be local in orientation even if they operate within an internationally consistent business format.

The main drawback of franchising is the difficulty of adapting the franchised asset or brand to localmarket tastes—even experienced corporations like McDonald’s or Marriott, which have managed tothrive on this trade-off as discussed above, have taken several decades and some false starts to get to this point of advanced practice. A key indicator that franchising carries this constraint is the fact thatmarketing budgets at local levels are usually restricted to short-term promotions rather than marketdevelopment. This is consistent with the concept that franchising is a rapid replication strategy. For example, consider the expansion of U.S.-based Weight Watchers into Mexico. Weight Watchers is ahighly successful dieting business that franchises its programs to operators of local clubs and groups of people motivated to lose weight and maintain their new lighter shape. Its expansion into Mexico, whichwas the result of an opportunistic network initiative by a member of the U.S. executives’ network,

encountered some cultural differences compared with the United States or Canada. In some parts of thecountry, the attitude still prevailed that being overweight was not bad because it indicated sufficientaffluence to eat well. In addition, Mexican consumers were far less nutritionally aware than their northerncounterparts, who encountered extensive nutritional information on all food products by law. Clearly,market development required heavy local investment in market education to establish the dieting clubconcept. Because it was a franchise organization, however, the local marketing funds held by theentrepreneurial and small-scale group operators were much below what was necessary. While somefranchising organizations allocate larger marketing budgets from central funds, it remains true that localmarketing plays only a limited role in the replication strategy for which franchising is best suited.





Licensing

Licensing is a common method of international market entry for companies with a distinctive and legally protected asset, which is a key differentiating element in their marketing offer. This might include a brandname, a technology or product design, or a manufacturing or service operating process. Licensing is a practice not restricted to international markets. Disney, for example, will license its characters tomanufacturers and marketers in categories such as toys and apparel even in its domestic market while itfocuses its own efforts on its core competencies of media production and distribution. But it offers a particularly effective way of entering foreign markets because it can offer simultaneously both a low-intensity (and therefore low risk) mode of market participation and adaptation of product to local markets.Continuing with Disney as an example, its many licensing arrangements in China allow its characters toadorn apparel or toys suited to local taste in terms of color, styling, or materials.7 This is because, as isusual in licensing agreements, the local licensee has considerable autonomy in designing the productsinto which it incorporates the licensed characters. The other major advantage of licensing is that, despitethe low level of local involvement required of the international licensor, the business is essentially localand is in the shape of the local business that holds the license. As a result, import barriers such asregulation or tariffs do not apply.

As always, there are disadvantages, and two in particular should be factored into any decision onlicensing. First, although it facilitates the creation of localized product, licensing is characterized by very

low levels of marketing control. The licensee usually has to obtain approval from the international vendor for product design and specification, but it usually enjoys almost total autonomy over every other aspectof the marketing program (even if the contract includes constraints such as minimum price levels or promotional budgets). This is because the licensee is not a representative of the international vendor and,compared to a distributor or franchisee, is much more of an independent business that licenses only onespecific and closely defined aspect of the marketing offer rather than acting as the de facto marketing armof the international vendor. Second, and perhaps most importantly, licensing runs the risk of creatingfuture local competitors. This is particularly true in technology businesses, in which a design or process islicensed to a local business, thus revealing “secrets,” in the shape of intellectual property that wouldotherwise not be available to that local business. In the worst case scenario, the local licensee can end up breaking away from the international licensor and quite deliberately stealing or imitating the technology.This might arise from malicious intent or simply a breakdown in relations, as is not uncommon betweenan international company and its local partner (see Chapter 5). Even in a best case scenario, the local

licensee will certainly benefit from accelerated learning related to the technology or product category— this is inevitable since the international company must by definition have a superior asset if there is amarket for licensing it in the country. Over time, even absent of malicious intent, the local firm is likelyto develop into a position in which it can launch its own rival business. Participation in internationalmarkets via licensing is therefore best suited to firms with a continuous stream of technologicalinnovation because those corporations will be able to move on to new products or services that retain acompetitive advantage over “imitator” ex-licensees.

These particular low-intensity modes of market participation are the most frequently adopted at the timeof market entry, although franchising and licensing are less common than entry via an independent localdistributor—perhaps because they involve rather more complex interorganizational contracts andmanagerial processes. In situations in which a replication strategy is adopted and rapid expansion of the business is a priority, they are highly suitable, and to that extent they are underutilized. In all cases, it isclear that the organizational arrangement and the marketing strategy are interrelated: the less involved theinternational company, the less likely it is to develop locally customized offers and the more likely it is tofollow a replication strategy. In fact, a replication strategy can run counter to the overarching objectivesin entering the market in the first place, as much recent experience in the large emerging marketsdemonstrates.

Marketing Entry Strategies—Learning from Emerging Markets

Just as the internationalization boom of the 1990s proved instructive with regard to market assessment, sothere is much to be learned from the marketing strategies adopted at entry by western companies in






emerging markets.8 While most attention has been paid to market entry mode questions, such as thechoice between a joint venture or a subsidiary, it is notable that most multinationals made the sameassumption about their marketing entry strategy—namely, that they would replicate the competitivestrategy that had served them well in developed markets, transferring their developed market brands andstrategies to emerging economies without adaptation. While an argument can be made for such areplication strategy on the grounds of leveraging competitive assets such as brand names, it can only bemade by ignoring the fundamental tenet of marketing, which is that companies should responsively adapttheir offerings in the face of different market conditions. The result in most cases has been anunprofitable niche position, in which MNCs compete with each other for the business of the small elitewho value their brands and can afford their prices. That this position is the wrong one for multinationalsis evidenced by their subsequent struggles, many aspects of which flow directly from this marketingapproach. The surprisingly rapid growth of local brands, many of which imitate their global competitors,demonstrates that distribution, for example, is an achievable goal when it is part of an integrated market-driven approach. The fierce competition among multinationals is also indicative of “me-too” nichemarketing strategies driven by replication rather than local market responsiveness, and it is evidence of aflawed execution of the original market entry strategy (to judge from the MNCs’ declared objectives inentering emerging markets) of market penetration.

To turn around their business in these markets, multinationals must in effect reenter the markets byrethinking their marketing strategy at two levels. First, they must embrace a mass-marketing mindset.

While most MNCs have lost the mass-marketing competence that made them huge corporations in thefirst place (because of the intensified competition and fragmentation that has developed in their homemarkets), this approach is suitable both for current conditions in emerging markets and for the market penetration objectives behind their market entries. This mindset, which includes the need for aggressiveattention to price competitiveness, should be reintroduced as the medium-term goal of the MNCs inemerging markets. Secondly, MNCs must develop dynamic strategies for reaching those mass markets; ineffect, market expansion strategies that will take them out of the elite niche.

There are two major reasons why multinationals should adopt a mass-marketing approach in emergingmarkets. First, it is demanded by the typical emerging market structure. Second, anything else isinconsistent with the rationale behind the entry of multinationals into these markets, which was market penetration that was justified by the high potential of large and/or economically undeveloped populations.The principal reason why these billions of people are described as potential consumers rather than

categorized into market segments is that they lack the financial resources to purchase the multinationals’ products. The affordability gap will only be bridged when companies reach down to them by offering products at affordable prices; it will not be realized by emerging market populations increasing wealth tothe point at which they trade up to the products currently on offer.

In practice, however, most multinationals did not develop localized products as part of their entrystrategy, instead preferring to transplant offerings from their traditional developed markets. Evendisregarding the question of whether the product met local needs, this is a niche strategy because of the price position that such products inevitably occupy. Keen to maintain a degree of global price consistencyand unable to lower the price much because of the threat of parallel importing, these transplanted products end up being priced at points at which only 3–5 percent of the population can afford them. It isthis niche strategy that has given local competitors the space to develop their own competence and brandsfar more quickly than multinationals had anticipated. It also fitted well with the niche distribution strategyadopted by most multinationals, which tend to rely on larger channels with which they are somewhatfamiliar and which cannot realistically achieve high distribution coverage of the traditional, complex,socially embedded channels characteristic of emerging markets.

In short, multinationals were pursuing marketing strategies that were fundamentally inconsistent withtheir declared objective of entering emerging markets to realize the mass-market potentials of their huge populations. This is particularly ironic for that large number of multinationals that trace their ownhistorical roots to the development of mass marketing in North America and Western Europe in the earlyand mid-twentieth century. While it might be argued that, given a long enough time frame, this potential







will be realized, the only circumstances in which this justifies such early entry is when first-mover advantage can be obtained.

Mass marketing, as explained by business historian Richard Tedlow, began with the “breakthrough idea”of “profit through volume.”9 The alternative business paradigm, that of keeping prices and margins high,was dominant in the era preceding mass marketing and is increasingly a hallmark of the “era of segmentation,” which characterizes most developed markets now. In these developed markets, marketingstrategies begin with breaking down demand into well-defined segments and developing brands and products narrowly targeted at those segments—almost the complete opposite of mass marketing. Bycontrast, mass marketing was built around good but simple products, narrow product ranges, and lowrates of product obsolescence.

Contrast these two marketing paradigms, and it is easy to understand why the multinationals failed toadopt a mass-marketing approach—not only had they lost the required skills, but they were activelyattempting to move in the other direction, adapting their marketing approaches towards the “segment of one” era that technology promises in developed markets. Speak to executives in these multinationals,however, and it becomes clear that the entry strategies that they followed were by choice rather thanforgetfulness. In many cases, they argue, mass marketing is not yet possible in most emerging markets because the marketing infrastructure on which such strategies depend, especially distribution systems, arenot yet sufficiently developed. Casting the issue as a “chicken-and-egg” problem in this way is a

blinkered approach for two reasons. First, Tedlow demonstrates that mass marketing was not aninevitable product of technological advances in manufacturing or distribution. Instead, it was stimulated by the vision of a set of entrepreneurs (such as Henry Ford) who sought to “democratize consumption”and reap the first-mover benefits of building scale in operations and customer franchise. This suggeststhat the multinationals’ niche marketing strategies represent a strategic failure rather than a marketfailure. Second, there are companies managing to penetrate the mass market.

The case of Kellogg, the U.S. cereals giant, demonstrates that it is not only local competitors who cansense the need for mass marketing and deliver it. Kellogg, lured by the prospect of a billion breakfasteaters, ventured into India in the mid-1990s. Like many of its counterparts, Kellogg’s market entrystrategy proved unsuccessful, and, after three years in the market, sales stood at an unimpressive $10million. Indian consumers were not sold on breakfast cereals. Most consumers either prepared breakfastfrom scratch every morning or grabbed some biscuits with tea at a roadside tea stall. Advertising

positions common in the west, such as the convenience of breakfast cereal, did not resonate with the massmarket. Segments of the market that did find the convenience positioning appealing were unable to affordthe international prices of Kellogg’s brands. Disappointing results led the company to reexamine itsapproach. Eventually, Kellogg realigned its marketing to suit local market conditions: the companyintroduced a range of breakfast biscuits under the Chocos brand name. Priced at Rs. 5 (10 U.S. cents) for a 50-gram pack (and with extensive distribution coverage that includes roadside tea stalls), they aretargeted at the mass market and are expected to generate large sales volumes. Other emerging marketveterans such as Unilever, Colgate Palmolive, and South African Breweries have amply demonstrated theviability of mass markets in emerging economies and the benefits of rapidly transferring knowledgegained in one emerging market to others.

Another argument articulated by some multinationals is that emerging market consumers are rapidly becoming more like their affluent market counterparts, and that it is therefore sensible to offer globallystandardized products and wait for the consumer to evolve towards a preference for these. This

convergence argument may or may not be true, but it is certain that the rate of change is slow;specifically, in most emerging markets, the mass market will remain poor well beyond the current planning horizons of most multinationals. Even as they grow more affluent, it is far from certain thatChinese and Indian consumers’ preferences will converge with those of Europeans or Americans. It is aslikely that they may retain idiosyncratic local consumption patterns that are driven by cultural norms. A better strategy for any serious emerging market player is to understand and cater to local consumers’current needs and evolve with them as they grow more affluent.






There are two general approaches to moving towards mass-market strength that correspond to afundamental choice that MNCs must make about the basis and nature of competition. On the one hand,MNCs must decide the basis on which they wish to compete in emerging markets. They can do so byeither transferring their global assets, such as brand names of proven strength in other countries, or bydeveloping local (i.e., market-specific) sources of advantage, which include but are not restricted to brandnames. In addition, there is the related question of whether to compete against other MNCs or againstlocal competition. These are, of course, interrelated questions, and the strategies are not mutuallyexclusive. Nevertheless, they represent quite different uses of marketing resources, and they will thus bemanifested in distinctive marketing strategies.

The choices made by most MNCs until now are clear. For the most part, they have chosen to leveragetheir global assets, including brands, managers, and suppliers of marketing services, in the belief thatthese represented their sources of competitive advantage and that they would be valued in emergingmarket economies. In theory, this is a justifiable entry strategy if the MNC accepts the consequentrestrictions on market size. In practice, this has led to overcompetition and rapid saturation of the wealthysegment of emerging market populations, principally because of the number of MNCs that entered thesemarkets in a short period. In effect, this approach assumes that the advantages possessed by thesecompanies are the output of previous marketing executives (e.g., established brands) rather than theability of the current marketing executives to adapt the corporations’ marketing assets and programs tonew markets. This overconservative approach represents a failure to commit to the new emerging

markets.

There are two principal routes of localization. The first is based upon the use of global sources of advantage, but it involves the MNC adapting its marketing mix to make that global asset more suited tolocal emerging market conditions. For example, an MNC might transfer an established global brand intoan emerging market but change its packaging size, price points, or even its product formulation toenhance its attraction to the emerging market retailer and consumer. (Kellogg’s approach in India is anexample of this degree of localization.) It is important to note that this strategy does leverage the MNC’sglobal assets (i.e., it is not based upon marketing derived ground-up from analysis of the local market).However, it is more than simply exporting a global brand via a local distributor—the necessaryadaptation requires investment. Importantly, this strategy also brings the MNC into competition withlocal players.

An alternative strategy is to develop new market-specific resources, a more direct but more costly and probably a slower approach than adaptation. This strategy is starting to be seen in the form of a number of MNCs acquiring local brands that are added to their portfolio alongside global counterparts. In Japan, for example, Coca-Cola carries a number of locally-oriented brands, such as Georgia iced coffee, that enableit simultaneously to meet local taste segments and to derive greater economies of scope from its sales anddistribution investments in the country. Alternative local resources that might be developed aredistribution assets, such as company-specific warehouses or fleets of vans or even bicycles. P&G took this approach in certain Eastern European markets. In these former communist states, the distributionsystems were not simply undeveloped—they had completely collapsed. Recognizing that intensivedistribution was an enabling condition for the development of their consumer goods business, P&Ginvested substantial sums in developing its own distribution network. It did so by funding distributor businesses in the form of vans, information technology, working capital, and extensive training.10 Thismodel, known within the company as the “McVan Model,” produced a significant competitive advantageover both international and local competition; in Russia, for example, the development of 32 regionaldistributors, with 68 further subdistributors, resulted in P&G having distribution coverage of some 80 percent of the population at a time when most multinationals were still restricted to marketing in the twomain cities of Moscow and St. Petersburg. This bold approach illustrates perfectly the trade-off betweencontrol and risk—considerable investment was required to develop this network in a country renowned asa distribution challenge (being the largest country in the world in terms of area), but by tackling the issuehead-on rather than waiting for the enabling condition to develop, P&G gained huge leads in marketshare in many categories. While this advantage has continued in some countries, the financialcommitment makes P&G far more vulnerable to economic shocks, such as the Russian financial crisis of the summer of 1998.






In summary, recent experiences in emerging markets strongly suggest that replication strategies, typicallyexecuted with low-risk forms of market participation, result in market skimming rather than true market penetration and development. This has been particularly ironic because market entry was undertakenostensibly to develop high-volume businesses in these high-population countries. In practice, it seemslikely that, over the long run, multinationals will follow the established template for internationalization by gradually increasing their involvement in the market and the extent to which they adapt their marketing programs to local consumer tastes.

A Framework for the Evolution of Marketing Strategies in an International Market

The process of business development in an individual foreign country-market consists of a sequence of distinct business challenges, and this evolution produces a sequence of marketing strategies andmarketing organizations. This evolution, originally described in the conceptual paper by Susan P.Douglas and C. Samuel Craig from which Figure 3-2 is adapted,11 consists of three principal phases: (1) alow-commitment market entry, in which the MNC seeks incremental sales with minimum investment andis in effect testing the market; (2) a phase of intensified local marketing activity to develop business beyond the platform achieved in market entry and maximize performance within the country; (3) theconsolidation of national units into a more integrated and efficient global marketing organization.Although some start-up firms appear to telescope this incremental internationalization into a “bornglobal” or “big bang” expansion (see Chapter 7), it remains the dominant pattern. The evolution of the

corporation through these phases appears to accelerate with international experience—from a morelaissez-faire attitude in early years of international operation to a deliberate and forceful approach as thefirm becomes more dependent upon, and committed to, its international business. This reflects theorganizational learning that occurs systematically during internationalization and highlights the fact thatthe objectives an MNC sets itself for its business in any individual country-market can be a function notonly of characteristics of the country, such as market potential, stability, and existing businessinfrastructure, but also of its own corporate international experience, level of commitment to internationalmarkets, and relevant management resources.

Figure 3-2. The Evolution of International Marketing Strategy (Source: adapted

from Douglas and Craig

In many ways, the initial phase is more concerned with sales rather than marketing.

Given the international firm’s focus on risk minimization and its lack of localknowledge, the distributor will usually take the easiest option of selling the newlyavailable products to its existing customer base. Indeed, the distributor will usually have been selected onthe basis of this customer base. In this initial phase, there is little adaptation to the local market becausethe low sales levels cannot support the fixed costs of developing a local offer and because theinternational firm is still learning about the market. In fact, the only circumstance in which theinternational company is clearly targeting a segment of customers is when its broader internationalmarketing strategy is based upon an international segment. In consumer markets, Nike, for example,addresses similar segments in multiple countries; in business to business markets, the customer is ofteninternational. Only when the distributor has exhausted the growth possibilities of “picking the low-hanging fruit” does the challenge of marketing arise with the need to target new customers or segments or introduce new product lines, in order to maintain growth.

It is often at this point that the international company takes over distribution and begins to invest in itsown marketing organization in the country-market. Once this organization is in place, the range of products and services expands rapidly, often including new offers developed specifically for the localmarket. In this stage, the emphasis on local market development results in a marketing focus not unlikethat in the domestic market or any other single market. Over time, however, the multinational firm can beexpected to seek synergies across its global marketing network, both in terms of production andmarketing economics, and market knowledge. It is also likely that it has a fully developed subsidiary inall developed markets, so it seeks consolidation to mirror the internationalization of its strategy. In thecountries of the European Union, for example, many international firms are now shifting marketing













strategy to a regional level, so they therefore realize that they do not need a senior marketing executiveand team in each country.

There are a number of key learnings that experienced executives identify from this evolution:

Greater Commitment at Market Entry

Increasingly, experienced companies seek closer control over marketing strategy at the time of marketentry instead of delegating everything to a local distributor. This usually involves placing one or twoappropriately qualified executives in-market alongside the local sales and distribution partner. Theobjective is to accelerate market development and maximize performance earlier in the process rather than relying on the distributor’s customer base and then reaching a sales plateau (see Chapter 5).

Long-Term Planning at Market Entry

Frequently, the appropriate market entry strategy is the wrong market development strategy. In other words, a company learns after a few years in the market that the distribution organization has the wrongcoverage, it has been offering the wrong product lines, or some other aspect of the marketing offer iswrong. The probability of this is higher when the company has taken an opportunistic approach to marketentry and has viewed the country as no more than a potential source of incremental sales of existing

products that can be achieved with minimal risk or investment. The remedy is obviously to prepare amore rigorous plan for market development at the time of entry—one that is based upon the level of analysis of market potential and enabling conditions described in the previous chapter.

Early Development of Local or Regional Marketing Programs

Experienced multinationals are becoming far more capable of modular design in their products or services, identifying a core platform from which local variations can be more easily and economicallydeveloped. This enables earlier development of products tailored to local market conditions, which can beexpected to accelerate market penetration. In many cases, the level at which products are customized isregional rather than country by country. This enables a multinational to retain some economies of scalewhile still adapting to local demand characteristics. Once a firm’s international marketing network is welldeveloped, such regional products may then be available at the time of market entry for other country-markets in the region.

These ways in which international firms are adapting the process of market development, based onaccumulated experience, amount to a blurring of the three phases in the general framework described.Greater commitment at the time of market entry, for example, anticipates the increased investment andcommitment previously seen at a later stage. Similarly, the development of regionally adapted productsanticipates the integrated network and focus on international synergies characteristic of fully developedinternational marketing organizations.

Another important underlying dynamic, which experienced multinationals come to learn, is thedistinction between market knowledge and marketing knowledge. Market knowledge is a local operatingcapability that is required for doing business in any country: it includes a knowledge of local regulatoryrequirements, business practices, negotiating styles, cultural norms, and a host of other details that add upto “the way people do business in a given country.” Clearly, this cannot be acquired quickly by an

outsider, so it explains why even the most experienced multinational will always need some sort of local partner at the time of market entry. Marketing knowledge, by contrast, is a global product-orientedcapability: Anheuser Busch or Heineken know more about the marketing of beer than any local partner they take on because of years of experience in a wide range of markets and segments. Like local marketknowledge, it cannot be acquired quickly by somebody new to the business. It is clear that both types of knowledge (market knowledge and marketing knowledge) are required to grow a business in a newinternational market. Inexperienced companies, however, tend to take on partners with extensive marketknowledge and, because of their own stand-off approach and desire to minimize risk, assume that thelocal partner also has marketing knowledge. In fact, the companies that own a particular product or service are almost always the most knowledgeable marketers of it—this knowledge is behind the long-run



desire of most companies to gain “control” of their international marketing operations in order tomaximize sales and growth. To rely on a local partner’s market knowledge to grow the business is toremove a vital engine of growth (in the form of well-developed marketing knowledge). This explains whyexperienced international companies are increasingly putting their own people alongside the localdistributor or sales organization at the point of market entry.

Entry strategies

There are a variety of ways in which organisations can enter foreignmarkets. The three main ways are by direct or indirect export or production in a foreign country (see figure 7.2).

Exporting

Exporting is the most traditional and well established form of operating in foreign markets. Exporting can be defined as themarketing of goods produced in one country into another. Whilst nodirect manufacturing is required in an overseas country, significantinvestments in marketing are required. The tendency may be not toobtain as much detailed marketing information as compared to

manufacturing in marketing country; however, this does not negatethe need for a detailed marketing strategy.

The advantages of exporting are:

• manufacturing is home based thus, it is less riskythan overseas based• gives an opportunity to "learn" overseas marketsbefore investing in bricks and mortar • reduces the potential risks of operating overseas.

The disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of control has to be weighed againstthe advantages. For example, in the exporting of African horticulturalproducts, the agents and Dutch flower auctions are in a position todictate to producers.



A distinction has to be drawn between passive and aggressiveexporting. A passive exporter awaits orders or comes across them bychance; an aggressive exporter develops marketing strategies whichprovide a broad and clear picture of what the firm intends to do in theforeign market. Pavord and Bogart2 (1975) found significantdifferences with regard to the severity of exporting problems inmotivating pressures between seekers and non-seekers of exportopportunities. They distinguished between firms whose marketingefforts were characterized by no activity, minor activity andaggressive activity.

Those firms who are aggressive have clearly defined plans andstrategy, including product, price, promotion, distribution and researchelements. Passiveness versus aggressiveness depends on themotivation to export. In countries like Tanzania and Zambia, whichhave embarked on structural adjustment programmes, organisationsare being encouraged to export, motivated by foreign exchangeearnings potential, saturated domestic markets, growth andexpansion objectives, and the need to repay debts incurred by theborrowings to finance the programmes. The type of export response

is dependent on how the pressures are perceived by the decisionmaker. Piercy (1982)3 highlights the fact that the degree of involvement in foreign operations depends on "endogenous versusexogenous" motivating factors, that is, whether the motivations wereas a result of active or aggressive behaviour based on the firm'sinternal situation (endogenous) or as a result of reactiveenvironmental changes (exogenous).

If the firm achieves initial success at exporting quickly all to the good,but the risks of failure in the early stages are high. The "learningeffect" in exporting is usually very quick. The key is to learn how tominimise risks associated with the initial stages of market entry andcommitment - this process of incremental involvement is called

"creeping commitment" (see figure 7.3).



Exporting methods include direct or indirect export. In direct exportingthe organisation may use an agent, distributor, or overseassubsidiary, or act via a Government agency. In effect, the GrainMarketing Board in Zimbabwe, being commercialised but still havingGovernment control, is a Government agency. The Government, viathe Board, are the only permitted maize exporters. Bodies like theHorticultural Crops Development Authority (HCDA) in Kenya may be

merely a promotional body, dealing with advertising, information flowsand so on, or it may be active in exporting itself, particularly givingapproval (like HCDA does) to all export documents. In direct exportingthe major problem is that of market information. The exporter's task isto choose a market, find a representative or agent, set up the physicaldistribution and documentation, promote and price the product.Control, or the lack of it, is a major problem which often results indecisions on pricing, certification and promotion being in the hands of others. Certainly, the phytosanitary requirements in Europe for horticultural produce sourced in Africa are getting very demanding.Similarly, exporters are price takers as produce is sourced also fromthe Caribbean and Eastern countries. In the months June toSeptember, Europe is "on season" because it can grow its ownproduce, so prices are low. As such, producers are better supplying tolocal food processors. In the European winter prices are much better,but product competition remains.

According to Collett4 (1991)) exporting requires a partnership betweenexporter, importer, government and transport. Without these four coordinating activities the risk of failure is increased. Contractsbetween buyer and seller are a must. Forwarders and agents canplay a vital role in the logistics procedures such as booking air spaceand arranging documentation. A typical coordinated marketing



channel for the export of Kenyan horticultural produce is given infigure 7.4.

In this case the exporters can also be growers and in the low seasonboth these and other exporters may send produce to food processorswhich is also exported.

Figure 7.4 The export marketing channel for Kenyan horticulturalproducts.

Exporting can be very lucrative, especially 'if it is of high value addedproduce. For example in 1992/93 Zimbabwe exported 5 338,38tonnes of flowers, 4 678,18 tonnes of horticultural produce and 12000 tonnes of citrus at a total value of about US$ 22 016,56 million. Insome cases a mixture of direct and indirect exporting may be

achieved with mixed results. For example, the Grain Marketing Boardof Zimbabwe may export grain directly to Zambia, or may sell it to arelief agency like the United Nations, for feeding the Mozambicanrefugees in Malawi. Payment arrangements may be different for thetwo transactions.

Nali products of Malawi gives an interesting example of a "passive toactive" exporting mode.

CASE 7.1 Nali Producers - Malawi

Nali group, has, since the early 1970s, been engaged in the growing and exporting of spices. Spices are also used in the production of a variety of sauces for both the local andexport market. Its major success has been the growing and exporting of Birdseye chilies. In

the early days knowledge of the market was scanty and thus the company was obtainingridiculously low prices. Towards the end of 1978 Nali chilies were in great demand, yet stillthe company, in its passive mode, did not fully appreciate the competitive implications of thebusiness until a number of firms, including Lonrho and Press Farming, started to grow andexport.

Again, due to the lack of information, a product of its passivity, the firm did not realise thatUganda, with their superior product, and Papua New Guinea were major exporters,However, the full potential of these countries was hampered by internal difficulties. Nali was



able to grow into a successful commercial enterprise. However, with the end of the internalproblems, Uganda in particular, began an aggressive exporting policy, using their overseaslegations as commercial propagandists. Nali had to respond with a more formal and activemarketing operation. However it is being now hampered by a number of important"exogenous" factors.

The entry of a number of new Malawian growers, with inferior products, has damaged theMalawian chili reputation, so has the lack of a clear Government policy and the lack of financing for traders, growers and exporters.

The latter only serves to emphasise the point made by Collett, not only do organisationsneed to be aggressive, they also need to enlist the support of Government and importers.

It is interesting to note that Korey (1986) warns that direct modes of market entry may beless and less available in the future. Growing trading blocs like the EU or EFTA means thatthe establishing of subsidiaries may be one of the only means forward in future.

It is interesting to note that Korey5 1986 warned that direct modes of market entry may be less and less available in the future. Growing

trading blocks like the EU or EFTA means that the establishment of subsidiaries may be one of the only ways forward in future. Indirectmethods of exporting include the use of trading companies (verymuch used for commodities like cotton, soya, cocoa), exportmanagement companies, piggybacking and countertrade.

Indirect methods offer a number of advantages including:

• Contracts - in the operating market or worldwide• Commission sates give high motivation (notnecessarily loyalty)• Manufacturer/exporter needs little expertise• Credit acceptance takes burden from manufacturer.

Piggybacking

Piggybacking is an interesting development. The method means thatorganisations with little exporting skill may use the services of onethat has. Another form is the consolidation of orders by a number of companies in order to take advantage of bulk buying. Normally thesewould be geographically adjacent or able to be served, say, on an air route. The fertilizer manufacturers of Zimbabwe, for example, couldpiggyback with the South Africans who both import potassium fromoutside their respective countries.

Countertrade

By far the largest indirect method of exporting is countertrade.Competitive intensity means more and more investment in marketing.In this situation the organisation may expand operations by operatingin markets where competition is less intense but currency basedexchange is not possible. Also, countries may wish to trade in spite of the degree of competition, but currency again is a problem.Countertrade can also be used to stimulate home industries or whereraw materials are in short supply. It can, also, give a basis for reciprocal trade.



Estimates vary, but countertrade accounts for about 20-30% of worldtrade, involving some 90 nations and between US $100-150 billion invalue. The UN defines countertrade as "commercial transactions inwhich provisions are made, in one of a series of related contracts, for payment by deliveries of goods and/or services in addition to, or inplace of, financial settlement".

Countertrade is the modem form of barter, except contracts are notlegal and it is not covered by GATT. It can be used to circumventimport quotas.

Countertrade can take many forms. Basically two separate contractsare involved, one for the delivery of and payment for the goodssupplied and the other for the purchase of and payment for the goodsimported. The performance of one contract is not contingent on theother although the seller is in effect accepting products and servicesfrom the importing country in partial or total settlement for his exports.There is a broad agreement that countertrade can take various formsof exchange like barter, counter purchase, switch trading andcompensation (buyback). For example, in 1986 Albania began

offering items like spring water, tomato juice and chrome ore inexchange for a contract to build a US $60 million fertilizer andmethanol complex. Information on potential exchange can beobtained from embassies, trade missions or the EU trading desks.

Barter is the direct exchange of one good for another, althoughvaluation of respective commodities is difficult, so a currency is usedto underpin the item's value.

Barter trade can take a number of formats. Simple barter is the leastcomplex and oldest form of bilateral, non-monetarised trade. Often itis called "straight", "classical" or "pure" barter. Barter is a directexchange of goods and services between two parties. Shadow pricesare approximated for products flowing in either direction. Generally nomiddlemen are involved. Usually contracts for no more than one year are concluded, however, if for longer life spans, provisions areincluded to handle exchange ratio fluctuations when world priceschange.

Closed end barter deals are modifications of straight barter in that abuyer is found for goods taken in barter before the contract is signedby the two trading parties. No money is involved and risks related toproduct quality are significantly reduced.

Clearing account barter, also termed clearing agreements, clearingarrangements, bilateral clearing accounts or simply bilateral clearing,is where the principle is for the trades to balance without either party

having to acquire hard currency. In this form of barter, each partyagrees in a single contract to purchase a specified and usually equalvalue of goods and services. The duration of these transactions iscommonly one year, although occasionally they may extend over alonger time period. The contract's value is expressed in non-convertible, clearing account units (also termed clearing dollars) thateffectively represent a line of credit in the central bank of the countrywith no money involved.



Clearing account units are universally accepted for the accounting of trade between countries and parties whose commercial relationshipsare based on bilateral agreements. The contract sets forth the goodsto be exchanged, the rates of exchange, and the length of time for completing the transaction. Limited export or import surpluses may beaccumulated by either party for short periods. Generally, after oneyear's time, imbalances are settled by one of the followingapproaches: credit against the following year, acceptance of unwanted goods, payment of a previously specified penalty or payment of the difference in hard currency.

Trading specialists have also initiated the practice of buying clearingdollars at a discount for the purpose of using them to purchasesaleable products. In turn, the trader may forfeit a portion of thediscount to sell these products for hard currency on the internationalmarket. Compared with simple barter, clearing accounts offer greater flexibility in the length of time for drawdown on the lines of credit andthe types of products exchanged.

Counter purchase, or buyback, is where the customer agrees to buy

goods on condition that the seller buys some of the customer's ownproducts in return (compensatory products). Alternatively, if exchangeis being organised at national government level then the seller agreesto purchase compensatory goods from an unrelated organisation upto a pre-specified value (offset deal). The difference between the twois that contractual obligations related to counter purchase can extendover a longer period of time and the contract requires each party tothe deal to settle most or all of their account with currency or tradecredits to an agreed currency value.

Where the seller has no need for the item bought he may sell theproduce on, usually at a discounted price, to a third party. This iscalled a switch deal. In the past a number of tractors have been

brought into Zimbabwe from East European countries by switchdeals.

Compensation (buy-backs) is where the supplier agrees to take theoutput of the facility over a specified period of time or to a specifiedvolume as payment. For example, an overseas company may agreeto build a plant in Zambia, and output over an agreed period of time or agreed volume of produce is exported to the builder until the periodhas elapsed. The plant then becomes the property of Zambia.

Khoury6 (1984) categorises countertrade as follows (see figure 7.5):

One problem is the marketability of products received in countertrade.This problem can be reduced by the use of specialised trading

companies which, for a fee ranging between 1 and 5% of the value of the transaction, will provide trade related services like transportation,marketing, financing, credit extension, etc. These are ever growing insize.

Countertrade has disadvantages:

• Not covered by GATT so "dumping" may occur



• Quality is not of international standard so costly tothe customer and trader

• Variety is tow so marketing of wkat is limited

• Difficult to set prices and service quality

• Inconsistency of delivery and specification,

• Difficult to revert to currency trading - so quality maydecline further and therefore product

is harder to market.

Shipley and Neale7 (1988) therefore suggest the following:

• Ensure the benefits outweigh the disadvantages

• Try to minimise the ratio of compensation goods tocash - if possible inspect the goods for specifications

• Include all transactions and other costs involved incountertrade in the nominal value specified for the

goods being sold

• Avoid the possibility of error of exploitation by firstgaining a thorough understanding of the customer'sbuying systems, regulations and politics,

• Ensure that any compensation goods received aspayment are not subject to import controls.



Despite these problems countertrade is likely "to grow as a major indirect entry method, especially in developing countries.

Foreign production

Besides exporting, other market entry strategies include licensing, joint ventures, contract manufacture, ownership and participation in

export processing zones or free trade zones.

Licensing: Licensing is defined as "the method of foreign operationwhereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-howor some other skill provided by the licensor".

It is quite similar to the "franchise" operation. Coca Cola is anexcellent example of licensing. In Zimbabwe, United Bottlers have thelicence to make Coke.

Licensing involves little expense and involvement. The only cost issigning the agreement and policing its implementation.

Licensing gives the following advantages:

• Good way to start in foreign operations and openthe door to low risk manufacturing relationships• Linkage of parent and receiving partner interestsmeans both get most out of marketing effort• Capital not tied up in foreign operation and• Options to buy into partner exist or provision to takeroyalties in stock.

The disadvantages are:

• Limited form of participation - to length of

agreement, specific product, process or trademark• Potential returns from marketing and manufacturingmay be lost• Partner develops know-how and so licence is short• Licensees become competitors - overcome byhaving cross technology transfer deals and• Requires considerable fact finding, planning,investigation and interpretation.

Those who decide to license ought to keep the options open for extending market participation. This can be done through jointventures with the licensee.

Joint ventures

Joint ventures can be defined as "an enterprise in which two or moreinvestors share ownership and control over property rights andoperation".

Joint ventures are a more extensive form of participation than either exporting or licensing. In Zimbabwe, Olivine industries has a jointventure agreement with HJ Heinz in food processing.



Joint ventures give the following advantages:

• Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-how in technology or process

• Joint financial strength

• May be only means of entry and

• May be the source of supply for a third country.

They also have disadvantages:

• Partners do not have full control of management• May be impossible to recover capital if need be• Disagreement on third party markets to serve and• Partners may have different views on expectedbenefits.

If the partners carefully map out in advance what they expect toachieve and how, then many problems can be overcome.

Ownership: The most extensive form of participation is 100%ownership and this involves the greatest commitment in capital andmanagerial effort. The ability to communicate and control 100% mayoutweigh any of the disadvantages of joint ventures and licensing.However, as mentioned earlier, repatriation of earnings and capitalhas to be carefully monitored. The more unstable the environment theless likely is the ownership pathway an option.

These forms of participation: exporting, licensing, joint ventures or ownership, are on a continuum rather than discrete and can takemany formats. Anderson and Coughlan8 (1987) summaries the entrymode as a choice between company owned or controlled methods -"integrated" channels - or "independent" channels. Integratedchannels offer the advantages of planning and control of resources,flow of information, and faster market penetration, and are a visiblesign of commitment. The disadvantages are that they incur manycosts (especially marketing), the risks are high, some may be moreeffective than others (due to culture) and in some cases their credibility amongst locals may be lower than that of controlledindependents. Independent channels offer lower performance costs,risks, less capital, high local knowledge and credibility. Disadvantagesinclude less market information flow, greater coordinating and controldifficulties and motivational difficulties. In addition they may not bewilling to spend money on market development and selection of good

intermediaries may be difficult as good ones are usually taken upanyway.

Once in a market, companies have to decide on a strategy for expansion. One may be to concentrate on a few segments in a fewcountries - typical are cashew nuts from Tanzania and horticulturalexports from Zimbabwe and Kenya - or concentrate on one countryand diversify into segments. Other activities include country andmarket segment concentration - typical of Coca Cola or Gerber babyfoods, and finally country and segment diversification. Another way of



looking at it is by identifying three basic business strategies: stageone - international, stage two - multinational (strategies correspond toethnocentric and polycentric orientations respectively) and stagethree - global strategy (corresponds with geocentric orientation). Thebasic philosophy behind stage one is extension of programmes andproducts, behind stage two is decentralization as far as possible tolocal operators and behind stage three is an integration which seeksto synthesize inputs from world and regional headquarters and thecountry organization. Whilst most developing countries are hardly instage one, they have within them organizations which are in stagethree. This has often led to a "rebellion" against the operations of multinationals, often unfounded.

Export processing zones (EPZ)

Whilst not strictly speaking an entry-strategy, EPZs serve as an"entry" into a market. They are primarily an investment incentive for would be investors but can also provide employment for the hostcountry and the transfer of skills as well as provide a base for the flowof goods in and out of the country. One of the best examples is the

Mauritian EPZ12, founded in the 1970s.

CASE 7.2 The Mauritian Export Processing Zone

Since its inception over 400 firms have established themselves in sectors as diverse astextiles, food, watches. And plastics. In job employment the results have been startling, as at1987, 78,000 were employed in the EPZ. Export earnings have tripled from 1981 to 1986and the added value has been significant- The roots of success can be seen on the supply,demand and institutional sides. On the supply side the most critical factor has been thegenerous financial and other incentives, on the demand side, access to the EU, France,India and Hong Kong was very tempting to investors. On the institutional side positiveschemes were put in place, including finance from the Development Bank and the cutting of red tape. In setting up the export processing zone the Mauritian government displayed a

number of characteristics which in hindsight, were crucial to its success.

• The government intelligently sought a development strategy in an apolitical manner

• It stuck to its strategy in the long run rather than reverse course at the first sign of trouble

• It encouraged market incentives rather than undermined them

• It showed a good deal of adaptability, meeting each challenge with creative solutionsrather than maintaining the status quo

• It adjusted the general export promotion programme to suit its own particular needs andcharacteristics.

• It consciously guarded against the creation of an unwieldy bureaucratic structure.

Organizations are faced with a number of strategy alternatives whendeciding to enter foreign markets. Each one has to be carefullyweighed in order to make the most appropriate choice. Everyapproach requires careful attention to marketing, risk, matters of control and management. A systematic assessment of the differententry methods can be achieved through the use of a matrix (see table7.2).



Table 7.2 Matrix for comparing alternative methods of marketentry

Entry mode

Evaluation

criteria

Indirect

export

Direct

export

Marketing

subsidiary

Counter

trade

Licensing Joint

venture

Wholly

ownedoperation

EPZ

a) Companygoals

b) Size of company

c) Resources

d) Product

e) Remittance

f) Competition

g) Middlemencharacteristics

h)Environmentalcharacteristics

i) Number of markets

j) Market

k) Marketfeedback

l) Internationalmarketlearning

m) Control

n) Marketing

costs

o) Profits

p) Investment

q)Administration



personnel

r) Foreignproblems

s) Flexibility

t) Risk

Details of channel management will appear in a later chapter.

Special features of commodity trade

As has been pointed out time and again in this text, the internationalmarketing of agricultural products is a "close coupled" affair betweenproduction and marketing and end user. Certain characteristics canbe identified in market entry strategies which are different from themarketing of say cars or television sets. These refer specifically to the

institutional arrangements linking producers and processors/exportersand those between exporters and foreign buyers/agents.

Institutional links between producers and processors/exporters

One of the most important factors is contract coordination. Whilstmany of the details vary, most contracts contain the supply of credit/production inputs, specifications regarding quantity, quality andtiming of producer deliveries and a formula or price mechanism. Sucharrangements have improved the flow of money, information andtechnologies, and very importantly, shared the risk betweenproducers and exporters.

Most arrangements include some form of vertical integration betweenproducers and downstream activities. Often processors enter intocontracted out grower arrangements or supply raw inputs. Thisinstitutional arrangement has now, incidentally, spilled over into thedomestic market where firms are wishing to target higher quality,higher priced segments.

Producer trade associations, boards or cooperatives have played asignificant part in the entry strategies of many exporting countries.They act as a contact point between suppliers and buyers, obtain vitalmarket information, liaise with Governments over quotas etc. andprovide information, or even get involved in quality standards. Someare very active, witness the Horticultural Crops DevelopmentAuthority (HCDA) of Kenya and the Citrus Marketing Board (CMD) of

Israel, the latter being a Government agency, which specifically gotinvolved in supply quotas. An example of the institutionalarrangements13 involved is given in table 7.3.

Table 7.3 Institutional arrangements linking producers withprocessors/exporters

Commodity Marketco-

Contractco-

Ownershipinteraction

Associationco-

Governmentco-

Marketingrisk



ordination ordination ordination ordination reduction

Kenyavegetables

X X X X

Zimbabwehorticulture

X X X X

Israel freshfruits

Thailand tuna XX X X X

Argentinabeef

X X X

XX = Dominant linkage

Institutional links between exporters and foreign buyers/agents

Linkages between exporters and foreign buyers are often dominatedby open market trade or spot market sales or sales on consignment.The physical distances involved are also very significant.

Most contracts are of a seasonal, annual or other nature. Someproducts are handled by multinationals, others by formal integrationby processors, building up import/distribution firms. In the case of Kenyan fresh vegetables familial ties are very important betweenexporters and importers. These linkages have been very important inmaintaining market excess, penetrating expanding markets and inobtaining market and product change information, thus reducingconsiderably the risks of doing business. In some cases, Government

gets involved in negotiating deals with foreign countries, either through trade agreements or other mechanisms. Zimbabwe's importsof Namibian mackerel were the result of such a Governmentnegotiated deal. Table 7.413 gives examples of linkages betweenexporters and foreign buyers/agents.

Table 7.4 Linkages between exporters and foreignbuyers/agents.

Commodity Marketco-

ordination

Contractco-

ordination

Ownershipinteraction

Associationco-

ordination

Governmentco-

ordination

Marketingrisk

reduction

Kenyavegetables X X X X

Zimbabwehorticulture

X X X X

Israel freshfruits

X X X



Thailandtuna

X XX XX X X

Argentinabeef

XX X XX X X X

XX = Dominant linkage

Once again, it can not be over-emphasized that the smooth flowbetween producers, marketers and end users is essential. However itmust also be noted that unless strong relationships or contracts arebuilt up and product qualities maintained, the smooth flow can beinterrupted should a more competitive supplier enter the market. Thisalso can occur by Government decree, or by the erection of non-tariff barriers to trade. By improving strict hygiene standards a marketingchain can be broken, however strong the link, by say, Government.This, however, should not occur, if the link involves the closemonitoring and action by the various players in the system, who areaware, through market intelligence, of any possible changes.

Chapter Summary

Having done all the preparatory planning work (no mean task initself!), the prospective global marketer has then to decide on amarket entry strategy and a marketing mix. These are two main waysof foreign market entryeither by entering from a home market base,via direct or indirect exporting, or by foreign based production. Withinthese two possibilities, marketers can adopt an "aggressive" or "passive" export path.

Entry from the home base (direct) includes the use of agents,distributors, Government and overseas subsidiaries and (indirect)includes the use of trading companies, export managementcompanies, piggybacking or countertrade. Entry from a foreign baseincludes licensing, joint ventures, contract manufacture, ownershipand export processing zones. Each method has its peculiar advantages and disadvantages which the marketer must carefullyconsider before making a choice.

Key Terms

Aggressive exporter Exporting Licensing

Barter Export processing zones Market entry

Countertrade Joint ventures Passive exporter

Review Questions

1. Review the general problems encountered when building marketentry strategies for agricultural commodities. Give examples.

2. Describe briefly the different methods of foreign market entry.



3. What are the advantages and disadvantages of barter,countertrade, licensing, joint venture and export processing zones asmarket entry strategies?

Review Question Answers

1. General problems:

i) Interlinking of production and marketing meansprivate investment alone may not be possible, soGovernment intervention may be needed also e.g. tobuild infrastructure e.g. Israeli fresh fruit.

ii) Licensing

Definition:

Method of foreign operation whereby a firm in one country agrees topermit a company in another country to use the manufacturing,processing, trademark, knowhow or some other skill by the licensor.

ii) "Lumpy investment" building capacity long before itmay be currently utilised e.g. port facilities

Advantages:

• entry point with risk reduction,• benefits to both parties,• capital not tied up,• opportunities to buy into partner or royalties on thestock.

iii) Time - processing, transport and storage - so credit is needed e.g.Argentina beef.

iv) Transaction costs - logistics, market information, regulatoryenforcement.

Disadvantages:

• limited form or participation,• potential returns from marketing and manufacturingmay be lost,• partner develops knowhow and so license is short,• partner becomes competitor,• requires a lot of planning beforehand.

v) Risk - business, non-business

iv) Joint ventures -

Definition:

An enterprise in which two or more investors share ownership andcontrol over property rights and operation.



vi) Building of relationships and infrastructural developments "correctformats"

2. Different methods

These are either "direct", "indirect" or "foreign" based.

Advantages:

• sharing of risk and knowhow,• may be only means of entry,• may be source of supply for third country.

Direct - Agent, distributor, Government, overseas subsidiary

Disadvantages:

• partners do not have full control or management,• may be impossible to recover capital,• disagreement between purchasers or third party -

served markets,• partners have different views on exported benefits.

Indirect - Trading company, export management company,piggyback, countertrade

v) Export processing zones -

Definition:

A zone within a country, exempt from tax and duties, for theprocessing or reprocessing of goods for export

Foreign - Licensing, joint venture, contract manufacture, ownership,

export processing zone.

Students should give a definition and expand on each of thesemethods.

Advantages:

• host country obtains knowhow,• capital, technology, employment opportunities;• foreign exchange earnings;• "reputation", "internationalisation".

3i) Barter-

Definition:

Direct exchange of one good for another. (may be straight or closedor clearing account method)

Disadvantages:

• short term investments,• capital movements,



• employment movements,• transaction costs and benefits,• not part of economy so alienisation,• labour laws may be different,• bureaucracy creation.

Advantages:

• simple to administer,• no currency,• commodity based valuation or currency basedvaluation.

Disadvantages:

• risk of non delivery,• poor quality,• technological obsolescence,• unfulfilled quantities,•

risk of commodity price rise thus losing out on anincreased valuation,• depressed valuation,• marketability of products.

ii) Countertrade -

Definition:

Customer agrees to buy goods on condition that the seller buys someof the customer's own products in return (may be time, method of financing, balance of compensation or pertinence of compensatingproduct based)

Advantages:

• method of obtaining sales by seller and getting aslice of the order,• method of breaking into a "closed" market.

Disadvantages:

• not covered by GATT,• so dumping may occur,• usuality differences, variety differences,• difficult to set price and service quality,• inconsistency of delivery and specification,

• difficult to revert to currency trading.

Exercise 7.1 Market entry strategies

Take a major non-traditional crop or agricultural product which your country produces with sales potential overseas. Devise a marketentry strategy for the product, clearly showing which you would useand justify your choice indicating why the method chosen would givebenefits to your country and the intended importing country(s).

10 steps to successful exporting

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