Export Strategy: Advantages and Disadvantages

1. 0. EXECUTIVE SUMMARY

The purpose of this survey was to analyze the different strategies for exporting that are available to an organization internationalizing for the first time. Specific goals were to recognize the disadvantages and advantages of an export strategy. The article recommends an organization taking up exporting as a means of internationalization but also emphasizes that for exporting to be totally successful, the business must approach it in a organized way so that it may derive the entire benefits associated with exporting.

2. 0. TERMS OF REFERENCE

My name is Amina J M Matongo, I am a student learning for my Bachelor of Arts in Business Studies at The Zambia Centre For accountancy Studies through the Greenwich College or university. This content in this article is based on evaluating different export strategies available to a firm wishing to internationalize for the very first time and advantages and disadvantages associated with an export strategy.

3. 0. METHODOLOGY

The information comprised and compiled in this article has been collected from international business books, texts, past knowledge and the internet.

4. 0. INTRODUCTION

A quantity of market entrance strategies are for sale to a firm wishing to internationalize into international markets. Entry strategies include Exporting, Licensing, Franchising, tactical alliances, joint ventures and wholly had subsidiaries. But because exporting requires limited risk, expense and knowledge of foreign markets and trades, most organizations favor exporting as their main international market strategy. Exporting is a strategy of producing products in one country (often the producer's home country), and then offering and distributing to customers internationally. The organization that is exporting keeps it's processing activities in the home market but conducts marketing, circulation and customer support activities in the export market, the firm may perform the second option activities itself or deal with an independent distributor or agent to have them performed (Cavusgil, Knight, Riesenberger).

Organizations venturing abroad for the first time, use exporting as an admittance strategy, but beyond major entry, all sorts of organizations, large and small use exporting regardless of their level of internationalization. Large companies such as Boeing and Toyota have used exporting in conjunction with other entry strategies.

Compared to more complex strategies such as foreign direct investment (FDI), the exporter can both enter into and withdraw from the market segments fairly easily, with reduced risk and expense. Exporting may be used repeatedly through the firm's internationalization process. (research 1)

4. 1. Why organizations internationalize include

To seek opportunities for development through market diversification. Significant market potential exists outside the home country which is how organizations both large and small generate over fifty percent their sales from marketplaces abroad.

Many foreign marketplaces may be underserved for example high emerging market segments, thus they have got high demand and less extreme competitive pressures which entails higher margins and profits for the company.

Firms are better in a position to serve key customers who've relocated abroad. For instance when Toyota opened it's first manufacturing plant in the united kingdom, many Japanese automobile parts suppliers used, building their own operations there.

To gain access to lower-cost or better-value factors of creation. Internationalization allows the firm to gain access to capital, technology, managerial skill, labor and land at lower costs, top quality, or better overall value at locations worldwide.

Another driver for internationalization is that the firm is able to develop economies of size in sourcing, creation, marketing and R&D. Also the firm will be nearer to supply sources, benefit from global sourcing advantages, and gain new ideas about products, services and business methods. Unique foreign environments expose organizations to new ideas for products, operations and business methods. (research 2).

5. 0. DISCUSSION

According to Cavusgil, Knight and Riesenberger, the more capable managers will use a systematic approach to exporting to improve the firm's prospects for successful exporting.

This way should be as follows:

5. 1. 1. Step one, assess global market opportunity

Management assesses the various global market opportunities available to the organization. The organization's readiness to internationalize and choose the most attractive export markets, identifies qualified vendors and other foreign business lovers then estimates industry market potential and company sales probable.

5. 1. 2. Step two, organize for Exporting

The second step is ideal for managers to handle the questions of what forms of financial, managerial and effective resources should be committed to exporting? Also to what extent should the organization rely on domestic and overseas intermediaries to handle exporting? Options available to the business are either to work with indirect exporting which is exporting through intermediaries in the home market or direct exporting which is through intermediaries in the foreign market.

5. 1. 3. Step three, Acquire needed skills and competences

Exporting is often complicated and as a result requires particular skills and competencies. Meaning the organization should acquire these skills and competencies, teach staff and participate appropriate facilitating firms such as freight forwarders, bankers etc.

5. 1. 4. Fourth step, Put into practice the export strategy

In this final stage, management formulates components of the organization's export strategy. This may involve product adaptation to modify a product to make it fit the needs and preferences of customers. In export markets with many competition, the exporter needs to conform its products/services in order to get a competitive edge. For instance when Microsoft market segments computer software in Germany, it must ensure the program is written in German.

Marketing communications version refers to modifying advertising, offering, public relations and promotional activities to suit individual marketplaces. Marketing activities are adapted with respect to the nature of the mark market, characteristics of the product/service, the firm's position relative to competition and management's specific goals and aims.

Price competitiveness refers to initiatives to keep foreign pricing consistent with that of rivals, the exporter might need to impose competitive prices. Regarding small and medium businesses (SME's), they may lack the resources to contend head to head on costs with larger competitors. Such companies do not be competitive predicated on price but by emphasizing the non-price advantages of their products/services such as quality, stability and brand command.

Distribution strategy often hinges on producing strong and mutually beneficial relationships with overseas intermediaries. Companies provide ongoing support to marketers and subsidiaries by means of sales team, training, specialized assistance, marketing understand how, promotional support and costs incentives. In marketplaces with numerous rivals, the exporter may need to boost the functions of vendors.

SOURCE: Adapted from Cavusgil 'et al', strategy, management and the new realities, pearson, 2008. pg 391.

6. 0. STRATEGIES FOR EXPORTING MAY BE LOOSELY GROUPED INTO THREE CATEGORIES

6. 1. Direct Exporting

Direct exporting consists of direct marketing and advertising to the client that is contracting with intermediaries situated in the international market to perform export functions; intermediaries include international based sales agents and marketers.

These intermediaries or real estate agents perform downstream value string activities in the prospective market. If a company has a realistically accessible market, immediate exporting of products and services may be a viable option. But where in fact the firm encounters less familiar marketplaces with different legal and regulatory surroundings, business practices, customs and or tastes, direct exporting may well not be a wonderful option. A local partner for example may be better in a position to deal with these complexities and provide the organization's potential client's better.

6. 1. 1. Benefits of direct exporting

The exporting company can establish a immediate connection with a international trading partner, and not just runs through it's own overseas trade companies in another country but also has the best chance of direct contribution in foreign orders.

Target management and control of the sales become possible which is unrealistic regarding indirect exports.

The strategy offers potential for higher profits because of more immediate contact.

Direct exports could also enable the maker to have a closer marriage with foreign potential buyers and industry.

Direct exporting does apply to a wider selection of goods and services.

6. 1. 2. Negatives of immediate exporting

Direct exports are afflicted by other conditions. For example, the deterioration of exchange rates, if the rate of domestic currencies of third countries boosts on the market segments where the company exports, it could cause the business to be relatively uncompetitive in international markets.

Direct exporting may be unacceptable for goods with a brief work life and are improbable to be exported, goods such as those that may have high move costs or goods that require intricate after -sales service which can't be awarded by resellers.

Direct exporting may necessitate the producer to obtain new features like marketing skills and money to become able to contract with clients or business companions.

6. 2. Indirect Exporting

This method of exporting is mainly used by providers in the transport, Auto and Equipment production industries. For instance, the Toyota Motor unit corporation.

Indirect exporting includes contracting with intermediaries in the producer's home country to perform export functions; these are intermediaries such as an export management company (EMC) or a Trading company. These intermediaries are responsible for finding foreign purchasers in the mark market, transport products and obtaining payment.

The types of intermediaries

Domestic established exporting retailers who sell the merchandise abroad and domestic based export realtors who sell with respect to the exporter but do not take subject of the merchandise; agents are usually paid by commission rate.

The producer/ exporter should exercise caution when selecting a realtor or distributor for indirect exporting.

6. 2. 1. The advantages of indirect exporting

The principal good thing about indirect exporting for some organizations is the fact it provides ways to penetrate the foreign markets minus the complexities and hazards of more immediate exporting. The international firm can start exporting with no incremental investment in set capital, low startup costs and few risks, but with potential customers for incremental sales.

The exporter will have less complexity in dealing with when reselling products in international markets, complexities which range from clashing civilizations to volatile exchange rates.

The exporter will not have to worry about handling product circulation in a foreign country as this is done by an export spouse.

The market access barriers have a tendency to be less in this form of exporting.

In indirect exporting, the legal romantic relationships exist between your organization's supplier (intermediary) and its own immediate client buyer. Questions of jurisdiction in international lawsuits become less of an issue for the indirect exporter.

The aspect of managing ongoing person relationships is eradicated for the company.

Compared with other types of access to foreign marketplaces and their development, indirect exports require scarce resources. This can be an edge for small and medium corporations (SME's) wishing to internationalize.

The company will have more time to concentrate on the main competencies with their business businesses.

Indirect exporting will not require a whole lot of organizational work or dedication of staff personnel, the firm only employs a tiny range of employees as the main work is carried out by international trade associates.

In the event that export strategy does not lead to achievement of goals, the exporter can simply withdraw from the marketplace.

6. 2. 2. The negatives of indirect exporting

The main downside of indirect exports is that not all brokerages are using the optimum market potential and opportunities for marketing, thus flaws and miscalculations in their actions have an impact on the income of producers of export goods.

Indirect exporting may lead to diminishing returns in the long run as trading partners make an effort to get maximum benefit from their service as mediators.

While the exporter using intermediaries to export can save a lot of money in the short and medium term, this type of distributor has little or no control over the business activities in international marketplaces.

By using an intermediary, the indirect exporter may lose out on brand popularity and commitment in international markets, thus leaving this opportunity and domains to larger organizations.

Lastly the producer using indirect exports may lack recognition from the end users of the product or service, who are a lot more familiar with the finish product.

6. 2. 3 The 3rd option available to exporters is to export by building proper partnerships with other organizations or individuals which have complementary skills or capabilities. The partner may often provide the insight, connections and experience that load the gap in the organization's export readiness.

The edge is that an alliance with a business providing a complementary product or service provides the producer with more effective market gain access to, resulting in more overseas sales in less time.

A downside may be that the two partners won't achieve synergistic benefits creating a failure in organization's export endeavors.

It should be observed though that many organizations use both strategies for different international market segments. Key issues for deciding whether to utilize direct or indirect exporting are (1) the amount of resources in conditions of the time, capital and managerial knowledge that management is prepared to commit to international extension and individual markets;(2) the proper importance of the foreign market; (3) the type of the firm's products, including the dependence on after sales support and (4) the option of capable overseas intermediaries in the target market. (reference point 3).

7. 0. AN EXPORT STRATEGY

As mentioned previous, exporting is the strategy of producing in the home country and then offering to potential buyers in foreign market segments or abroad. Organization's that use exporting as a technique include 3M (the Minnesota Mining and Making Co. ) making tape, sand newspaper and medical products between other products. 3M is a significant exporter with revenues of over $2billion in exports. Another export success account is FCX (located in west Virginia) systems which makes electric power converters for the aerospace industry, this business generates over 50 % of it's $20million in total annual sales from exports to more than 50countries(reference point 4), one third example is the Toyota Motor Firm.

The benefits and drawbacks of exporting to these known as organizations are:

7. 1. Advantages

Organizations can increase sales amount, improve market show and generate income that are often more favorable than in the home market.

The exporter can diversify the client base, reducing reliance on home markets. For instance Toyota is in various locations thus they have a diverse customer base.

Economies of range will increase and for that reason reduce the per product cost of making.

Exporting allows the exporter to minimize risk and take full advantage of flexibility that is in comparison to other varieties of internationalization. If situations necessitate, the organization can easily withdraw from an export market.

As compared to other kinds of entry, exporting is a low risk, low priced strategy as it generally does not require the exporter to establish a physical occurrence there. Organizations can test potential markets before committing greater resources.

The exporter can stabilize fluctuations in sales associated with financial cycles or seasonality of demand. For instance, a company can offset declining demand at home scheduled to an economic tough economy by refocusing efforts toward those countries that are experiencing better quality economic development.

Also the exporter is able to leverage the capacities and skills of foreign vendors and other business companions located abroad.

Lastly the exporting organization is able to develop meaningful overseas relationships abroad.

7. 2. Disadvantages

Compared to foreign immediate investment, the exporter has fewer opportunities to acquire and learn knowledge about customers, rivals and the marketplace. Meaning that it could fail to understand opportunities and hazards.

An export strategy will demand the organization to acquire new features and dedicate organizational resources to properly execute export transactions. Businesses that are serious about exporting must seek the services of staff with competency in international trades and foreign languages.

Exporting is much more very sensitive to tariff and other trade obstacles and fluctuations in exchange rates.

Many of the pitfalls associated with exporting can be avoided if a company hires an experienced export management company, or export advisor, in case it adopts the appropriate export strategy. (Hill, 2009).

8. 0. CONCLUSIONS

Firms venturing abroad for the first time usually use exporting as their mode of accessibility. Exporting is also the entrance strategy most well-liked by small and medium-sized enterprises. But beyond primary entry all types of firms, large and small use exporting regardless of their stage of internationalization. Exporting is the accessibility strategy responsible for the massive inflows and outflows that constitute global trade. Exporting typically generates substantial foreign exchange earnings for countries.

For example in the United States, SME's account for a great proportion of all U. S exporters. From 1992 to 2004, they symbolized nearly 100 percent of the expansion in the U. S exporter people, swelling from about 108, 000 organizations in 1992 to over 225, 000 organizations by 2004. SME's were accountable for nearly another of goods exports from the United States in 2006. (Cavusgil, Knight, Riesenberger).

9. 0. RECOMMENDATIONS

Since you'll be able to use both immediate and indirect exporting all together in different target markets, my advice would be to apply either direct or indirect exporting with respect to the target marketplaces and the conditions that prevail in those marketplaces. Both methods of exporting can be used successfully.

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