One of the most important and critical decisions in international marketing is the mode of entering the foreign market. This decision needs to be a cautious move for its implications will have too much bearing on the future growth of the company. Market entry assumes more significance due to the fact that no country willingly accepts anyone from outside. At one side, a company may decide to produce the product domestically and export it to the foreign countries. In this case the company need not make any investment in foreign countries.
On the other hand, the company may establish manufacturing unit in the foreign country to sell the product there. This strategy requires direct foreign investment by the company. In between these two extremes, there are several options each of which demands different levels of foreign investment. No matter how mighty your company may be, it is not a practical strategy to enter all foreign markets with a single entry method.
With all its power, even a largest company may have to formulate different entry strategies to different foreign markets. Exporter may opt for one entry strategy in one market and another strategy in another foreign market, because one entry strategy may not suit all the countries.
In this way a firm may adopt various modes for international marketing ranging from indirect export to direct investment in manufacturing units in foreign countries. Each of these strategies requires different levels of investment, ranging from no additional investment to high investment in production facilities. Where the investment is low, the international business firm faces less risk, less control over the foreign market. On the other hand, when the investments are high in the form of manufacturing facilities abroad, international firm can have full control over the market, but faces higher risk.
Exporting of products to a foreign market is a quite common entry strategy many firms follow for at least some of these markets. Under this strategy, the company exports the product from its home base, without any marketing or production or organisation in foreign countries. Normally, company exports the same product which is being marketed in the home market.
Exporting may be appropriate under the following circumstances:
1. If cost of production is much higher in the foreign country.
2. If there is political or other risks of investment in the foreign country.
3. When there is excess production capacity in the domestic market.
4. When expansion of existing plant is less extensive and easier than setting up plant in foreign country.
5. If foreign investment is not encouraged by the concerned foreign government.
6. If very attractive incentives are given by the government in the country for establishing facilities for export production.
7. If the value of export is not large enough to justify.
A manufacturer who wants to introduce his products in overseas markets can do so in two ways. The first alternative is to manage the export sales himself in the foreign countries. It requires greater involvement of the exporter. The other alternative is indirect exporting involving middlemen from the beginning to the end. The manufacturer does not involve himself in international marketing. Indirect export is not much different from the sale in the domestic market.
The middlemen get the goods produced from the exporter under their own specification and sell them in overseas markets or alternatively, manufacturer contacts such middlemen in a bid to sell his produce to them who sell them in foreign markets of their own choice. The middlemen sell the goods so procured in the same form or after grading, packing, designing or transforming them as per their own standards and specifications.
When a manufacturing firm itself performs the task of selling goods in foreign countries rather than entrusting it to any outside agency it is called direct exporting. Usually a home based export department or international marketing department in the firm is given responsibility for selling the products in foreign countries. The exporting firm may also establish its own sales subsidiary as an alternative mode.
When a manufacturer engages in direct export, he takes more risks but gets more returns. More than anything else, direct export means more involvement for the manufacturer, more control and more expertise within the firm.
In this way in direct exporting, the manufacturer takes upon himself the task of managing the export sales. The exporter engages in or supervises every step in the export of goods and shoulders the entire responsibility for the operations and bears all risks. This will naturally mean greater involvement on his part in the export business.
Thus, if a manufacturer firm opts for direct exporting strategy it has to perform the following functions which are not required in indirect exporting:
(i) The direction and supervision and control of export, including the development of export policy;
(ii) The adaptation of the product for export, including export packing;
(iii) Selling, including such related functions as advertising, sales promotion, sales training etc.,
(iv) Transportation of the product, including documentation for shipment, rail and ocean shipping, insurance and other related matters;
(v) Credit and terms of payment;
(vi) Financing, including exchange, invoicing and collections.
In this way, the exporter manufacturer performs all the functions relating to export from the beginning to end and has to bear all risks.
Direct Exporting by Indian Exporters:
By analysing the advantages and disadvantages of direct exporting, it can safely be said that direct exporting is much better, provided the exporting firm is financially sound. In India, more and more exporters are taking recourse to direct exporting.
There are two reasons for this involvement:
1. Improves Exporter’s Image in Domestic Market:
If manufacturer adopts direct exporting strategy and succeeds, it can boost the manufacturer’s image in the domestic market because of- (i) goodwill earned by the firm in foreign markets; (ii) improved quality of products as the firm will like to produce and supply quality goods to the domestic market in order to achieve scale-economies (it need not differentiate the product unless it is warranted by situation), (iii) product development as the firm uses modern and the best technology available in the world to make its product competitive in the foreign markets. The advantage of product development is also available to domestic consumers.
2. Export Incentives:
In India, liberal export incentives are given by the Government to promote foreign exports. They help exporters in taking pricing decisions.
Due to above reasons, Indian exporters are interested in direct exporting.
Indirect export means export of product or services through middlemen. When an exporter allows an intermediary in his own country to perform certain important marketing function in relation to exporting the product, it is indirect exporting. In other words, when a firm delegates the task of selling products in a foreign country to an outside agency, it is called indirect exporting. It is almost equivalent to domestic sales.
The company, under this system, sells its products in its own country to another party which undertakes the responsibility of exporting the same to other countries. In this way, the exporter loses, to a limited extent, his control over certain marketing operations. For small companies with little or no experience in exporting, the use of domestic middleman readily provides expertise.
If a manufacturer has once adopted the indirect method of exporting it is not necessary always to export indirectly through middlemen nor does it preclude the manufacturer from selling a part of his production directly. The actual method that is adopted depends on the volume of business and the manufacturer’s decision often changes in accordance with the different conditions of the sales.
Middlemen in Indirect Exporting:
In indirect way of exporting, the manufacturer is not directly involved in the export trade. The producer permits an intermediary located in his own country to perform important trade. It is almost equivalent to domestic sales. Two broad alternatives are available to the manufacturer who wants to export indirectly.
I. Export Marketing Middlemen:
There are various marketing middlemen who are experts in export trade.
i. Merchant Exporter or Export Houses:
There are a number of merchant exporters or/and export houses in India. These merchants or export-houses purchase goods from the manufacturers at the lowest possible price available in the domestic market keeping the requirements of the importer or quality of products in mind. They process the goods purchased, pack and brand them and sell them in foreign markets. They sell and buy goods on their own account and thus assume all risks involved in exporting the goods and are responsible for whole of the profits or losses.
Such merchant exporters or export houses are financially sound. They maintain their own branches in foreign countries, at main ports and in important trade centres of that country. They organise their sales through different channels and use media for advertisement and sales promotion. They maintain godowns, warehouses, and transportation facilities at important business centres.
These export houses conduct market researches and surveys, collect market information and keep a close watch on market trends. They often specialise in certain specific commodities or in certain areas.
In 1958, it was realised that to boost exports, positive steps are necessary to build up a number of export houses, which concentrate exclusively on exports. A scheme of recognition of Trading Houses was introduced in 1981 to develop new products and new markets particularly products from the small and cottage industry. With effect from April 1988, Trading Houses having high volume of exports are eligible for recognition as Star Trading Houses.
With effect from 1.4.94, another category, Super Star Trading Houses, has also been introduced. As on 21-4-97, the number of Super Star Trading Houses was 9, of Star Trading Houses 52,-that of Trading Houses 464 and of Export Houses 3,027. Merchant Exporters including export houses, etc., account for 78 per cent of India’s exports.
Following Export Promotion Councils are working to promote export in India:
1. Engineering Export Promotion Council, Kolkata.
2. Overseas Construction Council of India, New Delhi.
3. Basic Chemical Pharmaceuticals and Cosmetics Export Promotion Council, Mumbai.
4. Chemicals and Allied Product Export Promotion Council, Kolkata.
5. Council for Leather Exports, Chennai.
6. Sports Goods Export Promotion Council, New Delhi.
7. Gem and Jewellery Export Promotion Council, Mumbai.
8. Shellac Export Promotion Council, New Delhi.
9. Cashew Export Promotion Council, Cochin.
10. Plastic Export Promotion Council, Mumbai.
11. Apparel Export Promotion Council, New Delhi.
12. Carpet Export Promotion Council, New Delhi.
13. Cotton Textile Export Promotion Council, Mumbai.
14. Export Promotion Council for Handicrafts, New Delhi.
15. Handloom Export Promotion Council, Chennai.
16. The Indian Silk Export Promotion Council, Mumbai.
17. Synthetic and Rayon Textile Export Promotion Council, Mumbai.
18. Wool and Woollens Export Promotion Council, New Delhi.
19. Power-loom Development and Export Promotion Council, Mumbai.
20. Electronics and Computer Software Export Promotion Council, New Delhi.
The main advantages of export houses are as under:
(i) The export houses undertake documentation and shipping formalities necessary for exporting. The exporter manufacturer is free from all worries about exporting.
(ii) They purchase and sell goods at their own account after processing and packing and, therefore, bear all risks involved in exporting the products.
(iii) Export Houses, in most of the cases, provide finance to manufacturers who are ready to supply their products to these merchants. In some cases, they advance a part of the consideration to meet working capital needs.
(iv) As they maintain their own branches, depots, godowns, warehouses, transportation and sales force in foreign markets in order to maintain the supply of the goods, the manufacturer exporters need not arrange such facilities. Selling to export houses is economical to them.
(v) Export houses can efficiently face the price competition in foreign markets.
(vi) These merchants or export houses provide necessary information to domestic manufacturers about the style, fashion quality or price of the products required in foreign markets. It facilitates the manufacturers to adapt their products accordingly. It may lead to product improvement or product development.
The main disadvantages are as under:
(i) The manufacturer exporters remain unaware of the technicalities of the export market even when they have been exporting their product for a fairly long time. They cannot know about export markets because they are fully dependent for export on these houses. They sell goods to them as they sell them in the domestic markets.
(ii) The export merchants are interested only in profits and not in promoting the products of the manufacturers. They always try to purchase goods from the cheaper source, not necessarily from the same manufacturers.
ii. Export Commission Houses or Overseas Import Houses:
There exist import houses in some countries, for example Japan, where entry through import trading houses is the easiest and the cheapest. They act in exporting countries as an agent of importers and maintain their offices in almost big cities of the world. These houses have contacts with all important wholesalers in the importing country.
These are essentially, the buyers’ hired purchasing agents, operating on the basis of orders or indent received from these buyers. Selling through such import houses ensures that the goods will reach the important distributors and through them down the distribution system.
Following are the main advantages:
(i) They charge commission and all relevant expenses from the buyers as they act on their behalf.
(ii) The exporters come to know about the demands of the foreign buyers through these houses. Generally import houses invite tenders from the manufacturers in the exporting country and give order to supply the required quantity to the manufacturer. Thus, the exporter need not collect the orders.
(iii) Small manufacturers who have no experience of exporting, may be benefited from the services by such import houses.
(iv) The exporter may earn a handsome profit even by selling the goods to import houses at lower rates, because importer has not to bear the export commission and expenses.
The import houses are criticised on the ground that they charge commission from importer and exporter both whereas in principle, they should charge commission from importer. Sometimes, they act as an export agent on behalf of the exporters.
iii. Visiting or Resident Buyers:
Similar to the operations of the export commission house or import house are the resident or visiting buyers. A resident buyer is an independent agent who is located near production centres. Resident buyers are retained by the principal on a long-term basis to maintain continuous search for suitable new products and these resident buyers are entrusted the job of procurement of products for their principals.
Generally, resident buyers are local people. Some companies regularly send buying teams to different countries for the same purpose, i.e., for purchasing the goods for the importer.
Following are the main advantages:
(i) Such resident or visiting buyers are generally specialists of the goods to be purchased. It is technically sound and rational to appoint such persons on the team. Thus, qualitative purchases are expected at competitively reasonable rates.
(ii) Such buyers are appointed or teams are sent in those countries which are the major producers and suppliers of such products. In these countries, they are able to purchase goods on favourable terms and at competitive prices.
(iii) The resident buyer sees that the goods are supplied in time and as such ensures the importer the timely supply of goods.
They have no direct incentive from the importer and get a fixed remuneration each month irrespective of the purchases made. If opportunities in exporting countries are not exploited the system may prove costly.
iv. Manufacturer’s Export Agent:
Export agents are individuals or firms that assist manufacturers in exporting goods. Generally export agents provide limited services. Actually it is an agent of manufacturer in the exporting country. These agents focus more on sales and handling of goods. The advantage of using an export agent is that the firm does not need to have an export manager to handle export work, i.e., to handle all the documentation and shipping of goods.
While the disadvantages arise from the export agent’s limited market coverage, which may require the services of a number of export agents to cover the different markets of the various countries.
v. Export Broker:
The function of an export broker is to bring buyers and sellers together. The broker may be assigned one or more markets by the sellers. He is specialist in performing contractual functions. He does not actually handle the products he sells or buys. The exporter dictates the terms and conditions of sale and the minimum price.
For his services, he is paid brokerage by his principal exporter and importer. The broker generally specialises in particular products or class of products.
Export broker is an experienced and specialist person and helps the manufacturer in finding out the prospective buyer (importer) at reasonable rates in ‘overseas’ markets. He is one of the sources of information for the manufacturer.
The broker generally brings the buyer and seller together and does not purchase goods from the manufacturer for onward delivery to the importer. He does not undertake any type of risks involved in exporting. As soon as the purchaser and seller come to an agreement, his job is over and he becomes entitled to the brokerage.
vi. Buying Government Agency in Exporting Country or Country Controlled Buying Agents:
It is a government agency manned by government servants of importing country. The main function of this agency is to purchase goods for its government in the exporting country. They work in the same way as the resident buyers appointed by the private-owned organisations do. Agency generally purchases goods at the instructions of the importing government. Japan has established such agencies to purchase goods from foreign countries.
vii. Government Buying Agency for Export:
In this system of indirect exporting, the government of exporting country sets up such organisations in the country. These agencies purchase goods from the producers and export them to foreign markets. They deal in on their own account. In this way, they provide links between importers and exporters. Their operations are similar to those of export houses.
In India several such organisations have been set up. State Trading Corporation (S.T.C), Minerals and Metals Trading Corporation (MMTC) and other trading corporations, various Export Promotion Councils and Commodity Boards are such government agencies that are directly involved in purchasing the goods in the domestic market from the prospective exporters, and exporting them to foreign markets.
They provide various other facilities such as collecting foreign market information through researches and surveys and participate in fairs and exhibitions.
The government offers certain incentives to exporters who export their products through such agencies. They help small manufacturers who feel difficulty in exporting the goods. Because these are government agencies, the manufacturers sometimes suffer from the bureaucratic way of working and red-tapism.
Another form of indirect exporting is piggy-backing. When a company does not find any channel-partner with sufficient interest to pioneer new products, the practice of piggy-backing may offer a way out of the situation. Piggybacking is an arrangement with another company, which sells to the same customer- segment, to take on the new products as if it were the manufacturer.
The products retain the name of the manufacturer and both partners normally sign a long-term contract to provide for continuity. The new company is, in essence, ‘piggy-backing’ its products on the shoulders of the established company. Colgate/Palmolive Company has been distributing Wilkinson blades in many countries. Sony Corporation serves as a distributor in Japan for a number of European and US companies.
Under a piggy-back arrangement the manufacturer retains control over a number of marketing decision areas, particularly pricing, positioning and promotion.
II. Cooperative Export Trading Organisation:
Under this type of exporting a number of economically independent and sound manufacturing units voluntarily or under the directions of the government, set up a joint organisation for coordinating their export activities. The actual form of cooperative export organisation may range between a loose agreements to a formally incorporated company.
Such organisations also function on cooperative lines. The organisation performs all activities relating to export trading for and on behalf of the products manufactured by its members. All members share the fruits of export trading on an agreed basis.
The following are the advantages of cooperative exporting:
(i) Competitive advertising and price cutting are obviated by price and sale agreements. These will have some effect on reducing selling costs.
(ii) Combined sales have the salutary effects of standardising contracts, terms of sales and rebates.
(iii) The unnecessary and harmful trade activities such as price-cutting, dumping at a very low price and extending credit-terms are eliminated. Healthy trade practices are developed in foreign markets.
(iv) Such organisations have full control over supply, hence they can balance the supply and demand position effectively. It may lead to price stabilisation.
(v) The promotional expenses can be shared on an equitable basis. The best media of advertising and other sales promotion activities can be employed in the foreign market at reasonable and competitive prices.
Following are the main disadvantages:
(i) There is a problem of grouping of exportable goods. In speciality goods, the loss of identity will injure the sale-ability of the goods, and group selling may not be practicable.
(ii) This type of organisation requires cooperation. If it lacks cooperation it will not be possible to carry it on for long.
(iii) Failure of individual manufacturing concerns may constantly affect the cooperative trading organisation.
In short, there are many forms of indirect exporting and the exporter may choose any one or more of them according to his needs and products.