Question

You work for a firm that has decided to exploit the possibilities that sales abroad can bring and want to become an active exporter. You have 2 potential customers under consideration:

a. The first customer you are considering is a potentially large customer in Malaysia where the business potential could be about 15% of you current firm revenues per year for the next few years. This customer requires standard diesel machines, similar to the ones you are already supplying to your customer base in the USA.

b. The second is a potential customer in China. The future business potential is uncertain, however it could grow in the future or this could be even a one-off sale – it depends on how the first few transactions are handled and the support provided to the customer. This customer requires diesel machines which will be custom built for the customer.

What channel (method of entry into the market) would you use in each of the above cases? Justify your answer. What factors would you consider in making the decision?

Answer 1

Answer:

I work for a firm that has decided to exploit the possibilities that sales abroad can bring and want to become an active exporter. My company have 2 potential customers under consideration.

In order to enter the foreign market, various possible entry channels available for my company are as follows:

1. Through the mode of joint venture where my company partners with the foreign company for selling the products into a particular market

2. Through the licensing agreements where my company signs an agreement with the foreign company and allows the foreign company to manufacture and sell the product

3. Through exporting directly where my company directly export its product to the foreign customer

4. Through online sales where my company sells its product through the internet and

5. Through purchasing assets in the foreign markets where the company set up its own plant.

In our case, for the first customer, who is potentially larger enough to yield 15% of the company’s current revenue per year for the next few years, the company under consideration would adopt the strategy of exporting the product to the customer in Malaysia in order to enter the foreign market.

Since, the customer in Malaysia requires standard diesel machines which my company is already supplying to our customer base in the USA; it will be easier and economical to provide the machines through exporting the product rather than using any other option for entering the foreign markets.

In the second case, for the Chinese customer, the company would again use the option of exporting the product to the customer of China. Since the customer requires diesel machines which will be custom built as per the specifications provided by the customer, my company would implement ‘Assemble to order’ strategy (strategy where the products are made when the orders are received) for making the diesel machine and would ask the customer to wait for the requisite time period until the diesel machine is manufactured.

Moreover, the future business potential is uncertain and hence using other modes of entry into the Chinese market such as joint venture, licensing, online selling and purchasing the asset would be risky and highly uneconomical.

Factors to be considered while making the decision of exporting the product to enter the foreign market:

1. Joint ventures, licensing the agreement with the foreign companies and purchasing of the assets would be uneconomical and hence would not be considered as an affordable option for entering the foreign markets.

2. Using the option of online sales is available only for exporting the small sized products and since the diesel machines are larger in size, online option for entering the foreign market cannot be used. Moreover, in online selling, a huge amount of fees is required to be paid to the shipping companies along with the various taxes and custom duties and these fees goes on increasing with the increase in the quantity being shipped.

3. While exporting the product to the Malaysian customer, my company can save the various taxes and duties by shipping the standard diesel machines through free trade zones where the companies are exempted from the taxes and the custom duties.