Question

Strategic Management - As an international manager for your company, you have been tasked by your boss with determining whether or not to expand your company’s products abroad and the possibility of manufacturing and/or outsourcing your products as well. Please apply what you have learned in this course and discuss the following:

a. What factors do you think you should consider about your organization and its ability to expand abroad?

b. What are the various modes of entry that you would consider and what are the risk factors of each?

c. What factors are important in marketing and manufacturing your products/services abroad as well as sourcing your raw materials?

d. What considerations should your organization take into account with outsourcing and/or managing your supply chain?

e. In your opinion, which strategy(strategies) would you recommend and why? (Make sure you consider the level of investment and risk in your plan).

f. As part of your evaluation you might want to provide an example to illustrate your point. Your boss will take into account your detailed knowledge of this matter and make decisions based on your informed opinion of the matter. (10 points)

Answer 1

Answer 1: Below are the few critical factors that I would consider for my organization before it go international expansion.

Factor 1: Get company-wide commitment. Every employee should be a vital member of your international team, from the executive suite to customer service through engineering, purchasing, production and shipping. You're all in it for the long haul.

Factor 2: Define your business plan for accessing global markets. An international business plan is important in order to define your company's present status and internal goals and commitment, but it's also necessary if you plan to measure your results.

Factor 3: Determine how much you can afford to invest in your international expansion efforts. Will it be based on ten percent of your domestic business profits or on a pay-as-you-can-afford process?

Factor 4: Plan at least a two-year lead-time for world market penetration. It takes time and patience to build a great, enduring global enterprise, so be patient and plan for the long haul.

Factor 5: Build a website and implement your international plan sensibly. Many companies offer affordable packages for building a website, but you must decide in what language you'll communicate. English is unarguably the most important language in the world, but only 28 percent of the European population can read it. That percentage is even lower in South America and Asia. Over time, it would be best to slowly build a site that communicates sensibly and effectively with the world.

Answer 2:

Modes of entry into an international market are the channels which your organization employs to gain entry to a new international market.

Licensing

Licensing includes franchising, Turnkey contracts and contract manufacturing.

•Licensing is where your own organization charges a fee and/or royalty for the use of its technology, brand and/or expertise.

•Franchising involves the organization (franchiser) providing branding, concepts, expertise, and in fact most facets that are needed to operate in an overseas market, to the franchisee. Management tends to be controlled by the franchiser. Examples include Dominos Pizza, Coffee Republic and McDonald’s Restaurants.

•Turnkey contracts are major strategies to build large plants. They often include the training and development of key employees where skills are sparse – for example, Toyota’s car plant in Adapazari, Turkey. You would not own the plant once it is handed over.

International Agents and International Distributors

Agents are often an early step into international marketing. Put simply, agents are individuals or organizations that are contracted to your business, and market on your behalf in a particular country. They rarely take ownership of products, and more commonly take a commission on goods sold. Agents usually represent more than one organization. Agents are a low-cost, but low-control option. If you intend to globalize, make sure that your contract allows you to regain direct control of product. Of course you need to set targets since you never know the level of commitment of your agent. Agents might also represent your competitors – so beware conflicts of interest. They tend to be expensive to recruit, retain and train. Distributors are similar to agents, with the main difference that distributors take ownership of the goods. Therefore they have an incentive to market products and to make a profit from them. Otherwise pros and cons are similar to those of international agents.

Strategic Alliances (SA)

Strategic alliances is a term that describes a whole series of different relationships between companies that market internationally. Sometimes the relationships are between competitors. There are many examples including:

•Shared manufacturing e.g. Toyota Ayago is also marketed as a Citroen and a Peugeot.

•Research and Development (R&D) arrangements.

•Distribution alliances e.g. iPhone was initially marketed by O2 in the United Kingdom.

•Marketing agreements.

Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain independent and separate.

Joint Ventures (JV) and modes of entry

Joint Ventures tend to be equity-based i.e. a new company is set up with parties owning a proportion of the new business. There are many reasons why companies set up Joint Ventures to assist them to enter a new international market:

•Access to technology, core competences or management skills. For example, Honda’s relationship with Rover in the 1980’s.

•To gain entry to a foreign market. For example, any business wishing to enter China needs to source local Chinese partners.

•Access to distribution channels, manufacturing and R&D are most common forms of Joint Venture.

Overseas Manufacture or International Sales Subsidiary

A business may decide that none of the other options are as viable as actually owning an overseas manufacturing plant i.e. the organization invests in plant, machinery and labor in the overseas market. This is also known as Foreign Direct Investment (FDI). This can be a new-build, or the company might acquire a current business that has suitable plant etc. Of course you could assemble products in the new plant, and simply export components from the home market (or another country). The key benefit is that your business becomes localized – you manufacture for customers in the market in which you are trading. You also will gain local market knowledge and be able to adapt products and services to the needs of local consumers. The downside is that you take on the risk associated with the local domestic market. An International Sales Subsidiary would be similar, reducing the element of risk, and have the same key benefit of course. However, it acts more like a distributor that is owned by your own company.

Internationalization Stages, and modes of entry

So having considered the key modes of entry into international markets, we conclude by considering the Stages of Internationalization. Some companies will never trade overseas and so do not go through a single stage. Others will start at a later or even final stage. Of course some will go through each stage as summarized now:

•Indirect exporting or licensing

•Direct exporting via a local distributor

•Your own foreign presences

•Home manufacture, and foreign assembly

•Foreign manufacture

It is worth noting that not all authorities on international marketing agree as to which mode of entry sits where. For example, some see franchising as a stand alone mode, whilst others see franchising as part of licensing. In reality, the most important point is that you consider all useful modes of entry into international markets – over and above which pigeon-hole it fits into. If in doubt, always clarify your tutor’s preferred view.

The Internet

The Internet is a new channel for some organizations and the sole channel for a large number of innovative new organizations. The eMarketing space consists of new Internet companies that have emerged as the Internet has developed, as well as those pre-existing companies that now employ eMarketing approaches as part of their overall marketing plan. For some companies the Internet is an additional channel that enhances or replaces their traditional channel(s). For others the Internet has provided the opportunity for a new online company. More

Exporting

There are direct and indirect approaches to exporting to other nations. Direct exporting is straightforward. Essentially the organization makes a commitment to market overseas on its own behalf. This gives it greater control over its brand and operations overseas, over and above indirect exporting. On the other hand, if you were to employ a home country agency (i.e. an exporting company from your country – which handles exporting on your behalf) to get your product into an overseas market then you would be exporting indirectly. Examples of indirect exporting include:

•Piggybacking whereby your new product uses the existing distribution and logistics of another business.

•Export Management Houses (EMHs) that act as a bolt on export department for your company. They offer a whole range of bespoke or a la carte services to exporting organizations.

•Consortia are groups of small or medium-sized organizations that group together to market related, or sometimes unrelated products in international markets.

•Trading companies were started when some nations decided that they wished to have overseas colonies. They date back to an imperialist past that some nations might prefer to forget e.g. the British, French, Spanish and Portuguese colonies. Today they exist as mainstream businesses that use traditional business relationships as part of their competitive advantage.

Answer 3:

The challenges of sourcing abroad

Trading with foreign businesses differs from trading within Canada. New challenges are raised by the distances involved, by variations between countries, and by rules that govern international trading.

Legal considerations

It's not safe to assume that the same rules will apply abroad as in Canada. Factors to consider include:

whether there are import or export restrictions at either end of the transaction

whether technical standards in your supplier's country meet Canadian requirements

who is liable if a product causes harm or loss

whether your imported goods infringe any intellectual property rights

who bears insurance costs at each stage of transit

A well-drafted written contract will help to avoid disagreements or disputes. See the page in this guide on drawing up contracts with foreign suppliers.

Other considerations

There is a range of other factors you should bear in mind:

Language differences matter. It's not just a question of communication - make sure any labelling or other printed materials are error-free.

Payment methods for international transactions are a bit more complicated. See the page in this guide on methods of paying foreign suppliers.

Shipping procedures are also more complex, given the increased distances and the need to cross borders.

Understanding the business and social practices of your supplier's country can help build trust and develop relationships. However, remember that Canadian consumers may judge you on the business practices of your suppliers.

Think about how many suppliers you need. If you have too few you risk suffering supply-chain disruption if they have problems. If you have too many your managerial burden will increase.

The origin of your goods can affect the level of duty you pay. Some goods attract a preferential rate of duty, so you need to check where your supplier's raw materials have come from. Visiting suppliers is the best way of doing this.

Finding foreign suppliers

As with finding a domestic supplier, careful research is key to identifying foreign suppliers. You will have to identify countries to trade with, as well as individual suppliers within those countries.

Identifying suitable countries

For most goods and materials you can choose to import from a wide range of countries. Expect a trade-off between prices and levels of regulation and protection.

Suppliers in developing countries may be cheaper but it may be more difficult to resolve any problems. Factors that should influence your decision include:

familiarity with the country - knowing your target country and having contacts within your sector there makes doing business easier

communication - if you (or your employees) don't speak the local language, check that English is widely spoken by businesses, or whether there are translators and interpreters available

level of development - it's generally easier to trade with developed countries than with developing ones

how far away the country is - this affects shipping costs, the length of your trading cycle, and the ease of visiting suppliers if necessary

levels of existing trade with Canada - high volumes suggest other businesses have successfully chosen the route you're considering

Identifying suitable suppliers

There are many sources of information about potential suppliers, including:

our Strategic Information Center

trade associations for your sector

other importers in your sector

banks' trade services departments

overseas trade visits and exhibitions

your target countries' embassy in Canada

membership organisations for businesses trading between Canada and your source countries

Trade-services suppliers

Remember you may need secondary suppliers to help with the trading process, such as freight forwarders or import agents to handle shipping and customs-related formalities and documentation.

Choosing a foreign supplier

You should have the same priorities in mind when selecting a foreign supplier as when choosing a Canada-based one. You need to get the right price and quality, while making sure the supplier can be relied upon to meet high standards consistently.

The reliability of your supplier is crucial. While a competitive price is also important, make sure that low prices don't come with unacceptable compromises on quality or on the level of service you'll receive.

The main stages in the supplier-selection process are:

drawing up a shortlist

comparing the short-listed suppliers on the basis of value for money, reliability and creditworthiness

visiting the suppliers, if possible, to see their operations

deciding which of the suppliers to work with

Value for money

Make sure that you're happy with the price and quality the supplier is offering. Get a written quotation.

Ask for a sample based on your specification to make sure the supplier is capable of producing what you need.

Reliability

It's important to research supplier reliability. If possible, visit the supplier. Look at their work and their production system.

Find out as much as you can about the supplier. Talk to:

any Canadian references the supplier can give you

Canadian importers with experience in the market

trade associations and other importers in your sector

member organisations for Canadian businesses trading with the market

You should also check the reliability of any sub-contractors your supplier may be outsourcing work to.

Creditworthiness

Financial checks of foreign suppliers can be difficult due to a lack of accessible financial information. See if your bank's international trade team can carry out a status query - a query into the company's financial standing on your behalf.

Be cautious - avoid advance payment or long-term contracts until you trust the supplier. See the page in this guide on methods of paying foreign suppliers.

Building solid relationships with foreign suppliers

Trust is a crucial element of any supplier relationship. While it can take time and planning to build a solid relationship with foreign suppliers, doing so makes it more likely that you'll do increased business with them. It may even enable you to negotiate more favourable terms.

Build trust gradually

The key is to build the trading relationship slowly. Initially you should leave nothing to chance. Draw up written contracts that are clear and unambiguous. See the page in this guide on drawing up contracts with foreign suppliers.

Typically your first contracts with a new supplier will be on a project-by-project or shipment-by-shipment basis. As the relationship develops you may move to longer contract periods and potentially be able to negotiate better terms.

An important part of building trust is learning how things work in your supplier's country. Are there important cultural and social differences, or differences in the way business is done?

Communication

Communication is an obvious potential obstacle when dealing with foreign suppliers. Even simple actions such as routine telephone calls can be complicated by factors such as time differences and low-quality phone connections.

Face-to-face meetings are likely to be infrequent, but they can be vital to the trust-building process - so plan them carefully.

In addition, there are potential language barriers. Which language will you use with your supplier? Do you have enough foreign-language speakers in your workforce? Do these employees have the skills they'll need to deal with your suppliers? Would it help to use local interpreters, especially for key meetings, to avoid misunderstandings?

Monitor, review and adapt

Make sure you monitor key aspects of the new supplier relationship. This will make it easy to identify areas for possible improvement.

Schedule progress reviews with the supplier. If there have been any problems, decide together how to resolve them. If everything has been working smoothly and profitably, you may want to extend the level of business you're doing together.

Methods of paying foreign suppliers

There are four main methods for paying foreign suppliers for the goods you import from them - or for receiving payment if you're exporting abroad:

Advance payment. The supplier only ships goods once payment has been received.

Letters of credit. The importer's bank guarantees to pay when presented with a set of specified export documents by the supplier - the bank guarantee increases the cost of this method.

Documentary collection. When goods are shipped, the supplier sends the export documents to the importer's bank. These documents are only given to the importer when payment has been made.

Open account trading. The supplier ships goods to the importer, and asks for payment within an agreed period.

Minimise payment-related risks

For importers, the risk decreases as you move down the list above. Advance payment is the riskiest - there is a chance you'll pay but never receive the goods. Open account trading is the least risky - you only pay after receiving the goods.

For exporters, however, the risk increases as you move down the list. So while you might prefer open account trading, your overseas supplier may want advance payment. Letters of credit and documentary collections offer some protection to both parties by involving their banks as intermediaries in the process.

The International Chamber of Commerce has established rules governing documentary credits worldwide. The Uniform Customs and Practice for Documentary Credits (UCP500) is a set of internationally accepted rules on the issue and use of letters of credit. These rules are commonly used by banks in commercial transactions worldwide. As they are incorporated into contracts voluntarily, the rules are flexible, but once applied to any documentary credit, they are binding on all parties to the credit, unless specifically modified or excluded by the credit.

Match payments to cash flow needs

Payment methods can have a major impact on your cash flow position. Most banks offer import finance packages to bridge the period between paying for your imports and receiving payment when you sell them on to your customers.

Bear in mind that payment methods and terms are frequently a matter of negotiation. For example, you might offer a supplier a letter of credit in return for an extended 75-day payment period to match your cash flow requirements.

Drawing up contracts with foreign suppliers

There are many sources of potential confusion between an importer and a foreign supplier, from language difficulties to differences in business practices.

Drawing up a clear written contract is the best way to avoid problems. If disagreements do arise, they will be easier to resolve if you have a written contract rather than a verbal agreement.

Your contract should make all aspects of the trading process as clear as possible - what will happen, when it will happen, and exactly what each party is responsible for at each stage.

There are standard trading practices and systems to help you agree on key issues. Incoterms are an internationally recognised set of trading terms used in contracts of delivery. Special trade-related payment methods reduce the risks and uncertainties of international trade.

What to include

Key things to cover in a contract with a foreign supplier include:

Goods. Specify what goods are being bought, noting any legal or technical rules with which they must comply.

Price. How much will you pay? In which currency? At which exchange rate?

Payment method. When and how will payment be made? See the page in this guide on methods of paying foreign suppliers.

Delivery. How will the goods be transported to you?

Trading terms. Use Incoterms to specify exactly who is responsible for shipping costs, duties, and customs-related formalities. You can find out about Incoterms on the International Chamber of Commerce website.

Insurance. Be clear about who bears what risks - e.g. loss or damage - at each stage of the process.

Potential problems. Include procedures that would be implemented if a dispute arises, e.g. if one party's error causes delays or losses for the other.

Service level agreement. Define the level of service your supplier must provide.

Legal jurisdiction of the contract. If there is a dispute, where would legal proceedings be heard?

Bear in mind that the contracts you enter into with a supplier will evolve with your trading relationship. While early contracts might be on a shipment-by-shipment basis, longer-term contracts might follow as familiarity and trust develop.