Advantages
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Greater profits: Your potential profits are greater because you are eliminating intermediaries.
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More control: You have a greater degree of control over all aspects of the transaction.
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Absence of middlemen :You know who your customers are. Your customers know who you are. They feel more secure in doing business directly with you. Your business trips are much more efficient and effective because you can meet directly with the customer responsible for selling your product.
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Direct feedback: Your customers provide faster and more direct feedback on your product and its performance in the marketplace.
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Benefits of Government incentives: the exporter can secure full benefits of various export incentives and concessions(duty drawback, etc) offered by the government. You get slightly better protection for your trademarks, patents and copyrights.
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Spreading of marketing risks: a manufacturer exporter may supply his product s in many overseas markets this is in addition to selling in domestic markets because of the wider marketing area, the risks in marketing are divided. As a result actual marketing risk is minimized.
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Intensive use of selected market: intensive use of the foreign selected market is possible as exports are made directly. This gives larger sales and popularity in the market.
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Meeting export obligations: a manufacturer importing raw materials and goods on a large is required to accept certain export obligations as per government rules a manufacturer exporter can fulfil such obligations through direct exporting.
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Market goodwill: due to direct contact with consumers the firm can establish close relationships with the consumers and create good reputation in the market.
Disadvantages
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Huge investment: It takes more time, energy and money than you may be able to afford. Besides more capital investment a suitable organization structure, more marketing efforts and effective supervision and control is all bared by the exporter alone.
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Large manpower: It requires more "people power" to cultivate a customer base. This makes unsuitable to small firms with limited exporting capacity.
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Increasing responsibility: Servicing the business will demand more responsibility from every level of your organization.
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Heavy risks: You are held accountable for whatever happens. There is no buffer zone. the risk involved in direct exporting is more as the entire risk is undertaken by the exporter himself.
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Self-burden: You may not be able to respond to customer communications as quickly as a local agent can. You have to handle all the logistics of the transaction. If you have a technological product, you must be prepared to respond to technical questions, and to provide on-site start-up training and ongoing support services.
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Absence of specialization: there is absence of specialization in the business as the manufacturer – exporter looks after the production as well as exporting.
Various Direct Exporting
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Direct to Final Buyer Abroad - Manufacturer sells directly to buyer abroad. No middlemen. Needs high degree of marketing skills.
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- Buys and sells on own account.
He makes all the marketing decisions.
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- Sell your product on commission.
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- Handles primarily commodities and
deals in large volume, buying and selling for a fee.
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- Specialized import agencies of socialist and some non-socialist countries.
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- Exporter may seek royalty in exchanging for licensing a foreign firm to manufacture his product abroad, use his brand name, technology, etc.
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- Exporter may enter into a partnership arrangement with a foreign firm to produce and market jointly in the foreign country
Checklist for
1. Decide whether you will sell directly to foreign users or through an or whether you will sell to a , who will resell your product.
2. Prepare literature about your company and its products that can be used to support your export efforts.
3. If selling directly to foreign users yourself, prepare a sales campaign (direct mail, trade show participation, foreign visits, etc.) and develop a list of sales leads.
4. Begin sending letters to prospective customers and following up on sales leads.
INDIRECT EXPORTING
Those entering the exporting scene for the first time will find this method the most simple and least risky. The manufacturer does not deal with the complexities of exporting, but they hand the responsibility elsewhere. There are many organisations set up exclusively to buy your goods, then ship them and sell them abroad. This method is great for the short term, as finance is readily available, but once the goods have left you, you may lose complete control of where, when, how and to whom they are sold.
There are four main methods of indirect exporting:
- Export Merchants, this is a trading company that will buy the local firm's goods outright and assume the risk of being able to resell them profitably abroad.
The export merchant usually specializes in a particular line of products and/or in a particular geographical market area. Sometime it sells the goods with the original supplier's labels or puts its own label.
- Export Houses
- Trading Houses
- Government/Co-operative Agencies
The advantages are:
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Minimisation of Risk: It's an almost risk-free way to begin. Most of the risk is borne by the middlemen. The expenditure on marketing is also less as opening of foreign branches is not necessary.
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Minimal Involvement: It demands minimal involvement in the export process as there are middlemen to do your work. The firm concentrates on only manufacturing activities.
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Relief from Actual Exporting: A manufacturing firm doesn’t need to bother about export marketing. It allows you to continue to concentrate on your domestic business.
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Minimised Marketing problem: You have limited liability for product marketing problems -- there's always someone else to point the finger at. You learn as you go about international marketing.
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Miscellaneous Benefits: Depending on the type of intermediary with which you are dealing, you don't have to concern yourself with shipment and other logistics.
- You can field-test your products for export potential.
- In some instances, your local agent can field technical questions and provide necessary product support.
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Specialisation: A manufacturer specializes on production activities, he concentrates his attention on production activities only.
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Less Overheads: Here the exporter shares the overheads relating to production activities thus reducing the overheads in comparison to direct exporter.
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Suitable to small firms: Small firms prefer indirect exporting due to their financial and other difficulties, its more economical.
The disadvantages are:
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Lower Profits: Your profits are lower. An indirect exporter gets lower prices as compared to direct exporter. Here the exporter has to pay commission to the intermediaries as a result the profits reduce.
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Lesser Control: You lose control over your foreign sales because of the presence of intermediaries.
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Non-availability of Market Information: You very rarely know who your customers are, and thus lose the opportunity to tailor your offerings to their evolving needs. Even the information that comes is through the intermediaries so we don’t know if its reliable or not.
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Dependence on Middlemen: The export operations will be looked after by the middlemen and the export organisation will not have any say. When you visit your customer directly, you are a step removed from the actual transaction. You feel out of the loop.
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Increase in Competition: The intermediary might also be offering products similar to yours, including directly competitive products, to the same customers instead of providing exclusive representation.
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No benefits or Export Incentives: the export firm may not get the benefits of various incentives and facilities provided since he is not involved directly in the promotion of exports.
Checklist for
1. Prepare a short list of that might be interested in your Product.
2. Try to get references and recommendations about them.
3. Ask for information from each, explaining why.
4. Visit the most promising to find out what they can do for you.
5. Keep in mind which foreign markets you intend to enter first.
6. Reserve those foreign markets you wish to export .
7. Supply the trading houses selected by you with information about your company and products.
8. Negotiate an agreement whereby the trading house buys directly from you or acts as your .
9. Fill each export order as and when received and maintain contact.
LICENCING
Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor".
It is quite similar to the "franchise" operation. Coca Cola is an excellent example of licensing. In Zimbabwe, United Bottlers have the licence to make Coke.
Licensing involves little expense and involvement. The only cost is signing the agreement and policing its implementation.
Licensing gives the following advantages:
- Good way to start in foreign operations and open the door to low risk manufacturing relationships
- Linkage of parent and receiving partner interests means both get most out of marketing effort
- Capital not tied up in foreign operation
- Options to buy into partner exist or provision to take royalties in stock.
- It’s a cheaper alternative to direct and indirect exporting
- Trade restrictions have no effect on licencing as products are manufactured and sold in the target market itself.
The disadvantages are:
- Limited form of participation - to length of agreement, specific product, process or trademark
- Potential returns from marketing and manufacturing may be lost
- Partner develops know-how and so licence is short
- Licensees become competitors - overcome by having cross technology transfer deals
- Requires considerable fact finding, planning, investigation and interpretation.
- The profit earned by the licensee is more as compared to the fees or royalty payment
- The licensor may suffer loss on long term basis. Licensee may not renew his licence after its expiry
- Licencing as a technique for entering foreign market is available to only reputed firms possessing something unique as regards technology, brand name etc.
Joint ventures
Those who decide to license ought to keep the options open for extending market participation. This can be done through joint ventures with the licensee.
Joint ventures can be defined as "an enterprise in which two or more investors share ownership and control over property rights and operation".
Joint ventures are a more extensive form of participation than either exporting or licensing. In Zimbabwe, Olivine industries has a joint venture agreement with HJ Heinz in food processing.
It takes place when:
- The domestic investor buys an interest in a manufacturing unit situated in a foreign country
- A domestic investor and an investor of a foreign country jointly start a new venture in that foreign country.
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
- 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
- Partners may have different views on expected benefits.
If the partners carefully map out in advance what they expect to achieve and how, then many problems can be overcome.
Wholly Owned Foreign Subsidiaries
A firm interested in exporting may establish a subsidiary manufacturing unit in a foreign country. The exporting firm will be the exclusive owner and controller of the subsidiary. Such subsidiary is the result of direct investment in a foreign country. The subsidiary will manufacture and market the products in the foreign country but the benefits will be available to the home investors. Sometimes, the branches/subsidiaries may purchase raw materials from the foreign market and send them to the manufacturer who will manufacture the products and send back to branches for distribution to consumers. The branches opened may differ in the operations but are ultimately controlled by the head office. Subsidiaries are different from branches as subsidiaries are separate companies and follow the instructions of their holding company.