Company X has made the decision to move forward with its international expansion. After much deliberation, it has been decided to move into three new markets: Japan, Italy, and the United Kingdom. The decision to expand is only the beginning. Now, Company X must decide how it will expand into these international markets by weighing the advantages and disadvantages of each strategy. Once a recommendation has been formed, a timetable for advancement has to be created and put into motion.
Trade or Invest?
Company X has two options for entering international markets. It can choose to take part in international trade by exporting its mobility products to the market in question. Going the route of international trade allows companies to quickly enter the international marketplace with a minimal investment of time and capital. Additionally, this expansion into foreign markets gives the company a chance to hone its international business skills before making a more advanced international investment (Wild, Wild, & Han, 2008).
International investment is a more advanced of international expansion. It involves direct capital investment in the form of plants and equipment. A company might decide to make this kind of investment if certain conditions within the host country will result in an overall reduced cost of production. For example, if the cost of materials or labor is significantly cheaper in the host country (Wild, Wild, & Han, 2008). Additionally, trade barriers such as tariffs or government policies may make international trade a near impossibility (Sawyer & Sprinkle, 2006).
There are two main types of international trade: direct and indirect exporting. Direct exporting involves the use of sales representatives and distributors to deliver products directly to the host country’s buyers. It’s worth noting that buyers are not necessarily end-users of the product, but merely the distribution outlet within the host country. Although this might mean end-users, it can also many local shops and distributors (Wild, Wild, & Han, 2008).
Indirect exporting uses a third party to get the company’s goods to the international market. A company engaging in indirect marketing can get its products to international markets without being concerned with the logistics of how the products get to market. The indirect exporter sells its product directly to the third party who resells the product in the host country. Third party intermediaries include agents, export management company, and export trading companies (Wild, Wild, & Han, 2008).
Preferred Trade Strategy
For Company X, the best trade strategy is direct exporting. Although the company is relatively inexperienced in the international marketplace, indirect exporting does not allow Company X to ensure its products are appropriately marketed. Therefore, Company X should employee sales representatives in each of the three new international markets. These sales representatives will focus on finding local resellers for Company X’s mobility products. Additionally, the sales representatives will focus on selling to large institutional buyers such as hospitals and retirement centers (Wild, Wild, & Han, 2008).
The disadvantages of this strategy are mainly related to Company X’s inexperience in international business. There are many obstacles to overcome when trying to get products into an international market. In an export situation, there is the chance that product will be shipped and no payment ever received. Likewise, risks are assumed by importers that pay in advance for products. Therefore, some agreement much be reached regarding how the shipments will be paid for. It is recommended that Company X obtain a letter of credit for large shipments overseas. Letters of credits are agreements between banks to make payments when the product arrives. This arrangement offers protection to be the exporter and the importer. Additionally, customs, tariffs, and shipping insurance can create problems for the first-time exporter. An experienced freight forwarder can help educate Company X to these hazards and get product rolling with minimal hassle (Wild, Wild, & Han, 2008).
There are several options available to companies wishing to become involved in international investment. The company can set up a wholly owned subsidiary that is owned by the parent company and owns and manages the plants and facilities in the host country. Like a wholly owned subsidiary, a joint venture is a separate entity. Instead of being owned by just one company, two or more companies work together to form a joint venture. This has the advantage of letting the join venture benefit from the strengths of each parent company. Finally, a strategic alliance is an agreement between two or more companies to work together in the host country. There is no company formed, and the alliance might be short-lived. It is common for the members of a strategic alliance to own a stake in the other members to ensure that everyone involved is concerned for the performance of the other alliance members (Wild, Wild, & Han, 2008).
Preferred Investment Strategy
Due to its inexperience in international business, Company X should develop joint venture in its target markets should it decide on an investment strategy. Joint ventures reduce each members risk, and allows the venture to profit from the strength and experience of each member company. Additionally, a joint venture would allow Company X to take advantage of the local experience of it’s partner company. This is especially useful in terms of distribution (Wild, Wild, & Han, 2008).
Unfortunately, joint ventures are not without their disadvantages. Conflict between the two partner companies is a very real likelihood. Therefore, it is advisable that the partnership be slight unequal, so that one company can break the tie in case of disagreement. In the case of a two company partnership, a 51-49 split is sufficient. Joint ventures can also be risky when one partner of the venture is the government of the host country. Although many developing nations require this form of venture, that is not the case in any of Company X’s target markets (Wild, Wild, & Han, 2008).
Based on Company X’s inexperience, it is recommended that they begin with a direct export approach to international marketing. Although this method requires more involvement than the indirect exporting model, it allows Company X to maintain control of its property and corporate image until it reaches the buyer. The first step in this process is to determine the objectives that Company X hopes to achieve by entering these three markets. These objects should extend out three to five years. It is the goal of Company X to build on the relatively limited number of direct foreign sales it has currently secured and make the international sales division a profitable entity within that time frame.
In each market, a local sales manager must be selected. Initially, this individual will work along with the Vice-President of International Sales. Therefore, this person must be able to work independently, as well as, manage a team of sales people in the future. It is anticipated that a position of this magnitude will take 4 to 6 weeks to hire for. This will require direct involvement from the U.S.-based sales management. Additionally, compensation plans appropriate to each host country will be developed.
Once a sales manager is selected in each market, meetings with large buyers and distributors should be arranged. These meetings will initially focus on overcoming any cultural differences between the two companies and building the trust necessary for a successful import / export relationship. This will require several trips by the VP of International Sales, in addition to other meetings with just the local sales manager. Three to six months should be sufficient time to begin seeing payoffs from these meetings.
Simultaneous to the meetings with local buyers and distributors, Company X should contract with a freight forwarder that experience in the three target markets. Although the relationship with the freight forwarder may be short-lived, their expertise is crucial during the beginning exporting phase. The knowledge and experience gained while working with other governments and their import rules will eventually enable Company X to stop using the freight forwarder’s service. Finding a freight forwarder should be completed within a month.
Finally, all the pieces are in place and Company X will be ready to begin international shipments. It can be expected that the first shipments will take longer than anticipated, but thing should speed up as Company X’s experience grows.
Strategies to Avoid
There are a few international business strategies that Company X should absolutely avoid. Indirect exporting is an attractive option thanks to its low barrier to entry. Unfortunately, once Company X’s product is sold to the intermediary party, control of it is lost. Therefore, Company X has no way to control how that product is marketed in the target market. Additionally, selling to an intermediary cuts into Company X’s profit potential.
Any sort of investment option is risky for Company X. Wholly owned subsidiaries give maximum control over the operation in the target market. Unfortunately, none of the target markets have cheap labor or materials that make this sort arrangement profitable. Additionally, the “Made in the USA” tag carries significant weight in many countries. Therefore, it makes sense to keep production in the U.S. for as long as possible.
Sawyer, W. C., & Sprinkle, R. L. (2006). International economics, 2nd ed. Upper Saddle River, New Jersey: Pearson Prentice Hall.
Wild, J. J., Wild, K. L., & Han, J. C. (2008). International business: The challenges of globalization. (4th ed.). Upper Saddle River, NJ: Pearson.