Business Tip

"The world at your feet"

September 6, 2011
http://www.smeadvisor.com/2011/09/the-world-at-your-feet

The massive restructuring of political boundaries, the opening of new consumer markets, historic trade agreements, abolition of quotas, and the World Trade Organisation (WTO) have created numerous benefits for SMEs willing to take the step forward into the foreign markets.

Here are some of the reasons why businesses may wish to export:

Increase in sales and profits: If a firm is performing well domestically, expansion into foreign markets is likely to improve its profits.

Gain global market share: By exporting, a firm will learn from its competitors ,their strategies and what they have done to gain a share in foreign markets.

Reduce the level of dependence on existing domestic markets: By expanding into foreign markets, a firm will increase its marketing base, and reduce its dependence on local customers.

Offset market fluctuations: By tapping global markets, firms are no longer held captive by economic changes, varying consumer demand, and seasonal fluctuations within the domestic economy.

To make use of excess production capacity: Exporting can increase the utilisation of production capacity and length of production runs, thereby reducing average unit costs, and achieving economies of scale.

Enhance competitiveness: Exporting enhances a firm’s and a country’s competitive outlook. While the firm will benefit from exposure to new technologies, methods and processes; the country will benefit from an improved balance of trade.

Find excellent no-cost or low-cost experts in export. For many firms, the decision not to export is based on the fear of the unknown.

The exporting process

Exporters stand a much greater chance of success if, as a first step, they start thinking about their objectives in terms of:

• What products to export

• Where to export

• How to export

Lack of a definite set of goals or objectives will lead to dissipation of efforts in wrong direction and a waste of resources. The objectives need to be realistic, should take into account the existing situation of the market, the exporter’s position in the market and competition. The objectives should neither be too ambitious nor too modest and should not be modified constantly if the same is not attained in target period. But efforts should be intensified or resources should be redirected effectively to attain an objective in time.

Once the export goals and objectives have been formulated the exporter needs to understand the export process namely: the feasibility analysis, planning foreign market entry, and implementation. The stages are outlined below:

Stage #1: Export feasibility study

Analyse domestic performance
Assess the firm’s capacities
Consider the demographic, social, political, and economic factors of target markets.
Confer with international trade experts (for example. in the fields of marketing, finance, legal, and logistics)
Select target markets

Stage #2: Planning foreign market entry

Conduct and evaluate market research of the industry sector
Decide how the product will be marketed
Comply with target country licensing, standards and certification requirements
Apply for the necessary patent, trademark, and copyright protection
Identify taxes, tariffs, duties, quotas, or other non-tariff trade barriers
Establish pricing strategy
Seek financing

Stage #3: Implementation

Determine methods of distribution
Implement marketing plan
Choose sales representatives, or sales methods
Negotiate sales contract
Produce finished product
Obtain insurance cover
Complete the required paperwork
Package and label the product
Ship the product

The export traps

Below are some avoidable traps that can become problematic for exporters when writing the international plan.

Seek no-cost or low-cost advice

Firms that are new to exporting or are expanding into an unfamiliar foreign market often do not obtain qualified export counselling before developing their international business plan. Public and private sector professionals and organisations are available throughout the region to help firms clearly define their export goals and objectives.

Obtain management commitment

Before researching and writing the plan, the person responsible for developing the foreign market strategy must make sure that top management is firmly committed to the project. That person will then be better equipped to negotiate with foreign and financial partners to overcome the initial difficulties and financial requirements of exporting. All parts of the firm, from management to finance, marketing, production and training, must understand and appreciate the firm’s export expansion plans. Detailed CVs of all senior staff should be included in the international business plan.

Conduct market research

Many international business plans are weak in terms of market research. Market research should confirm the exporter’s instinct that a product will be acceptable, and sell in a particular market. Confirmation is sought through research carried out on small focus groups r by sending product samples, or by generally understanding the unique preferences of potential foreign customers.

Determine the export price

Pricing a product is the most important factor affecting financial projections in the international business plan. Many first-time, or infrequent exporters do not consider the various foreign costs that can contribute to the per unit price.

Among the special elements to consider when exporting are, the percentage mark-up, sales commissions, freight forwarder processing and documentation fees, financing costs, letter of credit processing fee, export packing charges, labelling and marking, inland freight charges, unloading at the terminal, insurance, translation of product materials, credit terms, payment schedules, payment currencies, insurance, commission rates, warehousing costs, after-sales servicing responsibilities, and costs of replacing damaged goods and so on.

Each of these costs should be taken into account in the financial projections, and budget. For further details in this area please refer to the EDC publication, ‘Pricing for Export’ which also includes a pricing matrix.

Highlight the firm’s capabilities

Price is not the only factor contributing to a buyer’s decision to purchase a product or service. Other important factors include management capability, production capacity, quality control system, technical cooperation with foreign firms, and system for handling orders, export experience, financial standing, and links with banks. These points should also be included in the international business plan.

Producing an export plan

Developing an international business plan requires careful planning and a commitment of time. As with any new business operation, the decision to export must be envisioned with a long-term business investment attitude rather than a short-term profit objective. Before making a commitment to enter into international business agreements, the development of an international business plan is an important and key step for determining a product’s readiness for export.

A well-prepared plan will assist the business in assessing the potential of a product in international markets; facilitate application for financing and how much it will cost to export a product. The core elements of a business plan include the following:

Executive summary

State what makes the company successful and then list the competitive advantages over domestic and foreign competition;

Present situation

Identify the company’s products which have export potential

Objectives

Define long-term goals and how exporting will help to attain those goals

Management

Conduct a company analysis in order to ensure that the decision to export is supported by all levels of management and to decide who will execute what functions.

Description

Answer the question: Why is the product/service unique in an international market?

Market analysis

Determine what are the opportunities in this market.

Target customers

Find out the demographic and socio economic profile of the target customer

Existing competition

Conduct an inquiry to determine the firm’s competitiveness within the industry. In analysing competition, it is helpful to know what are the market shares and trends of the industry.

Focus group research

Focus research on a small group of potential customers in order to gain feedback and constructive criticism.

Calculated risk

Estimate the industry and the firm’s performance over a period of three to five years so that the firm may calculate risks accurately.

Marketing strategy

Determine how customers will be attracted and their interests sustained.

Pricing/profitability

Develop an international pricing strategy.

Selling tactics

Carry out direct mailing, cold calling, and advertising tactics.

Methods of distribution

Determine where and how to deliver overseas.

Advertising

Consider foreign labelling and packaging requirements literature translations, and customer relations.

Public relations

Develop a regular and consistent product/service up programme, internal newsletter; write for technical magazine, press releases and so on.

Business relationship

Articulate a plan for developing international business relationships, include culture training. Determining the type of relations (for example an agent or distributor, representative, supplier or direct export)

Manufacturing plan

Indicate initial volume, expansion requirements, source materials and location of manufacture

Financial history

List out a five-year profit and loss statement

Financial projections

Remain realistic and conservative

12-month budget

Anticipate costs for financial year of exporting

Cash-flow projection

Calculate cash receipts vs. cash disbursements

Balance sheet

Illustrate liquidity and cash position

Break-even analysis

Calculate number of units to sell for break-even

Source/use of funds

Decide from where the funds will be obtained to start or expand export operations

Use of proceeds

Decide where profits and loans will be dedicated

Conclusions

State exporting goals, total capital required profile, expected schedule and general comments.

These lists are not to be taken as the entire process but provide some of the steps that will help companies to prepare for their journey to exporting.