Lecture 6.pdf

ENTERING AND
WORKING IN
INTERNATIONAL
MARKETS
Exporting and
Global Sourcing

The strategy of producing products or services in one country
(often the producer’s home country) and selling and distributing
them to customers located in other countries
Exporting as an Entry Strategy
§ Exporting is associated with low risk, low cost, and high
flexibility
§ Most firms prefer it as their primary and/or first foreign
market entry strategy
§ Popular strategy with SMEs
§ Trade, trade deficits, and trade surpluses are related to
exporting

Exporting as an Entry Strategy
• World exports has grown exponentially
• Exporting is part of firms’
internationalization portfolio, even if they
have extensive international operations
• MNEs - U.S. – 3/4 of the total value of
exports from the U.S. = large
manufacturing firms
• SMEs- other countries- more than 90% of
exporting firms in most countries are SMEs
with fewer than 500 employees

Why export?
§ Flexibility - The exporter can enter and withdraw from markets
fairly easily, with minimal risk and expense
§ Complementary - It can complement more sophisticated joint
venture or FDI strategies as firms begin to export from their
foreign locations to other countries

International Sales Intensity of
Typical U.S. Industries
Industry
Average International Sales in
the Industry (as percentage of
total sales)
Example Firm in the Industry
Example Firm’s
International Sales (as
percentage of total sales)
Energy 59% Exxon Mobil 66%
Information
Technology
57 Advanced Micro Devices 78
Materials 53 Corning 72
Industrials 45 Caterpillar 59
Healthcare 37 Abbott Laboratories 69
Consumer
Discretionary
35 Mattel 40
Consumer
Staples
34 General Mills 28
SOURCES: PATTI DOMM, “SHRINKING DOLLAR COULD BOOST THE MARKET AND MAKE THESE STOCKS BIG WINNERS,” CNBC, JULY 24, 2017,
www.cnbc.com ; Forbes, “The Global 2000,” 2017, www.forbes.com •; Hoovers corporate profiles, 2018, •www.hoovers.com

Services are Exported as Well
• Examples: Architecture, education, banking, insurance, entertainment,
information
• Many pure services cannot be exported because they cannot be transported
• Retailers offer their services by establishing retail stores abroad, via FDI
Retailing requires direct contact with customers
• Overall, most services are provided to foreign customers via entry strategies
other than exporting, especially FDI

Exporting
Advantages 😎 Disadvantages 🙄
Increase sales volume; improve market share Fewer opportunities to learn about customers,
competitors, and other aspects of foreign markets
Generate better profit margins Firm must acquire and dedicate new capabilities
in international sales contracts and transactions,
international financing methods, and logistics and
documentation
All of the above can strain organizational
resources
Increase economies of scale
Diversify customer base
Stabilize sales fluctuations
Minimize market entry costs Firm is exposed to tariffs, other trade barriers,
fluctuating exchange rates
Minimize risk
Maximize flexibility
Leverage the capabilities of foreign distributors

A Systematic Approach to Exporting

Export Intermediation Options
• Indirect exporting: Contracting with an intermediary in the firm’s
home country to perform all export functions, often an Export
Management Company or a Trading Company. Common among
firms new to exporting
• Direct exporting: Contracting with intermediaries in the foreign
market to perform export functions, such as distributors or agents.
They perform downstream value-chain activities in the target
market
• Company-owned foreign subsidiary: Similar to direct exporting,
except the exporter owns the foreign intermediation operation;
the most advanced option

Alternative Organizational
Arrangements for Exporting

Sources of Export Financing
• Commercial banks
• Distribution channel intermediaries
• Buyers
• Suppliers
• Government assistance programs
Airbus is Europe’s leading exporter of
commercial aircraft

Types of Exporting Intermediaries
§ Foreign distributor: Based in the foreign market. Works
under contract for the exporter, takes title to, and
distributes the exporter’s products in a national market
or territory, often performing marketing functions such
as sales, promotion, and after-sales service
§ Manufacturer’s representative: Contracted by the
exporter to represent and sell its merchandise or services
in a designated country or territory
§ Trading company: Engages in import and export of a
variety of commodities, products, and services
§ Export management company (EMC): Based in the home
market. Acts as an export agent on behalf of a client firm

Finding Foreign Intermediaries
• Country and regional business directories
• Trade associations that support specific industries
• Government departments, ministries, and agencies charged with
assisting economic and trade development
• Commercial attachés in embassies and consulates abroad
• Branch offices of certain foreign government agencies located in
the exporter’s country
• Freight forwarders and trade consultants with specific knowledge
about the exporter’s target markets
• Trade fairs
• On-site visits

Working with Foreign Intermediaries
• The exporter relies on intermediaries for much of the
marketing, physical distribution, and customer service
activities in the export market
• The exporter should cultivate mutually beneficial, bonding
relations; respond to the intermediary’s needs;
demonstrate commitment; and build trust
• Intermediaries prefer handling good, profitable products,
and desire various types of support

Developing relationships with intermediaries
• Cultivate mutually beneficial, bonding
relationships
• Respond genuinely to intermediary needs
• Build solidarity by demonstrating solid
commitment, remaining reliable, and building trust
• To create a positive working relationship, the
exporter should be sensitive to the intermediary’s
objectives and aspirations

Foreign intermediaries expect exporters to provide:
• Good, reliable products, with a ready market
• Products that provide significant profits
• Opportunities to handle other product lines
• Support for marketing communications, advertising, and product
warranties
• Payment method that does not unduly burden the intermediary
• Training for intermediary staff and visitation of the exporter’s facilities
• Establishment of after-sales service facilities- training of local
technicians and supply of replacement parts

Buyer-seller relationships
Relational exchanges
The relational approach to
channel selection involves
building a committed relationship
between a seller and a buyer
(Day, 2000).
The partners benefit from lower
uncertainty, increased efficiency
and lower transaction costs
Long-term orientation: short-term
sacrifices for the sake of possible
benefits in the future (Anderson
& Weitz, 1992)
Transactional
exchanges
Discrete exchanges that involve
limited communication between
the buyer and the seller and a
narrow relational content
(Dwyer et al., 1987).
Firms gain more flexibility
regarding the sales of products,
as well as short-term
opportunities to be exploited.
Source: Nyu, V., Nilssen, F., & Kandemir, D. (2022). Small exporting firms’ choice of
exchange mode in international marketing channels for perishable products: A contingency
approach. International Business Review, 31(1), 101919.

Common Dispute Areas with Intermediaries
§ Compensation arrangements
§ Pricing practices
§ Advertising and promotion practices and
the extent of advertising support
§ After-sales service
§ Return policies
§ Adequate inventory levels
§ Incentives for promoting new products
§ Adapting the product for local customers

Criteria for Evaluating Export Intermediaries
Intermediary Dimension Evaluation Criteria
Organizational
Strengths
• Ability to finance sales and growth in the market
• Ability to provide financing to customers
• Management team quality
• Reputation with customers
• Connections with influential people or government agencies in the
market
Product-Related Factors • Knowledge about the exporter's product
• Quality and superiority of all product lines handled by the
intermediary
• Ability to ensure security for patents and other intellectual
property rights
• Extent to which intermediary handles competing product lines

Criteria for Evaluating Export Intermediaries
Intermediary Dimension Evaluation Criteria
Marketing Capabilities • Experience with the product line and customers
• Extent of geographic coverage provided in the target market
• Quality and quantity of sales force
• Ability to formulate and implement marketing plans
Managerial Commitment • Percent of intermediary's business consisting of a single supplier
• Willingness to maintain inventory sufficient to fully serve the market
• Commitment to achieving exporter's sales targets

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Global Sourcing
Procurement of products or services from suppliers
located abroad for consumption in the home country or
a third country
Also called global outsourcing, global procurement or
global purchasing; it amounts to importing.
Involves a contractual relationship between the buyer
and the foreign supplier, in which the performance of
a specific value-chain activity is subcontracted to the
firm’s own subsidiary or to an independent supplier.

Sourcing for Typical Smartphone

Drivers of Global Sourcing
1. Technological advances in communications,
especially the Internet and international
telephony.
2. Falling costs of international business.
3. Entrepreneurship and rapid economic
transformation in emerging market countries.

Two Key Decisions Regarding
Global Sourcing
1. Decision 1: Outsource or Not? Decide whether each value-adding
activity should be conducted in-house or by an independent supplier.
Known as the ‘make or buy’ decision. Firms usually internalize activities
that are part of their core competence or that involve the use of
valuable intellectual property.
2. Decision 2: Where in the World Should Value-Adding Activities Be
Located? Firms configure their value-chain activities in specific
countries to cut costs, reduce transit time, access favorable factors of
production, and access competitive advantages.

Example of Worldwide Value Chain
Configuration
1. BMW employs more than 60,000 factory personnel at 30 sites
in 14 countries to manufacture its vehicles.
2. The Munich plant builds the BMW 3 Series and supplies
engines to other BMW factories abroad.
3. A plant in South Carolina makes 350,000 vehicles per year.
4. A plant in NE China makes cars in a local joint venture.
5. A plant in India makes BMWs for the Asia market.
6. BMW configures sourcing to minimize costs (e.g., by producing
in China), access skilled personnel (by producing in Germany),
remain close to key markets (by producing in China, India and
the United States).

Nature of Outsourcing and Global
Sourcing
Blank Value-adding activity is
internalized
Value-adding activity is
externalized(outsourced)
Value-adding activity
kept in home country
A
Keep production in-house, in
home country
B
Outsource production to third-
party provider at home
Value-adding activity
conducted abroad
(global sourcing)
C
Delegate production to foreign
subsidiary or affiliate(captive
sourcing)
D
Outsource production to a
third-party provider abroad
(contract manufacturing or
global sourcing from
independent suppliers)
Sources: Based on B. Kedia and D. Mukherjee, “Understanding Offshoring: A Research Framework Based on Disintegration, Location and
Externalization Advantages,” Journal of World Business 44, No. 3 (2009), pp.250-261; Information Economy Report 2009 (New York: United
Nations, 2009); World Investment Report 2004 (New York: U N C T A D, 2004).

Choices in Outsourcing Value
Chain Activities

Benefits of Global Sourcing
• Cost Efficiency, due to lower wages abroad, leading
to improve profitability.
• Ability to Achieve Strategic Goals
– Faster corporate growth.
– Access to qualified personnel.
– Improved productivity and service.
– Business process redesign.
– Increased speed to market.
– Access to new markets.
– Technological flexibility.
Retailers source their products from
China and other countries worldwide

Risks in Global Sourcing
• Lower-than-expected cost savings.
• Environmental factors, such as exchange rate
fluctuations, trade barriers, and labor strikes.
• Weak legal environment, which can affect protection of
intellectual property.
• Inadequate or low-skilled workers.
• Overreliance on suppliers.
• Risk of creating competitors.
• Erosion of morale and commitment among home-
country employees, due to outsourcing jobs.

You can reach me at:
valeria.nyu@nord.no
Any questions?
Thanks!

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