Foreign Sales Methods
There are three basic ways in which domestic firms can sell their products
in foreign countries: Export, employment of foreign sales representatives,
and ownership (or leasing) of a foreign sales office. In practice neither
these marketing approaches nor the basic choices between marketing and
production approaches are mutually exclusive, but we discuss them separately
for expository convenience.
Exporting. Domestic firms can sell their products in foreign countries by contracting with either a domestic exporter or a foreign importer when the potential for high return on sales is apparent, or at least expected. Typically, little product modification is required and both exporters and importers can be found who will either take title to the products (buy them for resale) or broker them (sell them on consignment). Both approaches can be used to break into a foreign market initially but suffer the disadvantage of removing the firm from the process of marketing its own products. However, they may be useful ways of identifying the foreign markets with greatest potential for further development.
Foreign Sales and Representatives. Domestic firms can employ a foreign sales representative to broker their products in foreign countries. This form of marketing usually involves paying a commission to the sales representative for consummated sales. Sales representatives normally take orders by demonstrating sample products or disseminating product literature while calling on customers in the foreign nation. Since sales representatives normally represent many clients, a particular product may receive less than their full selling effort. Nonetheless use of a sales representative overseas is a low-investment way to distribute products in foreign countries, though the required commissions may be high.
Information about foreign sales representatives as well as foreign importers and domestic exporters can be obtained from U.S. Department of Commerce offices and also from most U.S. banks that have international operations.
Foreign Sales Office. The highest form of foreign marketing activity is ownership of a foreign sales office. This approach allows the domestic firm to service foreign customers with its own sales force. Thus it normally represents a higher quality of selling effort than is possible with either exporting or sales representative. Of course, the firm exposes itself to a much heavier cost burden with a sales office abroad, so that careful analysis of this choice is especially important.
Foreign Production Facilities
Often firms do not begin producing products overseas until they have
first identified lucrative markets by exporting, through sales representatives,
or by operating a sales office. A production operation represents a major
capital investment and deserves this kind of conservative development.
Six arrangements can be used for establishing a foreign production facility. They are minority joint venture, co-owned joint venture, majority joint venture, wholly owned subsidiary, licensing agreements, and agent contracts.
Minority Joint Venture. This form of ownership is required by many foreign governments as a condition for being allowed to do business on their soil. It involves taking on a local partner who owns a controlling interest in the foreign operation. Minority participation usually involves a contract that specifies that the domestic firm will be responsible for management activities.
Co-owned Joint Venture. This is an equal participation joint venture.
Majority Joint Ventures. Majority joint ventures are partnerships with local partners who have a minority interest in the facility. Domestic firms typically prefer majority joint ventures over minority joint ventures for obvious reasons.
Wholly Owned Subsidiaries. This is a foreign facility that is 100 percent owned by the domestic parent. Refusing to enter foreign countries on any basis other than by wholly owned subsidiaries, IBM has distinguished itself by using this form of foreign expansion exclusively. When structuring its entrance into India, IBM's management chose to "withdraw from the market rather than accept local ownership."7
Licensing Agreements. Domestic firms can license to foreign firms the right to produce their products. Licensing provides a convenient way of "amortizing development costs and making quick profits without additional capital investment, which raises ROI."8 The licenser usually receives an initial payment followed by royalty payments in return for allowing products to be produced and sold by the foreign firm.9 Licensing carries the risk of creating a competitor out of the licensee. Because licensees are actually gaining technological expertise, "(l) licenses ... should only be provided to foreign competitors" by manufacturing businesses" in cases where technology is changing quickly and the U.S. company is confident of its ability to stay in the lead of technological change, or where the U.S. company can maintain significant manufacturing or marketing leadership in the product area."10
Agent Contract. This is a contract that grants the right to sell a product/service in the role of agent or representative of the manufacturer or originator.
CHOOSING THE TYPE OF PARTICIPATION
Davidson proposes a matrix for structuring participation decisions
that treats them as portfolio decisions (Exhibit 3.2-1).11 It
focuses on the possible outcomes of negotiations between a global firm
and a firm in the host country the global firm seeks to enter. Underlying
use of the matrix are several assumptions. First, the global firm and the
host country firm have similar participation preferences. That is, both
companies will try to maximize their own participation in ventures producing
products within their core businesses. For example, a tire manufacturer
will try to avoid licensing and joint ventures in tire manufacturing ventures,
preferring instead 100 percent ownership.
Second, the products of both the global firm and the host country firm are divided into four types: core, related, future and unrelated. Core business products are those that are the major business activity of the firm. Examples are tires for a tire manufacturer, autos for an auto manufacturer, computers for IBM. Related business products have something to do with the nature of the firm's core business, but they are a step or two removed from it--copiers for IBM or household appliances for an auto company.
The third assumption underlying the participation portfolio matrix is that it will not be used to seek a collection of possible participation parties. In other words the identity of parties is fixed in a particular application of the matrix.
Fourth, the matrix is not intended directly to take into consideration factors not explicitly addressed by it. For example, such differences between parties as marketing expertise, technological emphasis, and other characteristics of products, businesses, or parties can be considered by moving a particular column up or down, but not by changing relative positions within a column.
Turning again to Exhibit 3.2-A, and taking the desires of the global firm as our focus, we can see how the matrix highlights participation preferences. When the product in question is the core business of both the global firm and the host country partner (cell 1), the global firm will be unlikely to participate on any basis other than a majority joint venture.
When the product is a related business for the global firm, a co-owned joint venture (an equal partnership) is a reasonable expectation when the product is the core business of the host country firm. However, since the host country firm will have weaker commitment to a related business, the global firm can anticipate a majority position (cell 7).
For a global firm's future businesses that are in the host country firm's core, the global firm can usually expect nothing more than a minority participation (cell 3). A co-owned joint venture is reasonable when the global firm's future business is the host country firm's related business cell (cell 6). The global firm can look forward to a majority position when the product represents a future business activity to both parties (cell 8).
Finally, for its products in either unrelated or declining businesses, the global firm is likely to prefer an exclusive licensing agreement when the product is in the core business of the host country partner (cell 4) and a standard (or exclusive) licensing agreement when the product is a future business of the host country firm (cell 9).
Combinations of preferences for which collaboration is unlikely are represented by the empty cells in Exhibit 3.2-A. For the global firm, empty cells in its core business are usually characterized by a preference for wholly owned subsidiaries. They can be obtained by either development of a new subsidiary or acquisition of a local firm.
THE NATURE OF TRULY GLOBAL OPERATIONS
Davidson describes global strategic management as "the process of defining,
developing, and administering ... strategy and structure for a worldwide
business."12 Global strategy does not merely involve owning
a foreign subsidiary that represents a small proportion (in asset or sales
terms) of a firm's operations. Rather it is a business whose strategic
position in national markets is fundamentally affected by its overall global
position.13
Many firms achieve global status by a process of incrementalism.14 The typical stages in this process are15
By treating their foreign operations as add-ons, U.S. firms have created for themselves an almost natural international competitive disadvantage. With more and more of the domestic market successfully served by increasing numbers of foreign firms, U.S. firms have watched domestic sales growth potential dwindle. Where have they turned to compensate volume and profitability? Unfortunately for many they do not turn to their foreign operations! This is so because they have effectively "turned over" foreign markets to their international competitors--their Japanese and European counterparts--by virtue of less than enthusiastic global strategies.17
The existence of global industries and markets has forced companies to consider competition on a global basis.18 "Companies that fail to integrate their domestic and international markets and product strategies will be at an increasing disadvantage relative to those that do."19
Porter explains that competing globally is a vastly different strategic problem from competing nationally, even though the "structural factors and market forces operating in global industries are the same as those in more domestic industries."20 This difference is manifested in the following ways:
FOUNDATIONS OF GLOBAL COMPETITIVE ADVANTAGE
Local firms have some inherent advantages in the host country over
global competitors. These include "first choice in establishing market
positions, distribution systems and promotion strategies."27
Thus to compete successfully with domestic companies, global firms must
build their strategies around selected bases of competitive advantage.
Davidson identifies two major categories of competitive advantage: economic
advantages and strategic strengths.28 Within these categories
Porter lists traditional comparative advantages and various types of economies
of scale (which are similar to Davidson's economic advantages), and product
differentiation, proprietary product technology, and production mobility29
(which are similar to Davidson's strategic strengths). Economic strengths
lead to efficiencies in the activities of global firms and strategic advantages
cause differential advantages.30
Economic Advantages
Factor Costs. The global firm can build its strategy around
favorable factor costs relative to its host country competitors. Countries
within which it enjoys cost advantages should become prime candidates for
global expansion. In addition to the immediate profit advantages that superior
cost position firms will enjoy, reinvestment of their higher returns can
result in faster growth rates than for their competitors. They can also
price their products below those of their competitors. They can also price
their products below those of their competitors to gain market share if
there is a willingness to take action equal to that of competitors.31
Cost advantage can be manifested as low costs of capital, raw materials, labor, and complex factors. Complex factor cost advantages include efficiencies in purchasing, manufacturing, marketing (distribution), applications engineering (developing a product to solve a particular problem), and research and development,32 as shown in Exhibit 3.2-B.
Purchasing can offer competitive leverage when large global firms can realize unit cost reductions as large-volume buyers. Purchasing economies can also result when a large global industry (not just one business) can buy moderate portions of a supply industry's output. Moderate-sized orders by individual global firms preserve their bargaining power with suppliers. Cost advantages accrue from savings on superior raw materials yields (e.g., the Japanese produce more steel per ton of coal than the Americans), longer run lengths, and proprietary process technology.
In marketing cost advantages can be developed by high regional sales share. Here per-unit selling and advertising costs are lowered relative to low-share competitors when selling efficiency is established and maintained. Applications engineering can lead to cost supremacy when customer needs for customized products and service can be (1) identified and (2) met by standardizing modules of the product or system so that an individual complete system can be produced quickly and efficiently.
Economies of Scale. In addition to the purchasing scale economies mentioned earlier, global firms can benefit from economies of scale in production, international logistics, marketing, and global experience.33 Production economies can result from localized manufacture of products distributed globally. Firms that expect to benefit from production economies must have the distribution and selling capabilities to market their products across global boundaries.
Logistical economies lead to cost savings when global firms can (1) spread fixed costs of supply systems over many national territories or even (2) develop entirely new supply methods to deal with the great distances and transoceanic passages often required. The marketing economies of scale that can accrue to global firms are similar to the logistical economies in that they can result from development of a concentrated sales force internationally. Cost savings stem from spreading the fixed costs of such a force over a greater number of markets and would be possible for firms whose sales force is highly skilled and mobile and whose products are high-priced major equipment items.
International experience leads to cost advantages because, by serving many national markets, a firm progresses along its learning curve faster than a firm serving just one domestic market.
Strategic Strengths
Cost advantages can also be produced by a global firm's strategic strengths.
When properly exploited these strengths allow the global firm to do something
better than its local competitors in various host countries in which they
choose to operate. Porter lists strategic strengths of product differentiation,
proprietary product technology, and production mobility.34
The decision to enter a certain foreign country should be preceded by extensive research. Robinson describes six levels of demand analysis of potential foreign markets: potential need, felt need, potential demand, effective demand, market demand, and specific demand.35
Potential need is identified first by determining whether there is sufficient evidence to suggest that there may be a need for the company's product or service. Physical variables such as demographics, climate, income levels, occupational distributions, and geographical characteristics can be assessed to estimate potential need.
Then estimates are made of how much it would cost to transform potential need into felt need. The difficulty that would be encountered in making this transformation, after first identifying a potential need, is largely a matter of cultural characteristics such as value systems, extent of institutional development, and penetration of communication systems. Thus these factors would be analyzed to test for a felt need.
Third, various economic factors determine the amount of potential demand after determining the presence of a felt need for a product/service. Typical economic indicators such as disposable income and consumption patterns can be analyzed to determine the absence of structural blockages to the development of a felt need into potential demand.
Finding insufficient potential obstacles to growth of potential demand, the analyst would next turn attention to the assessment of politically determined effective demand. The object of this stage of analysis is to identify the extent to which market forces are allowed to operate by a potential host country's political institutions. Analysis would focus on such factors as import duties and quotas, foreign exchange restrictions, various environmental and labor laws and standards, and effectiveness of the legal system.
Fifth, the strategist would analyze the degree to which the firm would be able to develop market demand. Market demand assessment involves determining the ease with which typical marketing functions can operate within a country. These functions include advertising and promotion, distribution (shipping system facilities, cost, and effectiveness), market dispersion, and warehousing facilities.
Finally, with evidence that either no significant blockages exist to the development of market demand or that whatever blockages exist can be circumvented, the analyst would assess the firm's potential competitive position (called specific demand). The object of this last phase of analysis would be to compare the company's product and internal logistical support of it with the same factors of its potential competitors.
By analyzing potential countries via this six-step process, the analyst can proceed to estimate potential market share for the firm in the countries that successfully make it through each step. Then countries can be rank ordered by potential market share. The one with the highest estimated market share would be the most favorable expansion target, and so on down the list.
REFERENCES