Entry Strategies and Exporting - Essay Example

Entry Strategies and Exporting Introduction Over the of the past few decades, it has been operational, M and W have proven to be a very profitable firm and in its home market it has virtually taken over the apparel industry. Although it is not a monopoly, it has made sizable inroads into the market share of every other competitor and it currently holds approximately 70% of the national market share. This has resulted in high profits and numerous other benefits; however it appears the firm has reached a saturation point and it cannot reasonably expect to achieve any significant growth in the local market. Consequently, the firm stands at the threshold of the next step which is taking its operations to the international level, studies both academic and market based have shown that the demand for quality but affordable clothing in parts of Europe and Asia is increasing and this is opportunity that M and W can profitably exploit. Given its expansive scale of production at home it has considerable economics of scale and therefore it can afford to confront new markets with lower prices. In addition the firm has a great deal of experience which is evinced by the many years of production behind it in addition to the obvious market dominance which has been forged through strategic thinking and experience. Notwithstanding, before making the commitment to venture into internationalization, the firm should take to account several factors, more so the advantages and disadvantages of this move. This is important because by making such considerations, it can be aptly placed to develop an open minded and critical strategic plan. Besides, no matter how practical or natural any business move may appear, the manager should first ensure that they are aware of the underling advantages and disadvantages so they can strategize with both in mind. The entry of a company into international business is takes two forms, it can venture indirectly when forced by circumstances or when the directors order that the firm should purchase or sell from foreign sources. On the other hand it could be direct in which case the company deliberately makes a move which in most cases is preceded by reconnaissance into the new market. Whichever the case, before a firm ventures into the import export business, they needs must carefully asses the disadvantages and advantages. The firm in question is interested in the latter model since the decision to export is one that has been done deliberately and indeed the primary objectives of these paper are geared towards establishing the strategic suitability of this particular firm to gain ingress into the international market by considering the firms internal environment in the context of the prevailing international conditions. M and W can explore several entry strategies since there is no right or wrong one and the success of a new entrant is influenced by numerous other factors such as tariffs, level of adaptation logistics among others. The main entry points are; the none equity mode which would require the firm to have contractual agreements and the equity mode in which the firm takes part in joint ventures and operate fully owned subsidiaries. Advantages and Challenges of Internationalization Given the advent of globalization and the power and influence wielded by multinationals, the advantages are quite compelling (De Grauwe & Camerman, 2002). One of the most important ones is the increase in sales and profits that are bound to result if the firm is successful in the move, internationalization brings about a completely new market and the customer base can double of even treble. Taking into consideration that M and W had already saturated the market in its home country, internationalization is a great opportunity to expose their products to a diverse audience not to mention increasing the numerical scope of potential buyers. This will obviously translate into much higher sales and bigger profits in the long term especially if the company is as successful abroad as it has been at home. By going international, a firm also enhances international competitiveness since the organization has to be competitive at home before it ventures into the new market (Martin & Javalgi, 2007). The strategies acquired in the process of becoming domestically competitive are critical in enabling the firm to become competitive abroad as well. Selling internationally exposes the firm to a great deal of diversity, as opposed to when they are selling locally to limited customer base, international business forces firms to diversify their offerings since the customers have a multiplicity of needs (Gassmann & Keupp, 2007). Therefore, the firm will not be tied or restricted to the business cycle in the domestic market and in a given country; this provided a degree of insulation against financial crisis in a country since when one country is affected it can offset the losses in a different one. The expansion into a foreign market results in increased production capacity which is inversely proportional to operational cost. In addition, the foreign market can be an excellent way for a firm, to compensate and counterbalance seasonal demand since when goods are not in high demand in one area the production could be intensified elsewhere. Internatialisation also creates ample oppotinity for expancsion since as the firm grown it will require mere space, employees and capital. One of the challneges that many firms are faced with toay is the fact that they do not have a means by which to dispose surplus production and they are force to either sell it at lower prices or in some cases dispose it (De Gorter, 2006). However with an international market there are numerous avenues through which this excess could be disposed as the firm only needs to use it to offset supply in a different country or region. In most case, advantage exporting tend to outweigh the disadvantage, nevertheless, the latter must be considered because they have significant effect on the overall success of the enterprise and if they are not identified and managed, they may have negative effects on the business (Oviatt & McDougall, 2005). Extra costs are one of the main challenges that firms seeking to enter the export market will be bound to face, while in the long run the operational cost will reduce assuming the endeavors is successful, internationalization require considerable expansion which inevitably comes at significant cost. In addition the logistics are more costly and complicated since there has to be an allocation of personnel and resources to be transported in the new marketed and this will often cut deep into the margins. Sometimes the products must be modified due to cultural or even physical differences in the different country, for example a firm exporting shoes from the UK to japan may want to consider the size of the shoes since the Asian nation typically has citizens with smaller sized feet than the European one. Furthermore, due to different legal requirement in respect to packaging and different standards, the exporter may be forced to carry out extensive modifications on the goods (Cho & Kang, 2001). Exporting also presents the challenge of financial risk since the international transactions tend to be more expensive than local ones as well as being more prone to interference and especially in the advent of cybercrime (Albrow & King, 1990). The process of exporting often require a lot of bureaucratic processes as the documents have to be verified and double checked by authorities in different countries who may not necessarily agree or share interests. In many cases firs are forced to acquire export import licenses which tend to reduce their competitiveness in the new market. Moreover, finding information on foreign markets is unequivocally more complicated than it is in the domestic one, the customer demands as well as market conditions may be radically different in two countries and coming up with comprehensive market data can be a challenge more so for a foreign firm. Information on business practices, cultural barriers and numerous other factors that weigh in the determination of a firm’s success in the long run may be hard to come by and misconceptions in these areas could be potentially disastrous for the firm’s market strategy. Assessment of Global Market Opportunity It stands to reason that before they make the leap to international ventures; M and W must conduct an internal assessment so as to determine how ready it is for internationalization. The evaluation is not unlike a SWOT analysis in which the firm’s strengths weakness opportunities and threats are examined internally by management. This is the stage in which the firm has to determine the extent to which its motivational resources and competencies can play a role in international business. Strengths Low production cost High quality products due to experience Experienced workforce and Production cost are very low It is a market leader shoe production Challenges It lacks knowhow and expertise in the expert market It does not have a distribution network It lacks knowledge on the target market It has to make huge investments Opportunities To venture into the global shoe market It can improve brand image Increase local competitiveness Increase diversity Manipulate and anticipate global fashion trends Threats The reduced growth and saturation at home expose it to a takeover Despite the high local profits, the international venture may been too expensive Logistical challenges in transport and personnel deployment and recruitment The competition in the international market may reduce profitability The second step is to assess the suitability of the firms products in foreign markets, at this stage a systematic assessment of the firm’s suitability should be carried out to determine if the firm’s products fit the demands of the international market. The apparel produced by M and W are so popular locally because they are both good quality and retail at a lower price. They are based on western fashion and this is currently the trending fashion in most of the countries they are targeting such as japan Italy and Turkey. Screen countries to identify target markets This is crucial as it will allow management to narrow down the list of target countries and come up with a least of manageable few nations. This way, the resources in the firm dedicate to the appraisal of various target markets will be efficiently used and the assessment of the task will be enhanced. In this study six countries are considered, they are Ireland, Japan, Turkey and Italy, Greece and Portugal. After screening a variety of economic social political and demographic factors, Greece and Portugal were eliminated. Greece was taken out of consideration owing to the fact that its youth population who M and W aim to target is mostly made up of unemployed given the 44.4% unemployment rate and one of the highest negative GDPs in Europe. M and W thus decided that the county was not a viable option in light of its retrospective and prevailing economic difficulties. The market size in Portugal was significantly high with around 1.2 youth population, despite the fact that its GDP was found to be higher than Turkey’s which was retained its levels of high negative GDP growth in the recent years as well as the high unemployment rate. In addition, Portugal has been highly dependent on funding from the EU and combined with numerous other factors, this disqualified Portugal as a viable target for providing M and W a customer base. On the other hand, Japan was selected because of a stable economy, a relatively low unemployment rate all which bespoke good prospects for the endeavor. The GDP is much higher than the other countries and the current generations of youths have displayed a propensity for experimenting with the western tastes as opposed to sticking to traditional and local fashion (Kawamura, 2006). Italy already enjoys good trade relations with Sri Lanka and this makes it potentially easy for business transactions since they would be building on an already existing relationship. Turkey, being a growing economy has recently made attempts to venture into the EU and it is currently working hard to improve its economy and labor market so as to gain admittance into the European Union (Ercan, 2007). In addition, it has a high population of youths who are growing up in an environment where secularism is taking over from religious policies. As a result, they are more likely to be willing to try out new fashions, more so those from the west. In the fourth stage, management is allowed to gain an understanding of the sum of potential sales they can expect from the different countries. Youths aged between 15 and 24 in Japan are around 12 million and the unemployment rate in Japan is lower than in all the other four countries at 8%. The aspirations and values of the youths are changing rapidly against their traditional culture and they tend to incline towards westernization. Admittedly the economy and unemployment situations in Ireland are far from comfortable; nonetheless research shows that they have one of the highest birth rates in Europe. In the long run this implies they will have a high population of youths and this can is ample justification for an M and W in the same neighborhood. Furthermore, the harsh economic times are encouraging people to buy cheap and disposable clothing. This presents M and W with an opportunity to capitalize on the willingness of the population to while for a slightly higher price they get relatively good quality clothes which is essentially what M and W have to offer. As aforementioned, Turkey has a favorable GDP and the economy will make it an suitable market, however there is bound to be very stiff competition since Turkey is one of the leading producers of apparel globally. Turkey being the 7th largest supplier of apparel in the world (Au & Wong, 2007), M and W must be prepared to face very stiff competition; however several of its strengths provide an opportunity to deal with this competition. Its prices are considerably low, it produces very high quality items, they can respond quickly to customer demands as well as a having a highly trained workforce. Using these strengths, M and W can cut a niche for itself and by competing with the established Turkish firms it will both increase in diversity and quality. Italy is a particularly attractive market because the youths tend to focus on high quality but fairly priced clothing (Tiggemann, Verri & Scaravaggi, 2005). The EU financial has had its toll in the country and as a result there is less disposable cash in the offing; therefore, youths have tended to buy carefully since they are now taking to consideration value for money. Given the way M and W works the economic and demographic situation makes Italy appear an ideal target since there is a demand for cheap but high quality apparel which is the main area of specialization for the M and W. In its excursion into the international market, the firm will have to identify suitable partners with whom it can collaborate, at this point the manager will use a “wish list” of the things he/she expects the ideal partners to possess. A solid and experience distribution and supply network, given that M and W does not have one. Partners must also have a good reputation in the international market as well as connections with firms with which M and W intends to do business. Distributer must have had experience in the apparel industry in two or more of the four countries selected. The marketing firms will also be required to have a great deal of familiarity with the markets in these countries more so in terms of culture and fashion trends are concerned. Marketer and distributers should be financially stable and capable of handling the high volumes of work form M and W so as to ensure maximum exposure and sustain the supply and marketing efforts. Any partners must at least share the standardization levels and ethical goals with M and W and if they do not they should be willing to adjust so that they represent the firm based on how it wishes to be perceived by clients. Estimated M&W Sales Volume by Target Market Year-1 Year-2 Year-3 Year-4 Year-5 Japan Target Customer Volume 124,000 133,920 144,634 156,204 168,701 Estimated Sales Per Year 7,440,000 8,035,200 7,231,680 9,372,257 10,122,038 Turkey Target Customer Volume 137,000 147,960 159,797 172,581 186,387 Estimated Sales Per year 8,220,000 8,877,600 9,587,808 10,354,833 11,183,219 Italy Target Customer Volume 19,000 20,520 22,162 23,935 25,849 Estimated Sales Per Year 1,140,000 1,231,200 1,329,696 1,436,100 1,550,940 Ireland Target Customer Volume 6,000 6,480 6,998 7,558 8,163 Estimated Sales Per Year 360,000 388,800 419,904 453,496 489,776 Assumptionn Expected sales per customer are $60.00 per year A Systematic Approach to Managing Export-Import Transactions Several documents are required for successfully carrying out import and export trade, and until they are successfully filled and submitted to the required parties, they the cargo cannot be discharged to its destination. While most of the documents used are handled by brokers, it is the onus of the M and W who are the importers to ensure that the various parties adhere to the firms as well as international trade laws. The firm can obtain the requisite information of documentation from the customers, foreign embassies or reference books such as the export shipping manual and air cargo tariff guide. These documents include; air waybill, which is the contract between the shipper and carrier, the bill of exchange, consular invoice certificate of landing inspection and landing certificate and the insurance certificate, the dock receipt destination control statement pro-forma invoice export packing list and manifest, these are the generic documents which are subject to change depending on the nature of investment and the specific country in which the exporter targets to do business. For instance the consular invoice is required by the Turkish and Japanese government and it must be obtained from them before one can import anything into the countries (Cherukonda, 2014). In addition some government requires that inspection certificates are issue for exported goods and this must be done by a third party. Payment Methods There are various methods of payment open to the company; the most viable ones in this case are cash in advance, open account and letter of credit. Cash in advance, is used when the exporter wants to reduce risk, this is because payment is received before the goods are transferred to the customer, and this would be advantageous for M and W because they would completely avoid credits risk. Letters of credit are among the securest payment methods in international trade and M and W would greatly benefit from using it as a term of payment, an LC is essentially a commitment by a bank on a buyers behalf that the exporters that a given amount will be paid to them if all the terms and conditions are met, this way the customer is guaranteed that they will receive the goods and the exporter is in no danger or not getting paid (Folsom, Gordon, Spanogle, Fitzgerald & Van Alstine, 2012). This suitable for M and Ws situation because as a new firm in the global market, it can be used in situations where a relationship or trust has not been established between the firm and its clients. There are different types of LCs; Irrevocable, revocable, confirmed or special, which can be transferred from one party to another. Open account is also a very advantageous means of payment but for the importer rather than the importer. An open account is a sale where goods are dispatched before payment is made, in international trade; the period takes 30 to 90 days, for the exporter, this is often a high risk method and M and W might find that many clients will want to use this method. Because of the intensity of the competition in the international market it is often easy for importers to press exporters into using this technique since they are aware that exporter’s reluctant to extend credit stand to lose out to those who are (Folsom, Gordon, Spanogle, Fitzgerald & Van Alstine, 2012). Given that M and W will be faced with such situations, they should take precautions one of which involves acquiring to seek extra protection using credit insurance. Conclusions and Recommendation Although it is evident that the firm has qualified to venture into the import export market it needs must take to account the various cultural, geographical and social demands of the target markets and design clothes that are specific for the target market. Clothes designed for the Turkish market for example the clothes must be adjusted for the relatively high temperatures experienced therein (Insel, 2003), furthermore, the Muslim majority means that M and W should ensure the clothes exported there are culturally acceptable (Kaplan & Okur, 2008). The pricing of the clothes must also be taken to account since the export markets are equal in respect to economic ability. For example, the economies of Italy and Japan are considerably better that those in Turkey and Ireland; therefore, the exporter should ensure that the prices are in line with the respective target countries. References Albrow, M., & King, E. (Eds.). 1990. Globalization, knowledge and society: readings from international sociology. London: Sage. Au, K. F., & Wong, M. C. 2007. Textile and clothing exports of developed & developing countries: An analysis under the restrictive trade regime. Journal of the Textile Institute, 98(5), 471-478. Cherukonda, N. 2014. Exporting Basics. Trafford. Trafford Publishing. Cho, J., & Kang, J. 2001. Benefits and challenges of global sourcing: perceptions of US apparel retail firms. International Marketing Review, 18(5), 542-561. De Gorter, H. 2006. Export subsidies: Agricultural policy reform and developing countries. 00 Trade, Doha, and Development, 109. De Grauwe, P., & Camerman, F. 2002. How big are the big multinational companies?. Tijdschrift voor economie en management, 47(3), 311-326. Ercan, H. 2007. Youth Employment in Turkey. ILO. Folsom, R. H., Gordon, M. W., Spanogle Jr, J. H., Fitzgerald, P. L., & Van Alstine, M. P. 2012. International Business Transactions: Trade and Economic Relations. American Casebook Gassmann, O., & Keupp, M. M. 2007. The competitive advantage of early and rapidly internationalising SMEs in the biotechnology industry: A knowledge-based view. Journal of World Business, 42(3), 350-366. Insel, A. 2003. The AKP and normalizing democracy in Turkey. The South Atlantic Quarterly, 102(2), 293-308. Javalgi, R. G., & Martin, C. L. 2007. Internationalization of services: identifying the building-blocks for future research. Journal of Services Marketing, 21(6), 391-397. Kaplan, S., & Okur, A. 2008. The meaning and importance of clothing comfort: A case study for Turkey. Journal of Sensory Studies, 23(5), 688-706. Kawamura, Y. 2006. Japanese teens as producers of street fashion. Current Sociology, 54(5), 784-801. Oviatt, B. M., & McDougall, P. P. 2005. Defining international entrepreneurship and modeling the speed of internationalization. Entrepreneurship theory and practice, 29(5), 537-554. Tiggemann, M., Verri, A., & Scaravaggi, S. 2005. Body dissatisfaction, disordered eating, fashion magazines, and clothes: A cross‐cultural comparison between Australian and Italian young women. International Journal of Psychology, 40(5), 293-302. Read More