EXPORTING ESSENTIALS: SELLING PRODUCTS AND SERVICES TO THE WORLD SUCCESSFULLY (2014)
Chapter 8. Methods of Exporting
Direct, Indirect, and Collaborative Sales Channels
[Be] prepared to change your strategy or combine several options as your business needs evolve. By opening your mind to the full range of possibilities, you broaden perceived opportunities, sharpen your strategic decisions, and enhance global performance.
—Pankaj Ghemawat, Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona, Spain1
There are several factors to consider when determining whether a direct, indirect, or collaborative sales strategy is best for you—the most important are the extent of your resources, the degree of control you wish to exercise over your export ventures, and other in-country issues. The following analysis will help you to make a decision that is tailored to your needs.
First, let me emphasize that timing is everything. Readiness to seize an opportunity is more important than having your whole strategy nailed down beforehand. If you get a promising inquiry for your export product, go for it. Don’t analyze it to death until after you’ve responded to the inquiry. If there’s one thing I’d like you to take away from reading this particular section and entire book, it’s the exporter’s habit of action: It’s better to do something—anything—that will put you in the export marketplace than to expend enormous amounts of time researching and debating options and wondering what other people would do if they were in your place. When an opportunity comes, you must be ready to operate via any sales channel, be it direct, indirect, or collaborative.
Methods of Exporting
Let’s look at the two primary methods of exporting: direct and indirect.
Direct exporting means you export directly to a customer interested in buying your product. You are responsible for handling the logistics of shipment and for collecting payment.
The advantages of this method are:
· Your potential profits are greater because you have eliminated intermediaries.
· You have a greater degree of control over all aspects of the transaction.
· You know who your customers are.
· Your customers know who you are. They feel more secure in doing business directly with you.
· Your business trips are much more efficient and effective because you meet directly with the customer responsible for selling your product.
· You know whom to contact if something isn’t working.
· The feedback you receive from your customers on your product and its performance in the marketplace gets to you faster and more directly.
· You get slightly better protection for your trademarks, patents, and copyrights.
· You present yourself as fully committed and engaged in the export process.
· You develop a better understanding of the marketplace.
· As your business develops in the foreign market, you have greater flexibility to improve or redirect your marketing efforts.
The disadvantages of direct exporting:
· It takes more time, energy, and money than you may be able to afford.
· It requires more people power to cultivate a customer base.
· Servicing the business will demand more responsibility from every level of your organization.
· You are held accountable for whatever happens. There is no buffer zone.
· You may not be able to respond to customer communications as quickly as a local agent can.
· You have to handle all the logistics of the transaction.
· If you have a technological product, you must be prepared to respond to technical questions and to provide on-site start-up training and ongoing support services.
Indirect exporting refers to selling your products to an intermediary, who in turn sells them either directly to customers or indirectly to importing wholesalers. The easiest method of indirect exporting is to sell to an intermediary in your own country. When selling by this method, you normally are not responsible for collecting payment from the overseas customer nor for coordinating the shipping logistics.
An export management company (EMC) is one such intermediary. A good one will, in all respects, act as a global extension of your own sales-and-service presence—more or less executing your intentions on behalf of the product. These companies offer a wide range of services but most specialize in exporting a specific range of products to a well-defined customer base in a particular country or region. For example, one of these companies might specialize in exporting agricultural products to restaurant customers in Europe. An EMC is highly market driven, representing your product along with other companies’ noncompeting products as part of its own import “product line” aimed at the customer base it has created. Generally, it buys the product from a manufacturer and marks up the price to cover its profit. This is called a buy-resell arrangement. Other common compensation structures include commission and buy-and-resell, start-up payment, project fee only, fee plus commission, and buy-and-resell. An EMC will carry out all aspects of the export transaction. Fees vary depending on the services rendered and risks accepted but can range anywhere from 1 to 7 percent of sales value.
Finding a good EMC is not that difficult. You can conduct a search through Google or Bing with the keywords “Export management company” to access a list of them. For each company, make note of how long it has been in business, the number of employees it has, the products in which it specializes, and the countries to which it exports. Start your own select list of companies that export products that are similar to yours but don’t act as competition to it. Then consult the following resources for more referrals to add to your list:
· A local trade association with an international focus: Attend a few meetings and talk some shop—somebody’s bound to know of an EMC or even run his own.
· The international division of your bank: The division is likely to have an inside line on which EMCs are reputable and doing well.
· A conference or trade show that specializes in a particular industry, such as agricultural, construction, or hunting and sporting goods: Attend a show or even consider exhibiting so you can access a list of exhibitors and buyers who attend. As you walk through the show, ask questions. Find out who is using whom for export movements.
· As always, your local Chamber of Commerce or small business assistance center: It generally knows who has been in the export trading business for a while. At the very least, it can point you to a good exporting resource.
· Freight forwarders: They might be able to provide you with the names of EMCs that use their service. Because you probably haven’t made a sale at this point, you probably don’t have a working relationship with a transportation company. Ask someone you know who uses a freight forwarder regularly.
You might also use the services of an export trading company. ETCs are virtually identical to EMCs, but they tend to function on a more demand-driven basis, according to which the demand of the market compels them to buy specific goods or commodities. They usually have long-standing customers for whom they source products on a regular basis. For example, they might get a request from a customer to find a supplier of canned corn who can provide twenty container-loads a month for a given number of months. The ETC will then seek out a reputable manufacturer that can handle the demand at an economical price and arrange for the transport of the goods to the customer. You can track down a good ETC using the same channels recommended above for finding an EMC.
Indirect exporting can also involve selling your products to an intermediary in the country where you wish to transact business, who in turn sells them directly to customers or other importing distributors (wholesalers). Under these circumstances, you will not know who your end consumers are. When selling by this method, you are normally responsible for collecting payment from the overseas customer and for coordinating the shipping logistics. In some instances, the overseas agent might request that it be allowed to handle the shipping, usually because it receives special transportation rates from carriers with whom it has done volume business for years. In this case, you will need to arrange for the cargo to be ready by the shipment date. You must still collect payment from the customer, but your actual involvement in the transaction is minimal. It is nearly as easy as a domestic sale.
The advantages of indirect exporting are:
· It’s an almost risk-free way to begin.
· It demands minimal involvement in the export process.
· It allows you to continue to concentrate on your domestic business.
· You can learn about export marketing as you go rather than needing to master it immediately.
· Depending on the type of intermediary with which you are dealing, you don’t have to concern yourself with shipment and other logistics.
· You can field-test your products for export potential.
· In some instances your local agent can field technical questions and provide necessary product support.
The disadvantages are:
· Your profits are lower.
· You lose control over your foreign sales.
· You very rarely know who your customers are and thus lose the opportunity to tailor your offerings to their evolving needs.
· You are a step removed from the actual transaction causing you to feel out of the loop.
· The intermediary might also be using your product to test the market for her own products that are similar to yours, including ones that are directly competing with it. They might be selling their products to the same customers instead of providing exclusive representation.
· Your long-term outlook and goals for your export program can change rapidly, and if you’ve put your product in someone else’s hands, it’s hard to redirect your efforts accordingly.
Questions to Use for Deciding on the Method of Exporting
Only you can determine which strategy suits your needs. Your choice will depend on your goals, your available resources, and the type of business you run. I do recommend that you choose the method that makes you most comfortable and lets you focus on your own core competencies or business priorities, so that you aren’t wasting your energy worrying that something isn’t working. At the same time, though, I think I’ve made my bias in favor of direct exporting abundantly clear—it’s the only way to maximize control, profits, and market presence. I urge you to move in that direction as soon as you feel able.
Tip If at all possible, go the direct marketing route. It’s the best way to learn, grow your presence in the market, and maximize profits.
Let’s start with a list of questions to consider before you decide which method of exporting will be best for you:
1. How big is your company? A larger company will have more people power to dedicate to the task of achieving direct sales than a small firm or a solo operator, who may find the indirect route to be more readily within his reach.
2. How big do you (or your company or division) want to get? If you want to be the size of Siemens International someday, tackling direct sales now will help you build the foundation for that blockbuster future. But even if you prefer to continue doing business as a one-person operation, you’ll want to establish some direct channels as your business develops.
3. How much time and money do you have? If you have deep pockets and all the time in the world, then you have nothing to lose by selling direct. If time is of the essence because you don’t have unlimited funds, indirect channels are more likely to bring you a fast sale.
4. Will your product require extensive on-site training and support? Look at Apple, one of the world’s largest producers of smart phones. It wants to maintain a reputation not only for making high-quality, expertly designed products but also for improving its customers’ lives. The only way to express this commitment to them is by staying right in their faces all over the world and constantly improving upon and updating existing products. Would Apple rely on local agents or set up a joint venture to cultivate the high degree of customer satisfaction it’s after? Unlikely. The more complex and technical your product, the greater the importance of on-site customer service. In Apple’s case, this involves retail stores featuring only its own products, staffed by highly trained company employees. But if you’re exporting a product that comes without instructions, you’ll do your customers no disservice by going indirect.
5. Do you feel like you know what you’re doing and where you want to go? Do you have a strong heart, mind, and stomach? If you can honestly answer yes to these questions, then go direct. If not, start off indirect and slowly move into developing collaborative relationships.
Caution Early in my career, I worked with an export trading company that purchased goods from my company so it could export them to Japan. I, in turn, was acting as an export trading company for the manufacturer, who thus had two intermediaries between itself and its foreign customers. Imagine the high retail price the consumer paid once the product landed in his country! If you are two or three times removed from a direct relationship with your customers, think twice—or even thrice!—about how you might get to them directly. After all, the name of the export game is to generate your own network of customer relationships. The sooner you begin building this foundation, the sooner you will have a flourishing export business.
In-Country Factors that Can Affect Your Distribution Choice
To ensure you make an intelligent decision regarding whether to export directly or indirectly, confront the following issues. Going in with your eyes wide open will help enable success in an overseas market.
· Your potential costs and profit margins can help you determine whether it is more profitable to sell directly or indirectly. In some emerging countries, competition in large cities is so fierce that costs are low and margins thin. On the other hand, particularly in rural areas, the lack of capital can cause just a handful of big, established companies to grow significantly, often gaining monopolies. Hence, the large companies in these areas get away with charging higher prices and achieving wider profit margins. As a potential exporter, determining the competition you will face will help you figure out whether selling directly will truly be profitable, or if it makes more sense to do it indirectly.
· The competition you face in your export area can affect your choice of entry. Is the market you are about to enter saturated with lots of competitors? Will you end up a “me too”-type product with no key differentiator to spur sales? Or do you have a value proposition (better pricing, design, or quality, for instance) that will disrupt the market and allow you to become a market leader?
· The length of a sales channel can affect distribution choice. In Japan, for example, the traditional distribution system adds many layers to get a product transported to a consumer. In this country, perhaps it would be better to work directly with a big retailer than to go through an importer that might sell to three other intermediary companies to get the product in the hands of the end user.
· The reach or availability applied to your product line can affect whether it is profitable to bring it into a new market. Is there an existing distribution system for your type of product in the country you are exporting to or must it be established? Does the government have any restrictions to direct sales on your product line, sales to intermediaries, or limitations on licensing requirements? The more established the system for bringing your product into the country and the fewer restrictions, the less time and labor will be required to export the product.
· The channel of distribution affects how a product enters a market. If there is no distribution system to be found in an export country or it is blocked, it will be impossible to enter the market. Or perhaps your product can only be sold door to door or through street stands and the country you wish to enter does not support that method of selling.
· The product inventory needs to be handled, paid for, and stocked. Nothing is worse than having lots of interest and demand for your product, only to find out later that it is out of stock at the factory. Get a feel for power, control, and competition in a market. If you see or hear of any distribution company dominating a market (distributing to many middlemen across the country), it’s a sign that it will be a tough market to crack unless you get that company on your side. Go elsewhere.
· Barriers to enter a country, whether real or imagined, can influence a market-entry strategy. Certain economic or political trade controls and restrictions can cause impediments to an import. Two of the key controls are tariff and nontariff barriers set up to reduce imports that might compete with locally produced goods. It’s a form of protectionism. Others include: embargoes, sanctions, export license requirements, entry time restrictions, restrictive government policies, high entry and exit costs, and weak infrastructure.
· Distance can matter. According to Pankaj Ghemawat, writing in the Harvard Business Review, “By distance, I don’t mean only geographic separation, though that is important. Distance also has cultural, administrative or political, and economic dimensions that can make foreign markets considerably more or less attractive.”2 Make sure you evaluate the many dimensions of distance and how they can impact opportunities in a foreign market, allowing you to decide whether it will be profitable to export directly to a country.
The bottom line is: you need to spend as much time as you need surveying the market before you decide on your method of exporting.
Other Methods to Entering an Export Market: Collaborative Sales
Now that we’ve looked at direct or indirect exporting, let’s examine other means for entering an export market: global strategic initiatives, or what I refer to as collaborative sales. Each of these new styles of selling enables you to enter an overseas market faster to expand your existing sales or operations into a foreign country. And none of them are mutually exclusive. Rather, these options should be considered along with, or in addition to, direct and indirect exporting. You can, for example, export if a market permits it and has a licensing arrangement in place or form a joint venture. Once you form a new relationship, you reduce domestic dependence and increase export revenues and profits worldwide. I’ll start with the most widely used initiative first and then drill down as best I can from there.
Tip All global strategic initiatives involve an attempt to achieve outcomes that are acceptable to all parties involved. Keep it clear in mind what you are seeking to gain from the initiative, select the right type of relationship, and choose a partner whose contribution will enable you to achieve those goals. Most important, seek international legal (for agreement help) and financial advice. Consult with your export dream team before taking formal action.
If you’ve gotten about as far as you can on your own in charting your export strategy, it’s a good time to consider partnering with another company that is located in a foreign country where you are already doing business or would like to be doing business. First, it’s important to understand exactly how a partnership works and what it can and cannot do for you.
A partnership is a commitment (voluntarily made) by parties to work collaboratively rather than competitively to achieve mutually desired results in a complex endeavor. A partnership does not necessarily involve a formal contract. It can be formed with a handshake and be based purely on trust. “You do this. We’ll do that.” Done.
Partnerships can be project based, narrowly defined, or spelled out with a definite time frame. It depends on what needs to be accomplished. If the arrangement is relatively long in duration, say five to ten years, some refer to that as “strategic partnering.”
In a partnership, each side knows and commits to the goals of the project and to those of one another, but independence is generally retained. In other words, each party may individually suffer or gain from the relationship.
The biggest downside or disadvantage to a partnership is conflict resolution or the question of who takes responsibility should a crisis arise. The biggest advantage is you can get a partnership going rather fast by minimizing risks while maximizing your leverage in the marketplace.
Global Strategic Alliance
There is no precise definition of a global strategic alliance (GSA). There have been many different versions put forward by thought leaders with the focus on what it achieves. In my experience, a GSA is usually established when a company wishes to edge into a related business or new geographic market—particularly one in a country where the government prohibits imports in order to protect domestic industry. Strategic alliances can come in all shapes and sizes—from an informal business relationship based on a simple contract to a licensing or joint-venture agreement that spells out what needs to be done. Typically, these alliances are formed between two or more corporations in the same or complementary businesses, each based in its home country, for a specified period of time. They are formed between a group of companies that would benefit equally from the partnership. The arrangement can create a win-win environment—or a big-time lose—for all parties. The common goal, however, is for all parties to achieve their objectives more efficiently, at a lower cost, and with less risk than had they acted alone.
The cost of a GSA is usually shared equitably among the corporations involved, and the alliance is generally the least expensive way for all concerned to form a partnership. An acquisition, on the other hand, offers a faster start in exploiting an overseas market but tends to be a much more expensive undertaking for the acquiring company—and one that is likely to be well out of the reach of a solo operator. While a global strategic alliance works well for core business expansion and utilizing existing geographic markets, an acquisition works better for immediate penetration of new geographic territories. Hence, an alliance provides a good solution to export marketers that lack the required distribution to get into overseas markets.
A GSA is also much more flexible than an acquisition with respect to the degree of control enjoyed by each party. Depending on your resources and the type of relationship you form, you can structure an equity or nonequity alliance. Within an equity alliance, each party can hold a minority, majority, or equal stake. In a nonequity alliance, the host-country partner has a greater stake in the deal and thus holds a majority interest.
Yet the right choice of a partner is arguably more important than how the alliance is structured. When it gets down to business, you want a partner who will have an active contribution to make and who is flexible and able to resolve conflicts as the alliance evolves. Even more important, however, is that you have a clear idea of what you are seeking to gain from the alliance and that you have chosen of a partner whose contribution will enable you to achieve those goals.
What do alliances look like? Starbucks, once a small business, opened its first store in Seattle in 1971. Since then, it has created more than seventeen thousand stores in more than fifty-five countries. It was strategic partnerships that enabled it to advance a lot of its growth. “Starbucks partnered with Barnes and Noble bookstores in 1993 to provide in-house coffee shops, benefiting both retailers.”3 A couple of years later, Starbucks partnered with Pepsico to bottle, distribute, and sell the coffee-based drink Frappacino.
In 2010, Intuit, which serves millions of small businesses around the world with its financial software, and Nokia (soon to be a part of Microsoft), which sells hundreds of millions of devices each year, announced an alliance to develop and deliver an innovative new mobile and web-based marketing service. This service has catered to small businesses around the world, bringing their respective expertise to bear for a wider audience than had they not partnered up.4
Forming an Alliance: Where to Look
You might be surprised to find that you can build mutually advantageous alliances with some unlikely allies. Many companies make conscious decisions to form partnerships with complementary or even competing companies that can offer them a market share in countries they have been struggling to break into for years. South Korean technology company Samsung and American-based Best Buy, for example, have entered into a broad global strategic alliance that involves setting up 1,400 ministores selling Samsung products in Best Buy and Best Buy Mobile locations across the United States. The locations feature Samsung’s laptops, connected cameras, and accessories, giving Samsung a presence in Best Buy locations, previously held only by Apple. By using their complementary strengths and expertise, these companies ensure their mutual survival and foster continued growth in their respective industries.
Even if you’re not an international technology company or one of the world’s leading retailers, you can follow the example set by Samsung and Best Buy and see which of your contacts, colleagues, peers, or competitors in the international market might have compatible needs and objectives. You’ll probably feel most secure with a company that you already have a reasonably long-standing business relationship with, especially if you have achieved substantial sales growth together. It could be your distributor in Athens, a manufacturer that took on distribution of your product in Vietnam, or that trading company in Japan that can’t keep up with consumer demand. Any one of your contacts with a problem you can solve or a need you can fulfill might serve as a potential partner.
Advantages of a GSA
There are many specific advantages of setting up a GSA. It will allow you to:
· Get instant market access, or at least speed your entry into a new market
· Exploit new opportunities to strengthen your position in a market where you already have a foothold
· Increase sales
· Gain new skills and technology
· Develop new products at a profit
· Share fixed costs and resources
· Enlarge your distribution channels
· Broaden your business and political contact base
· Gain greater knowledge of international customs and culture
· Enhance your image in the world marketplace
Disadvantages of the GSA
There are also some inevitable trade-offs of a GSA to consider:
· Weaker management involvement or less equity stake in the larger company
· The dreaded market insulation—an inability to see the realities of the market—due to the local partner’s presence
· Less efficient communication within the company
· Poor resource allocation
· Difficult to keep objectives on target over time
· Potential loss of control over such important issues as product quality, operating costs, employees, and customer service.
For example, if you enter into a GSA with even a little less equity stake—say, 49 percent—you lose managerial control. You may end up with that equity percentage because the host government only allows up to 49 percent for an outsider, because you could only negotiate that amount, or because you were willing to accept a minority stake in exchange for gains (e.g., responsibility for R&D) that you thought important during the negotiation phase. Whatever the reason, what are you going to do if profits plummet, product quality deteriorates, or customers are dissatisfied? You do not have enough interest in the venture to take action. Your 49 percent can swiftly depreciate when it comes to exercising any control. In any partnership, the majority-interest holder tends to dominate, putting its needs first and its partner’s last. The ideal situation is a fifty-fifty partnership, which allows both parties to share the decision making. If you do settle for a minority interest, make sure you maintain enough control to accomplish your objectives in the target market.
Caution There are always exceptions to the fifty-fifty partnership being the ideal scenario. In the United States, for example, there can be advantages to a business having 51 percent ownership by women or minorities. This can be used to gain contracts or preferential treatment in the marketplace. The Small Business Administration, for example, offers many special programs and services to help women business owners who have 51 percent or more stock ownership succeed.5
It’s also critical to explore all the legal and financial implications before entering into an alliance with an overseas company. Seek legal counsel from those who are well experienced in international trade, acquisitions, joint ventures and divestitures and ask them to go over the best- and worst-case scenarios with you. You should hire counsel both in your own country and in the host country for maximum protection of your rights. You are not only seeking to ensure the fundamental integrity of the partnership but also to work out crucial entitlements and obligations, such as copyrights, trademarks, patents, taxes, antitrust, and exchange controls.
You will also need to keep informed about the host country’s political and economic stability. Get in touch with the local economic development offices within that country. They should be able to assess the country’s future investment climate and to provide you with past, present, and future growth trends. This will give you a better idea of what kind of risks you will incur, if any, if you go ahead with the alliance.
As an exporter, it’s only a matter of time before you consider a GSA as a logical step in expanding your business. It’s not enough to expand domestically; that is not an exporter’s core business. Your core business is the world. Up until now, you may have single-handedly cemented strategic alliances with a network of agents and distributors to maintain access to markets worldwide, but you are currently finding that this is no longer enough to remain competitive. You may feel that you’ve gotten about as far as you can on your own and want to explore alternatives for kicking your export business into high gear. You’re prepared to exchange a limited measure of creative control if it will get you established in highly lucrative new business territories.
So you’ve decided to create a GSA. Now what?
Negotiating a Deal for the GSA
In negotiating a deal for a GSA, your main concern should be that you and the other party share the same goals and see the deal-making process in the same light.
During the initial phase of negotiations, rather than discussing an agreement point by point, you might be better off outlining in draft form how you would like the joint venture to work. This keeps the draft-in-progress simple and provides a tangible way for the other side to see your ideas. Then expand on each point in your outline and make sure that each party understands the objectives and implications. You can accomplish this by presenting each issue in draft form and having a representative from each side write a synopsis of her understanding of it. If there are any discrepancies or disagreements, you can clear them up at this point, prior to putting together a final draft agreement.
After you submit your draft, it’s up to the other party to make a counterproposal that sets out its own conceptual framework for a GSA. This method allows for shared control of negotiations and gives the parties an opportunity to offer alternate ways of setting up the venture. With each proposal and counterproposal, the parties will narrow the gap and come closer to a viable agreement.
Retaining Autonomy and Independence
A good GSA allows for both parties to retain a fair degree of autonomy and independence with minimal restrictions on complementary business opportunities. Ideally, the two parties will form a whole that equals more than the sum of its parts. So, it’s important to spend a significant amount of time getting to know the party with which you are considering joining forces.
Problems usually occur when there is poor communication between parties or when there is a staggering difference in strengths and management philosophies. Without a clear-cut mission statement that clarifies goals or objectives from the beginning, things can take a disastrous turn when business gets well underway. For example, it might initially seem that an alliance between a company that has a stronger management team and one with a weaker one offers enormous opportunities for the weaker partner, but in the long run it turns out that the weaker party becomes a drain on resources, forcing the stronger management team to carry the entire weight of the alliance. In the end, the strong partner buys out the weaker one. It’s a no-win situation.
To have a reasonable chance of success, the merging parties should both have three vital elements: (1) good communication skills, (2) matching corporate cultures, and (3) matching corporate philosophies. If you do not see these elements operating during the time of negotiations, you never will. Cut your losses and look for a more compatible partner.
Considering the GSA: What Can We Learn?
Before you decide to enter into a GSA, make an excruciatingly honest appraisal of your own goals, strengths, and limitations. Determining at the outset if you’re really ready to form an alliance or not and what you can realistically expect to accomplish will save you losses down the road. Appraise your potential partner just as carefully. And remember, no two deals are alike; the final structure of any alliance depends on what each party has to offer the other and what each hopes to gain.
Expect cultural factors to complicate the smooth running of business. For instance, if your partner-to-be behaves in a way you experience as flat out weird in that it goes against the grain of your own culture, factor that in and consider it very carefully while you are reviewing the upside and downside of the deal. This odd behavior could mean trouble waiting to happen. Picture yourself living with the alliance you’ve made for a long, long time. Make sure you can live with your partner before you sign on the dotted line.
As a longtime independent businessperson, you might approach such an arrangement with ambivalent feelings and dread the potential headaches of working out all the details. But if the arrangement is structured properly, thoughtfully, and equitably, a GSA can pay off handsomely for both parties in terms of greater growth, higher profits, and excellence in export business. I recommend that you review and consider all the options I have talked about and then harness your newfound skills and direct your efforts exactly as you see fit.
Just as GSAs allow companies with complementary skills to benefit from one another’s strengths, a joint venture can do the same. When two companies invest money into forming a third jointly owned enterprise, that new enterprise is called a joint venture. For a joint venture to work, there should be a nice give-and-take, a codependency, or a shared management arrangement. The joint venture can receive market knowledge (customer and distribution, for example), assets, and financing from both parent companies without altering the condition of the parent company. The new venture is an ongoing enterprise whereby the parent companies—“parents”—own the joint venture and share in the profits (or losses) it generates.
A joint venture spells out a defined project that each of the respective parties involved agrees to and carries out. Again, I repeat: Not only do the parties share in the venture’s profits, but they also share in the losses. Each parent company has an equal voice in controlling the project, which means there is more than one parent. Oftentimes they each can be powerful and visible.6
Tip Oracle founder Larry Ellison recently purchased the Hawaiian island of Lanai. He was cited in an interview in the Wall Street Journal, saying, “We have the right climate and soil to grow the very best gourmet mangos and pineapples on the planet and export them year-round to Asia and North America. We can grow and export flowers and make perfume the old-fashioned way—directly from the flowers, like they do in Grasse, France. We have an ideal location for a couple of organic wineries on the island.”7 The big question is this: Should Ellison do this on his own or elect to go the sales collaboration route and negotiate with Dole on the pineapple side and Chanel or Estée Lauder on the perfume side? If Ellison is eager to get to market and doesn’t mind giving up a piece of the action, collaborating with other companies who have been there, done that will speed up the process. If not, he can launch on his own, take as much time as he wants and reap 100 percent of the rewards. Knowing Ellison, he will go it alone. It’ll be fun to watch his progress.
One illustration of how a joint venture might work would be a situation in which you currently export a ton of stuff to a particular overseas market. The importer asks you if he can make the product in his market and reexport to other contiguous markets. That’s how the seed is planted. You form a joint venture, and that newly formed enterprise spells out intent, and it starts to service customers in other parts of the world. You continue exporting to the importer, but he has a new obligation or role and vested interest, as you do, in the success of the newly formed organization.
Tip Two classic articles on the subject of joint ventures worth a read are: “How to Make a Global Joint Venture Work,” by J. Peter Killing (Harvard Business Review, May 1982, http://hbr.org/1982/05/how-to-make-a-global-joint-venture-work/ar/1), and “Launching a World-Class Joint Venture” by James Bamford, David Ernst, and David G. Fubini (Harvard Business Review, February 2004, http://hbr.org/2004/02/launching-a-world-class-joint-venture/ar/1).
International franchising is a strategic way to reduce dependence on domestic demand and grow new future revenue and profit centers worldwide. Extending a brand globally through franchising involves a lower risk than doing it through more hands-on exporting, requires minimal investment, and offers a huge upside potential on scaling capabilities. Let’s look at what international franchising is, its benefits, examples of companies that have successfully franchised internationally, how to get started in franchising, and where to look for additional help.
What Is International Franchising?
Franchising is a pooling of resources and capabilities to accomplish a strategic marketing, distribution, and sales goal for a company. It typically involves a franchisor—potentially you—granting an individual or company (the franchisee) the right to run a business or sell a product or service under its successful business model and giving the other party the right to be identified by its trademark or brand.
The franchisor charges an initial up-front fee to the franchisee, payable upon the signing of the franchise agreement. Other fees, such as marketing, advertising, or royalties, may be applicable and are largely based on how the contract is negotiated and set up. Advertising, training, and other support services are made available by the franchisor.
Benefits of International Franchising
In addition to entering new overseas markets with additional customers, international franchising can also offer franchisors the opportunity to use what are called foreign-master owners, rather than franchisees. These individuals are typically natives of the country and understand the political and bureaucratic problems in their country far better than any outsider. Foreign master franchise owners pay a hefty up-front fee to acquire a designated geographic area or, in some instances, an entire country, where they operate as a mini- or subfranchise company, selling franchises, collecting royalties, training the owners, and overseeing all other related matters. They can even open units by themselves. In general, a specified number of franchises must be outlined to gain the exclusive right to use the business model in an entire country.
Examples of Successful International Franchising
Domino’s Pizza International began serving consumers outside the United States in 1983 when the first store opened in Winnipeg, Canada. Since that time, Domino’s Pizza International has extended its global reach to include more than fifty-five international markets, serviced by more than 3,230 stores.
The company claims, “The success of Domino’s Pizza outside the U.S. is due to the collaborative relationship between our exceptional franchisees and the corporate team that supports them. Together, we continuously strive to support a policy of ‘One Brand–One System’ in order to be the best pizza delivery company in the world.”8
Another fast-food giant, McDonald’s, does business in 118 countries around the world. For those countries where McDonald’s does not already have a presence (Afghanistan, for example), the company does not have any firm plans to open locations. The company says it is instead focusing on the markets where it already has a presence.9
Many of these companies weren’t huge when they started their overseas operations, yet little acorns grow into mighty oaks. A friend and colleague of mine, Shelly Sun, CEO and cofounder of Illinois-based BrightStar, has visions of having her company follow such a path: The company was established in 2002 as a full-service health care staffing agency serving corporate and private clients. Sun has big plans to use the franchise model to take her company international. Currently, her firm generates $250 million annually and has more than 250 locations throughout the United States and Canada, and she has plans to expand it further within Canada as well as to the United Kingdom, Australia, and China. She wants to first make sure she has a solid base of franchisees and an equally solid basis of royalties coming in before going global. “If we had expanded internationally prior to 2012, we would not have had the resources to invest in the high level of support, which we believe is indispensable in a successful international expansion strategy,” says Sun.10
Getting Started in International Franchising
The best place to find out how to get started is the International Franchise Association (http://www.franchise.org). It can help you with the first steps to take and tell you what opportunities are available in the global marketplace. As in any new international expansion, there will be challenges: cultural differences, legal considerations, contract negotiations, and intellectual property issues, to name just a few. For a snapshot on what is involved, see the article “Dealing with the Complexities of International Expansion.”11
Where to Look for Franchising Help
Here are a couple of resources that will guide you in the international franchising area:
1. International Franchise Association: (http://www.franchise.org/). This site is considered the go-to source on anything to do with franchising—from country profiles to international franchising articles and information on international franchising laws.
2. Franchising World: (http://www.franchise.org/Franchise-Industry-Fran-World.aspx). The International Franchising Association site offers digital versions of current Franchising World issues and archives of past articles.
3. DLA Piper’s Francast Newsletter: (http://www.dlapiper.com/us/publications/list.aspx?Title=francast). The Francast Newsletter is put out by DLA Piper. DLA Piper is considered the number one global law firm in the area of franchise law by Who’s Who Legal and is ranked the top practice in the United States by the respected research firm Chambers & Partners.
4. Grow Smart, Risk Less: A Low-Capital Path to Multiplying Your Business Through Franchising: Written by Shelly Sun, this book provides a road map to guide you in franchising your business.
5. International Franchising: A Practitioner’s Guide: Written by Marco Hero, this book is a practical guide for all those involved in planning and operating an international franchise program, describing a range of topics from in-house counsel, to managing directors, to those in private practice.
Establishing a Foreign Office or Acquiring an Existing Company
When companies want to quickly gain access to markets or a new area of expertise (technology, for example), they usually form a partnership or GSA. They can also open a foreign office or acquire a smaller company with those assets in the targeted market.
To maintain better control of your exports, you can establish a foreign branch office, subsidiary, or joint venture, in which you make the decisions, and staff it with local people, who receive the imported goods (your exports) and see that they are properly distributed to the intended customers and serviced thereafter.
The advantages of this type of arrangement is that the branch office can serve both as the initial link in the marketing channel in the foreign market and can facilitate customer loyalty for the brand. The biggest disadvantage is that you have higher setup costs and the potential for higher credit risks at the beginning stages of operation.
Acquiring a smaller company, on the other hand, offers a faster start in exploiting an overseas market and might avoid getting a trade restriction (which blocks an export or makes it cost prohibitive to sell a product at a profit) but tends to be a much-more-expensive undertaking for the acquiring company—one that is likely to be well out of the reach of a smaller enterprise.
Due to uncontrollable economic factors, many companies can be forced into establishing a foreign branch office if they want to maintain a market presence. This often happens when companies are doing well with their exports in a foreign market, only to discover later on that the government has raised the tariff on their particular commodity from 20 percent to 70 percent. As a result, they must decide to either stay in the market, take the hit, and hope for the best—thereby remaining competitive—or beat the system by acquiring a company in the foreign market that can make and distribute the product, in which case they will enjoy a definite cost advantage by eliminating the tariff. Obviously a lot depends on competition (if you are the only one in a market, you might be able to sustain the tariff increase), customer demand, funding, human resource capability, and long-term outlook.
Whatever route you take, keeping track of regulations that constantly change, not to mention having the experience needed to run an operation and distribute products through the distribution chain, can be complicated. Before you consider this option, check with your international attorney and tax accountant. Make sure the opportunity you see or anticipate justifies the investment.
With ever-changing compliance issues and new country alerts appearing frequently, you will need to be kept informed of issues that can impact your overseas operations. Will your office staff handle this or will you need to appoint an outside person to manage the foreign operation? This is sometimes necessary because seemingly routine tasks, such as issuing payroll or taking care of back-office mail and supplies, can absorb huge amounts of time, particularly when dealing with different time zones, multiple languages, and a wide variety of service providers.
Take into consideration these six points before establishing an office overseas:
1. Who are your core customers?
2. Where is your best talent pool located?
3. What is the legal structure and regulatory climate of the other country like?
4. What are the preliminary tax consequences?
5. How will cultural differences impact your enterprise?
6. Do you speak the language?
Where laws prohibit the establishment of a foreign branch office, subsidiary, or joint venture, licensing can prove useful to an exporter. Licensing is different from obtaining an export license, which is covered in Chapter 13.
Licensing is a contractual arrangement where the firm—the licensor—offers some proprietary assets (a trademark, a patent, marketing know-how, technology, or an established production process, for example) to a foreign company—the licensee—in exchange for royalty fees or other kinds of payments. The licensing agreement can be long term or on a per-project basis.
Companies like HP12 and Oracle13 license some of their software technology to companies in other parts of the world to jointly create better products, speed up time-to-market, and generate lucrative royalties fees. To allow customers to legally use its images for their projects, Getty Images licenses its stock photos, illustrations, and archival images to individuals and companies worldwide.14
Royalty fees for licensing can range anywhere from one-eighth of 1 percent of the gross-sales revenue stream to 15 percent or greater. Before you sign on the dotted line, consider these factors: you must account for currency conversion, how royalties will be paid, geographic jurisdiction, what taxes might be applied, and how progress will be monitored and audited.
Licensing can be very beneficial to small companies that lack the resources to invest in foreign facilities. Compared to exporting, licensing can also offer an entry mode that requires a low commitment of capital and allows you to navigate around import barriers while still providing you with access to markets quickly that might otherwise be closed to imports.
As in all modes of entry into the market, there can be risks with licensing. The biggest one I see is—as the licensor—is serving as a feeder to a potential future competitor. Once an agreement expires, the licensee can run with your idea. That brings us to—once again—the ever-important issue of consulting with your international attorney about how to protect yourself against the risks of licensing arrangements. When evaluating prospective licensees, review the list of characteristics to look for in distributors and the list of questions to ask them provided in Chapter 7.
When all is said and done, the best strategy for export market expansion is one that makes you feel like you have the whole world in your hands. Although most companies begin their foray into foreign markets through exporting, the best long-term global-market entry strategy is a diverse one—employing direct, indirect, and collaborative initiatives—to ensure you don’t rely on one single channel for export growth. The collaborative initiatives we’ve looked at in this chapter are options to be considered along with, or in addition to, direct and indirect exporting.
Once you’ve decided what type of exporting method you are going to use, you must figure out how to put the deal together and make the export sale happen. Next, I’ll show you how to choose safe, prompt, and cost-effective transport; arrive at an appropriate price-per-product unit; and work with a freight forwarder to prepare your final quotation. Read through these next two chapters carefully and refer back to them often. You want to be on top of all the information you’ll need at each stage of the process.
1. “Managing Differences: The Central Challenge of Global Strategy,” Pankaj Ghemawat, Harvard Business Review, March 2007, http://hbr.org/2007/03/managing-differences-the-central-challenge-of-global-strategy/ar/1.
2. “Distance Still Matters: The Hard Reality of Global Expansion,” Pankaj Ghemawat, Harvard Business Review, September 2001, http://hbr.org/2001/09/distance-still-matters-the-hard-reality-of-global-expansion/ar/1.
3. “Examples of Successful Strategic Alliances,” Je’ Czaja, Chron, accessed October 27, 2013, http://smallbusiness.chron.com/examples-successful-strategic-alliances-13859.html.
4. “Nokia and Intuit Form Global Alliance to Create Mobile Marketing Services to Small Businesses,” Intuit: Press Releases, September 15, 2010,http://about.intuit.com/about_intuit/press_room/press_release/articles/2010/NokiaAndIntuitFormGlobalAlliance.html.
5. “Guide to Size Standards,” SBA.gov, accessed October 27, 2013, http://www.sba.gov/content/guide-size-standards.
6. See “How to Make a Global Joint Venture Work,” J. Peter Killing, Harvard Business Review, May 1982, http://hbr.org/1982/05/how-to-make-a-global-joint-venture-work/ar/4.
7. “Larry Ellison’s Fantasy Island,” Julian Guthrie, Wall Street Journal, June 13, 2013, http://online.wsj.com/article/SB10001424127887324798904578529682230185530.html.
8. “Dominos Around the World: International Franchising with Dominos Pizza,” Domino’s Biz, accessed October 27, 2013, http://www.dominosbiz.com/Biz-Public-EN/Site+Content/Secondary/International/International+Franchising/.
9. “International Franchising,” the About McDonalds Web site, accessed October 27, 2013, http://www.aboutmcdonalds.com/mcd/franchising/international_franchising.html.
10. Shelly Sun, CEO and co-founder, BrightStar, email exchange October 8, 2013.
11. “Dealing with the Complexities of International Expansion,” Bachir Mihoubi, International Franchising Association, published in Franchising World, March 2011, http://www.franchise.org/Franchise-Industry-News-Detail.aspx?id=53325.
12. “Technology Transfer,” HP, accessed October 27, 2013, http://www.hp.com/hpinfo/abouthp/iplicensing/technology/.
13. “Global Pricing and Licensing,” accessed October 30, 2013, http://www.oracle.com/us/corporate/pricing/index.html
14. “License Agreements,” gettyimages, accessed October 27, 2013, http://www.gettyimages.com/Corporate/LicenseAgreements.aspx.