Professional Documents
Culture Documents
Costing Guidelines
Introduction to the formal costing exercise
A costing sheet enables an exporter to:
• Check that every expense has been covered in arriving at the export price.
(Please note that the costing sheet is a guide only. We cannot be held responsible
should you neglect to include a cost that is important to your export price. For
this reason, we recommend that you sit down with your accountant or with a
business partner and carefully consider all the costs that may impact upon your
export price!)
• Provide a detailed record of the terms that have been quoted to the foreign
buyer.
This costing sheet has two sections:
• The first section - outlined below - discusses all of the items included in
the export costing sheet (it is essential an instruction manual for completing the
costing sheet)
• The second part is the sheet itself
- click here to access the costing sheet
Guidelines for completing the costing sheet
1. Determine your product cost
The starting point in your export costing exercise is to determine the cost of
producing the product you intend exporting. To this end, there are two types of
costs you need to calculate; the first is your fixed cost, which includes costs
that you would have to pay whether you produced any products or not such as the
rent for your factory (these costs stay the same irrespective of how many items
you produce for export), and the second is your variable cost, which includes
those costs directly associated with producing the goods and which will vary
depending on the number of items you produce. To learn more about fixed and
variable costs, click here. Fixed costs include all factory overhead such as rent,
rates and taxes, lights and water, etc.; the cost of senior management which have
to be paid irrespective of how many goods are produced; administrative costs such
as insurance; selling costs and advertising costs; etc. Variable costs include the
cost of materials, the labour involved in the manufacturing process, etc.
2. Include all product adaptation costs
If you will be using your domestic cost calculations as a basis for this export
costing exercise, you should then also include any extra costs associated with
making any changes or adaptations to the product in question. However, if you
start a completely new costing exercise specifically for your export production,
then you will not have to worry about these costs as they will already be included
in your production costs. See also product adaptation.
3. Include all individual and sales packaging and labelling changes to the product
It may be necessary for you to make changes to the unit (or individual) packaging
of your product (for example, your overseas customer may want glass packaging
instead of plastic packaging for your medical preparations, and/or the labelling
of each unit may also have to be different to accommodate language and regulatory
requirements).
Besides for the individual packaging, you may also have to include the cost of
changing the sales packs that you use for your product. Your sales packs include
those boxes in which you pack 10 or 20 or more units and which are used for
display in stores (of course, not all products make use of sales packaging - for
example, industrial machinery is not likely to require sales packaging but certain
food items). Such sales packaging will almost certainly have to be adapted for the
export market in respect of language, design and regulatory information.
As far as labelling is concerned, these may have to be printed in a foreign
language, perhaps containing information not included in the labels used within
the local market. Also, from a sales point of view, they must be suitable to the
foreign consumer. The selling price of the product must include sufficient
allowance for these extra labeling costs.
The above costs can be considered to be the Product Costs
4. Bulk packing, crating and labelling for export
This is different from the individual and sales packaging we referred to above.
Instead, it refers to the bulk packaging (and accompanying labelling) necessary to
ensure the safe delivery of your goods to your customers. In some instances this
may involve the crating of goods or the palletising of goods combined with shrink
wrapping. At this point, the goods have not yet been containerised (if they will
be sent by container - this task still lies ahead and the cost thereof needs to be
included later). The cost of packing for overseas shipment will vary according to
the product, destination, and means of transportation. You must include reasonable
provision for these expenses.
5. Marking
A small cost needs to be allocated to the stenciling of an identification mark on
each package for export.
6. Strapping
In some instances, cartons or crates may have to be wire- or nylon-strapped to
help prevent it from being accidentally opened en route to its destination. Small
packages that are not going to be containerised should also be strapped together
to discourage pilferage and other loss.
7. Internal documentation costs
There may be documentation that must be produced to accompany the consignment such
as a packing sheet. The cost of producing this documentation must be included
here.
8. Bank interest charges
Producing the goods may take some time (days, weeks or even months) to be produced
and then these goods may be kept in storage for even longer awaiting shipment.
During this time, there is money/capital tied up in the goods and you may have had
to borrow the money to produce these goods (even if you did not borrow money, you
could have earned interest on your own money that you have used). For this reason,
it is wise to include these interest charges (or lost income) in your
calculations.
8. Profit
Once all of the above costs have been calculated, you need to include your profit
margin into the calculation. What margin you decide on will depend on your costs,
your export objectives, the circumstances prevailing in your target market, your
intended pricing strategy, etc.
9. Agent's commission abroad
If you have appointed an agent abroad, you may need to include the agent's
commission into your Ex Works price. This is usually calculated on a percentage
basis.
At this point, you have now arrived at your Ex works price
Ex Works (EXW) is an internationally used term to indicate a specific selling
condition that is outlined in the INCOTERMS 2000 - a set of rules defining the
responsibilities in international trade contracts, compiled by the International
Chamber of Commerce. To learn more about the Incoterms, click here.
10. Loading the goods
Once you have produced and packaged the goods for export, and placed the goods at
a suitable point for collection (usually your warehouse), the next step is to load
the goods onto the means of transportation that is to be used to move the goods to
the airport or harbour. Usually, the means of transportation will be a van, a
motorised truck or railway truck. Where goods are to be sent by container, the
container must be ordered, delivered and loaded.
In the case of Ex Works, the seller is only responsible for placing the cargo at
the buyer's disposal at a convenient point in the factory or warehouse (a loading
ramp, say). As the seller, you are not obliged to load the cargo onto whatever
means of transportation will be used to collect the goods from your factory or
warehouse - this task is the responsibility of the buyer. However, it remains a
negotiable item and the buyer may request for you to load the goods onto the truck
that they arrange to collect the goods from you. If this is what has been
negotiated, then you will need to cost the loading of the goods onto the truck to
be supplied by the buyer as part of your Ex Works cost.
11. Pre-shipment inspection
Some overseas buyers may require that the goods be inspected before they leave the
exporter's premises. Usually they will require an independent third-party to do
this inspection. Generally, the cost of the inspection is paid for by the
importer, but it may be negotiated that the exporter carries this cost. In this
unlikely event, you will need to include these inspection fees as part of your
costs.
12. Freight forwarder's fee
If you plan to make use of the services of a freight forwarder for documentation
and book the shipping space required, allowance must be made for the fee involved.
The amount of these fees can be obtained in advance from the forwarder or shipping
agent.
13. Local inland freight
There are essentially four ways that your goods can be transported to the country
of destination (referred to as cross-border transportation) - air, sea, road and
rail. Air and sea are commonly used for destinations that are far away (e.g.
Europe, Asia, Americas), while road and rail are commonly used for destinations in
Africa. However, road and rail are also used to get your goods to the nearest
airport, harbour or railway station for cross-border transportation. This is
referred to as inland freight.
Whichever cross-border mode of transportation you use, you have to decide how to
get your goods from your factory or warehouse to the required harbour or airport
or railway station (i.e. which inland freight method will you use?). In the case
of road transportation to a destination in Africa, the truck will probably come
direct to your factory/warehouse, collect the goods and take them all the way to
the end destination, thereby combining the local freight component and the cross-
border freight component into a single freight cost. However, in the case of the
other three options (rail, sea and air), there will usually be a local inland
freight component that you will need to including in your costs.
14. Unloading charge
There is usually a charge for unloading goods from railway cars or trucks. This
cost will be incurred when the goods arrive at the seaport or airport. There may
also be unloading and loading costs incurred if goods are moved from one transport
medium (e.g. truck) to another (e.g. rail) somewhere along the inland freight
component and such costs must also be taken into consideration.
15. Terminal handling charges
At the harbour there are specialist companies that take responsibility for all the
handling of goods and payment of harbour and wharfage dues at the quay side. These
are referred to as wharfage companies and you will need to account for their fees
in your costing exercise. Similar costs are incurred at airports but these
services are provided by the airline in question and are included in the air
freight costs and are usually not a separate cost.
16. Long or heavy load charge
If the shipment is exceptionally long or heavy, an extra charge may be incurred.
17. Consular documents
Although not a common requirement, some countries require consular documents to be
purchased before they will allow goods to enter their borders. These documents can
be quite expensive, particularly in the case of export to the Latin American
countries. Initially, the exporter may wish to quote to the foreign customer a
price of so many dollars plus the cost of consular documents. If not, it must make
adequate provision in the price to cover their cost.
18. Financing charges
Until payment is received, your firm will have part of its working capital tied up
in export merchandise. Even if no credit is given, it will have to wait until the
goods are shipped or delivered before payment is made and even the payment process
may take some time. If credit is given to the foreign customer, you may have to
wait an additional 60, 90, or 180 days for payment. Your selling price should
include an amount to cover the cost of this working capital.
What is more, if you intend to discount at your bank a time draft that has been
accepted by the foreign importer, in order to obtain your money sooner, then
allowance must be made in your export price for bank discount charges.
19. Export credit insurance
You may want to buy credit insurance or "Factoring" for your credit sales abroad.
If so, then allowance should be made for it.
20. Other charges
Here, space is left for the inclusion of unexpected additional expenses such as
the cost of overseas telephone calls associated with the delivery component of the
contract, extra storage charges that may be required, etc.
At this point, you have arrived at your FOB price
Bear in mind that an FOB price requires the goods to cross the ship's rail for
your responsibility to end. Thereafter the buyer takes responsibility for all the
costs.
21. Ocean freight
This cost includes the shipping of the goods by sea to the foreign port. The cost
may be quoted by the ocean carrier (i.e. the shipping line) in local currency or
U.S. dollars.
At this point, you have arrived at your C & F price
20. Marine insurance
You will want to insure your firm against financial loss from all possible risks,
including damage to the goods or theft while they are being shipped abroad.
Usually, ocean freight is insured for 110 percent of its total value to cover
anticipated profit and the interest cost of working capital tied up in the
shipment.
At this point, you have arrived at your CIF price
22. Conversion into foreign currency
The foreign buyer will usually ask for a price quotation in US dollars or perhaps
in euros, Japanese yen, British pounds, or some other currency. Therefore, the
price in rands must be converted to a price in the foreign currency. Care must be
taken to use the correct exchange rate. You may wish to eliminate the risk of an
exchange loss by selling the foreign currency to a bank on a forward basis, in
exchange for local currency. The cost of this bank service, which provides you
with a predetermined, fixed rate of exchange for any foreign currency you will
sell to the bank in the future, should be included in the export price quoted to
the foreign importer.
Export promotion
Once you have (a) developed or adapted your product(s) to meet the requirements of
the foreign consumer, (b) gone through a careful costing exercise to ensure that
your product is competitively priced (given your planned pricing strategy), and
you've figured out how to distribute the product both to, and within, the foreign
market, the next challenge you face is to inform your prospective customers of the
product's availability and its value. This is known as the "promotion" element of
the marketing mix (the 4Ps). Today, promotion is also referred to as marketing
communications.
Developing an export promotion strategy really only involves three steps. These
are:
• Determining the most appropriate mix of advertising, sales promotion, direct
marketing, internet marketing, publicity and personal selling for each foreign
market
• Determining the extent of standardisation of your export promotion effort
• Deciding on the core message(s) you will use to promote your product and
company
Preparing a promotion strategy statement for your export plan
These above-mentioned promotion issues we discuss in more detail in subsequent
sections. Once you have worked through these various promotional issues, you
should be able to prepare a statement outling your export promotion strategy. This
statement should:
• Identify the mix of promotional elements you plan to use to promote you firm
abroad, explain why you have made this choice
• Indicate the extent of standardisation you plan to use within your promotion
strategy
• Highlight a overarching core message that you plan to carry across to your
targey market through your promotional effort
• Explain how this promotion strategy will help your firm achieve its export
objectives.
Step 1: Deciding on a suitable mix of promotional elements
In this first step of setting your export promotion strategy, you will need to
decide on which of promotional elements you will use to promote your firm abroad.
There are essentially six elements to choose between. They are:
• Advertising
• Sales promotion (including participation in trade fairs)
• Direct marketing,
• Internet marketing
• Publicity (or PR)
• Personal selling
Knowing the difference
In order to select an appropriate mix of these six elements, you need to
understand what each element entails. To this end, we discuss each of these
elements in greater detail in order for you to understand (a) what is involved in
each of these elements of promotion, and (b) to enable you to decide whether this
element is suitable for your company.
Choosing a promotional mix
It is unlikely that you will use only one means of promoting your firm in the
foreign marketplace. Instead, you are likely to use a 'mix' of these six elements.
For example, you may choose to place an advertisement in a trade magazine in the
target market, which you backup with an e-mail marketing campaign. You may also
decide to make use of trade fairs (a form of sales promotion) to promote your
company and you may also use personal selling by calling on your top twenty
potential customers. But before you can decide on which elements to choose, you
need to know what they involve, so let us move on to discuss each of these
elements.
Advertising
Introduction
Let us begin by defining advertising. Advertising is commonly defined as the paid-
for promotion of goods, services and companies by an identified sponsor in the
mass media (such as television, radio, magazines, newspapers, the Internet, etc.).
In this instance, your company is the 'identified sponsor' - you will be paying
for the advert that will be placed in your choice of mass media to promote your
export products.
Most of us are familiar with the concept of advertising as we encounter it
everywhere we go; whether on TV, on radio, in newspapers, in magazines, on the
Internet, or on billboards, advertising is the most common form of marketing
communications one will encounter in business. International advertising, however,
faces more problems than any other aspect of international communications because
of the differences between nations in the areas of culture, language, government
restrictions, tastes and attitudes of the local population, agency availability,
and the availability of certain media, such as television or the Internet.
What advertising media are there?
The most common categories of advertising media are outlined in the table below.
We have also provided some comments on the suitability of each medium for use by
exporters.
Broadcast media
Television advertising • Very expensive
• Better for mass consumer goods
• Very visual and impactful medium
• Not really feasible for smaller exporters
• Highly specialised/targeted shows might be a possible consideration
Radio advertising • Also quite expensive
• Better for mass consumer goods
• Listeners don't see the product/service; they have to imagine it
• Unlikely to be used by smaller exporters
• Highly specialised/targeted radio shows might be a possible consideration
• Some radio stations have a regional or city focus which may be worth
considering if appropriate
Print media
Newspapers • Newspaper advertising is quite expensive
• Short lifespan and limited space
• Can choose between national and city papers to control reach
Magazines • Can be expensive; but is generally within the reach of smaller
exporters
• Although there are national magazines (which are very expensive), there are
also very focused sectoral and industry-related magazines which tend to be more
affordable
• Targeted magazine advertising is a realistic option for most exporters
• You need to consider the audience and readership of the magazine to decide
if it is suitable for you
• Generally has a slightly longer life than newspaper advertising - reders may
come back to the magazine several times and it may be read by several different
people
Directory advertising • Most countries have many different directories (such
as the Yellow Pages and Brabys in SA)
• As many consumers and businesses make use of directories to find suppliers,
it may be worthwhile to submit your company details for inclusion in a directory
so that you will come into consideration when they are looking for suppliers.
• Usually not very expensive, but is unlikely to attract many customers
• Some marketers consider directory advertising a waste of money, as the
return is too little
• You may want to take additional advertising in the directory (e.g. a full
page ad in the section that applies to your firm's activities), but this can be
very expensive
Outdoor advertising
Billboard advertising • Usually quite expensive
• Very shotgun approach, but longish life
• Not likely to be used by smaller exporters
• Fine for building brand awareness for larger firms
• Not much space to carry accross your message
Flyer handouts • Not very expensive, but too narrow in its impact for
exporters who need to reach a wider audience
• Only really suitable for consumer goods (not used for industrial products)
• Little control over the delivery of the flyers
• Comes across as somewhat 'cheap'
Bus and car (transit) advertising • Similar to billboard advertising
• On the expensive side
• Suited to consumer, rather than
• Limited message
• More mobile
• Best used for brand-building
• Not likely to be used by smaller exporters
Posters • Similar in some respects to billboards, transit advertising and
flyers (just smaller)
• Much cheaper and therefore more affordable
• Probably better for consumer than industrial goods
• Often used in support of sales promotion activities such as trade fairs and
in-store promotions
• Not a very big reach - limied readership
• May be used to a limited extent by exporters
Skywriting • Expensive
• Very short life
• Has to be used in conjunction with a major event such as World Cup event
• Not likely to be used by exporters
Other advertising media
In-store advertising • Obviously aimed at retailers and consumers and not
the industrial market
• Might be worth considering if you are trying to break into retail outlets
• Would need to negotiate with retailer regarding cost
• Retailer may be reluctant to give away advertising sapce for a relatively
unknown product
• Limited use for exporters aiming at the reatil market
Promotional gifts • Not very expensive
• Limited imact
• Fine to backup your sales promotion or personal selling efforts
• A good promotional gift has a long 'in mind' life
• Limited reach - very personal
• Can be used by exporters to promote themselves to selected buyers
• Gift should not be construed as a bribe
Movie advertising • Very expensive to produce advert
• More popular amongst younger generation
• Aimed at consumer goods, not industrial/business products
• Unlikely to be used by exporters much
• Good for brand buidling of selected products
Product placements • This is when you negotiate to have your product used
in a move or television programme
• High cost
• Your product would need to be unique for it to be considered (e.g. iPod
music, Masserati car, Apple computer, etc.)
• Unlikely to be a viable channel for most export products
In-flight advertising • Might be used onboard aricraft (e.g. the inflight
magazine) or at airports (much like billboards)
• Quite expensive
• Captured audience - likely to spend time reading your ad if it is relevant
to them
• More suitable for consumer than industrial products
• Worth considering, depending on your target audience
Internet advertising • Affordable and within reach of most exporters
• Similar in nature to a magazine advertising
• Can carry across more information than in a magazine and more visual
information
• Can be made interactive
• Advertising can be very targeted reach specific users
• Company website an absolute must
• Internet advertising must be considered by all exporters (even if they later
choose not to use it)
• Discussed in more depth under Internet marketing
Your budget needs to be fairly detailed as your budget will also underpin some of
the operational activities you will need to perform (such as printing business
cards and arranging transportation for your products to the fair). In the early
stages of preparing your budget, you may not know all of the costs, but estimate
them as far as possible and revisit the budget regularly to update the outstanding
costs. Preparing for a trade fair is also a time consuming activity and for this
reason you need to do the budgeting (and planning) well in advance.
Likely cost items
The likely expenses you will incur are the following:
• Renting a stand usually on a space basis
• Electricity and water charges, including any required fittings
• Designing the stand (if you plan to have a professionally designed stand)
• Building the stand (you may be able to do this yourself, but your may also
require help)
• Renting or buying display racks and other stand furniture
• Telephone installation and call charges (perhaps you will make use of a cell
phone instead)
• Internet access and usage charges (if required)
• Forwarding and insurance costs to get your samples and materials to the fair
(this could be very high if you are taking heavy industrial machinery with you)
• Delivery of the display goods from the airport or harbour to the trade fair
• Customs clearing charges
• Cleaning of the stand (especially after the fair) - this may be a required
fee
• Dismantling of the stand after the fair
• Security services - this may be fixed or optional fee
• Arranging a reception or cocktail during the course of the event
• Advertising and publicity charges
• Printing costs of brochures, catalogues, flyers, posters and/or business
cards (or transportation costs if you are taking these materials with you)
• Any additional staff costs, if you plan to hire an assistant to help with
the stand or perhaps with interpreting
• Any additional market research costs
• The travel costs associated with attending the trade fair, including all
follow-up visits after the fair has ended
5. Booking the stand
Introduction
Once you have set your objectives, decided on which trade fair to participate in,
decided to participate, and have prepared a budget, your next important step is to
actually book the stand. You need to do this quite early on to ensure that you get
the best space possible and perhaps to benefit from any discounts the organisers
may be offering. The longer you take, the more risk there may be in either not
getting space at all, or getting such badly located space, that it would not be
worth participating in the first place.
Booking the stand also represents further commitment on your part and adds
emphasis to the steps that follow.
Stand location
Selecting and booking a good location is the key to the success of your
participation. Like with any retail operation, it is all about location, location,
location! The earlier you book your stand, the better chance you have to get a
good spot. Be firm in your negotiations with the organisers and demand to get a
good position. They may want to hold you at bay because they hope to get a key
client to take the best spot. Pressure them as much as possible for the sport you
want and do not allow them to change your mind at later stage even if they offer
you a discount.
Make sure that the location you have chosen is:
• In a busy area - traffic is essential to success at trade fairs
• In an area that most visitors will need to pass by to get to other key parts
of the fair
• Visible from various areas in the fair - allowing visitors to home in from
different parts of the hall
• Spacious enough for visitors to move by freely - a congested spot may cause
visitors to choose another route or to be so focused on getting through that they
miss your stand
• Not overpowered by a major participant - this may result in visitors rushing
part your stand to get to the main exhibitor
In terms of your stand and its design, the following factors should also be borne
in mind:
• A professional look will greatly enhance your status at an exhibition where
your clients may not know you. Creating a professional look need not cost the
earth. You may want to approach exhibition designers for help, or you may want to
study some of the tips and hints we provide you.
• Your stand need to be big - a smaller stand is cheaper and if professionally
designed will have just as much impact as a bigger stand
• A corner stand is one of the better locations to get
• A location near a key focus point such as a lounge or meeting spot is also
very beneficial
6. Organising your participation in the trade fair
Introduction
In this part of your plan, you need to sit down and prepare all of the activities
that you need to undertake to ensure that the fair is a success. These activities
are discussed below:
Preparing presentation materials (Powerpoint slides, brochures, etc.)
In preparing for your exhibition, you need to think what it is that you want to
achieve and what the core message is that you hope to carry over to your stand
visitors. The trade fair objectives that you set for yourself earlier on in your
trade fair planning will indicate what you hope to achieve, but from this you
still need to distil a core message (be it "reliability", "quality",
"adaptability", "innovation", or whatever). This is the message that you will
incorporate in your promotional materials, stand design and interaction with
potential customers. It is the message that you hope will attract potential
customers to do business with you.
Once you have decided what this message is, you need to prepare a presentation
that outlines what you want to carry across to your customers. You will probably
use a program such as Powerpoint to prepare a number of slides highlighting the
key points that you want to make (about your company, about your products, etc.).
This presentation you may use at the stand either on an ad hoc basis to example
things to a potential customer, or you may use it as a perpetually running
background display about your company and products.
You will also use aspects of this information in your other supporting promotional
materials and these need to be prepared as well - brochures, flyers, catalogues,
price lists, posters, etc. Today, CDs are a powerful way of promoting companies
and their products and don't take up much space. Make sure that your promotional
materials are professionally produced - after all they reflect your company and
its products.
Preparing your samples
With your objectives in mind, your core message outlined and a framework of a
presentation at your disposal, you can now focus on other important issues. One of
these is deciding on what samples you will take with you. For some companies, it
is sufficient just to have brochures, videos and catalogues available to show
clients, but in many other instances, it is much more effective to have actual
products to show potential clients. This is especially true if the product has
some unique feature which can really only be appreciated when seen and touched by
the customer. For this reason you may want to have one or two samples with you for
display. In some cases (if the product is small and cheap enough and won't be
duplicated), you may want to give away samples and so you want to have enough
samples on hand to give to potential customers. In the case of heavy machinery,
you may also want to have this machine on display for visitors to see.
Deciding on what samples you plan to have available at the fair is the first step.
The next step is to prepare these samples for the fair - for example, there may be
some thing you need to do to the product to ensure that it cannot be copied or to
make its unique features more visible (a machine may have a cut-away so that you
can see inside the machine). You may also have to specially produce these samples
for the fair (perhaps printing your company details on the sample).
You also need to think about how you will package the sample(s) to get them to the
fair. A engine may have to be crated, while other samples can be carried in your
luggage. You may also have to arrange for the freighting of the samples to the
fair, but this we discuss later.
Printing your promotional materials
As we have already prepared the promotional materials, we now have to print them
or produce them (in the case of CDs or videos). You will need to make the
necessary arrangements for this. Bear in mind that you do not want to run out of
promotional material on the stand, so you need to print/produce enough materials
to last the time of the fair (and longer, if you will be doing some sales
promotion after the fair). At the same time, you don't want to waste your
promotional materials by having them left over and having to either take them back
home with you or throw them away. For this reason, the numbers you print or
produce need to be carefully thought about, but too much is better than too
little. If you see that you will have promotional materials left over towards the
end of the show, be more generous and hand them out to everyone, but if you see
that you will be short, then hand them out only to the more promising customers.
If you have materials left over at the end of the show, these could be passed on
to an agent or other representative that you appoint.
Arranging for the design and construction of the stand
Your next big task is to design your stand and arrange for its construction. At
this point, there are several possibilities that you could follow. The first
possibility is not to make use of any special design features, but only to have a
desk and couple of chairs available at the stand, supported by some posters and
other promotional material such as pull-up screens that you place on the walls and
around the stand (a lot of smaller companies follow this route). Although this may
be the cheapest route to follow, it may not carry across a very good impression
and needs to be considered as an alternatively only if you are really have serious
budgetary constraints.
The better option would be to create a more professional designed stand using
either specially designed exhibition materials or off-the-shelf materials. If you
think you are creative enough, then maybe you can tackle the design task yourself.
Design materials today are being produced in such a way that you can use them off
the shelf without necessarily using a design service. Most of these materials are
collapsible and can be packed in carry cases that you can take with you, or send
ahead. However, if you don't have the time of the design inclination, stay away
from this option.
The best option would be to make use of a design service that is experienced with
the needs of the exhibition industry and it is likely that they will come up with
professionally designed stand materials that will add impact to your status in the
foreign marketplace. Of course, stand designers are not cheap and this service
comes at a price, but the price may be worth it, considering the cost and risk
associated with exporting, especially if the design helps you achieve your
objectives. You may also want to use a design company overseas. Costs are usually
higher, but they can not only design the stand, but construct it for you. Your
local company may know of a good exhibition designer in your target country or you
may want to search for such a company on the Internet.
Exhibition stand materials are usually created in an easy-to-carry manner which
may allow you to carry your stand with you to the trade fair as part of your
luggage. Alternatively, you may need to arrange for the stand materials to be
forwarded to the trade fair by a freight forwarding company. This we deal with in
a coming section.
At the stand, you may also need to arrange someone to construct the exhibition
shell for you especially if it was designed by a South African company as an easy-
to-construct kit or if you bough it off the shelf. While they are not difficult to
construct, being in a foreign country and under pressure will just make the
construction of the shell difficult and it may be worth it to hire someone to do
it for you.
Arranging for freight forwarding, delivery and clearance
You will almost certainly need to make use of a freight forwarding company to
deliver the samples, promotion materials and exhibition shell to the trade fair in
question. Wherever possible, try to make use of a company that can guarantee
deliver of these items to the trade fair itself. You do not want to be stuck
trying to clear the goods through customs and trying to arrange them to be
delivered from the airport or harbour to the trade fair itself.
What is more, ensure that these goods are delivered timeously (which means that
you need to deliver them to the forwarding agency in time). There is nothing worse
than arriving at the show knowing that your samples, promotional materials and any
other items haven't arrive yet - it will put you under considerable pressure at
the fair.
ATA carnets
An ATA Carnet is a document usually issued by your local chamber of commerce that
will allow you to take your samples into the country without paying duties on
them, as long as you of course take them back out of the country with you.
Booking your flights and other travel arrangements
Other arrangements that you should not leave until the last minute are your travel
arrangements - your flights and accommodation also need to be booked timeously. In
the case of large, international trade fairs, it is not uncommon for flights and
accommodation to become fully booked quite quickly. The earlier you book, the more
assured you will be of getting there and having a place to stay. Prices are often
cheaper, the earlier you book.
Click here for links to travel agents
Arranging and preparing your support staff
Will you need staff to help with the trade fair and what will they do. The sort of
tasks that you may need assistance with include:
• Assembling and dismantling your stand
• Electrical and technical installations
• Interpreting
• Assisting with enquiries
• Undertaking research
• Handing out promotional material
Arranging for payments
If you plan to sell goods at the stand, then you need to think about how you will
be able to allow customer to pay. Certainly cash is the best option, but many
customers may want to pay using credit cards - will you allow this? It may be
difficult to arrange and electronic point-of-sale machine at the trade fair, but
if you design your website with a credit card facility as part of the site (and
using a payment gateway that will work in the country in which the trade fair
takes place), then you can use the online facility to take payments.
Customer interaction
You need to prepare yourself on how you will deal with customers and handle
queries. Will you position yourself outside the stand and try and "attract"
customers into your stand, or will you remain within the confines of the stand and
wait for customers to come to you? What will you use as an attraction to get
customers to come into your stand? If they have questions what will you do? What
will you do if you have several customers wanting your attention at the same time?
Will you hand a brochure and/or sample to every visitor? Will there be a facility
(such as a running presentation or some exhibit) to keep your customers occupied
and to attract their attention? How will you keep record of your discussions with
potential customers?
You will need to give thought to these and other questions relating to your
customer interaction. You will also need to train any staff that you use to follow
the same procedures.
7. Actually participating in the trade fair
Introduction
Finally the day arrives when you actually have to take part in the exhibition.
This is what all of the weeks and months of preparation have been about. The next
few days will be a busy, intense time during which you live and breath the
exhibition. There are a number of tasks that lie before you and we discuss them
below, but perhaps the most important task is ensuring that you bring everything
with you when you leave your office in South Africa. There is nothing worse then
arrive in a foreign country with important documents, addresses, contact numbers
and forms missing. Before you depart South Africa, make sure that you:
• Have all of your important documents with you (including your tickets,
passport, money, etc.)
• Have a list of all of the important contact details of the people you will
be dealing with overseas
• Have enough business cards and all your promotional material with you
• Have your stand contract with you, as well as any other relevant contractual
documents
• Have samples with you, if you plan to take them with you
• If you're taking samples with you, ensure that you have your ATA Carnet
documents at the ready to clear your samples through customs in the target country
• If you are bringing your stand structure with you (yes, it is possible to
carry the stand with you; modern stand structures are often fully collapsible and
very light-weight), have these ready and packed
Arriving overseas
Step one is to get to your hotel and to check in. It is always best to have an
established base from which to work - a place that you can call home for the next
few days of the exhibition. Unpack, settle in and get yourself organised. Have a
quick nap if you can. Once you are settled in and more refreshed and give your
attentiuon to other tasks.
Hopefully you were able to arrive a day or more ahead of schedule with stand
assembling taking place in the next day or two. This will give you time to visit
the exhibition hall and to orientate yourself as to where everything is. It will
also give you time to make contact with the people that you will be working with.
It would be wise to call these individuals as soon as possible to ensure that
there are no misunderstandings and that they will be ready for you as orginally
agreed. If there is a problem, then you still have day or so to sort things out.
Stand assembly
Make sure that you are at the exhibition hall early. You don't want to arrive late
and find that they are assembling your stand incorrectly. Instead be ready and
waiting. Be careful not to interfere too much with the stand designer/assembler -
they are the experts after all, but the stand should meet your requirements. Do
not get into a fight or be too overbearing. The last thing you need is for the
assembly team to go on strike! Instead wortk with them and communicate your
expectations clearly and in a friendly manner.
If you are doing the assembly yourself, get down to it and prepare the exhibition
area with space for promotion (banners, brochure stands, display walls and
multimedia facilities) and meeting space; an area where you can sit down and
discuss matters with potential clients. Try and keep the design simple, attractive
and professional.
The exhibition itself
Your stand has been assembled, your promotional materials are in place and the
exhibtion has started. This doesn't mean that you can sit around waiting for
potential customers to arrive. There is nothing less attractive than a stand with
the staff sitting in the corner looking bored and disinterested. You now need to
begin "pulling" customers in. Customer interaction is critical. Smile as visitors
walk past. Show interest; hand out brochures. Invite them to take a business card.
Ask a brief question or two, but don't become over-bearing or "pushy" - this will
just chase customers away. Don't rush out and tray and hijack visitors walking by;
this comes across as very threatening. A good ploy is to ask visitors to leave
their business card for a draw for some or other prize at the end of the
exhibition - make it worth while. A few thousand rands in prize material will
encourage visitors to voluntarily give you their business card. These cards are
serve as excellent leads for the future.
Take time to walk around
Remember, that although you want to get customers to come to your stand, your
competitors are also on display and it would be very beneficial to walk around and
to get some idea of what the other companies are offering. Also look at their
stands and supporting material for future reference; maybe they are doing
something that you could copy. Do not walk around in the busiest time - this is
when you need to be available at your stand. Walk around very early on or late in
the day when most visitors are not yet there or have already gone home.
Writing up your notes
You will almost certainly not remember what was said between yourself and the many
customers that visit your stand. For this reason, you need to keep notes! The best
way to do this is to prepare a discussion sheet that you can write on, and that
lists the issues you need to raise and/or get clarity on. Make sure you get a
business card and staple the business card to this sheet, otherwise jot down the
person's contact details. Be careful of using a digital recorder or video cam to
record sessions as this may be viewed as an intrusion of privacy and may chase
visitors away.
Ensuring that the stand is properly dismantled
At the end of the fair, the organisers normally allow you limited time to
dismantle your stand. Get down to this immediately - the longer you take, the more
frustrating the exercise becomes. Be careful with security, this is often the time
when most valuables are stolen as you wander from the stand to the truck where you
will be loading your materials for transportation back to South Africa. The
organisers will expect you to ensure that your stand is fully dismantled and is
clean - if they do not provide for the clean afterwards, it may be an expense that
you need to arrange and account for.
Ensuring that materials are returned to South Africa
If the shell materials, samples, promotional material, etc. are to be returned to
South Africa, then you will need to arrange this. You will almost certainly have
arranged this with your freight forwarder in South Africa beforehand. They will
provide you with a contact person and company name usually in the city you are
located in and this firm will come and collect your goods to be returned to South
Africa. Make sure that you give them a call a day or two ahead of time to ensure
that they do not forget and that they will be there on the day you dismantle your
stand. If they speak another language or you experience any problems, then call
your freight forwarder in South Africa and ask them to deal with their
representative. After all, you will most probably be paying the South African
forwarder for the full service and so it is up to them to ensure that everything
runs smoothly.
Prepare your follow up
Prepare a plan of action on how you will follow up on the enquires you have
received. Some of these enquiries may only require a courtesy e-mail, asking if
they want to pursue the matter. Others may be more serious and may require you
sending more information. If you plan to still appoint an import agent or similar
representative, then there may be more information you require from the firm
(background information, company history, credit information, etc.).
8. Ensuring thorough follow-up after the fair
Introduction
Without follow-up, all of your efforts and the all the money you have spent will
have been in vain. Do not expect potential customers to call you. You need to
contact them. E-mail is the best way to do this. A few days (not too long) after
the exhibition you should send them an e-mail (or fax or letter, if they don't
have e-mail). Thank them for visiting your stand. In so doing, you will be
reminding them of your company, your stand and your products. Mention to them that
you are interested in establishing a market for your products in their country and
that you are seeking agents and/or customers. Ask them very briefly, but directly
if they are interested in your product and if not now, might they be in the
future? Ask them if they mind if you send them the occasional informative e-mail
about your products.
In the instances where you had more in-depth discussions with individuals at the
exhibition, refer to your notes and include a summary of your discussion in the e-
mail. Provide them with any information you might have promised them. If the
discussion was fairly detailed and/or promising, you may want to put a specific
proposal to them. If the discussion was fairly general, keep your comments simple
as well. Be careful about providing too much strategic information to potential
competitors. If you beleive that a potential customer is actually a competitor,
send a short thank you e-mail and invite them to ask you if they want any further
information. Check out their websites to see if they are, in fact, competitiors.
If they are, what can you learn from them. Could there be potential for co-
operation?
Don't loose faith in your contacts. It is unlikely that they will respond with an
order immediately. It may take months or even years before one of them becomes a
customer. For this reason, you should keep them on your mailing list. Send them
your e-newsletter, if you have one, or send them the occasional e-mail keeping
them up-to-date with developments in your firm - new products, price lists, etc.
If they ask to be taken off your mailing list - do so. This is a matter of
professional courtesy. Most will be happy to receive the odd e-mail from you and
the chances are that one of these contacts will eventiually become a customer. Do
not send out e-newsletters or e-mails too often; at most one per month (quarterly
is perhaps even better) - you don't want to annoy your potential customers.
Publicity
What is public relations?
Public relations (also referred to as PR) is the activity of communicating with
customers, potential customers, intermediaries, the general public and any other
interested stake holders (together referred to as your firm's 'publics'), usually
through means of the general or specialised press (although any media can be
used), with the idea of generating goodwill and positvely influencing public
opinion towards your company and its products. Put another way, it is about
keeping good relations with the public (not necessarily only your customers).
Examples of public relations include support of charitable events, news releases
about some positive activity of the firm, such as community participation.
Public relations and publicity
Publicity is a form of PR which is unpaid and carried in the mass communication
media because the information in question is considered newsworthy by the media.
PR involves basically generating positive publicity for and countering bad
publicity about the firm.
Publicity, the alternative to advertising
Publicity differs from advertising, therefore, in the fact that it is not paid
for. Considering that the expense of advertising is on its major drawbacks for the
average exporter, publicity seems a good alternative for most exporters
(especially smaller ones). However, the problem with publicity lies in the fact
that the medium through which you want to publicise your firm, must be interested
enough in what you have to say to carry your newsworthy 'story'. In some cases -
with very specialised products and magazines for example - this may be quite easy,
but in other instances, publicity may be very difficult to generate.
Publicity is not always easy to generate
It is usually particularly difficult for an exporter to place press releases with
overseas media because of the distance involved. The media owner probably doesn't
know about your firm and will want to use their space for other more newsworthy
publicity. Nevertheless, you should still endeavour to get positive media
coverage, particularly in respect of any new additions to product lines or
improvements to existing products, wherever you can. To this end, you need to
identify and obtain copies of overseas magazines and publications in your target
market that focus on your product line or industry (you would gather these
publications as part of the research you undertook in step 7 of the export
process). Bear in mind that many industry associations, chambers, government
departments, newspapers, magazines, etc. are always on the lookout for news that
may be of interest to their respective audiences. A trade magazine specialising in
engineering in your target market, for example, may be willing to carry an article
about your firm and its efforts to establish itself in their local market. The
same may be true of the local chamber of commerce which will be happy to include
an article in their newsletter. Of course, not all of these channels will be
prepared to carry your article, but many may. Your task is to find the right
publicity channels, prepare a short, relevant article and submit it to the
editor/publisher for publishing. An occasional follow-up as new developments take
place, is also worth considering.
You need to consider, though, that editors tend to use the material that is
appropriate in content and style to their readership and which requires the
minimum of editing or sub-editing. Editors are normally experienced journalists
and can see at a glance whether material is suitable for publication or
broadcasting. Purely promotional material is unlikely to be published - material
submitted must have definite news value. It is essential, therefore, that you
write any story from the reader's point-of-view. You may want to hire a
professional journalist or PR specialist to prepare one or more articles that you
can use (perhaps adapting it yourself for different magazines).
Personal selling
What is personal selling?
Du Plessis et al define personal selling as two-way person-to-person process
during which the seller learns about the prospective buyer's wants and needs, and
seeks to satisfy these wants and needs by offering a range of products or services
that the seller has available to offer to the buyer. The seller will commonly try
to positively influence the buyer's decision about the purchase of the goods the
seller has available. Personal selling can also take place over the telephone.
You need to find a salesperson with the same language and cultural characteristics
Because of the need to communicate and interact with the buyer, successful
personal selling in foreign markets is dependent on understanding the target
country's country's social, cultural and language characteristics. For this
reason, personal selling should be carried out by a salesperson that can speak the
language and that share the culture of the target country. You may either make use
of a travelling salesperson or use a person that is based in the target market.
The latter option is probably the best option to follow for the serious exporter,
but is very expensive and requires considerable management effort.
The foreign-based export salesperson
Very few small to medium exporters would have the resources to run a foreign-based
salesperson, certainly in the early stages of foreign market development. Salaries
are inevitably high and the associated costs (office rental, furniture, computers,
electricity, telephone, Internet access, etc.) are also high. You also need to ask
yourself whether the foreign-based salesperson will be fully occupied and whether
they will be able to generate enough sales to cover their costs. You also need to
ask yourself whether the foreign-based salesperson will have enough understanding
of and commitment to your company and its to do a good sales job. Of course, it
may be that you need to the salesperson to undertake additional tasks such as
product training and product support, as well as to deal with administrative
matters. These additional tasks may well justify the expense of a foreign-based
salesperson. As your firm's exports grow, so the idea the possibility of employing
a foreign-based salesperson becomes more justifiable.
Relocating a salesperson from South Africa
An alternative to employing a foreign-based salesperson would be to locate a local
salesperson from South African to live and work in the foreign marketplace. This
person would also be an expatriate in the sense that he/she is a South African
living and working in a foreign country. This is an even more expense way of
employing a foreign-based sales person. You will need to take into consideration
the employees' conditions of service and the high cost of foreign living,
including the relocation to this market. Conditions of service are of particular
importance to an employee who is based in another country and such matters as
salary, expenses and career development should be sorted out before (s)he is
posted abroad. Actual salary levels and the allowance for the local cost of living
need to be established separately for each country that you target. The only
reason you would follow this route would be becuase the salesperson has been with
the firm a long time, has a deep understanding of the firm and its products, and
is a committed and diligent salesperson who you know is capable of working on his
or her own. You would need put this person on language training courses and you
need to be convinced that they have the personality to fit in with this new
culture; not everyone hands new cultures and environments in positive way.
You are unlikely to employ someone new in South Africa and then relocated this
person on a fulltime basis to the new foreign marketplace. It is doubtful whether
this person (even if you chose someone that speaks the langauge) would have the
company background or commitment necessary to succeed.
The travelling export salesperson
An alternative to to the foreign-based salesperson is the travelling salesperson.
Because this person or team is based at home, your operational costs will
generally be much lower even if travel is factored into the equation. What is
more, this person could be taksed to also handle many of the administrative,
financial and/or logistical tasks associated with your firm's exports and in so
doing, you can better justify his/her costs. The person could also undertake
product training and provide product support when overseas, thereby setting off
some his/her expenses against other cost items (i.e. training and support). Having
the person work from your home base means that they are far more likely to have a
deeper understanding and commitment to your company. This person should
nevertheless, still be selected to have the same cultural and language
characteristics as in the target market (using an expatriate - a foreign national
living in South Africa - may be a possibility).
When is it OK not to speak the language and understand the culture
While we argue that it is essential to use a salesperson that has the same
language and cultural characteristics as are to be found in the target market, the
only time this need not be necessary is when the owner or export manager of the
firm undertakes the personal selling task themselves. Their position and status as
'head' of the firm's export operations, may help them overcome (to a limited
extent) the language and cultural barriers they will face. These barriers will
still require attention and you may need to employee a interpreter when you make
these sales calls.
An effective export salesperson should have the following attributes:
• (S)he should be able to make decisions (often on the basis of very little
information) and take risks and opportunities of considerable magnitude. Overseas
buyers lose patience with sales staff who are constantly referring back to
headquarters for instructions.
• (S)he should be capable of guiding agency operations and training agency
staff.
• (S)he should know where to look for advice and information and how to
interpret market research data.
• (S)he should be able to adapt to, and identify with, cultures very different
from his/her own.
• (S)he should be able to persist in the sales task without supervision.
• (S)he should have a sound constitution, as (s)he will be subjected to
extremes of climate, strange food and indifferent hotels, as well as company and
customer entertainment!
• Ideally, (s)he should be fluent in the language(s) of his/her potential
customers.
Sales through agents
An alternative to employing a salesperson, is to close an agency agreement either
with firm or individual in the foreign marketplace. An agent is a company/person
who represents your company in the marketplace within which they operate. They may
represent several other (even competing) products. An agent is usually paid a
commission and never really takes ownership of your products. The task of the
agent is to bring your company into a contractual relationship with third parties
(i.e. buyers), for which they get paod a commission. An agency agreement is a
legal relationship that exists between your firm and the agent. Employing an agent
is like have a part-time salesperson working for your company. The problem with
agents is that they do work for you directly and you have little direct control
over them. If they are poor, you will inevitably waste your time (and maybe some
money). A good agent, on the other hand, can be extremely profitable for your
firm. It is essential therfore that you employ a good agent. Bear in mind that
legal title to your goods never passes to the agent - it passes, because of the
agent's efforts, directly from your company to the customer, with the agent
receiving remuneration by way of commission.
Salesperson versus sales team
For most new exporters it will be difficult to even get one fulltime export
salesperson into the field. They are expensive which ever route you follow, and
you are not generating any sales as yet. Few exporters will be in a position to
afford one salesperson, let alone a whole team. However, with some more
established exporters it may be necessary to put a sales team into action. There
may be an engineer that understands the product; a financial manager that can
crunch the numbers and thrid member that does the actual negotiating. The
Japanese, for example, almost always use teams when they sell. Using a sales team
has it advantages in the sense that the work is divided between team members that
are expert in their respective areas. If a team works well together, they can put
put a more effective sales pitch into effect. A sales team is also a more
professional and serious approach. Clearly, only larger firms are truly in a
position to make use of the sales team. It is also highly unlikely that an
exporter will establish a whole foreign-based sales team in the target market - it
is simply too expensive. Having said that, a few multinational companies such as
Bell Equipment company, SABMiller and others may well make use of sales teams as
their size can justify it.
Market-entry channels
Markety-entry - Direct versus in-direct exporting
We have said that your first distribution decision will be how to enter the
market; which we - not surprisingly - referred to as market-entry. Market-entry
can broadly be further divided into two categories, namely in-direct and direct
exporting.
Indirect exporting
In-direct exporting is when you sell your products to local companies in South
Africa as though they were local sales, yet your products are then sold onwards by
the buyer to foreign customers. For your firm, the sale is nothing more than a
local sale; you are paid in rands and the sale is like any other domestic sale.
Nevertheless, your products still end up crossing the border and being sold in
other countries. In fact, you may not even be aware that your products are ending
up overseas. On the other hand, you may well be aware that the local buyer is
selling your products into foreign markets and this fact may have spurred you on
to begin with your exporting endeavours. Alternatively, you may be quite happy to
continue along this route as it requires very little effort on your part and
represents a low risk route into exports. To learn more about the different types
of in-direct exporting, click here.
Direct exporting
Direct exporting is when you as the exporter are more involved and have some
control over the exporting process. With direct exporting you will normally
receive payment directly from abroad; that is, it is no longer a domestic sale as
in the case of in-direct exporting. There are essentially three different types of
direct market-entry channels available to you. These are:
1. Those that involve selling directly to an overseas customer who may be the
end-user, or through an intermediary such as an import agent, distributor, through
your own sales subsidiary based in the foreign marketplace. Click here to learn
more.
2. Those that involve licensing, franchising and contracting, i.e. involving
the sale of knowledge or skills to overseas buyers. Click here to learn more.
3. Those that involve manufacturing abroad, e.g. a joint venture arrangement or
the establishment of a wholly-owned off-shore manufacturing operation. Click here
to learn more.
Factors affecting the choice of market-entry channel
The choice of market-entry channel will, of course, depend on:
• The company's objectives in respect of the desired volume of international
business, expected geographical coverage, etc.
• The size of the company in terms of sales and assets
• The company's product range and the nature of its products, e.g. industrial
or consumer, high or low price
• The competition in the foreign market
However, a number of other factors, which are unrelated to the company and its
industry, will also need to be taken into consideration whenever entry into a new
market or a change of established channels is contemplated:
• Channel availability: Different markets call for different approaches to
market-entry. For example, some countries will not permit wholly-owned foreign
operations; licensing may not be an option because of the lack of qualified
licensees and in some small markets, the only reputable agent may already be
representing the competition. Thus, the company might eventually opt for wholly-
owned operations in some markets, marketing offices in others, and agents or
distributors in the rest.
• Sales volume and profit objectives: Sales volume will depend to a large
degree on the channel selected - a small marketing office in the capital city is
going to generate fewer sales than a sales force that covers the entire national
market. Estimating its long-term sales and costs, and comparing profit margins
with sales volume can determine the profitability of a particular market-entry
method. A 15% profit margin on a high sales volume may be preferable to a 20%
margin on a lower sales volume.
• Operating costs: Estimated sales volumes should always be considered in
relation to the cost of a particular market-entry method. Setting up a
manufacturing operation in another country, will involve considerable initial
investment and ongoing working capital. For other market entry channels, finance
may be required for inventories or for extending credit facilities.
• Personnel requirements: Certain market-entry channels may be out of the
question because it may not be possible to meet the necessary personnel
requirements. The establishment of a production plant, for example, might require
skilled managerial and technical staff.
• Risk: The greater the company's investment in the foreign market, the higher
the risk. Apart from capital investment, the company may risk inventories,
receivables and may incur a financial loss because of exchange rate movements,
etc. In general, the more direct and visible the entry of a company in the market,
the more vulnerable the company is.
• Control: The degree of control that a company is able to exercise will
depend on the market channel selected. A firm selling to a local trading company
might have no control at all, whereas it would be possible to exercise firm
control over an overseas marketing or manufacturing operation.
• Flexibility: Environmental and market conditions often change over time. The
exporter may either want to expand its involvement in the foreign market to take
advantage of new market opportunities, or to cut down its operations because of
adverse developments. This should be borne in mind at the time of choosing a
particular entry channel.
Indirect export distribution
The different indirect exporting options
We have said that indirect exporting is when you sell your products to local
companies in South Africa as though they were local salesl; you are paid in rands
and the sale, yet your products still end up crossing the border and being sold in
other countries. There are several different indirect exporting options available
to you. These are:
• Foreign buying offices located in the local market - Large international
retailing organisations such as Walmart, Sears, Sainsburys, Carrefour and others
may establish buying offices in various countries that they consider to be major
sources of supply (such as the US, China, India, etc.). These buying offices then
approach local firms to buy goods from them. For the local supplier, it is just
another local sale. The buying office pays in rands and takes all the
responsibility of distributing the product to their home base, wherever it may be.
Occasionally, large industrial firms may also establish buying offices in
countries that represent major suopplier to the firm. Are there many such buying
offices in South Africa? The answer is no. Besides for an industry such as the
fruit industry, South African is not such a major international supplier to
warrant these retailers establishing buying offices in the country.
• International trading company (ITC, also called an international trading
house (ITH)) - There are a number of companies around the world that specialising
in buying and selling products internationally. They often establish branches in
several countries around the world and each branch operates as a separate business
unit buying from the local market and selling through its branches into other
foreign markets and visa versa. The Japanese are well-known international traders
and examples of Japanes companies active in South Africa include Mitsui and
Itochu. Another (non-Japanese) example is the Gerber Goldschmidt Group, but there
are many others. These trading companies may go beyond just buying and selling and
may begin to become involved in operations by buying a stake in local companies or
entering into joint ventures. Sometimes these operations may be referred to as
export trading houses (ETH) or export trading companies (ETC), but there is a
subtle difference. An ETC/ETH is a local company that buys and sells international
for its own account, while an ITC is a overseas company with office or branch in
the local market, that buys and sells goods internationally.
• Multinational purchases - South Africa has a few local companies that have
grown to become major multinational (even global) firms. Companies such as Bell
Equipment Co., Altron, Barlows and SABMiller are such examples. Also, there are
global companies with operations in South Africa - consider BMW, Ford, Toyota,
etc. It is quite common for these companies to buy raw materials and components
from local suppliers and to use these inputs in their respective manufacturing
processes. As these companies export their products around the world, so any
component that you may have supplied them also finds its way overseas. Yet, for
your company, it remains a local sale.
• Tourist purchases - Foreign travellers visiting South Africa are major
consumers of certain products (curios, wines, fruits, clothing, gifts, etc.) that
they take back home with them. Agin, for your company, such as purchase is nothing
more than a local sale.
• Piggyback exporting - There may be export or multinational firms that sell
their goods internationally and that have built up a comprehensive marketing
network abroad. In order to maximise the power of these networks, these companies
may seek complementary products to their existing range of products which they can
then also sell through their networks to their foreign customer base. Consider
Bell Equipment Co. that sells heavy earth-moving and forestry equipment into
Europe. They could decide to take on additional industrial equipment (such as
heavy-duty jackhammers or chainsaws) that they don't manufacture but that
complements their existing range of products, and then sell these products to
their European customers through their European sales network. Often the companies
that provide the piggybacking service (called the carriers) take responsibility
for the marketing and distribution themselves and simply buy the products from the
local supplier (known as the 'rider') as with a normal domestic purchase. For the
supplier, it is just another local sale. In other instances, the rider and carrier
may work toegther and share the cost and responsibility, perhaps with the rider
paying a commission to the carrier for use of their network. In this latter
instance, this is not considered a form indirect marketing, but is instead a type
of direct exporting.
• Export management companies - EMCs are common in the US, but are unknown in
South Africa. Usually, an EMC manages exports for another company. If the EMC
takes full control and responsibility of the exports (including payments) for a
management fee but with minimal invovlement on the part of the manufacturer, then
this could be considered an indirect form of exporting. If, however, the EMC
manages the export activities of a manufacturer with their involvement and
cooperation and if the manufacturer receives payment from the overseas buyer, then
this is a form of direct export which the manufacturer is simply using the EMC to
provide a service.
• Export agents - Export agents are similar in function to EMCs and while EMCs
are not common in SA, export agents are. Whereas EMCs normally take full control
over a manufacturer's exports, an agent provides a market and administrative
function for a fee or commission. In most instances where export agents are
involved, the manufacturer (the principle) still receives payment direct from the
foreign buyer and as such this form of market entry is considered a direct market-
entry method. If the export agent also handles the payment, then perhaps it could
be considered an indirect form of exporting. In this latter case, there is little
difference between the EMC and the export agent. Generally, however, using an
export agent is not considered an indirect form of exporting (and should instead
be discussed as part of the direct market-entry options).
Different forms of representation in international trade
Agent on commission
This is a person who acts on behalf of a principal either by soliciting orders, or
concluding contracts, or negotiating deals using the authority vested in him by
the principal. Payment is usually made in the form of a commission. This type of
agent is most suitable where long- term selling is required to a fairly large
number of customers. One agent could represent a number of manufacturers of
complementary and non-competitive products at any one time.
If the principal has some doubt about the credit-worthiness or financial status of
the buyer introduced to him by his agent, (s)he may ask the agent to assume
liability in case of non- payment by the buyer. In other words, the agent is asked
to assume the 'del credere' risk. However, the agent is not liable for the risk in
the case of non-acceptance of goods by a solvent buyer. Logically, in view of the
liability in such an arrangement, the 'del credere' agent expects a higher-than-
normal commission. The existence of the 'del credere' agent is only common in the
United States.
If it is clear that some time may pass before a product is established in the
market, a retainer or fee may be paid to the agent initially to provide some
financial inducement. However, once sales improve, the agent would normally be put
on to a commission.
Salaried salesperson
Where a lot of non-profitable, pre-sales work, training, customer contact, etc. is
involved, the most suitable method of selling is through salaried salesperson. The
salesperson would have the authority to accept orders on behalf of the principal,
who would meet all expenses involved. (S)he could work from home or from an
overseas sales office.
Independent salesperson
This is a commercial traveller with his/her own area of retailers, wholesalers, or
factories. The person would act on behalf of a number of different principals and
can accept orders on behalf of each. (S)he does not get involved in the stocking,
servicing or documentation of goods. This type of salesperson is suitable if there
are only a few customers for any one principal and if, the goods are simple to
understand and to sell.
Agent/Distributor
Here the agent works on a commission for, say, the sale of machinery, but works on
profit basis for the sale and distribution of consumables or spares related to the
product. The exporter is the contracting party with the customer for the machine,
but the customer purchases the consumables directly from the agent in his/her own
right
Agent/Warehouse-person
Some products require an approach to selling that is best suited to a commission
agent but the agent must also provide warehousing facilities for which they are
paid a fee. The agent takes responsibility for administering stock, keeping it
under tight security and issuing regular reports on the stock situation. They can
change prices if necessary and can also divide bulk supplies into more easily
distributable units.
Agent/Servicing company
Capital equipment, such as cranes and machine tools, cannot be bought by the agent
and is handled on a commission-on-sales basis. However, these goods must be
serviced and the agent guarantees certain minimum service facilities -
installation, maintenance, spares, and repairs - in return for a direct charge in
proportion to the extent of the work involved.
Agent/Design office
Many products need a design service incorporated into the selling approach, e.g.
factory flooring, air-conditioning and audio/visual equipment. The agent must have
drawing office facilities where individual clients' needs can be worked out. This
type of agent is paid for these services separately from the commission earned on
the orders themselves. Often the installation is carried out by local contractors,
or may even be organised and paid for by the customer.
Agent/Customer
Sometimes a major customer is willing to offer the exporter's products to other
potential customers on a commission basis.
Agent/Manager
Often when selling to a developing country, it is important that the exporter has
at his disposal a detailed knowledge of the market and the assurance that his
affairs are being continuously managed at a senior level. This can be accomplished
by a managing firm which will report on agents, supervise joint ventures,
recommend new ways of entering the market and advise on a sales approach. Because
of its local status, it can lobby authorities to prevent interference. Often it
offers its own wholesale or retail outlets, or distribution networks for
managerial services plus an agreed share of overall profit.
Factory representative/Agent controller
This is a salaried employee based abroad to supervise the marketing arrangement in
a specific group of markets. Normally (s)he controls the local agent's operations,
but does not actually sell to customers, rather accompanying the agent on key
calls.
Export management agency
This agency acts as the manufacturer's export department either for all or for a
selection of foreign markets. The agency familiarises themselves with the
manufacturer's product range and pricing structure, and investigates potential
outlets. They operate on a commission basis, or on fee plus commission basis.
Representative purchasing for himself as principal
Export merchant
The export merchant purchases the goods from the exporter on his/her own account
as principal, with the intention of reselling them at a profit. (S)he must then
find the customer and take the financial risk. The manufacturer must ensure that
they do not compete against the merchant's own sales effort. The agreement may
have a clause to the effect that all orders from a specific sales area, whether or
not placed by the merchant, will be credited to his/her commission account
Distributor
Distributors buy from the exporter to resell at a profit. They have exclusive
right to market the goods in their territory. All orders must be channelled
through them. The export merchant might purchase goods from the manufacturer and
appoint their own distributors in different areas, giving them the right to
resell, or they might act as distributors themselves.
Stockist
The stockist generally buys from the manufacturer, the export merchant or the
distributor, reselling at a profit but qualifying for special terms by agreeing to
hold minimum stocks to ensure prompt local supply. These special terms can be
discounts or long credit periods or, as often happens, the exclusive stockist
right in a specified area. Normally, they would not stock competitors' products. A
network of stockists is essential if customers are to obtain ready supplies.
Agent who assembles
When a firm wants to export goods that will require facilities for repair or
maintenance and/ or when customers are dubious of the performance of the foreign
goods, then often the answer is to set up an assembly organisation. The agent will
purchase the goods - a German forklift truck, for example, minus the engine,
hydraulic and electrical components. These parts may then be purchased from local
manufacturers who have designed them specifically to fit the German chassis. The
parts are easily replaced or repaired. The agent invests time and money in
assembling the machines, generating income from the profit made from selling the
final product. Often high tariff barriers are overcome by using a large proportion
of local equipment/parts in the finished product.
Representative acting for buyers who are the principals
It is important to remember that there are buying representatives, as well as
selling representatives. There are export merchants whose principals have asked
them to purchase large quantities of goods on their behalf. The orders placed by
representatives of the Japanese trading companies, for example, constitute more
than 70 per cent of all Japanese imports. There are also commercial sections of
embassies and foreign trade delegations which have instructions to locate
suppliers of goods and equipment required by their nationalised industries.
Buying office
Many large companies, especially US department stores, set up buying offices in
various centres that are identified as having profit potential. Usually the orders
are large and the buying office arranges transport and ensures prompt payment.
Buying house
Buying houses place orders for both consumer and technical goods, and serve
specific markets. They may combine the job of agent and principal depending upon
whether they are ordering for clients as a service, or purchasing on behalf of
parent or associated companies.
Buying agent
This type of agent offers services similar to those of a buying house and a buying
office but to a wider range of principals. (S)he acts as host and documentation
clearing house for visiting buyers of many countries. In order to get exclusive
lines, department stores and fashion houses which are big buyers of foreign
products, are often served by a buying agent. It would be difficult to acquire
this type of service from a local agent who is intent on supplying as many
customers as possible.
Selling through a representative in the market
It has been estimated that representatives handle more than half the world's
foreign trade. There are three main types of representative:
• Those that act for the exporter who remains the principal
• Those that purchase for themselves as principal
• Those that act for buyers who are the principals
Whichever type of representative is chosen as an intermediary, it is necessary to
enter into some sort of legal agreement protecting the rights of both parties
concerned. Although such a contract is designed to govern disputes and protect
each party's interests in law, it can serve as a plan of action for setting
targets, detailing financial incentives and defining penalties (loss of rights,
etc.). It can also be phrased in such a way that it is compulsory for an agent to
bring in a certain percentage of business over a period or else face the
termination of his contract.
Licensing and franchising
Licensing
A licensing agreement is an agreement wherein the licensor gives something of
value to the licensee in exchange for certain performance and payments. Usually
what is transferred from one party to the other is some form of industrial or
commercial expertise, such as:
• A patent covering a product or process
• The right to the use of a trademark or brand name
• Copyright
• Manufacturing know-how on products or processes (that is not the subject of
a patent)
• Technical advice and assistance including (occasionally) the supply of
components, materials, etc. which may be required in the manufacturing process
• Marketing advice and assistance
Payment for the expertise involved can take any or a combination of the following
forms:
• An initial payment, payable as soon as the licensing agreement is signed,
either for know-how or for the initial transfer of machinery, components or
designs
• An annual minimum payment
• An annual percentage fee based either on sales or on profits
• A mutual exchange of knowledge and/or patents, i.e. cross-licensing
Advantages of licensing
There are numerous advantages in entering into a licensing agreement with a
foreign national:
• Licensing requires very little capital outlay (making it an accessible
channel even to small companies) and it should provide a high rate of return on
the capital invested
• It provides access to markets which might otherwise be closed because of
high rates of duty, import quotas or other restrictions, or because of excessive
transportation costs
• Should the licensing arrangement prove to be a failure, it will not result
in heavy financial losses
• The exporter does not face the risk of having assets nationalised or
expropriated
• The exporter gains access to the licensee's local marketing and distribution
organisations, and existing clientele, thus avoiding many of the problems
associated with setting up a wholly- owned manufacturing subsidiary
• Many governments favour licensing over direct foreign investment because
licensing brings technology into the country without the disadvantages associated
with direct investment
• Because of the limited capital requirements, licensing enables new products
to be sold worldwide before competition develops
Disadvantages of licensing
Licensing, however, does have some disadvantages:
• During the period that the licensing agreement is in force, the firm may
transfer sufficient expertise to the licensee to enable the latter to set himself
up as a competitor, not only in the original market but perhaps also in
neighbouring markets or even in the domestic market
• Licensing provides limited returns on the investment of managerial and
engineering time - royalties and fees normally constitute less than seven per cent
of turnover
• Governments can impose restrictions either on the remittance of royalties or
on the supply of components
• It is often difficult to control the quality of the product which, in most
cases, is sold under the licensor's brand name
• Although the contract should specify the responsibilities of each party,
misunderstandings and conflicts can arise during the implementation stage. Areas
of conflict might include; the marketing efforts of the licensee, the
interpretation of exclusivity and the extent of the licensee's territorial
coverage
Managing licensing operations
The selection of the licensee is a vitally important step and a number of
candidates should be identified and evaluated before making a final choice. Many
companies - to their detriment - have chosen licensees by responding to an
initiative from a foreign producer without considering alternatives. The licensing
agreement must be carefully drafted in order to protect the interests of both
parties. It should include clauses relating to the duration of the agreement,
territorial coverage, the royalty rate, protection of trade secrets, minimum
performance, and quality control.
The licensor should endeavour to maintain some control over the licensing
operation by supplying some of the key components rather than exposing know-how
entirely. Alternatively, provision can be made in the agreement for converting the
operation into a joint venture on expiry of the agreement, avoiding the
possibility of the licensee becoming a competitor. The firm should encourage
effective licensee performance by assessing the ability of the licensee to solve
production and marketing problems and by maintaining a flow of up-to- date
technological know-how, thus ensuring that the licensee will continue to perceive
value in the arrangement. Exporters must have both a policy and a plan for
licensing, and must have an executive responsible for the implementation of both.
Franchising
Franchising is a form of licensing whereby the franchiser provides a standard
package of components or ingredients together with management and marketing
expertise, and the franchisee provides capital, market knowledge, and personal
involvement.
Franchising works well for products that are not subject to patents. Pepsi-Cola,
for example, relies heavily on franchising. The franchise holders own the bottling
plants, employ local staff and control their own advertising and sales promotion.
Pepsi-Cola sells the concentrate to the bottlers and provides promotional and
managerial support. Franchising holds the same advantages as licensing and creates
the opportunity for revenue to be earned from a product that cannot be patented. A
franchiser also enjoys a greater degree of control over the operation because they
supply the ingredients or components.
Contracting
What is contracting?
Contracting involves entering into an agreement with a company that provides your
firm with a service. In the case of the market-entry options we have been
discussing, this service would involve the contract to manufacture and/or market
your goods in an overseas target market.
Management contracts
A management contract is an agreement whereby a company (the management company)
manages some or all of the operations of another company in return for management
fees and, sometimes, a share of the profits. Many hotel groups have management
contracts with hotels in other countries and earn fees for consulting and for
providing management services. With management contracts, there is minimal risk
associated with market entry, no expropriation risk, and no need for capital
investment. These contracts capitalise on management skills and provide a
guaranteed minimum income.
Manufacturing contracts
Contract manufacture involves a formal, long-term contract between parties in two
different countries for the manufacture or assembly of a product. The company that
places the contract retains full control over distribution and marketing.
There are a number of advantages to contract manufacturing:
• As there is no need to invest in manufacturing plant, the company placing
the contract does not need vast capital resources, nor does it have to be
concerned about the possible political instability of a market
• There is no risk of the company experiencing financial loss because of
adverse movements in foreign exchange rates
• The company placing the contract can avoid labour and other problems that
could result from a lack of familiarity with the country concerned; at the same
time, it enjoys the advantage of being able to advertise its product as locally
made
• Cost advantages could include savings in transport costs and lower
production costs
• If a market proves to be too small or too risky, it is easier and less
costly to terminate a manufacturing contract than shut down a wholly-owned off-
shore production unit
Contract manufacturing, however, also has its drawbacks. It is often difficult to
find a foreign producer with the ability to manufacture the product to the
required standards and in satisfactory quantities; even when a suitable
manufacturer is identified, the company placing the contract runs the risk of
training a future competitor!
You may want to consider the following factors when deciding on whether to go the
contracting route.
Manufacturing abroad
Considering offshore manufacturing operations?
If your company were considering the establishment of an offshore production unit
as a market-entry channel, you would face a number of key policy decisions. These
include:
• How much to invest initially
• Whether to manufacture abroad (you must decide where to locate the
production facility)
• Whether to establish a full manufacturing operation or to opt for an
assembly plant
• Whether the operation is to be wholly-owned or a joint venture
• Choosing between acquiring an operation already in existence or establishing
a new facility
The initial international investment decision
This is one of the most difficult decisions to make because of the relatively high
level of uncertainty and risk involved. Not only are you likely to be hampered by
a lack of familiarity with the foreign environment, but you are also faced with
the prospect of high political and exchange risks.
Calculating the likely rate of return on such an investment includes:
• Estimating both current and future market potential
• Estimating the share of the market the company is likely to acquire, as well
as the resultant sales volume
• Estimating both current and future production costs
• Arriving at an anticipated profit margin by comparing sales revenue with
costs; this profit margin should at least be equal to the domestic profit margin
and should be high enough to compensate for the increased risk and uncertainty
• The various areas of concern that might influence the decision to invest
should then be investigated.
Location of investment
The decision regarding where to locate your manufacturting facilities will
normally be closely linked to the initial decision to invest because of the
multitude of factors relating to a specific foreign market that will affect that
initial decision. Apart from investigating the suitability of already identified
target markets for the positioning of a manufacturing unit, the advantages of
establishing the plant in a third country might be worth considering. Apart from
possibly giving the exporter free access to the identified target markets; it may
also offer lower tax rates, lower wage rates and special incentives to foreign
investors.
Foreign assembly operations
If opting for a foreign assembly operation, you would produce all or most of the
product's ingredients or components domestically and then ship them to the
assembly plant where the final stages of the manufacturing process would be
completed.
A local government requirement of most assembly operations, however, is that a
significant portion of value must be added to the product in the market in which
the assembly plant is located in order to enjoy 'country of origin' accreditation.
There are numerous advantages to establishing an assembly plant. These include:
• Lower freight costs
• Lower import duties
• Easier modification of the product to suit local market requirements
• Possible cost advantages - wage rates may be lower for the assembly
operation and it may also be possible to purchase cheaper components from local
sources
• The ability of the company to create a national image in the target market
• Access to government contracts and tenders
• Foreign assembly operations allow exporters the opportunity to gain the
initial experience in a market that they may later wish or be required to
establish a full manufacturing operation
International joint ventures
An international joint venture in assembly or manufacturing is an operation in
which two or more companies in different countries combine resources, not merely
for manufacturing purposes but also to acquire marketing, financial and management
advantages. All the participants in a joint venture have a share in the equity and
a say in the management of the operation. However, no one participant holds a
sufficient shareholding to exercise effective management control.
Joint ventures are usually entered into when:
• Total foreign equity ownership is not permitted by local law because
governments feel their nations benefit more from profits and technology if their
local nationals have a share in the business
• Finding a partner in the target market may be the only way to invest in a
market that is too competitive or too crowded to admit a totally new operation
• It is important to quickly acquire either local marketing expertise or an
established distribution network
• The company does not have sufficient capital to fully exploit all potential
markets
• Managerial and other human resources are limited, e.g. In the case of small
companies
• The company fears expropriation or other risks of a financial nature
• A company wishes to protect its sources of supply of raw materials
Conflict can often arise between the partners in a joint venture because of
differences in culture, business practices and management styles, as well as
inadequate communication resulting from the problems of distance and language.
Disputes are usually about the composition of the product line, the market
coverage of the joint venture and whether not earnings should be paid out or
ploughed back into the operation.
To minimise conflict:
• Carefully evaluate the prospective joint venture partners
• Negotiate a joint venture agreement to the benefit of all concerned
• Ensure that the agreement covers all eventualities that could possibly give
rise to disputes and that it includes an arbitration clause or similar mechanism
whereby unforeseen disagreements can be resolved
Acquisition of a foreign company
The acquisition of a foreign company involves the purchase of all or a majority of
the shareholding of that company. The advantages of acquiring an already-
established operation are considerable and include:
• The company immediate gains entry to the foreign market, thus earning
revenue from its investment immediately.
• The company's initial investment provides not only manufacturing facilities
but also established distribution arrangements, market knowledge and customer
contacts, as well as trained and experienced local staff.
• Be aware that local government incentives, often available for investment in
totally new operations, are not generally available in the case of an acquisition.
In addition, problems will invariably be encountered in the integration of a newly
acquired foreign company with the cultural and management workings of the domestic
firm.
You may want to consider the following factors when deciding on whether to go the
contracting route.
In-market distribution decisions
Understanding in-market channels
Once a market-entry strategy has been chosen to get your products into your
foreign target markets, we indicated that the next challenge you will face will be
distributing the product to the end user within these foreign markets which we
referred to as in-market (or foreign market) distribution. Distribution systems
vary significantly among nations whose economic, social and cultural environments
differ from one another. Consequently, every product and country will present a
unique distribution problem, the solution of which will require careful research
(which you will have done as part of the export research you undertook in step 7).
At the same time, your market-entry strategy will affect the in-market channel(s)
you decide to use. For example, if you are selling through an import agent, once
your product(s) reach the importer, the in-market factors come into play. These
including answering questions such as: How the importer will get the goods to the
end user? What transport will be used? Who is the eventual consumer? How long is
the distribution channel? How many other intermediaries are there? Are the
products being sold in other countries? What mark-ups are being applied and what
costs come into play?
Similarly, if you plan to use your own sales representatives or to sell directly
to the end consumer or if you plan to franchise your goods abroad or license a
foreign manufacturer to produce and sell your goods, whichever option you choose
will translate into different in-market activities. Therefore, before you can
begin to consider any in-market activities, you need to know which market-entry
option you plan to use. The one, clearly, impacts upon the other. Don't forget
that we metnioned that your in-market distribution channel will often go beyond
just the physical movement of goods and may impact on other marketing decisions
such as promotion and pricing (as your in-market partners or intermediaries make
their own marketing and distributing decisions).
What in-market factors are likely to come into consideration
Assuming you have decided on a particular market-entry channel, there are many
factors you will need to consider when looking at your in-market distribution
alternatives. These include the following:
• The number of intermediaries that make up the in-market channel
• The mark-ups applied by these intermediaries
• The services these intermediairies provide (promotion, sales, distribution,
etc.)
• The power and control of these intermediaries
Channel design
Channel design should be based on the evaluation of a number of market
characteristics. These include:
• The number, geographical location, purchasing patterns and purchasing
preferences of customers
• The bulk, weight, perishability, unit value and servicing requirements of
each export product
• The extent of the activities of existing intermediaries, e.g. In respect of
physical distribution, storage, advertising, customer credit, selling, etc.
• Whether competitors' channels can be used or whether they should be avoided,
the degree of exclusivity offered to competitors by various intermediaries, etc.
• Whether the government imposes any legal restrictions on the operations of
channel members
• The company's size, financial resources, product mix, previous channel
experience and overall marketing strategy.
In the course of your research (see step 7), problem areas will be identified. For
example, channels adopted in other markets may be non-existent in the target
market in question, few intermediaries may be available in many developing markets
and those who are available, may be operating exclusively on behalf of
competitors.
When barriers to normal in-market distribution are present, you may consider:
• Taking over local distributors
• 'Buying' distribution by offering financial incentives, e.g. high
commissions on sales
• Establishing your own distribution outlets
• Developing a totally new channel, such as that developed by Tupperware, i.e.
holding tea parties in the consumer's home at which the product is sold
• The Internet, which is rapidly changing the various marketing channels
exporters use
The final choice of foreign market channel, whether of the traditional type or an
innovation, will depend on the anticipated distribution costs, the degree of
control that can be exercised over the channel, market coverage and the likely
continuity of the distribution service over the longer term.
Anticipated distribution costs
These comprise the cost of the initial capital required for the development of a
channel and the cost of maintaining the channel, e.g. agents' commissions,
distributors' mark-ups, the cost of a company's own sales force, etc.
Degree of control over the channel
The degree of control that you will be able to exercise over the in-market channel
will depend largely on your choice of channel and on your financial resources.
Heavy advertising, for example, generates consumer demand and automatically draws
products through the distribution chain. However, less affluent manufacturers
should nevertheless endeavour to influence the intermediary's market coverage,
prices, services, etc.
Market coverage
This may be on an intensive basis, i.e. the product is made available in as many
outlets as possible, or on a selective basis, i.e. the product is made available
in only a selected number of outlets often under an exclusivity agreement. the
exporter may have difficulty in finding an intermediary who is prepared to handle
all the products in the range - often intermediaries reject the less lucrative
products.
Channel management
The selection of effective channel members in the foreign market is often a
problem. Low sales volumes hamper many channel members or are under-financed and
some simply cannot be trusted. Smaller distributors may close down when partners
retire. Others may switch loyalties when a particular product line fails to give
them lucrative margins because of adverse exchange rates or politically inspired
consumer resistance. Frequently, when a manufacturer is not well-known abroad, the
intermediary's reputation becomes that of the manufacturer - often with
devastating effects.
Screening likely candidates should involve:
• Sending a letter, including product information and distributor requirements
in the native language, to each prospect
• Following up the best respondents to extract information that is more
specific. This would include product lines already being handled, territory
covered, size of operation, number of salespersons, etc.
• Checking references from other clients and customers of the prospective
intermediary
• Where possible, visiting the most promising candidates in person
Once a suitable intermediary has been identified, a distribution agreement should
be drawn up. This would detail the specific responsibilities of both the exporter
and the intermediary, and should specify an annual sales volume target. This
target will serve as a basis for evaluation of the distributor and failure to meet
it could give the exporter the right to terminate the contract.
The role of the intermediary
The marketing function of the foreign intermediary is multi-faceted. Thus, the
intermediary could be involved in any of the following:
• Assembling products so that they form a range of complementary items that
are likely to be of interest to buyers
• Converting bulk items into smaller lots in accordance with customer
requirements
• Adapting goods to meet the needs of the marketplace
• Organising the physical distribution of products, i.e. transportation and
storage within the marketplace
• Setting appropriate prices for the goods
• Handling sales promotion and advertising
• Identifying buyers and selling to them
• Extending credit to buyers, where this is required.
Motivating intermediaries
Once intermediaries have been selected, a motivational programme should be
instituted to maintain their interest in the product(s). Apart from financial
incentives, the exporter might also provide:
• Staff training
• Advantageous credit terms
• Company communication including company newsletters, web pages etc.
• Visits by intermediaries to the company's headquarters
• Visits by the company's staff to intermediaries' offices
• Technical assistance and product support services
• Adequate product information
Terminating distributor agreements
The exporter may wish to terminate a distributor agreement, perhaps because market
conditions have altered, a intermediary's performance has not been up to standard,
or company mergers have necessitated a change in distribution policy. Dismissing
intermediaries is not an easy task because of the legal protection they enjoy in
most parts of the world.
In Norway, for example, the manufacturer must be able to prove the negligence of
the channel member concerned and even if the dismissal is sanctioned, it is likely
that the intermediary will have to be reimbursed for his investments in
establishing customer contacts and creating goodwill. In other countries, a
intermediary cannot be dismissed without the dispute going before an arbitration
board to establish whether or not the relationship should be terminated.
The customary practice, in case of a contact being terminated, is for the
dismissed party to receive indemnity equal to one year's commission - an
unexpected cost that could adversely affect the export marketing plan. To avoid
such an eventuality, seek legal advice in each export market prior to drawing up a
contract and should ensure that selection procedures are such that do not cause a
predicament of this nature.
Controlling intermediaries
A high degree of control over international channels of distribution is
particularly difficult because of the often lengthy channels involved. Some
companies set up their own distribution systems to solve this problem while others
issue franchises or establish exclusive distributorships.
Control should be two-tiered:
1. Control over the whole distribution system
2. Control over individual intermediaries
Overall controls need to be implemented for the entire system to ensure that the
export operation meets both cost and market coverage objectives. Distribution
specifics such as pricing margins and transhipping parameters should be clearly
defined. Problems may arise, for example, when goods intended for one country are
diverted through distributors to another where they compete with existing retail
or wholesale organisations handling the same product.
Marketing objectives have to be clearly spelt out to the intermediary. Standards
of performance ought to include; sales volume objectives, expected market share in
each market, feedback on inventory turnover ratios, the number of accounts per
area, growth objectives, price stability objectives, and the quality and extent of
any publicity/promotion. The standards set should be specific and in writing to
facilitate regular evaluation of performance. When standards are not met, the
causes should be investigated.
The influence of payment terms and Incoterms on distribution
What do we mean by payment terms and Incoterms?
Payment terms are the payment provisions (or details), that have typically been
negotiated between the exporter and the foreign buyer, regarding the settlement of
a transaction. These terms will normally indicate (or at least imply) the method
of payment, when payment must take place, what credit is being allowed and for how
long, and when delivery is expected. Click here(step 9) to learn more about
payment terms. These payment provisions will clearly impact on distribution. For
example, by setting the delivery date of the goods in an Letter of Credit will
place certain time constraints on the distribution of the goods to reach the
destination by the time and date specified. Selling on a consignment basis, for
example, will also mean that you need to account for perhaps having to return the
goods not sold to South Africa. What is more, you will need to pay for the
distribution of the goods in advance and this may encourage you to choose the
cheapest transportation alternative in order to keep costs down.
In exporting, payment terms commonly incorporate one or other agreed-upon Incoterm
(standing for international commercial term), such as EXW, C&F, CIF or DDP. Click
here to read more about Incoterms. The purpose of these Incoterms is to spell out
clearly where the responisbilities of the exporter and import lie in respect of
distribution and payment. For example, with EXW (ExWorks), the exporter is
responsible to deliver the goods at the factory door in South Africa, while for
CFR, the seller is responsible for the goods until such time as they cross the
ship's rails in South Africa (even though the seller - the exporter - pays for the
freight). What is more, CFR is intend for ship transportation only. Clearly,
depending on which of these two (or any other) Incoterms forms the basis of the
payment terms, the distribution responsibility of the exporter will vary
considerably. Thus payment terms and Incoterms directly affects the distribution
function.
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