Practice of International Trade EIMSO2 Lecture V3

Developed by:Dr. Basil J. Janavaras

Professor of International BusinessMinnesota State University, Mankato, USA

Export Management System Online

www.eimso2.com

funded by Tunghai International Business for the Practice of International Business Course

Suggestions to Start:1. Preview all four Modules to see the big

picture2. Print & review our Case Example (Select

Bedding)3. Review Porters 5 Forces Model:

eLearning Document (Mindspring)

EIMSO link or International Business textbook

4. Review SWOT Models:1. eLearning Document (Mindspring, Southwest Airlines)

Management textbooks or online sources

5. Print out & follow complete EIMSO User Guide (help)

Company situationModule 1:

Overview1. Choose Industry &

Company2. Conduct internal analysis3. Determine international

experience (if any)4. Conduct Porters 5 Forces

analysis: evaluate the profitability

or power dynamics of the specific industry

5. Select a specific product line or service of the chosen company (to export)

6. Analyze companies readiness to export

7. Conduct a SWOT Analysis Evaluate your company’s

competitive position

8. Briefly state conclusions and recommendations for Module 1

Module 1: Company Situation Analysis

1.1 Company AnalysisCompany Selection

Choose a company that you know about or have an interest in

Select one that has information readily availablePublic traded

company or private one that you have a relationship with

Try to find a company from Taiwan or Asia

1. (a) Background2. (b) Mission3. (c) Sales/Profits for

3 Years4. (d) International

Strategies No. of countries

(resources, risk, experience)

Sales, Assets, HR Operating Subsidiaries

5. (e) Intl. Situation Experience Motives

Diversification Strategy (high)

Many markets, quickly, and increasing resources gradually to all

Expensive, requires extensive management for success

Licensing / franchising entry strategies can reduce resource requirements

one or a few foreign markets until it develops a strong competitive position there

Less resource intensive Less risk intensive

1.1 d Corporate Level International Strategy

Concentration Strategy (low)

Describes a companies movement into foreign markets:

Prefer PreferFactor Broad (Diversification) Narrow

(Concentration)

if: if:

1. Market growth rate low high2. Market sales stability low high3. Need for product adaptation low high4. Need for promotion low high

and distribution adaptation5. Program control requirement low high6. Resource Constraints low high

Source: “Marketing Expansion Strategies in International Marketing,” Journal of Marketing, Spring 1979, p.89.

Diversification vs. Concentration Strategies: Product and Market Factors

1.1 e Levels / Degree’s of Exporting

1.1 e Export Motives:

Methods Indirect Export (local

middleman)

Direct

Foreign Sales/Marketing Subsidiary

License/Franchise

Foreign Factory

Within current Sales/Marketing

Administrative Export Department Logistics Department

International Division

Global Structure (product, geography, function)

1.2 International Involvement

Organization

Key: Export functions closer to the C.E.O show more resource, attention and commitment to international business

International Alternative Options

Indirect / Direct

INDIRECT:

Occurs when the

exporting

company uses an

external

organization

located within the

same country.

May use a

separate

department to

correspond, but

does no engage in

any international

sales activities

DIRECT: Direct

sale to importer

or buyer in

foreign market.

Merchants (take ownership) vs. Agents (do not)

TodayForeign Sales % of

Total SalesForeign Assets % of

Total AssetsOverseas Subsidiaries

% of total subsidiariesGeographic Dispersion

of International operations

Executive's International Experience

How international the company can be?

How international the company wants to be?

1.2a International Involvement Degrees/Gap Analysis

Future Desire

Export Department

Organizational StructuresInternational Division

Porters Five Forces“To Sustain long term profitability you must respond

to your competition strategically”. Michael Porter, 1979, The Five Forces of Industry Strategy We always monitor our rivals (competitors) …but there is

more: Smart customers can force down prices (buying groups

Wal*Mart) Suppliers can limit your profits if they are powerful enough to

dictate prices to you (E.g. Microsoft) New entrants (competitors), often with lower cost structures and

hungry for success can require you to increase investments/upgrades to maintain your position (E.g. Ryan Air UK, Gol Brasil)

Substitute offers can someday lure your customers away (E.g. Magellan GPS vs. the iPhone or Blackberry)

1.3 Industry Analysis

Threat of New

Entrants

Bargaining

Power of

Suppliers

Bargaining

Power of Buyers

Threat of

Substitutes

Rivalry among existing Competitors

Supplier & Buyer PowerSupplier Power: how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you or the cost of switching from one to another.

The fewer the supplier choices you have, and the more you and the more you need suppliers' help, the more powerful your suppliers are.

Buyer Power: how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on.

If you deal with few, powerful buyers, they are often able to dictate terms to you.

Competitive Rivalry & SubstitutionCompetitive Rivalry: The number and capability of your competitors – if you have many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation. If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.

Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.

Threat of New Entry

Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.

Porters Five Forces

Click icon to add picture

New Entry

Competitive

Rivalry

Suppliers

Buyers

Substitutions

Worksheet

One of the least profitable industries because all five forces are strong:Established rivals: compete intensely on price

(online reservation systems change continuously, Expedia, Travelocity, Bing)

Customers are fickle, always searching for the lowest fare, regardless of carrier (airline independent – non loyal, miles only go so far)

Suppliers; Plane (Boeing) and Engine Manufactures (GE, Pratt & Whitney) are few and strong, so are labor unions (highly trained employees)

New Competitors enter the market every yearSubstitutes: HSR, Bus, Car

Porters Five Forces Example: Commercial Aviation

Industry Profitability

A theory explaining the relationship between principals, such as a shareholders, and agents, such as a company's executives.

In this relationship the principal delegates or hires an agent to perform work.

The theory attempts to deal with two specific problems: first, that the goals of the principal and agent are not in conflict (agency problem), and second, that the principal and agent reconcile different tolerances for risk.

Agency TheoryWho is your

agent?

End User Description:Gender, Age, Income, Education, Frequency of

PurchasesHousehold Types (large, multi-family, singles)

Differences between Domestic and Target MarketsCustomizations required (physical, energy,

package, user guide)

1.4 Target Market Profile

Key advantages and disadvantages For the user Compared to the competition

Selling Price (maybe average for a family of products)

Product Comparison (H-M-L)Lifecycle Stages:

1.5 Product Profile

Computer assisted scoring.Team review & analysis.

1.6 Export Readiness

Strengths = Internal to Company or ProductWeaknesses = Internal to Company or

Product

Opportunities =external provided by market)Threats =external attacks from market forces

Trends = What is happening over time (3-5 yrs)Provides us a better insight over time.

1.7 SWOT + “T”

ConclusionBrief summary of significant results or new

insight based on analysis in this ModuleIdeally one statement for each sub-section

E.g. Custom index relevant to your productFinal comment: most important revelation for

your product/industry

RecommendationDecision on what next steps to pursue (go – no go)

and how new information may be useful in next step (need to pre-view Module 2)

Conclusion and Recommendation

Global Market SearchModule 2:

1. Research & Select Countries2. Select Criteria relevant to determine

market success3. Determine a “weighted value” of

importance for each criteria4. Conclusion and recommendations5. Report Generation

Module 2 Agenda

Consider Module 1 Analysis:Choose 3-10 countries based on

Product demand indicators or proxiesSimilar target market as domestic marketSimilar cultural and behavioral characteristicsPositive economic and per capita income statistics

Should indicate a high sales potentialThese countries become your “short list”

From 230 to as few as three.

Country Selection

GeneralMarket Size & Growth

RateExports/Import by Country

Past sales figures, 5 yrsby Product ReportPer Capita

Income/Discretionary Income

Middle Class Size and Growth Rate

Political Freedom

Internet penetrationTelephone penetrationMass transportation

penetrationProxies

DVD for Flat Screen TV’sHome sales for

dishwashersTariff and Quota’sCustom Factors

Industry specific

Criteria Selection

Specific (product)

Derived Marketing DataEstimate

consumption based on GDPUse other countries

as a guideIf positive slope,

tells us that GDP is important to demand

Can be used for planning sales over timeEmerging economies

with changing GDP’s

Weighted CriteriaEach criteria = X%

Enter Year, unit of measure, and the valueShould total 100%

Positive criteria to demand don’t check boxNegative impact on demand (e.g.

unemployment, corruption), check box= √Transparency International:

http://www.transparency.org/Survey:

http://www.transparency.org/news_room/in_focus/2008/cpi2008/cpi_2008_table

Country Evaluation

US Commercial Servicewww.export.gov

Doing business in>www.doingbusinessin.org

See EIMSO website resourcesCIA FactbookYahoo.finance.com

Sources

ConclusionBrief summary of significant results or new

insight based on analysis in this ModuleIdeally one statement for each sub-section

E.g. Custom index relevant to your productFinal comment: most important learning for your

product/industry

RecommendationDecision on what next steps to pursue (go – no go)

and how new information may be useful in next step (need to pre-view Module 3)

Conclusion and Recommendation

Questions???

IN-Depth Market ANALYSISModule 3:

1. Select top 2 countries2. Develop business contacts that may

assist with exporting Agents/Distributors Government agencies, etc.

3. Determine market sales potential 4. Develop a profile of the top two

competitors

Module 3 Agenda (part I)

Consider all sources of information:Government Trade offices (www.export.gov)Associations, Journals, Reports, Newspapers

Provide leads or contact names.Trade Fair Schedules (by country)

Names and coordinators of industry leads/contactsDistributors from online databases

Alibaba, ebay,

Make a list and prioritize from strong to weak.

3.1 Contacts

China ExamplesChina Consumer MarketChina Automobile

IndustryChina Beverage MarketChina Consumer

Demographics

Global Beverage MarketWorld Coffee Market

Brazil Cellular MarketBrazil Wireless IndustryBrazil Consumer MarketBrazil Consumer

Demographics

Global Automotive Market

World Wireless Data

3.1 Secondary Research Search Terms

Brazil Examples

Total Market Potential (a x b x c = TMP)A. Number of potential consumers

Eligible or qualified (ability to pay, access to store, freedom to purchase, interest)

Critical, realistic analysis, consider substitutes

B. Frequency Use domestic market as a starting point Consider differences in frequency or size of

package or culture and buying habits (household, individual extended households)

C. Selling price of the product (your estimate, can be changed)

3.2 Market and Company Sales Potential

Top DownStart with population

dataFilter for

Age, Income, Geography, Education, etc.

Specific factors for your produce/service

Result is Total Market Potential

Start with detailed existing sales data for your competitors product

Add up data from multiple competitors

Result is Total Market Potential

3.2 Market Estimation

Bottom Up

Multiply TMP by your sales success percentageto get your estimated (forecast) sales number.

Total Potential Market x Success factorEstimate your sales achievement based on

competitors distribution strategyDirect vs. non direct competitor sales is a key

factorDirect have better success, typicallyDue to closeness and information exchange from

producer to consumer

3.2 Market Estimation

A: Top three Export Competitors:See Module 1.2 for your original competitor listChoose one domestic and one international

minimallyWho is the most dangerous competitor?

Local or internationalWhat are customers buying preferences (local

or import)?

3.3 Competition

B: Export methodsRefer to export method chart for competitors

for each country – recall for your own strategy.C: Market Coverage

National, regional or local/city market coverage

D: Export methods by CompetitorChoose known export methods for your

competitorE: Final review of competitors by country

The more direct their methods, the more difficult for our plan

3.3 Competition

4. Export regulations5. Country Entry Conditions

Administrative to Infrastructure

6. The Best Target Market Country7. Conclusion (summary) &

Recommendations

Module 3 Agenda (part II)

Determine if an Export License is requiredNational security (e.g. cellular telephones,

ATM’s)Shortage (e.g. rice in Vietnam during 2008)

Search Google: “US Cellular Phone Export License”

3.4 Export Regulations

Each Country has a different set of rules for importing products. Tariff’s, quota’s and rules are all different and found in many places.

Administrative BarriersConsider paperwork, bureaucracy and other administrative

tasks. Score 1 for very difficult or 5 for easyImport Licensing

Consider the process for getting an import license (sometimes your distributor will do this), consider how difficult this task will be. Score 1 for difficult or 5 for less difficult

Quota/Tariff’sScore 1 for very high tariff’s or low quotas or 5 for low tariffs

or no quotas.

3.5a Country Entry Conditions

Convertibility of currency (e.g. can you exchange it easily and inexpensively at a bank)Score 1 if no, 5 if yes (favorable).

Country’s current account standing (balance of payments)Score 1 if no, 5 if yes (favorable).

Country’s currency is stable?Score 1 if no, 5 if yes (favorable).

3.5b Foreign Exchange Performance

1. Banking system is efficient, available, useful, helpful?

Score 1 if no, 5 if yes (favorable).

2. Energy reliability and accessibility? Score 1 if no, 5 if yes (favorable).

3. Internet connections and availability (speed, performance)

Score 1 if no, 5 if yes (favorable).

4. Telecommunications systems &5. Transportation (highways, air cargo system,

waterways, railways)1. Score 1 if no, 5 if yes (favorable).

3.5c Country Infrastructure

Regulated distribution channels, protection bias?Score 1 if no, 5 if yes (favorable).

Channels provide national accessibility (geographic reach)?Score 1 if no, 5 if yes (favorable).

Existing channels are capable to distribute our product?Score 1 if no, 5 if yes (favorable). “Capability

Analysis”

Others?

3.5d Market Channel Conditions

1. Is it easy to establish a presence (company, office)?

Score 1 if no, 5 if yes (favorable). “Doing Business In”

2. Country has anti-trust legislation (competition laws) in place?

Score 1 if no, 5 if yes (favorable).

3. Country is a member of the WTO? Score 1 if no, 5 if yes (favorable).

4. Intellectual property protection &5. Level of corruption

Score 1 if none, 5 if yes (favorable).

3.5e Legal Environment

Questions?

More than just market numbers and costs (tariff’s & transportation)Include administrative realities & bureaucracyInclude legal protection & distributor strengthInclude telecoms and transportation

This weighting will calculate the best market based on all criteria you will rank (weight)

3.6 The best target market

3.6 a Main Criteria Weighting

Result:

Conclusion:A summary or important information for each

section (at least the critical ones)Talk especially about unique factors or items

which you do not agree with the computer results

Recommendation:What choice your group will make regarding

#1 country to export to (so far)

3.7 Prepare your Conclusion (summary) and Recommendation

International tariff database: http://www.export.gov/logistics/eg_main_018142.as

p

Harmonized US Tariff Schedule:http://www.usitc.gov/tariff_affairs/

References:

Entry Strategy and Marketing PlanModule 4:

Goals: To determine the most effective entry strategy and develop a marketing plan based on previous analysis of: Company goals, resources and strengths & weaknesses Product and target market, and Available distribution alternatives

Topics: Entry Mode compared to company goals Product / Market Strategy Distribution Strategy Shipping Pricing and Payment Plans Promotion Projected Profit/Loss Statement

4.0 Module Introduction

Consider your realistic market entry options (likely export oriented)Estimate how each different entry mode would

effect your sales successEstimate on a comparative basis to the other

optionsWhich are better, (higher score) which are worse

(lower score)Enter your numerical ranking.

This weighting will calculate the best entry option for you.

4.1 Entry Mode

5 = good / favorable1 = not good / unfavorable

Ex. Would Corporate Owed Retail stores be good for sales?

Enter scores for each potantial market entry alternative

Only choose

potential

entry

options.

Consider

how that

entry

alternative

would

impact sales.

Also

consider

long term

market

knowledge

development

.

Calculate weights to find a quantitative ranking.

Explain your

choice in 4.1b.

Speak about

your best

option, then

remaining

options.

a) Focus on your specific marketsEnter data in sections that relate to your target

marketAdd additional factors if not present E.g. “other”

Place a check mark in activate box.

b) Use the information from 4.2a section to complete 4.2c Describe the market using bullets

c) Consider your target market, potential distributors and create a promotion plan

a) Goal is what you will accomplishb) Objective is how you will do itc) Time is the date of completion

4.2 a, b, c Product / Market Strategy

Short sentence

to describe

target

customer…

Marketing goals

should be very

specific for your

chosen target

market

Target market & marketing goals

Questions?

a) Channel IssuesDescribe any specific licenses or known

legal/admin threats with regard to distributors – this can be critical.

b) Choose the best channel (check all that apply)

c) Discuss the relative advantages and disadvantages from your top choices

a) Remember, your top choice may not be interestedb) Remember, your top choice may not be available -

legalc) Remember, your top choice may not be capable –

financial or technical

4.3 Distribution Strategy & Plan

a) Port of origin (EXW – Taichung, Taiwan)a) ExWorks [From Factory]– All risk to Buyer

from Factoryb) Determine the shipping origination (city,

port).

b) Port of destination (CIF – USSEA – Seattle, USA

a) http://www.worldportsource.com/countries.php

b) http://www.worldportsource.com/ports/CHL.php

c) Transportation Carrier Costsa) Airb) Oceanc) Motor / Truckd) Rail

4.4a-c Shipping Details

Total 1800

Shipping Details

a) Choose required shipping documentsBased on your product and country and transportation

Export Price List Commercial Invoice Bill of Lading Ocean Bill Shippers Export Declaration Dock Receipt Certificate of Origin

See EIMSO for examples.

Insurance Certificate Power of Attorney Pro Forma Invoice Packing Slip Air Bill Truck Bill of Lading Shippers Instructions

4.4d Documentation Requirements

Example Documents

a) Channel IssuesDescribe any specific licenses or known

legal/admin threats with regard to distributors – this can be critical.

b) Choose the best channels (check all that apply)

c) Discuss the relative advantages and disadvantages from your top choices

a) Remember, your top choice may not be interestedb) Remember, your top choice may not be available -

legalc) Remember, your top choice may not be capable –

financial or technical

4.5 Pricing/Payment Methods

a) Price: Cost Plus Pricing (Fixed? + Variable + Profit)

Decide if fixed costs are to be included or not based on weather there is existing unused factory capacity

Seek data from online sources: “XXX manufacturing costs”

iPhone example : http://www.dslreports.com/forum/r18978878-iPhone-manufacturing-cost

Our tea example = No fixed costs to start, variable is $2=Profit is $3

b) Shipping Costs: Use from Section 4.3c) Wholesale Price: Total Cost * Wholesale

Markup Cost of Tea = US$5 * 50% Markup = US$7.50

d) Retail Price: Wholesale Price * Retail Markup Wholesale Price US$7.50 * 50% Markup =

$11.25

4.5a-c Export Price EXW Taichung, Taiwan

ExWorks (Factory) Price 1,000 units.

Cost (2) + Profit (3)

Add

-Shipping

-Forwarder

-Duties

= Landed Cost in Country

Enter Markup’s = 50% or so.

Export Price

d) Determine INCOTERM for Shipping & Legal Responsibility issues

E.g. EXW ExWorks, CIF Cargo Insurance Freight, FOB Free on Board Consider shipping method and competitive

situation Consider liability and ownership of cargo

e) Choose best payment alternative Consider existing relationship, economy,

value of goods Consider common practice in industry Letter of credit is most popular export

financing method

4.5 d-e Terms of Sale & Payment Methods

Consider

advantages and

disadvantages of

each alternative,

then choose your

best option.

Incoterms and Financial Optoins

a) Select promotional options & estimate costs:

a) Consider international coach travel expenses for 1 individual at US$5,000/week.

b) Consider/estimate costs to deliver trade show materials.

c) Consider relationship building practices in each country, cost of entertainment, local travel, shows and memberships if desired.

b) Consider internet as a required mechanism localized for language and cultural access. Mobile internet access should also be evaluated.

4.6 Promotion

Trade Shows

Travel (CEO)

Government

Programs

Printed

Materials

Advertising

Promotion

1. Review Company Sales Potential and Total market Potential to estimate your unit sales and price.

1. Initial years sales should be a fraction of ongoing; perhaps growing by 100% for the first two years

2. Cost of goods sold may be found from Module 1.1c or your current estimate of the materials and labor involved in producing a unit of your product.

3. Operating expenses may be found in 1.1c or may be estimated again. Manufacturing expenses may typically range in the 10-30% range; this is dependent on your industry.

4. Calculate Net Profit.

4.7a Projected Profit/Loss (P/L)

First Year total

unit sales &

revenue

Second year

forecast & third

year forecast

OP Expenditure

is your

promotional

expenses plus

any other

expenses

incurred

resulting from

the specific

export project

Projected P & L

b) How many units are required to break even?a) Based on a percentage of gross profitb) Unit sales calculated by dividing operating

expenses by percentage of gross profit

c) Profit & Sales Case Scenariosa) Choose best case: (I usually choose my actual

planned for case here)b) Choose worst case:

a) You may reduce sales by a fraction (25%, 50%, 75%) considering economic conditions, forecast errors, selling difficulties

b) You should also consider if you selling expenses will rise

a) This is often the case in emerging markets as estimates are difficult to identify

4.7b-c Break Even Point & Scenario Planning

Break Even Point

Best Case & Worst Case Scenarios

Conclusion / Summary:A summary sentence or important information

for each section (at least the critical ones)Talk especially about unique factors or items

which were not expected and changed your strategy

Recommendation:What choice your group will make (go or no-go

based on profitability)What would be the next steps to make this plan

a reality?What is the timing involved for any next steps?

4.8 Prepare your Conclusion (summary) and Recommendation

Conclusion & Recommendation

Questions?

Course Integration & PresentationModule’s 1-4:

Review & Refine Summary /Conclusion for each Module (1-4). Make sure you mention the important findings

(learning's, insights, revelations) from each sub-module (e.g. 1.1, 1.4, 2.3, 4.1, etc).

This information should explain and tell a logical story. This should be objective not persuasive.

If there is missing data/information, make an assumption and state that the data was not available. Cite your data sources when appropriate – mention

when you make an educated estimate (guess)

Your plan should tell why your chosen product and country are the best options for an export project.

Course Integration: Export Plan

Uses the same information

from your Module Conclusion

sections. Must be factual,

reliable – well written.

Re-format it when necessary

into paragraph form. Use

complete sentences, proof-

read for grammar and

spelling.

Change your communication

from objective to persuasive

to suggest your audience

agree with your final

recommendation.

Must tell a logical story.

Executive Summary Format

15-20 minutes – approximately 15-20 slidesEveryone participates in the presentationSubmit our presentation slides and your

executive summary before your presentation.Goal is to explain and recommend a specific

product for export to a specific country, including modules 1-4:Company Readiness – Industry AnalysisProduct Readiness – User SegmentsMarket Selection – Company Sales PotentialCosts (Marketing, Shipping, Documentation,

COGS)P/L

Presentation Contents

Uses the same information

from the Executive Summary.

Simply re-format it into

PowerPoint slides – 15-20

slides for a 15-20 minute

presentation.

Change your communication

from objective to persuasive

to suggest your audience

agree with your final

recommendation.

Must tell a logical story;

Recommendation is important.

All group members must be

able to discuss all sections.

Sometimes people get sick or

change jobs.

C.E.O Powerpoint Presentation Format

C.E.O. PresentationModule’s 1-4:

Groups 1-X