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Global Business Today 8e by Charles W. Hill 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not...

Good Morning my friend

Enclosed is this weeks Discussion ( sending assignment separately), Thank you in advance for your help. 

Respond to your Discussion topic after you have completed your reading.

Examining the Export Process

You are the assistant to the CEO of a small textile firm that manufactures quality, premium-priced, stylish clothing. The CEO has decided to see what the opportunities are for exporting and has asked you for advice as to the steps the company should take.

Checklist:

Read Chapter 14 in your text.

Visit the U.S. Government website:

Source: Export.gov: Helping U.S. Companies Export. Retrieved from http://export.gov/


Based on information contained in Chapter 14 of your text and the Internet site above, respond to the following:

What specific steps should this firm take to pursue exporting as a business option and what advice would you give the CEO? Explain.

Be sure to address the Discussion topic(s) in an initial post of at least 150 words

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Global Business Today 8e by Charles W.L. Hill
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© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 14-2 Chapter 14 Exporting, Importing, and Countertrade
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Page 392 small businesses export. According to the company, this resource helped the company to better understand the markets it was targeting for exports. Without such help, it would have been limited to cold­calling prospects. On the marketing side, to supplement its in­country distributors, SteelMaster has used a website to reach more international prospects. In addition to English, the company has a Spanish language website and introductory pages in Arabic, French, Portuguese, Romanian, and Korean, among others. By bidding for key words on search engines such as Google and Bing, SteelMaster has found that it has been able to drive traffic to its website—and that enhances people’s understanding of the product and can ultimately translate into sales. Sources: L.L. Sowinski, “And the Winner Is…”, World Trade, January 2011, pp. 40–42; “Virginia Based Company Wins SBA/VISA Export Video Contest,” U.S. Newswire, November 7, 2011; and “UPS Honors SteelMaster with Global Trade Award,” Business Wire, January 12, 2011. Introduction The previous chapter reviewed exporting from a strategic perspective. We considered exporting as just one of a range of strategic options for profiting from international expansion. This chapter is more concerned with the nuts and bolts of exporting (and importing). It looks at how to export. As the opening case makes clear, exporting is not just for large enterprises; many small firms such as SteelMaster have benefited significantly from the money­making opportunities of exporting. The volume of export activity in the world economy has increased as exporting has become easier. The gradual decline in trade barriers under the umbrella of GATT and now the WTO (see Chapter 7) along with regional economic agreements such as the European Union and the North American Free Trade Agreement (see Chapter 9) have significantly increased export opportunities. At the same time, modern communication and transportation technologies have alleviated the logistical problems associated with exporting. Firms are increasingly using the Internet, toll­free phone numbers, and international air express services to reduce the costs of exporting. Consequently, it is not unusual to find thriving exporters among small companies. ANOTHER PERSPECTIVE Autarky: Not in the Vocabulary of Globalization! The word autarky refers to the belief that a country should be self­sufficient and avoid trade with other nations. Most economists regard autarky as an idealistic, but impractical, goal. Throughout history, countries have tried to achieve autarky, but soon discovered they could not produce the wide range of goods their population wants and make those goods available at competitive prices. In fact, those countries found themselves worse off economically than nations that engage in international trade. Word to the wise: Unless your country can efficiently produce everything it needs, it needs to trade. Source: “Economics A­Z,” www.economist.com. Nevertheless, exporting remains a challenge for many firms. Smaller enterprises can find the process intimidating. The firm wishing to export must identify foreign market opportunities, avoid a host of unanticipated problems that are often associated with doing business in a foreign market, familiarize
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Page 393 with weak currencies can be a problem. Countertrade allows payment for exports to be made through goods and services rather than money. This chapter discusses all these issues with the exception of foreign exchange risk, which was covered in Chapter 10. The chapter opens by considering the promise and pitfalls of exporting. The Promise and Pitfalls of Exporting The great promise of exporting is that large revenue and profit opportunities are to be found in foreign markets for most firms in most industries. This was true for SteelMaster, which was profiled in the opening case. The international market is normally so much larger than the firm’s domestic market that exporting is nearly always a way to increase the revenue and profit base of a company. By expanding the size of the market, exporting can enable a firm to achieve economies of scale, thereby lowering its unit costs. Firms that do not export often lose out on significant opportunities for growth and cost reduction. 1 Consider the case of Marlin Steel Wire Products, a Baltimore manufacturer of wire baskets and fabricated metal items with revenues of about $5 million. Among its products are baskets to hold dedicated parts for aircraft engines and automobiles. Its engineers design custom wire baskets for the assembly lines of companies such as Boeing and Toyota. It has a reputation for producing high­quality products for these niche markets. Like many small businesses, Marlin did not have a history of exporting. However, in the mid­2000s, Marlin dipped its toe in the export market, shipping small numbers of products to Mexico and Canada. Marlin CEO Drew Greenblatt soon realized that export sales could be the key to growth. In 2008, when the global financial crisis hit and America slid into a serious recession, Marlin was exporting only 5 percent of its orders to foreign markets. Greenblatt’s strategy for dealing with weak demand from the United States was to aggressively expand its international sales. By 2010, exports accounted for 17 percent of sales, and the company has set a goal of exporting half of its output by 2014. 2 Despite examples such as SteelMaster and Marlin, studies have shown that while many large firms tend to be proactive about seeking opportunities for profitable exporting— systematically scanning foreign markets to see where the opportunities lie for leveraging their technology, products, and marketing skills in foreign countries—many medium­sized and small firms are very reactive. 3 Typically, such reactive firms do not even consider exporting until their domestic market is saturated and the emergence of excess productive capacity at home forces them to look for growth opportunities in foreign markets. Also, many small and medium­sized firms tend to wait for the world to come to them, rather than going out into the world to seek opportunities. Even when the world does come to them, they may not respond. An example is MMO Music Group, which makes sing­along tapes for karaoke machines. Foreign sales accounted for about 15 percent of MMO’s revenues of $8 million, but the firm’s CEO admits this figure would probably have been much higher had he paid attention to building international sales. Unanswered e­mails and phone messages from Asia and Europe often piled up while he was trying to manage the burgeoning domestic side of the business. By the time MMO did turn its attention to foreign markets, other competitors had stepped into the breach, and MMO found it tough going to build export volume. 4 MMO’s experience is common, and it suggests a need for firms to become more proactive about seeking export opportunities. One reason more firms are not proactive is that they are unfamiliar with foreign market opportunities; they simply do not know how big the opportunities actually are or where they might lie. Simple ignorance of the potential opportunities is a huge barrier to exporting. 5 Also, many would­be exporters, particularly smaller firms, are often intimidated by the complexities and mechanics
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Page 394 prosecuted. learning about a country’s trade regulations, business practices, and more before a deal can be closed. The accompanying Management Focus, which documents the experience of FCX Systems in China, suggests that it may take years before foreigners are comfortable enough to purchase in significant quantities. LEARNING OBJECTIVE 1 Explain the promises and risks associated with exporting. MANAGEMENT FOCUS FCX Systems Founded with the help of a $20,000 loan from the Small Business Administration, FCX Systems is an exporting success story. FCX makes power converters for the aerospace industry. These devices convert common electric utility frequencies into the higher frequencies used in aircraft systems and are primarily used to provide power to aircraft while they are on the ground. Today, the West Virginia enterprise generates more than half of its annual sales from exports to more than 70 countries. FCX’s prowess in opening foreign markets has earned the company several awards for export excellence, including a presidential award for achieving extraordinary growth in export sales. FCX initially got into exporting because it found that foreigners were often more receptive to the company’s products than potential American customers. According to Don Gallion, president of FCX, “In the overseas market, they were looking for a good technical product, preferably made in the U.S., but they weren’t asking questions about ‘How long have you been in business? Are you still going to be here tomorrow?’ They were just anxious to get the product.” In 1989, shortly after it had been founded, FCX signed on with an international distribution company to help with exporting, but Gallion became disillusioned with that company, and in 1994 FCX started to handle the exporting process on its own. At the time, exports represented 12 percent of sales, but by 1997 they had jumped to more than 50 percent of the total, where they have stayed since. In explaining the company’s export success, Gallion cites a number of factors. One was the extensive assistance that FCX has received over the years from a number of federal and state agencies, including the U.S. Department of Commerce and the Development Office of West Virginia. These agencies demystified the process of exporting and provided good contacts for FCX. Finding a good local representative to help work through local regulations and customs is another critical factor, according to Gallion, who says, “A good rep will keep you out of trouble when it comes to customs and what you should and shouldn’t do.” Persistence is also very important, says Gallion, particularly when trying to break into markets where personal relationships are crucial, such as China. China has been an interesting story for FCX. Recently, the company has been booking $2 million to $3 million in sales to China, but it took years to get to this point. China had been on Gallion’s radar screen since the early 1990s, primarily because of the country’s rapid modernization and its plans to build or remodel some 179 airports between 1998 and 2008. This constituted a potentially large market opportunity for FCX, particularly compared with the United States, where perhaps only three new airports would be built during the same period. Despite the scale of the opportunity, progress was very slow. The company had to identify airports and airline projects, government agencies, customers, and decision makers, as well as work through different languages—and make friends. According to Gallion, “Only after they consider you a friend will they buy a product. They believe a friend would never cheat you.” To make friends in China, Gallion estimates he
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Page 395 Sources: J. Sparshott, “Businesses Must Export to Compete,” The Washington Times, September 1, 2004, p. C8; “Entrepreneur of the Year 2001: Donald Gallion, FCX Systems,” The State Journal, June 18, 2001, p. S10; and T. Pierro, “Exporting Powers Growth of FCX Systems,” The State Journal, April 6, 1998, p. 1. Exporters often face voluminous paperwork, complex formalities, and many potential delays and errors. According to a UN report on trade and development, a typical international trade transaction may involve 30 parties, 60 original documents, and 360 document copies, all of which have to be checked, transmitted, reentered into various information systems, processed, and filed. The United Nations has calculated that the time involved in preparing documentation, along with the costs of common errors in paperwork, often amounts to 10 percent of the final value of goods exported. 10 QUICK STUDY 1. What are the benefits of exporting? 2. What are the risks and pitfalls associated with exporting? Improving Export Performance Inexperienced exporters have a number of ways to gain information about foreign market opportunities and avoid common pitfalls that tend to discourage and frustrate novice exporters. 11 In this section, we look at information sources for exporters to increase their knowledge of foreign market opportunities, we consider the pros and cons of using export management companies (EMCs) to assist in the export process, and we review various exporting strategies that can increase the probability of successful exporting. We begin, however, with a look at how several nations try to help domestic firms export. LEARNING OBJECTIVE 2 Identify the steps managers can take to improve their firm’s export performance AN INTERNATIONAL COMPARISON One big impediment to exporting is the simple lack of knowledge of the opportunities available. Often, there are many markets for a firm’s product, but because they are in countries separated from the firm’s home base by culture, language, distance, and time, the firm does not know of them. Identifying export opportunities is made even more complex because more than 200 countries with widely differing cultures compose the world of potential opportunities. Faced with such complexity and diversity, firms sometimes hesitate to seek export opportunities. The way to overcome ignorance is to collect information. In Germany, one of the world’s most successful exporting nations, trade associations, government agencies, and commercial banks gather information, helping small firms identify export opportunities. A similar function is provided by the Japanese Ministry of International Trade and Industry (MITI) , which is always on the lookout for export opportunities. In addition, many Japanese firms are affiliated in some way with the sogo shosha, Japan’s great trading houses. The sogo shosha have offices all over the world, and they proactively, continuously seek export opportunities for their affiliated companies large and small. 12 German and Japanese firms can draw on the large reservoirs of experience, skills, information, and other resources of their respective export­oriented institutions. Unlike their German and Japanese competitors, many U.S. firms are relatively blind when they seek export opportunities; they are
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Page 396 MANAGEMENT FOCUS Exporting with a Little Government Help Exporting can seem like a daunting prospect, but the reality is that in the United States, as in many other countries, many small enterprises have built profitable export businesses. For example, Landmark Systems of Virginia had virtually no domestic sales before it entered the European market. Landmark had developed a software program for IBM mainframe computers and located an independent distributor in Europe to represent its product. In the first year, 80 percent of sales were attributed to exporting. In the second year, sales jumped from $100,000 to $1.4 million—with 70 percent attributable to exports. Landmark is not alone; government data suggest that in the United States, more than 97 percent of the 240,000 firms that export are small or medium­sized businesses that employ fewer than 500 people. Their share of total U.S. exports grew steadily and is around 30 percent today. To help jump­start the exporting process, many small companies have drawn on the expertise of government agencies, financial institutions, and export management companies. Consider the case of Novi Inc., a California­based business. Company President Michael Stoff tells how he utilized the services of the U.S. Small Business Administration (SBA) Office of International Trade to start exporting: “When I began my business venture, Novi Inc., I knew that my Tune­Tote (a stereo system for bicycles) had the potential to be successful in international markets. Although I had no prior experience in this area, I began researching and collecting information on international markets. I was willing to learn, and by targeting key sources for information and guidance, I was able to penetrate international markets in a short period of time. One vital source I used from the beginning was the SBA. Through the SBA I was directed to a program that dealt specifically with business development—the Service Corps of Retired Executives (SCORE). I was assigned an adviser who had run his own import/export business for 30 years. The services of SCORE are provided on a continual basis and are free. As I began to pursue exporting, my first step was a thorough marketing evaluation. I targeted trade shows with a good presence of international buyers. I also went to DOC (Department of Commerce) for counseling and information about the rules and regulations of exporting. I advertised my product in Commercial News USA, distributed through U.S. embassies to buyers worldwide. I utilized DOC’s World Traders Data Reports to get background information on potential foreign buyers. As a result, I received 60 to 70 inquiries about Tune­Tote from around the world. Once I completed my research and evaluation of potential buyers, I decided which ones would be most suitable to market my product internationally. Then I decided to grant exclusive distributorship. In order to effectively communicate with my international customers, I invested in a fax. I chose a U.S. bank to handle international transactions. The bank also provided guidance on methods of payment and how best to receive and transmit money. This is essential know­how for anyone wanting to be successful in foreign markets.” In just one year of exporting, export sales at Novi topped $1 million and increased 40 percent in the second year of operations. Today, Novi Inc., is a large distributor of wireless intercom systems that exports to more than 10 countries. Sources: Small Business Administration Office of International Trade, “Guide to Exporting,” www.sba.gov/oit/info/Guide­ ToExporting/index.html; U.S. Department of Commerce, “A Profile of U.S. Exporting Companies, 2000–2001,” February 2003, report available at www.census.gov/foreign­trade/aip/index.html#profile; The 2007 National Exporting Strategy (Washington, DC: United States International Trade Commission, 2007).
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Page 397 employs 76 district international trade officers and 10 regional international trade officers throughout the United States as well as a 10­person international trade staff in Washington, DC. Through its Service Corps of Retired Executives (SCORE) program, the SBA also oversees some 11,500 volunteers with international trade experience to provide one­on­one counseling to active and new­to­export businesses. The SBA also coordinates the Export Legal Assistance Network (ELAN), a nationwide group of international trade attorneys who provide free initial consultations to small businesses on export­related matters. In addition to the Department of Commerce and SBA, nearly every state and many large cities maintain active trade commissions whose purpose is to promote exports. Most of these provide business counseling, information gathering, technical assistance, and financing. Unfortunately, many have fallen victim to budget cuts or to turf battles for political and financial support with other export agencies. A number of private organizations are also beginning to provide more assistance to would­be exporters. Commercial banks and major accounting firms are more willing to assist small firms in starting export operations than they were a decade ago. In addition, large multinationals that have been successful in the global arena are typically willing to discuss opportunities overseas with the owners or managers of small firms. 13 LEARNING OBJECTIVE 2 Identify the steps managers can take to improve their firm’s export performance. Export Management Export specialists who act as an export marketing department for client firms. Utilizing Export Management Companies One way for first­time exporters to identify the opportunities associated with exporting and to avoid many of the associated pitfalls is to hire an export management company (EMC). EMCs are export specialists that act as the export marketing department or international department for their client firms. EMCs normally accept two types of export assignments. They start exporting operations for a firm with the understanding that the firm will take over operations after they are well established. In another type, start­up services are performed with the understanding that the EMC will have continuing responsibility for selling the firm’s products. Many EMCs specialize in serving firms in particular industries and in particular areas of the world. Thus, one EMC may specialize in selling agricultural products in the Asian market, while another may focus on exporting electronics products to eastern Europe. MANAGEMENT FOCUS Export Strategy at 3M 3M, which makes more than 40,000 products including tape, sandpaper, medical products, and the ever­ present Post­it notes, is one of the world’s great multinational operations. Today, more than 60 percent of the firm’s revenues are generated outside the United States. Although the bulk of these revenues came from foreign­based operations, 3M remains a major exporter with more than $2 billion in exports. The company
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Page 398 navigate the paperwork and regulations so often involved in exporting. Second, it often makes sense to initially focus on one market or a handful of markets. Learn what is required to succeed in those markets before moving on to other markets. The firm that enters many markets at once runs the risk of spreading its limited management resources too thin. The result of such a shotgun approach to exporting may be a failure to become established in any one market. Third, as with 3M, it often makes sense to enter a foreign market on a small scale to reduce the costs of any subsequent failure. Most importantly, entering on a small scale provides the time and opportunity to learn about the foreign country before making significant capital commitments to that market. Fourth, the exporter needs to recognize the time and managerial commitment involved in building export sales and should hire additional personnel to oversee this activity. Fifth, in many countries, it is important to devote a lot of attention to building strong and enduring relationships with local distributors and/or customers (see the Management Focus on Red Spot Paint for an example). Sixth, as 3M often does, it is important to hire local personnel to help the firm establish itself in a foreign market. Local people are likely to have a much greater sense of how to do business in a given country than a manager from an exporting firm who has previously never set foot in that country. Seventh, several studies have suggested the firm needs to be proactive about seeking export opportunities. 16 Armchair exporting does not work! The world will not normally beat a pathway to your door. Finally, it is important for the exporter to retain the option of local production. Once exports reach a sufficient volume to justify cost­efficient local production, the exporting firm should consider establishing production facilities in the foreign market. Such localization helps foster good relations with the foreign country and can lead to greater market acceptance. Exporting is often not an end in itself, but merely a step on the road toward establishment of foreign production (again, 3M provides an example of this philosophy). LEARNING OBJECTIVE 2 Identify the steps managers can take to improve their firm’s export performance. MANAGEMENT FOCUS Red Spot Paint & Varnish Established in 1903 and based in Evansville, Indiana, Red Spot Paint & Varnish Company is, in many ways, typical of the companies that can be found in the small towns of America’s heartland. The closely held company, whose former CEO, Charles Storms, is the great­grandson of the founder, has 500 employees and annual sales of close to $90 million. The company’s main product is paint for plastic components used in the automobile industry. Red Spot products are seen on automobile bumpers, wheel covers, grilles, headlights, instrument panels, door inserts, radio buttons, and other components. Unlike many other companies of a similar size and location, however, Red Spot has a thriving international business. International sales (which include exports and local production by licensees) now account for between 15 percent and 25 percent of revenue in any one year, and Red Spot does business in about 15 countries. Red Spot has long had some international sales and once won an export award. To further its international business, Red Spot hired a Central Michigan University professor, Bryan Williams. Williams, who was hired because of his foreign­language skills (he speaks German, Japanese, and some Chinese), was the first employee at Red Spot whose exclusive focus was international marketing and sales. His first challenge was the lack of staff skilled in the business of exporting. He found that it was difficult to build an international
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