Exports are essential to any competitive economy. The disciplines of exporting favour those who are informed and resourceful. Exporting requires that companies build on their strengths; research market potentials thoroughly, initiate a realistic financial plan, and enact effective delivery practices. If a company accomplishes these preparations and the follow-through, its internationalisation efforts are deemed successful.
This guide offers practical insights to SMEs that want to expand into international markets. In the pages that follow, we review processes, procedures and challenges that can help you determine the directions and timetables you need to execute a productive export plan.
Market research is your starting point to discover whether exporting can develop your business potential.
Market research is recommended for any large and small organisations. While building your company’s business strategy, it is important to collect and analyse data about a particular target market, competitors, and the market’s environment. This increases your understanding of challenges and opportunities. Such market research usually screens a range of countries to short-list the most suitable target markets.
Your research team is most likely to require two methods of data collection:
Primary research : information collected to generate specific data about targeted areas of concern.
Secondary or desk research : information collected from existing data such as reports, newspapers, magazines, journal content, and government statistics.
Your studies should be designed to assess:
Three methods can shape your market research, uncover and design opportunities, and collect crucial answers to your strategic questions. They are qualitative research and quantitative research.
Qualitative research examines how and why things are as they are. It directs your attention to issues and concerns that directly affect the human side of business.
Quantitative research examines what can be measured numerically. It usually measures market phenomena and other concerns with statistical analysis.
Your customers in different markets have developed varying interests and motivations as well as different political, social, political and economic standpoints. External PEST (P for political, E for Economic, S for social and T for technological) analysis examines opportunities and challenges that can be anticipated. This strategic analysis observes key issues affecting your target markets according to five criteria below.
- The following aspects of any potential market should be well-researched and analysed before your company launches commercial initiatives:
Physical and demographical environment
- A basic understanding of these market aspects will help you adapt your business communications, improve intercultural effectiveness, and develop strategies for overcoming cultural obstacles. Sharing short- and long-term plans with your network of contacts should be particularly informative. Such contacts include potential customers, other exporters, potential local partners, and professionals at conferences and trade events.
- Your business strategies should be informed not only by your capabilities and intentions but also by competitors’ policies and methods. Competitor analysis helps predict their behaviours. This can help you determine:
This analysis should use organised intelligence-gathering techniques that pattern a wide array of information to support well-informed strategic decisions.
Michael Porter (1985) analyses competitors according to four central qualities:
A competitor analysis should include the market’s strongest competitors, as well as potential competitors that might also begin exporting to your target area. Moreover, competitors who offer products different from yours can pose a threat to your export strategy by offering an alternative. They are called indirect competitors and should be
- You need to clarify exactly what you intend to export. Your marketing team will play a key role in this task by defining a product positioning and creating competitive advantages.
- Do not forget to incorporate information and advice from your representative or a local marketing expert in order for you to understand your intended consumers’ perspectives.
Your strategy should include the following steps:
Your product range can expand to suit market demands such as seasonal fluctuations or consumer evolution. A product can also be repositioned to make it more competitive over a long-term plan. To choose the right product positioning and to create a competitive advantage, the following factors must be carefully analysed:
When the analysis is complete, a few decisions must be made, such as whether:
Sometimes, you may need to modify a particular product (and its manuals) to satisfy buyer tastes or needs in foreign markets. You should adapt to:
Exporters should start commercialising products which do not require major reconceptualisation or technical modification. Yet services should cater to the local criteria for satisfaction, which may be significantly different from your local market.
Once you have assessed that your goods and services will be viable in your chosen market, determine your short-and long-term goals. Then execute the required modifications and consider:
First, different geographic factors must be assessed in segmentations to gain global, national, city, postal code or rural perspectives. The economic, cultural and political differences between countries can have significant influences on any marketing.
Secondly, you need to segment targeted international markets into factors that will help you clarify how those markets fit your business identity. This requires the analysis of several criteria, all of which affect whether consumers would be appropriate for what you would export:
Priority should be given to foreign markets that:
Identify the most attractive market segments you can serve according to segment preferences, patterns of competition, and company strengths.
Your distribution method should target your selected segment, best employ your resources, and minimise the need for switching to other strategies later. The foundational and day-to-day aspects of a profitable export enterprise rely on the decisions you make about the following considerations.
Decide which sales and distribution networks work best for you:
Selecting a reliable distributor or agent can be challenging as it can be hard to obtain accurate information about the quality, honesty and efficiency of various agents. The chart below outlines a way to effectively select your distribution method.
Distinctions between these methods depend on the company’s engagement in local activities.
They can also be used alone or in combination:
This method is the most complex. The exporter handles every aspect of the process from first market approach to after-sales services. Consequently, the export team should be committed totally to understanding and serving foreign customers properly. While complex, this method tends to be most profitable over a long-term growth if based on quality research.
Establishing a local office directly controls and therefore usually increases your efficiency. This office acts as your distributor and allows you to exchange information efficiently with overseas end-users and retailers.
While exporting directly, you will need to canvass your market segment. Such prospecting will position you in front of a client. Presenting your product or service directly can show you whether the relationship with the client is worth pursuing.
Plan the first exploratory visit to the market so that it coincides with a local trade show if you can. Trade shows can be a valuable way of gaining ground information. Plan your business stages around an annual calendar that includes the local interesting events.
Options for contacting your potential clients are:
A selected intermediary will sell your products abroad through existing contacts and assume a major part of the risks. To make this effective for your firm’s needs, you should insist that this agent enacts your preferred strategy and development plan.
The foreign intermediary generally provides support and service for the product, relieving the company of these responsibilities. The distributor usually carries a product inventory and sufficient spare parts, and maintains adequate facilities and personnel for servicing operations.
Distributors typically deliver a range of complementary products to retailers or dealers that belong to a pre-established network. It is essential that you ensure their commitment not to represent your competition.
Depending on your business model and product type, other options are available:
A partner knowledgeable from a local perspective can teach you about competitors, technological shifts, and new opportunities likely in your target market. A welldesigned development plan for the local market will help you retain considerable control over the local process.
To carefully identify, qualify and select your future representative, consider closely the following criteria:
When local counterparts purchase products directly, packing and marking the products to their own specifications and under their own names, this is called a private label approach. In such transactions, you relinquish control over the marketing and promotion process.
Local intermediates for indirect sales include:
Different approaches to domestic intermediates handling your exports include:
Every exporting organisation must create a dedicated foreign trade team which performs all tasks related to international sales, facilitates strategies and procedures, and carries out policies that promote the corporate presence in international markets. Train new collaborators about your export structure in detail and provide them with complete job descriptions.
Members of the export team should build consistent, effective interactions with their partners abroad.
Different export team organisation structures can be appropriate:
An international relation can deteriorate quickly without frequent communication and monthly or quarterly visits. The local counterpart should be treated as well as a domestic client. For example, partners should be notified consistently and frequently of all changes in price, contacts, addresses, and data changes. Such commitments will ensure strong product visibility in the marketplace.
Products and services delivered to your clients are inseparable from the team that renders them. The quality of service is determined by the service skills of each team member. Because these team members maintain ongoing contact with the client, they should demonstrate sophisticated interpersonal skills and cultural sensitivity.
After-sale service and cost-effective maintenance are critical for any products that require diligent pre- and post-sale service. If your distribution network has to provide this service backup, conduct a strict training programme with a knowledgeable local team, periodically assess service quality, and ensure that spare parts are readily available.
The main components of pricing are market demand, costs, and competition. Your market research should include an analysis of all of variables that impact pricing.
Take into account additional costs inherent in the export process, as they substantially increase the final price paid by the importer. These include transport, transaction costs, customs tax, foreign exchange fees, and value-added taxes.
Discuss expenses and pricing with your accountant. Evaluating each factor will likely result in export prices that differ from domestic prices.
The market-linked parameters below must be considered in calculating your export price:
The internal parameters below must be considered when calculating your export price:
SMEs traditionally have been restrained from conducting international trade because of their limited resources, even when their underlying profitability was sound, because international activities usually require planning for an investment over a period of time.
Management should monitor continually the financial implications of becoming a viable exporter. Below are strategies that can address these challenges:
The export component of your business should be self-sustaining as soon as possible. The best way to ensure this is an accurate cash flow forecast. You need to ensure that you identify the initial capital outlay to fund export set-up costs, have more money coming in than going out, and provide for the daily money flow.
A cash flow forecast will also help you identify gaps in your planning. For example, if most or all of your sales will be credit rather than cash, payment could be delayed one to two months – or even longer – after the sale, depending on how efficiently you can secure payment.
This will always be the most difficult aspect of any export budget. It is important to resist the temptation to make top-down market predictions. Your estimates should be carefully researched and cautious, based on your assessment of competitors and their market share, what the local customers are likely to buy, and what marketing and promotions can drive sales.
Once you have researched your selling price, identified your costs, and completed the cash flow forecast, you are in position to calculate your break-even point. This will help you assess whether the export process is feasible.
It may also give you an indication of the minimum quantities you need to ship, or the hours you need to work, to make the effort worthwhile. You can then compare the required break-even point (minimum quantities or minimum hours) with your research on the level of demand in the actual market. This calculation should consider the following:
Many business owners seeking investment funding are unable to articulate their financial details. But investors should consider the following points crucial:
It is important to use specialist financial advisors, either in-house or service providers, to understand and control your company’s cash flow and financial position.
Key export functions to allocate for your available financial resources:
Computing the actual cost of producing your product and bringing it to the market is the essential determiner of whether or not exporting your product is financially viable. If your organisation uses the cost-plus method of calculation, you simply add administration, research and development, overhead, transportation, distributor margins, and customs charges to domestic manufacturing cost.
Marginal cost-pricing is a more accurate method of pricing for new market entry. This method considers the direct expenses of producing and selling products as a floor beneath which prices cannot sink without incurring loss.
Domestic and export products may have additional costs assigned to cover expenditures associated with their postage, necessary market research, and financing, etc. It is essential for an export company to handle these costs in a specific analytical accountancy rather than in its general accountancy.
A few essential procedures allow your company to cut these costs:
A well-managed strategic process helps exporters to gain a stronger marketing positioning and a higher profitability. Effective exporters usually design their strategies to:
The goals planned with the key members of your export team should be SMART:
Newcomers in international markets often research for markets with needs and conditions similar to their domestic customers.
You must know what your company is capable of before you expand its responsibilities. One key assessment tool is the internal SWOT (strengths, weaknesses, opportunities, and threats) analysis. This identifies a corporation’s core competencies as well as predictable advantages and disadvantages of entering a target market. The SWOT analysis provides a realistic picture of the organisation by examining:
Any internal analysis of a company should be market-oriented because objectives and resources are only meaningful when they assist in meeting customer needs.
Your assessments should include:
Other factors crucial for an accurate diagnostic include:
Export risk management requires precise compliance measures because international markets present unique risks due to the diversity of laws, currencies, habits, political regimes, and culture.
Economic risks arise in a variety of forms. They can threaten the seller’s ability to collect payment for goods and services. There are risks in supplying goods on credit to a person you may not have met, who is far away, speaks a different language, has a differing cultural view of life, and whose business objectives contrast with yours.
In this arena of increased risk, export development also incurs initial capital outlay and operating costs in markets whose demand level may not yet be assured.
Economic indicator movement: Political and economic stability, protectionist tendencies, GDP, growth, inflation and unemployment can all impact profitability.
Risks during execution of the order: Unforeseen increases in production costs or cancellations during execution of an order can disrupt initiatives.
Export transactions usually begin with an inquiry from abroad that is followed by a request for a quotation. The offer or order confirmation should include these key documents:
The preferred method for export transactions is a pro forma invoice, a quotation prepared in invoice format. Pro forma invoices are not used for payment purposes.
In foreign trade, prospective buyers usually enquire about information on quantity, quality, delivery date, quotation, and other terms.
A well-structured offer describes the product, pricing, logistic conditions and also specifies the terms of sale and terms of payment. Foreign buyers who are not familiar with the product are usually offered a more detailed description than that which would be offered to a domestic buyer. An accurate quotation should include the following points:
A pro forma invoice should include two statements: one that certifies that the pro forma invoice is true and correct and another that states the country of origin of the goods. The pro forma invoice should also be clearly labelled as such.
A valid acceptance should include the following:
In intercontinental business, a contract is influenced by foreign legislation, linguistic barriers, and other cultural differences. These aspects could diminish the potential profits or the efficiency of the work collaboration.
That is the reason why legal risks should be carefully studied.
Governments require official documents like health certificates, consular invoices, security norms, certificates of inspection, etc. Some export authorisations can be granted only after satisfying expensive scientific or technical controls.
Local regulations can determine which products and technologies can or cannot be cleared through customs.
Warranties represent a commercial advantage if they distinguish your product from a competitor’s product. They can play a major role in negotiations for new markets. Levels of expectation for warranties vary by country, depending on production quality, local standards, competitive practices, the activism of consumer groups, etc.
Because customers overseas typically expect a specific level of performance, be specific as to your warranty’s coverage. Promise only what you can deliver.
Warranty service should be handled locally with the assistance of a representative or distributor. Servicing warranties will probably be more expensive and troublesome in foreign markets and may raise your product cost. Therefore, offer only warranties that are market appropriate.
Terms of sale The documented terms of sales should cover and explain in detail the following:
A documented agreement on delivery terms protects everyone from confusion over terminology that could lead to potential losses. Terms in international business transactions often sound similar to those used in domestic business, but frequently they have very dissimilar meanings. Exporters should know these terms before preparing a quotation or an invoice.
Any contract is the reflection of an economic reality and a unique business situation. To avoid mistakes or miss important points, your representation contract should account for the following:
Effective protection of intellectual property creates a significant barrier to competitors, builds credibility, adds value, and helps prevent other businesses from copying your products or services. To protect products, creations, and brand names, a company must comply with local laws on patents, copyrights, and registered property:
If your products comply with established technical conditions, you can apply for an international patent that covers the countries with markets you have targeted. The patent provides an enforceable monopoly for a certain period of time for any person or company to capitalise on new and innovative products and processes.
Registered designs and models provide an enforceable monopoly for a set period of time for certain new and/or original creations and designs such as shape, configuration, pattern, etc.
Copyright is noted by the symbol © and gives rights to the authors of original works, including those of art, literature, music, recordings, and computer software…
A trademark is noted with the symbols ® or ™ that indicate that a mark or commercial name has been registered. This is your brand, which supports and defends your reputation. It distinguishes your product from similar products issued by competition.
These protections vary from one country to another. In developing countries, barriers to the use of your own brand name or trademarks could exist. In some regions, piracy of brand names and counterfeiting of products can occur. It can be useful to obtain the advice of local lawyers and consultants when appropriate.
Quality of service also affects a company’s intellectual property rights. If quality control is not maintained, the manufacturer can lose its rights to the product by the argument that it has abandoned the trademark to the distributor. Agreements with local representatives should therefore be specific about the nature of repairs, suitability and staffing of service facilities, inspection provisions, training programs, and payment of costs that these considerations require.
Other ways to maintain control of your intellectual property while exporting include:
If civil unrest breaks out in one of your foreign markets, import permits may be revoked, currency flow may be interrupted, and international payment moratoriums or boycotts may occur.
Governments might also build barriers to limit their imports, including: duty, quota limits, imports licensing, tariff or non-tariff barriers, health regulations, and environmental standards. Exporting companies may find that “buy-local” policies restrict their products.
If you incorporate a local branch, verify that the exporting country has a double taxation avoidance agreement (DTAA) with Luxembourg to avoid double taxation of your local profit. Tax is a critical and complex issue, so we strongly recommend that you discuss the subject with a reliable tax advisor in Luxembourg.
Confidentiality conditions and a signed non-disclosure agreement enable a company to disclose private information to a counterpart while protecting its property. Confusion about intellectual property could lead to legal action with another company.
Success is also a risk because it obliges you to remain committed to the defined export strategy and forecasted sales levels.
Exporters can call on banking techniques, credit and/or insurance policies, and incentive measures. Transaction insurance, for example, is essential for a buyer who wishes to minimise economic risk. To select any of these risk-preventative tools, you need to first implement a quality diagnostic that will identify all the risks, evaluate financial needs, and find the optimal procedure that covers each risk.
Not all risks originate in the international environment. Internal and strategic decisions can also lead to a failed export development. Below are scenarios that could lead to failures:
When shipping a product overseas, the exporter should strictly control packaging, labelling, documentation, and insurance requirements. This could lead to prompt delivery of the product, providing a key advantage in making the sale.
Products must be documented correctly to meet local requirements. They must also arrive in without damage. Exporters should anticipate potential problems such as breakage, moisture, theft, and excess weight by insuring the goods against damage, loss and delay.
The following table presents an optimal procedure for packing and shipping:
Marking and labelling should be used on export shipping cartons and containers to:
Most exporters rely on an international freight forwarder to perform these services because exporting physical goods requires time-consuming and multitudinous precautions. International freight forwards advise you about freight costs, port charges, consular fees, special documentation, insurance costs, and their handling fees.
Incoterms or international commercial terms, a series of international sales terms published by the International Chamber of Commerce, are widely used in international commercial transactions.
They are divide transaction costs and responsibilities between buyer and seller and reflect state-of-the-art transportation practices (see glossary for more details).
In addition to the considerations above, you should secure a cargo insurance. Your export goods should be well-covered by insurance, and both parties involved in the export transaction must be aware fully of their responsibilities.
Note that you may have an insurable interest long after the goods have left your possession, while your buyers are at risk until they receive your goods. The terms of cover are usually defined in the sale contract or letter of credit.
Because being paid in full and punctually is of great concern in any business, the level of risk in extending credit should not be taken lightly.
Any new international customer has to be carefully evaluated, and a complete due diligence of the buyer’s financial capabilities should be mandatory. If the risk is significant, an irrevocable and confirmed letter of credit or even payment in advance should be imposed. The customer relations manager should monitor older accounts periodically to identify unfavourable changes in a customer’s payment patterns.
For difficult markets situations, international bankers and experts can advise you on how to cope with unusual circumstances.
Common methods of payment are listed below, from most to least secure:
The exporter is relieved of collection problems and has immediate use of the money. A wire transfer is commonly used and offers the advantage of being almost immediate. Payment by check is not recommended.
Advance payments tend to incur cash flow problems and increased risks for the buyer. This solution is characteristically not for long-term collaboration.
Payment by letter of credit is based on pre-established documents, not on the terms of sale or the physical condition of the goods. The letter of credit specifies the documents that must be presented by the exporter, such as an ocean bill of lading (original and several copies), a consular invoice, a draft, and an insurance policy.
The letter of credit also contains an expiration date. Before payment, the bank is responsible for making payment, and for verifying that all documents conform to the letter of credit requirements. If not, the discrepancy must be resolved before payment can be made and before the expiration date. A letter of credit may be irrevocable and thus cannot be changed unless both parties agree, or revocable, in which case either
party may make changes.
We do not recommend a revocable letter of credit because it exposes the exporter to additional risks.
The exporter simply bills the customer, who is expected to pay under agreed terms at a fixed date. The absence of documents and banking channels can make it difficult to pursue the legal enforcement of claims; additionally, an exporter occasionally has to pursue collection abroad, which can be difficult and costly.
Methods for solving payment problems:
Effective promotion is communication with customers and fine-tuning your product launch strategy in the market. Communication of your competitive advantages will provide information to the end user and encourage him to purchase your product or service.
As your communication channels and strategies become increasingly efficient, choose local promotional tools that will increase your market penetration and brand awareness:
A variety of factors help you determine your promotional actions:
Attending local business exhibitions can facilitate your development in the market. Showcase and demonstrate your latest products and service, study rivals, and learn about recent trends and opportunities.
Building credibility with testimonials from previous customers rapidly becomes a competitive advantage and increases your credibility. This tactic will inspire your buyers’ confidence.
Your promotional objectives should be clear, specific, brief, and set quantified goals. Your objectives represent a benchmark which you will monitor, evaluate, and improve.
Once you are clear about your promotional objectives, decide which tactics or fusion of tactics will elicit the best results. Your tactics should be geared toward establishing connections. For example, you might send out a direct mailing package with brochures that you can follow up with a phone call. Or you could advertise in a trade journal targeting further enquiries or even generating immediate sales.
Strategy implementation is a critical and risky step, particularly if sequence and phasing are not carefully organised. Planning will strengthen your unique position in the market. Ensure that your resources and talent are aligned to secure the position for which you are aiming.
Once you decide which market entry strategy you will use, it is important that you assign responsibility to appropriate personnel for each task. Bear in mind that if you need to travel to your target market, you may also need to delegate the responsibility of running your business back home while you are away. This factor should be included into your promotion plan.
Exporting should improve your competitiveness by exposing your organisation to new environments and market conditions. If well-managed and controlled, exporting will facilitate growth and prosperity, and reap tangible benefits for your company.
Developing a simple and flexible plan that takes into account the market conditions will help you to structure your activities, obtain a positive return and avoid most of the numerous risks that you face, as long as you adhere to local rules and regulations.
Fully understanding your product’s competitive advantages enables you to institute an efficient and practical promotion plan that has measurable results.
Strong credit protection and support from an experienced lawyer protecting your intellectual property also minimises your risk. Closely monitoring the end-users’ needs, the cultural factors, and the competition will ensure a successful exporter can ensure his payment and secure the gross profit margin through an accurate pricing.
Once you choose your direction and clearly identify your objectives, it is essential that you fix a timetable and determine subsequent actions. Export managers should consider that it can take at least two years to build effective relationships, obtain sustainable growth and return, and consolidate an exporting revenue stream for their business.
With many available market entry methods available, choosing between direct sales and a local alliance, or choosing a combination of both, is not easy. Selecting a suitable business counterpart that has an adequate distribution network is crucial to your local success.
Finally, to ensure that you take a realistic approach, you should remember that:
Here is a list of important terms that are most frequently used in international trade:
Air freight shipments are handled by air waybills , which can never be made in negotiable form.
A bill of lading is a contract between the owner of the goods and the carrier, which, as in the case of domestic shipments, is assigned to export shipment.