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Exporting as a foreign market mode, merits, demerits
Foreign market entry modes differ in degree of risk they present, the control and commitment of resources they require and the return on investment they promise.
There are two major types of entry modes: equity and non-equity modes. The non-equity modes category includes export and contractual agreements
Exporting is the process of selling of goods and services produced in one country to other countries.
There are two types of exporting: direct and indirect.
Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in production concentrated in the home country and affording better control over distribution. Direct export works the best if the volumes are small. Large volumes of export may trigger protectionism. Types of Direct Exporting.
• Sales representatives represent foreign suppliers/manufacturers in their local markets for an established commission on sales. Provide support services to a manufacturer regarding local advertising, local sales presentations, customs clearance formalities, legal requirements. Manufacturers of highly technical services or products such as production machinery, benefit the most form sales representation.
• Importing distributors purchase product in their own right and resell it in their local markets to wholesalers, retailers, or both. Importing distributors are a good market entry strategy for products that are carried in inventory, such as toys, appliances, prepared food.
Advantages of direct exporting:
• Control over selection of foreign markets and choice of foreign representative companies
• Good information feedback from target market
• Better protection of trademarks, patents, goodwill, and other intangible property
• Potentially greater sales than with indirect exporting.
Disadvantages of direct exporting:
• Higher start-up costs and higher risks as opposed to indirect exporting
• Greater information requirements
• Longer time-to-market as opposed to indirect exporting.
Indirect exports is the process of exporting through domestically based export intermediaries. The exporter has no control over its products in the foreign market.
Types of indirect exporting:
• Export trading companies (ETCs) provide support services of the entire export process for one or more suppliers. Attractive to suppliers that are not familiar with exporting as ETCs usually perform all the necessary work: locate overseas trading partners, present the product, quote on specific enquiries, etc.
• Export management companies (EMCs) are similar to ETCs in the way that they usually export for producers. Unlike ETCs, they rarely take on export credit risks and carry one type of product, not representing competing ones. Usually, EMCs trade on behalf of their suppliers as their export departments.
• Export merchants are wholesale companies that buy unpackaged products from suppliers/manufacturers for resale overseas under their own brand names. The advantage of export merchants is promotion. One of the disadvantages for using export merchants result in presence of identical products under different brand names and pricing on the market, meaning that export merchant’s activities may hinder manufacturer’s exporting efforts.
• Confirming houses are intermediate sellers that work for foreign buyers. They receive the product requirements from their clients, negotiate purchases, make delivery, and pay the suppliers/manufacturers. An opportunity here arises in the fact that if the client likes the product it may become a trade representative. A potential disadvantage includes supplier’s unawareness and lack of control over what a confirming house does with their product.
• Nonconforming purchasing agents are similar to confirming houses with the exception that they do not pay the suppliers directly – payments take place between a supplier/manufacturer and a foreign buyer.
Advantages of indirect exporting:
• Fast market access
• Concentration of resources for production
• Little or no financial commitment. The export partner usually covers most expenses associated with international sales
• Low risk exists for those companies who consider their domestic market to be more important and for those companies that are still developing their R&D, marketing, and sales strategies.
• The management team is not distracted
• No direct handle of export processes.
Disadvantages of indirect exporting:
• Higher risk than with direct exporting
• Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting
• Inability to learn how to operate overseas
• Wrong choice of market and distributor may lead to inadequate market feedback affecting the international success of the company
• Potentially lower sales as compared to direct exporting, due to wrong choice of market and distributors by export partners.
Those companies that seriously consider international markets as a crucial part of their success would likely consider direct exporting as the market entry tool. Indirect exporting is preferred by companies who would want to avoid financial risk as a threat to their other goals.
91. Collaborative Arrangements: Licensing, Franchising, Management Contracts
A license is contractual right that helps you control, manage and protect your IP. Intellectual property (IP) is intangible property that is created in someone's mind. Categories include art, literary works, music, inventions, designs, processes and trademarks. Licenses and Your Rights
Types of Property Rights
Be familiar with the different types of property rights before you create a licensing agreement. It's also key to know the scope of your rights, such as exclusive property rights. While the law often changes in this area, the best protection is to register for any or all rights that apply to your situation:
• Copyrights - original works of authorship fixed in any tangible expression form
• Patents - inventions
• Trademarks - words, names or symbols identifying goods made or sold, distinguishing them from others
A license allows an intellectual property rights holder (the licensor) to make money from an invention or creative work by charging a user – the buyer of the lisence (the licensee) for product use. Licenses protect proprietary rights in things such as software and other computer products
Franchising is a business model in which many different owners share a single brand name. A parent company allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an initial fee and royalties based on revenues. The parent company also provides the franchisee with support, including advertising and training, as part of the franchising agreement. .
The franchising business model consists of two operating partners: the franchisor, or parent company, and the franchisee, the proprietor that operates one or multiple store locations. Franchising agreements usually require the franchisee to pay an initial fee plus royalties equal to a certain percentage of the store's monthly or yearly sales. Initial fees vary significantly across each industry, Royalty fees are also variable. The franchisee also covers the costs of actually starting and operating the store, including legal fees, occupancy or construction costs, inventory costs, and labor. Franchise agreements usually have a term of between 10 and 20 years, depending on the company.
The parent company authorizes the franchisee's use of the company's trademarks (for example, selling Big Mac's at McDonald's) as part of the franchising agreement. Additionally, the franchisor provides training and support as well as regional and/or national advertising.
Franchising is a faster, cheaper form of expansion than adding company-owned stores, because it costs the parent company much less when new stores are owned and operated by a third party. On the flip side, potential for revenue growth is more limited because the parent company will only earn a percentage of the earnings from each new store
Advantages of the Franchising Model
• Franchisees require less initial capital than independently starting a company and can use proven successful strategies and trademarks.
• Franchisees are provided with significant amounts of training, not common to most entrepreneurs.
• The franchisor benefits because it can expand rapidly without having to increase its labor force and operating costs, using much less capital.
• Franchised stores have a higher margin for the parent company than company-owned stores because of minimal operating expenses in maintaining franchised stores.
Drawbacks of the Franchising Model
• Franchising stores reduces the amount of control that the parent company has over its products and service, which may lead store quality to vary greatly from store to store.
• Franchisees must pay a percentage of their revenues to the parent company, reducing their overall earnings.
A management contract is an arrangement under which operational control of an enterprise is vested (наделять правом) by contract in a separate enterprise which performs the necessary managerial functions in return for a fee. Thus, management contract is a business format which separates ownership from operation. Management contract is a formal arrangement under which the owner of a business employs the services of an operator to act as his/her agent to provide professional management, in return for a fee. The operator assumes full responsibility for the management of the business, while the ultimate legal and financial responsibilities and rights of ownership of the property, its furniture and equipment, its working capital and the benefits of its profits (or burden of its losses) remain those of the owner. A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.
The owner usually seeks an effective return, the contractor an effective earnings stream. Typically, the fee structure is in two parts: a base fee of around 3 per cent of a business turnover and an achievement fee of around 10 per cent of gross operating profit or earnings before debt, interest and tax. Management contracts are often formed where there is a lack of local skills to run a project