INTERNATIONAL BUSINESS STRATEGY
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
SPRING 2024 - WEEK 2
LEARNING OBJECTIVES:
1.
Discuss environmental analysis and market screening
2.
Explain market indicators and market factors
3.
Describe statistical techniques for estimating market demand and categorizing similar
markets
4.
Discuss the value of trade missions and trade shows
5.
Discuss the problems that researchers face in overseas markets
6.
Explain the difference between country filtering and segment filtering
INTRODUCTION INTERNATIONAL BUSINESS STRATEGY:
International business strategy is the way a firm makes choices in the procurement and
use of scarce resources in order to achieve its international objectives. International business
strategy includes decisions that relate to all functions and activities of the firm. To be
effective, a firm's international business strategy must be internally and externally consistent.
The goal of international business strategy is to achieve and maintain competitive
advantage, i.e. a unique and favorable competitive position within a country and in the world.
To create a competitive advantage, a company must develop skills or competencies that (a)
create value for consumers and for the company's customers. (b) it is rare, as something
shared by competing firms cannot be the basis for a competitive advantage, (c) it is difficult
to imitate or substitute, (d) it is organized in such a way that it is possible to fully exploit its
competitive potential.
In designing an international business strategy, the company creates added value by
utilizing the capabilities and core competencies it already has from its domestic business
activities. The company's ability to do so is highly dependent on the competitive capabilities
of its home country. This means that one of the international business strategies is to choose
the country where the company is domiciled, or a country that is seen as a domestic business
activity. However, until now there are not many companies that really behave as global
companies in the sense that they are free and willing to determine where their headquarters
are located. Companies in Indonesia generally make Indonesia the domicile of their
headquarters. Therefore, in this lecture it is assumed that international business means the
home country as the headquarters of the company and business activities in the country are
domestic business activities. Business activities to and from outside the home country are
international business activities.
BENEFITS AND OBJECTIVES OF INTERNATIONAL BUSINESS:
The benefits of doing international business have been explained earlier, which include:
a. increasing profits and sales, b. protecting markets, profits and sales, c. protecting foreign
markets, d. ensuring the availability of material supplies, e.g. increasing the number of
customers, e.g. increasing the number of customers, e.g. increasing the number of customers
raw materials, e. acquire technology and management skills,
f. geographical diversification, g. enlarging the company, and others. Each company wants
the benefits it needs and can afford, so the benefits of international business will not be the
same for each company.
Based on the benefits and objectives to be obtained, a company thus has various
choices in viewing another country, namely: a. as a market,
b. as a manufacturer, c. as a technology provider, d. as a raw material provider, e. as a
product or product component provider. A company may have only one or a few benefits or
objectives that it wishes to obtain from another country.
A large part of international business activity is international trade, particularly exports.
Even international investments are also largely aimed at eventually selling their products to
target markets. Therefore, it is natural to understand that most companies doing international
business view other countries as markets. Therefore, in this material, the discussion of
international business strategy is limited to: targeting strategy, entry modes strategy, and
international competitive strategy in the perspective of other countries as markets.
TARGETING STRATEGY
DEFINITIONS.
Targeting strategy is a strategy to choose which countries will be used as target markets
for a company's international business activities. Determining one or more countries as a
target market is very necessary and is a part of the company's international business activities
strategic decisions that every company doing international business needs to make. No
company has such an abundance of resources that it can instantly do business with every
country in the world. Each country has a different business environment from the other, and
doing international business to a country without strategic considerations is tantamount to
doing business without strategic management. Thus, any company that wants to do
international business needs to determine a target country, which is usually one or a few
countries at a time. In the selection process, the company needs to scan the countries in the
world by analyzing the general external environment of each country. From the results of the
scanning process, several countries need to be selected for further assessment, in order to
determine the target country at a time. The question is how many countries will be scanned?
Ideally as many as possible, but this is obviously very inefficient, as it may take years to scan
all the countries in the world. Therefore, it is common to have a few countries that have been
filtered based on criteria that the company wants, e.g. proximity, developed country group,
developing country group, and so on. In deciding which countries are worth continuing to
scan, the company must first conduct an internal analysis, so that it can make an informed
decision according to the company's capabilities and shortcomings.
COUNTRY SCANNING PROCESS:
The process to scan the predetermined group of countries will follow the stages:
1.
Basic needs potential
2.
Financial and economic
3.
Political and legal
4.
Sociocultural
5.
Competitive
6.
Final selection
Basic needs potential. Basic needs potential is the first stage in country scanning. Need
is the most important factor, because if there is no need for a product in a country, then there
is no point in trying to market the product in that country. The basis for the potential need for
a product is determined by various factors, one of which is physical. For example, a company
producing space heaters would exclude Indonesia at this stage, as there is no point in
marketing space heaters to Indonesia. Indonesia is located in the tropics and is an
archipelago, so temperatures are generally hot. What is needed is air conditioning.
Actually, it is not the current need that is important, but the basic potential need. For
example, in the early 1970s, Indonesians did not need fast food, such as products from KFC,
McDonalds, Pizza, and so on. Not long after, with promotions that emphasized the
advantages of American culture and products, as well as the right marketing mix strategy, fast
food has now become a necessity for the Indonesian population.
In general, it is more difficult for producers of raw materials, auxiliary materials,
machinery and equipment to estimate the potential demand base. The usual procedure is to
estimate the number of users of their products based on the economic growth rate to estimate/
What is more difficult is for products derived from commodity products, for example, how to
estimate the basic potential need of a country's population for skin whitening cosmetics, for
underarm hair removal cosmetics, and so on? For these products, there is no need before,
because the need needs to be transformed into desire first.
Data on exports and imports of a product can be used to estimate demand. However,
import data does not reveal the potential demand base. Existing data needs to be corrected by
evaluating whether the marketing strategy is correct, whether there is a role for government
foreign exchange control, government policies. For example, the basic potential need for
cigarette products in many developed countries has become minimum, due to government
policies in determining the amount of cigarette excise, regulation of places allowed to smoke,
and socialization of the dangers of smoking for health by the government and non-
governmental organizations.
ECONOMIC AND FINANCIAL FACTORS:
Economic and financial factors often eliminate the most countries in the targeting
strategy process. Trends in inflation, currency exchange rates, interest rates are important
financial indicators to consider. However, other financial factors also need to be taken into
consideration, such as the availability of credit, the culture of the country mode of payment
by consumers, and the rate of return on investment.
Economic data needs to be processed before it becomes useful information to measure
the amount of market demand. These are market indicators and market factors. Market
indicators are economic data that are useful for measuring the relative market power of
different geographic regions. Market factors are economic data that correlate with the market
demand for a product. Each company may have to develop its own model to formulate the
formula for market indicators and market factors unless an existing model is deemed
applicable to the company's products.
Such indicators are useful only if the data has been projected into the future, and that
the data is updated frequently on a periodic basis. Many indicators for various products and
various countries have been collected and processed by consulting companies.
POLITICAL AND LEGAL FACTORS:
The political and legal elements that can eliminate many countries as target markets for
companies are numerous, including:
Barriers to entry. Import barriers by the target country government can be positive or
negative, depending on the entry mode strategy chosen by the firm. Import barriers can be
positive if the company adopts a direct investment entry strategy. However, this also depends
on the provisions set by the target country government regarding ownership requirements,
and the industry sectors allowed for direct investment. It is also possible that raw material
requirements, components that may have to be supplied by the domestic industry.
Barriers to repatriation of profits. Direct investment may be an alternative where
barriers exist. However, the possibility of restrictions on repatriation of profits or limits on
the amount that can be repatriated may be an important consideration in this screening
process.
Stability of government policies. Companies generally do not care about the political
system of a country. The most important thing for them is whether the economic policies,
especially those issued by the government, will change if the government changes?
Political stability. Every company wants its activities in a foreign country to be safely
protected by the government and laws of that country. A country will not be chosen if the
company does not feel safe doing business in that country, and is not protected either from
political disputes, or disturbances by government officials, or security and defense forces, or
from community groups.
Government system. Companies that want to invest directly in a country certainly hope
that their investment will be smooth both in development and operation. The government and
legal system in each country is different. In general, a country can be distinguished as a
unitary state, or a federal state. A federal state means that the activities of foreign companies
will be regulated by the federal government and state governments together. The state
government will have much greater powers, while the federal government is limited to only
when it comes to foreign policy, defense and federal law. Whereas in a unitary state, the
absolute authority lies with the central government, and local governments facilitate and
support the decisions of the central government. A unitary state with special autonomy is
similar to a state in a federal system. All of that does not make a problem for a foreign
company to do business in a country that adheres to these different systems, because it only
needs to adjust to the government system adopted by the country. Perhaps what makes it
complicated is if a company wants to invest directly in a country that is a unitary state, but
which has hundreds of autonomous regions, with authority that in reality is often greater than
the authority of the central government. Moreover, local regulations, even if they contradict
the law, cannot be overturned by the central government.
Sociocultural factors. The next stage of screening is based on sociocultural factors, the
most difficult factors to identify. This difficulty is because sociocultural factors are highly
subjective, and data is difficult to obtain, especially secondary data. Therefore, in general,
knowledge of a country's sociocultural factors often has to be obtained from others. Some
countries that are active in international business use education, culture and utilizing their
representative offices as a way to obtain data on the sociocultural factors of other countries,
including by sending their students to study in various other countries, holding student
exchanges, providing scholarships for students from other countries to study in their country,
holding cultural exchanges, organizing international conferences, and so on.
Competitive factors. At the beginning of this stage, the company already has a short
list of prospective target markets. The next stage is to analyze the competitive environment of
the industry. Each country will be analyzed for various indicators, including:
1.
Number, size and financial strength of competitors
2.
Market share of each company
3.
Marketing strategy of each company
4.
The effectiveness of their promotional program
5.
Quality level of their products
6.
Source their products, imported or locally produced.
7.
Their pricing policy
8.
Their sales service level
9.
Distribution channels used
10.
Their market coverage.
Countries with intense competition and strong competitors should be avoided, unless
the company has goals and strategies that require intense competition and strong competitors.
After this final scanning stage, the company should have a list of one or more countries to
target for international business.
TARGET MARKET SELECTION PROCESS:
After all this analysis, there is no more accurate data than that obtained by visiting the
countries that have been selected in the final list. Such visits can be made by means of: field
trips to gain experience of both life and culture business activities in the country, or
participate in trade shows in the country. Often after a visit, it may be necessary to conduct
market research to get a more accurate understanding of the country's market conditions.
ENTRY MODES STRATEGY INTRODUCTION:
More than two decades ago, a minister complained that Indonesian exporters relied
mostly on exporting raw materials, while manufacturing, plantations, and agriculture were
not taken seriously. The minister also insinuated that Indonesian exporters behaved only as
tailors. This means that they only wait for buyers to come to Indonesia, order or buy goods,
and then export. If no one comes, then there is no export. The same fate as a tailor. If no one
comes to order clothes, then no food. Amazingly, this is still the case today. It is true that
Indonesian people preserve culture.
The problem is not so simple. The decision on the mode of entry into foreign markets is
not easy to change. In addition, each mode of entry chosen carries with it high costs of
implementation, legal consequences and also enormous risks and often long-term impacts. It
is therefore a strategic decision for a company that has decided on a particular country as its
target market. The next strategic decision is to decide which mode of entry should be taken.
TYPES OF ENTRY MODES:
Based on this principle, the various modes of entry that can be chosen can be grouped
into: nonequity modes of entry, and equity-based modes of entry. Nonequity modes of entry
means that the modes of entry in this group do not require investment in the form of equity
owned by the company. Equity based modes of entry means that the modes of entry in this
group require an investment of equity owned by the company.
NONEQUITY BASED MODES OF ENTRY
Exporting
Exporting is a mode of entry that involves selling to a target market domestically
produced products. This mode requires little investment and is relatively risk-free. This mode
is commonly used by companies that are doing international business for the first time or not
long ago. It is also used when the foreign market is only a small part of the total production.
The benefits of exporting for the company are :
1.
To serve markets where the company has no production facilities or capacity
limitations.
2.
To meet government pressure for companies to export
3.
To remain price competitive in the domestic market
4.
To test the market and competitors' reactions overseas
5.
To meet market demand from overseas
6.
To balance the demand cycle in the domestic market
7.
To increase sales
8.
To extend the product demand cycle period
9.
To gain a strategic advantage in the domestic market.
10.
To fulfill management's ambition
11.
To improve the efficiency of production facilities
Exporting can be differentiated between direct exporting and indirect exporting.
Indirect exporting is simpler than direct exporting because it does not require special skills or
funds because exports are managed by other companies from within the country. Direct
exporting is exporting managed directly by the company itself, which generally requires
special skills and considerable sales costs.
Indirect exporting.
There are several types of indirect exporting, namely:
1.
Exporters who sell on behalf of manufacturers:
a.
Manufacturer's export agent: a trading company that represents a company in exporting
its products. Export agents promote, transact, ship and arrange payment. Export agents
are usually rewarded with a commission on sales made on behalf of the manufacturer.
b.
Export management companies: Companies that can act as foreign market distributors or
agents depending on the agreement with each manufacturer.
c.
International trading companies: Export management companies which are large
multinational companies. Typically, these companies also import, have transportation
and finance facilities.
2.
Exporters who purchase products on behalf of overseas customers.
Export commission agent/Buying agent: a company that represents overseas buyers. The
company earns commission from transactions by acting as a purchasing agent in the
exporting country.
3.
Exporters who buy and sell on their own behalf.
a.
Export merchants/distributors: companies that buy directly from producers and sell, ship
and receive payment on their own behalf. In this case the buyer and the producer are not
interconnected. Often the company has exclusive rights to sell to certain foreign markets.
b.
Cooperative exporters are producers who invite other producers with different products
to export their products along with their own.
c.
An association of manufacturers who compete with each other to cooperate in exporting
products overseas.
4.
Exporters who buy for their overseas companies
a.
Large foreign users: Large manufacturers and trading companies often locate their
purchasing offices in other countries.
b.
Export resident buyers: similar to export commission agents, but they usually have a
closer relationship with the buyers, for example as non-permanent employees of the
buyers.
The use of indirect exporters brings potential limitations for the producer, namely: a.
commission fees for the indirect exporters, b. overseas customers may be lost if the exporter
decides to procure their products from other producers, c. producers do not have experience
in international trade transactions. These are the reasons why companies that have developed
their export business often switch to direct exporting.
Direct Exporting. Companies that have decided to use the direct exporting mode of
entry can choose to use their own employees for marketing or use intermediaries. If it
chooses to do it in-house, then the company can establish an organization specifically
assigned to manage export activities both in administration and logistics, as well as for
marketing. If exports have grown rapidly, the company may need to establish a sales and
marketing office in the target market country.
If the company decides to use intermediaries, the headquarters organization will only
manage administrative and logistical activities, and there may be staff responsible for exports
to target markets. Marketing activities may use a choice of several types of intermediaries:
a. Manufacturer's agents are companies that are domiciled in the target market and
represent the company in marketing its products to the target market country. They
generally earn a commission from each transaction that occurs.
b. Distributors are independent trading companies that buy products from manufacturers,
hold inventory and sell them for profit. A distributor may be designated as an exclusive
distributor, which means that the manufacturer will only sell its products to the
exclusive distributor.
c. Retailers, especially for consumer products, often also act as direct importers.
d. Trading companies are large trading companies in the target market country that act as
distributors of the manufacturer.
Licensing is a mode of entry into a target market in which a company (licensor) makes
an agreement with a company (licensee) that has capital in the target market by granting the
company the right to use the intellectual property of the company (licensor), including
technology, production processes, marketing procedures, brands, management skills of the
licensor for use by the licensee, for a certain fee.
Technology and brands are common intellectual property that are licensed. However,
many companies still do not want to use licensing as a mode of entry into their target market,
with the main reason being the fear that the licensee will manufacture under its own brand
once the licensing contract is over. Many licensee has learned enough technology during the
license period to perfect the technology, and become a superior competitor in the target
market country, even in other countries, or in the licensor's own country.
Some industries, especially service industries, use a special type of licensing, namely
franchising. In franchising, the company (franchisor) as the owner of the product or service
grants the right to the company (franchisee) in the target market country to sell the product or
service using the technology, brand, production and marketing procedures that must be
followed carefully. Industries that widely use the franchising mode are the food service
industry, hotels, fitness, business services, beauty, and so on.
Contract manufacturing is a mode of entry into a target market through a contract
between a manufacturer in the home country and a company that has capital in the target
market country. The producer in the home country grants the company the right to use
technology, machinery, brands, and production processes to produce a certain amount of the
producer's products, which will be fully purchased by the producer. In this way, the producer
enters the target market with nonequity modes of entry, and obtains products from local
production for marketing to the target market country or other countries.
EQUITY BASED MODES OF ENTRY:
When company management decides to use direct investment, there are several
alternatives that can be taken, namely: wholly owned subsidiaries, joint ventures, and
strategic alliances.
Wholly owned subsidiary is a direct investment either by building a factory/company
from scratch, or by buying an existing company, which is wholly owned by the company.
Establishing a factory from scratch It provides advantages such as being able to select the
most feasible factory location, being able to design the factory and production process
according to the desired technology, and in accordance with environmental requirements that
ensure the sustainability aspect of the company's activities, capacity that is in line with the
planned, and so on. In addition, it can ensure that the employees to be hired meet the skill
requirements, and can adapt easily to the culture of the organization to be fostered. The
downside is that it takes a long time to get the plant ready for operation. Direct investment in
developing countries often faces the problem of extortion by government officials, as well as
by the community. These problems often result in protracted readiness of the plant to operate,
and can even lead to the failure of the plant construction project.
In addition, it is often not possible to make investments
direct due to investment restrictions in certain industries, or restrictions on certain locations.
More and more countries are banning the wholly owned subsidiary mode, or requiring a
gradual reduction of foreign ownership to below 50%.
Joint venture is a direct investment into a target country that forms a joint company
with: a. a local company, b. a state-owned company, c. another foreign company, d. a
cooperative with other companies both local and foreign for a limited time.
The advantages of the joint venture entry mode include:
a.
reduce risk and competition
b.
improving economies of scale
c.
comply with local government requirements on local participation
d.
following the nationalism of local residents and governments
e.
additional skills tax incentives from the local government, additional capital, experienced
employees.
The disadvantages of the joint venture mode of entry are mainly the loss of control over
the direct investment. However, control can still be obtained in various ways, namely: a.
control through management contracts, b. control of technology or markets, c. majority
ownership, and so on.
Strategic Alliance is a direct investment partnership with customers, suppliers, and
even competitors. This mode of entry is often used in facing the challenges of globalization,
including research costs, product development costs, marketing costs, and the need to enter
various global markets.
ENTRY MODE DETERMINATION STRATEGY:
In order to formulate an entry mode strategy for the target market country, it is
necessary to analyze the competitive advantage of the target market country. This analysis
can also be used to formulate target market determination strategies and entry modes for
companies that aim to obtain other benefits from international business besides being a
market.
A country's competitive advantage can be expressed by using Porter's model (1998)
which states that a country's competitive advantage is determined by factors: (1) Factors of
condition, (2) Demand conditions, (3) Firm strategy, structure, and rivalry, (4) Related and
supporting industries. Factor conditions consist of basic factors, namely natural resources,
labor, land, capital, and advanced factors, namely infrastructure, communication systems,
transportation, trained personnel. Demand conditions are the nature and size of the market in
a country, determined by its population and income. Related and supporting industries are
the availability of industries that are related to and support the production of the company's
products, firm strategy, structure, and rivalry are the structure and competition in the industry
as well as the strategies used by companies in the industry.
Demand conditions are the characteristics and magnitude of potential or actual
demand for the products of a relevant industry in a country. Demand conditions are generally
determined directly or indirectly by population size, per capita income and income
distribution. Demand for consumer products can be estimated directly from these
demographic and socio-economic characteristics. Whereas the demand for industrial products
or services can be estimated indirectly.
The absolute size of demand is not a significant factor in contributing to a country's
competitive advantage, but the characteristics of demand in the country are more important.
Demand in a country will be an important factor if the size of the market in that country is
larger than in other countries. Another characteristic is if the consumers of the demand in the
country demand high quality, as this will force the company to expand.
Factors of production consist of : basic physical factors, and infrastructure factors.
Basic physical factors are natural resources, labor force, land, which are endowed to a
country. In today's modern economy, the endowed factor is not as important as the factor that
is the result of the labor of the people of a country, which is the infrastructure factor.
Infrastructure factors include accumulated capital, transportation systems, communication
systems, a trained and ethical workforce, utility systems such as water, electricity, waste
management. Existing infrastructure factors are less important than the speed and efficiency
with which they are built, developed and utilized for a particular industry.
The availability of related supporting industries is crucial to support direct
investment in the country's finished products. Supporting and related industries are all
industries that play a role in the production and marketing of a company's products. The
availability of related supporting industries will make it easier for a company to use the
country as a provider of components and auxiliary materials. Thus this can be interpreted as
all industries, although of course each company's business unit has its own type of related
supporting industry. Supporting industries related to the company's interests are industries
that can support the competitive advantages of the company's business.
Inter-industry structure and competition determine how firms are created,
organized, and managed as well as the political and economic conditions of competition in
the region. Many countries have an inter-industry structure and competition that is far from
contributing to the country's competitive advantage, or even contributing negatively to the
country's competitive advantage. Structure conditions and inter-industry competition are
actually products of the country's political, governmental and legal systems.
ENTRY MODE STRATEGY DECISION:
An analysis of a country's competitive advantages helps in determining the mode of
entry that should be used. As a broad approximation, exporting mode of entry is used when a
country's competitive advantages are low, while demand factors are high. Direct investment
mode of entry is used when a country's competitive advantage is high. Licensing is used
when a country's competitive advantage is neither high nor low.
The mode of entry to be chosen is certainly not sufficient if it is based on estimates
alone. It is necessary to consider in detail the strengths and weaknesses of the company, the
complete competitive advantage model of the target market country in order to determine the
specific mode of entry to be taken. This analysis needs to be done for each country if more
than one target market country has been determined. Thus, even though the target market
countries are determined simultaneously, the mode of entry into each country may vary.
COMPETITIVE STRATEGY
INTERNATIONAL BUSINESS DIVISION LEVEL COMPETITION STRATEGY:
The final strategic decision that needs to be formulated before the company is in the
selected target market country is the competitive strategy. This strategy is a decision to
choose a strategy that is differentiated based on the dimensions of the need for global
integration and the need for globalization adapt to local needs. Therefore, the competitive
strategy may vary between target market countries.
A multidomestic strategy is an international business strategy in which strategic and
operational decisions are decentralized to strategic business units in each country or region,
allowing strategies to be tailored to local conditions in each location. The use of this strategy
typically leads to increased market share in each country, as the company can concentrate on
adapting to local needs. However, the use of this strategy can be detrimental as it does not
generate economies of scale and is not integrated with other countries.
A global strategy is an international strategy in which the head office determines the
same strategy that must be implemented by each strategic business unit in each country. This
strategy indicates that the company weighs the need for global integration and the importance
of adapting to the local needs of each country. With this strategy, the company can take
advantage of developing economies of scale and standardizing its business activities, which
means lower costs. A global strategy provides a great opportunity for the head office to
innovate in all aspects and then apply it to all its markets. This strategy is most effective
when the differences between the company's markets and customers are not significant.
Effective operations are required to implement this global strategy. Improving the
efficiency of a company's international operations requires the shared use of resources and
coordination and cooperation across national borders. Centralization of decision-making by
headquarters will specify how resources are shared and coordinated across countries. This
strategy is generally successful when used in regions where regional integration between
countries occurs.
A transnational strategy is an international strategy in which the company seeks to
achieve global efficiency while simultaneously adapting to local conditions. This strategy is
difficult to implement, and requires flexible coordination with each strategic business unit in
each country. Nevertheless, global market trends increasingly demand the need for
companies doing international business to implement transnational strategies.
Transnational strategies are increasingly important to succeed in competing in
international markets. This is because an increasing number of global competition challenges
companies to lower their costs. At the same time, the Market demands with the easier and
faster flow of information due to the diffusion of the internet and the desire for products that
are specifically needed by consumers, force companies to do product differentiation.
Home country replication strategy is an international strategy in which a company
uses the strategies implemented in its home country to implement across its markets. To be
successful, the firm needs to have competitive advantages that are truly valuable worldwide.
This strategy can be applied when the company has a competence that is difficult to compete
with and there is a low need for customization to the local market.
PRACTICE QUESTIONS:
1.
If a company will conduct business activities to other countries. What are the 6 stages of the
process of scanning the country to be addressed.
2.
What is the difference between indirect exporting and direct exporting? In Indonesia's
economic conditions, which model is more suitable?
3.
Give an opinion that the food, hotel, fitness, and beauty industries use the franchising mode
more than other industries?
4.
List the advantages and disadvantages of the joint venture strategy
and strategic alliances
5.
Explain with a picture what International competitive division level strategies are.
6.
Why is the availability of related supporting industries so important to support direct
investment in finished products?
7.
What is the role of sociocultural factors in determining which country to locate a business in.
EXPORT AND IMPORT:
LEARNING OBJECTIVES.
1.
Explain why companies export and three areas of export challenges
2.
Identify sources of counseling and export support
3.
Discuss the meaning of terms of sale
4.
Identify sources of export financing
5.
Describe the activities of a foreign expedition company
6.
Outline the export documents required
7.
Identify import sources
INTRODUCTION:
International trade remains the mode of entry into international markets that dominates
the world's international business today and is expected to do so for the foreseeable future. It
is therefore necessary to recognize the procedures, administration and documents required for
the implementation of such international trade.
INCOTERMS:
Incoterm (International Commercial Terms) is a terminology list of trade terms relating
to international trade, especially regarding delivery mechanism clauses. The list is issued by
the International Chamber of Commerce (ICC), an international non-profit organization
founded in 1919, and headquartered in Paris, France. Incoterms have been commonly used in
international trade transactions and its use has been adopted by many trade-related
institutions and bodies and courts of countries around the world.
The provisions of Incoterms primarily aim to clarify communications concerning the
obligations, costs and risks associated with the transportation and delivery of goods in
international trade. The Incoterms rules have been accepted by governments, legal
institutions, agencies and trade institutions around the world for the interpretation of
terminology commonly used in international trade. They aim to reduce or completely
eliminate uncertainties that may arise from different interpretations of the rules in different
countries. Incoterms have therefore been commonly used in trade agreements around the
world. Incoterms have been regularly refined since they were first published in 1923, and the
most recent replacement for Incoterms 2010 is Incoterms 2020 which has officially taken
effect from January 1, 2020.
EXPORT
WHY DO COMPANIES EXPORT?
A company conducts international business by exporting both direct and indirect
exporting with various purposes, including:
- Serving markets where the company does not have production facilities, local factories
do not produce a complete product mix.
- Fulfilling demand or government encouragement for companies to export
- Staying competitive in your own market.
- Testing overseas markets and competition in those markets
- Meet consumer demand for the company to export
- Balancing the sales cycle in the domestic market
- Gain additional sales
- Extend product life cycle
- Competing with overseas competitors
- Following the success of other companies
- Improve equipment utilization rate
WHY DOESN'T THE COMPANY EXPORT?
With the various benefits that can be obtained from exporting, it has long been
researched why many companies in Indonesia do not export. There are many reasons why a
company does not export, whether it is its own desire, or because of the complexities and
risks involved in doing international business.
Many companies simply want to limit their activities to domestic markets, and do not
want to face the complexities and risks of doing business internationally. Beyond these
companies, there are far more companies that are interested and willing to export, but do not
have sufficient resources or capabilities to explore foreign markets. Insufficient capability to
enter the export market can be divided into (a) the capability of the product itself and its
production process technology or (b) the capability in export marketing, in funding, and in
the export procedure itself own, and financial and payment procedures, or both (a) and (b).
If the problem is due to incompetence in the product itself and in the technology of the
production process, then the appropriate solution is for the company to improve its own
capabilities. If the problem is in marketing capabilities, in finance, in procedures for
exporting and finance and payment, then this is actually not difficult to solve. Indeed, the
support of many parties including the government is needed so that Indonesian exports can be
increased, especially exports from companies that have never exported. The experiences of
various countries such as China, Thailand, Malaysia, etc., which have succeeded in
increasing their exports to surpass Indonesia, are worth studying for possible application in
Indonesia. The problem may be that Indonesian culture has become a culture that does not
want to learn from other countries.
TERMS OF SALE
An international trade will involve many parties, especially in the mechanism of
delivering goods from seller to buyer. It also involves a lot of costs. Because the producer and
buyer are in two different countries, it is necessary to clarify the responsibilities of each
party, the executor of the delivery activity until it is received by the buyer, the costs that must
be paid, and so on. After the transaction is approved, the delivery of goods will generally
involve the following activities: delivery of goods from the seller's warehouse to the terminal
to the conveyance that will be used to transport the goods crossing national borders, delivery
of goods from the terminal of the country of departure to the terminal of the country where
the goods are sent, and then delivery of goods from the conveyance used across countries to
the destination where the buyer receives the goods. The whole process will also involve other
parties and costs, and therefore it must be clear which responsibility for activities and costs
lies with the seller and which with the buyer. All of this is stated in the so-called terms of sale
agreed by the seller and buyer in each transaction.
As described earlier, terms of sale in international trade now follow the definitions and
rules of Incoterms 2020. In a transaction, the seller and buyer can negotiate terms of sale that
can be mutually agreed upon. Parties adopting Incoterms must understand the definitions and
rules set out by Incoterms. Although the wishes of each party are permitted as long as they
are mutually agreed upon, and must be clearly stated, it is not permitted to have its own
interpretation of the Incoterms terms of sale.
Some terms have special meanings in Incoterms and need to be recognized according to
Incoterms, including:
- Delivery: the location in a transaction where the risk of loss or damage is transferred
from the seller to the buyer.
- Arrival: the location named in the terms of sale where the freight carrier has been paid.
- Free: The seller has the obligation to deliver the goods to a place designated for transfer
to the carrier.
- Carrier: Any person contracted by a carrier, performing or purchasing rail transportation
services, road, air, sea, or inland waterway or a combination of these modes.
- Freight forwarder: A company that makes or assists in making shipping arrangements.
- Terminal: Any place, whether enclosed or not, such as a wharf, warehouse, container
yard, air or rail cargo terminal.
- To clear for export: Submit Shipper's Export Declaration and obtain export license.
PROVISIONS FOR SEA TRANSPORTATION AND INLAND WATERWAYS
- FAS: Free Alongside Ship (name of the port of shipment). The seller has delivered the
goods when they have been placed alongside the buyer's vessel at the designated port. In
this case, from that moment on the buyer bears the entire cost and risk of loss or damage
to the goods
- FOB: Free on Board (name of the port of shipment). The seller is obliged to deliver the
goods on board the vessel designated by the buyer in the manner customary at that port.
This means that if there is an export clearance requirement, the seller must take care of
it. In this case, the buyer must arrange and pay for ship transportation costs, bill of lading
fees, insurance, costs of unloading goods from the ship and transportation costs from the
port of arrival to the buyer's premises.
- CFR: Cost and Freight (name of port of destination). The seller arranges and pays the
carrier to the port of destination. The payment covers all origin costs including export
clearance. The buyer must arrange and pay for their own insurance, and the cost of
unloading the goods from the ship and transportation to the buyer's premises.
- CIF: Cost, Insurance & Freight (destination port name). The seller's obligations are the
same as CFR, plus the seller is obliged to arrange and pay for shipping insurance
including if there is transit. In Incoterms 2020, the seller is obliged to insure the goods at
110% of the contract value following the Institute of London Underwriter's Cargo
Clauses (A). The seller must also submit the necessary documents for the buyer to obtain
the goods from the carrier. These documents are: invoice, insurance policy, and bill of
lading. The seller's obligation ends when the documents are delivered to the buyer.
PROVISIONS FOR EACH MODE OF TRANSPORTATION
- EXW: Ex Works. The seller prepares the goods to be delivered at the seller's premises.
Under these terms of sale, the buyer takes on the entire obligation to deliver the goods to
the buyer's premises. These terms of sale can be complicated, especially when it comes
to Customs rules and taxes, which make it necessary to clarify the responsibilities of the
seller and the buyer so that the goods can be delivered by the buyer to his desired
destination.
- FCA: Free Carrier (name of the place of delivery). The seller sends products that have
met all the rules of the seller's country for export to a place in the seller's country and is
handed over to a carrier designated by the buyer or another party designated by the
buyer.
- CPT: Carriage Paid To (destination name). CPT replaces C&F and CFR for all shipping
modes by ship outside non-containerized cargo. The seller arranges and pays for export
clearance and shipping costs to the destination or port of destination. However, the
goods are considered delivered when the goods have been handed over to the lead or first
vessel. This means that after that, the risk is borne by the buyer.
- CIP: Carriage and Insurance Paid to (name of destination). These terms of sale are the
same as CPT plus the seller must insure the goods for 110% of the contract value of the
goods in accordance with the Institute of London Underwriters' Institute Cargo Clauses
(A). This insurance policy must also cover transit time, be in the same currency as the
contract, and allow the buyer, seller or anyone else with an interest in the insured goods
to make a claim.
- DPU: Delivered At Place Unloaded (name of destination). The seller is obliged to
deliver the goods unloaded to the place of destination. The seller pays all transportation
costs (export fees, vessel, unloading charges from the main vessel at the port of
destination, and destination port charges) and assumes all risks until arrival at the port of
destination or terminal. All risks of delay at the terminal are the responsibility of the
seller.
- DAP: Delivered At Place (name of destination). The seller delivers the goods until they
are handed over to the buyer at the port or place of destination named in the contract. The
seller's obligation ends here. It is the buyer's obligation to unload the goods and any costs
thereafter.
- DDP: Delivered Duty Paid (name of destination). The seller is obliged to deliver the
goods to the place named in the contract and pay all costs of bringing the goods to that
destination, including import duties and taxes. The seller has no obligation to unload the
cargo. These terms of sale are only feasible if the seller has in-depth knowledge of
registration and is familiar with the procedures and is legally entitled to remove the
goods from the port in the buyer's country.
EXPORT PAYMENT TERMS
After understanding the export process, including the various prices and international
sale and purchase agreements, it is necessary to know how to pay for the international sale of
goods. Payment conditions are often a decisive factor in a successful export venture.
Some types of payments that are common in international trade are:
- Cash in advance. The buyer will pay before the goods are made or shipped. This
condition is offered when the seller does not know the buyer at all, and there are no
circumstances that can help the seller believe that the buyer will pay for the goods. It is
rare for this condition to be accepted by buyers, because some of their working capital
has been used to pay for products that they are not sure they will receive. In general,
buyers can accept this condition if the product purchased must be made and can only be
used by the buyer, not by others.
- Open account: the buyer pays upon receipt of the goods without any guarantee. Under
this selling condition, the seller bears all the risk of payment for the goods he has
delivered. Therefore, this condition is usually only offered when the seller has full
confidence in the buyer.
- Consignment: payment is made after the goods are sold. The entire payment risk for this
condition is also the seller's burden. Therefore, this condition should also be offered only
when the seller is well acquainted with the buyer and his responsibility to pay.
- Documentary drafts: an order from the seller to the buyer to pay a certain amount at the
time the order is presented (sight draft) or at some future time (time draft) and must be
paid before the buyer receives the shipping documents.
- Letter of Credit: In the L/C (letter of credit) payment method, the bank acts as an
intermediary between the seller and the buyer. The L/C itself is a document issued by the
buyer's bank in which the bank promises to pay the seller a certain amount under the
conditions specified in the document. In general, the seller will request an irrevocable
and confirmed L/C. A confirmed L/C means that the correspondent bank in the seller's
country ensures that they will pay according to the terms and conditions written in the
L/C. An irrevocable L/C means that if the seller has accepted the L/C, the buyer cannot
cancel or change the L/C except by mutual agreement between the seller and the buyer.
L/C is usually also L/C payable at sight, meaning that the seller will receive the L/C at
sight.immediate payment (within 5 to 10 days) after all documents and conditions in the
L/C are received by the buyer. It is also common for buyers and sellers to agree on
payment by usance L/C, e.g. 30, 60, 90, 120, or 180 days. This means that the seller will
receive his payment after the buyer receives all shipping documents, within the agreed
period.
The picture above shows an example of a transaction with an L/C between a buyer
(importer) in Indonesia and a seller (exporter) in the USA. Steps to start the process until
seller receives payment is outlined below:
1.
Once the seller and buyer agree on the terms of trade, the buyer will arrange with the
bank to open a letter of credit stating the documents required for payment.
2.
The buyer's bank will open an irrevocable L/C that details what the seller must do in
terms of shipping the goods later.
3.
The buyer's bank will send the irrevocable letter of credit to its correspondent bank in
the USA and ask for confirmation. The seller may request a specific USA bank as the
correspondent of the buyer's bank.
4.
Bank USA will prepare a confirmation letter and submit it along with the irrevocable
L/C to the seller.
5.
The seller will review all terms and conditions stated in the L/C to ensure that the seller
will be able to fulfill all requested conditions. Freight forwarders will be contacted to
ensure that there are vessels that will be able to deliver the goods at the requested time.
6.
Once the goods are ready, the seller will contact his freight forwarder to deliver the
goods to the designated port or airbase.
7.
While the goods are loaded onto the ship or airplane, the freight forwarder will complete
all the necessary paperwork.
8.
The seller submits the documents that have been double-checked in accordance with the
specifications specified by the buyer in the L/C and are complete, and in accordance with
the provisions of the USA to ensure the goods can be exported.
9.
The USA bank will double-check all the documents, and if everything is complete, the
bank will send all the documents to its correspondent bank in Indonesia to be forwarded
to the buyer.
10.
The buyer will use these documents to collect the goods from the ship or airplane
carrying the goods.
11.
A draft accompanying the letter of credit is then paid by the USA buyer's bank as
payment of the transaction.
EXPORT FINANCING
Exports require a large amount of working capital, especially if export sales make up a
large part of the company's total sales. This is because the cost of preparing the product has to
be paid before the product is ready for shipment, while payment often takes a long time,
because payment can only take place when the goods have arrived at the destination and all
the documents required to receive payment have been received by the seller and filed with the
seller's bank.
Working capital required for exports can be obtained from various sources and different
types of funding, including:
a.
Banks: banks are always a source of export funding through working capital. Banks can do
discounting of time drafts, by paying the seller and keeping the time draft until it is ready to
be cashed.
b.
Factoring: By using factoring services, companies can be more competitive in the market.
The company can offer its products with payment conditions"open account", making it more
attractive to buyers. The company then sells the invoice to the buyer to the factoring
company. The risk of the buyer not paying becomes the risk of the factoring company, which
will of course assess the credit rating of the buyer to minimize the risk of the buyer not
paying.
Forfaiting: the purchase of bonds arising from the sale of goods that have exceeded the
usual limit of unpaid trade persons for longer than 90 days or 180 days for factoring. Account
receivables are usually in the form of trade drafts or promissory notes with payments ranging
from 6 months to 5 years. Since forfeited debt is sold without any collateral, it is usually
followed by bank security, in the form of a letter from the bank providing the guarantee.
DOCUMENTS REQUIRED FOR EXPORT:
Proper and consistent documentation is essential when shipping goods by sea or air.
The problem is that there are many documents to complete and each may come from a
different institution, but there should be no discrepancies in words and numbers.
These documents include:
- Bill of lading (B/L) has various functions, namely (a) as a contract of carriage between
the shipper and the carrier, (b) as a receipt from the carrier for the goods shipped, and (c)
as a certificate of ownership. B/Ls can be straight or to order. A straight bill of lading
cannot be sold. Only the named party can pick up the goods at the destination. Bill of
lading to order means that it can be traded. The holder of the bill of lading is the owner of
the goods.
- Insurance certificate is proof that the shipment has been insured against loss or damage
during transit. The carrier is not liable for the goods it carries unless the damage or loss
occurs due to their negligence. There are three types of maritime insurance policies,
namely: (a) basic named peril is insurance that covers perils arising from sea, fire, falls,
explosions and hurricanes. (b) broad named perils covers theft, pilferage, non-delivery,
damage and leakage in addition to those covered under basic named perils. (c) all risks
cover all loss or damage to goods due to any external factor.
- Commerical invoice. An invoice stating the sale of goods and includes: name and address
of the seller, name and address of the buyer, product, quantity, price per unit, total price,
other costs taken into account, country of origin of the product, export packaging mark,
clause that the goods will not be transshipped to another country. Invoice for L/C also
includes the bank name and L/C number.
- Consular invoice. A form obtained from the consulate office of the buyer's country in the
language of the buyer's country and detailing the name of the goods, quantity, price per
unit and total price. This form must be approved by the consulate as a kind of visa for
entry into the buyer's country. The purpose of the consular invoice is to prevent import
duty smuggling, which is a crime in the buyer's country by overpricing the goods. lower
than the usual market price, as well as giving a name for the goods that is different from
the goods delivered.
- Certificates of origin. Certificates indicating the country of origin of the goods being
shipped, prepared by authorities in the seller's country and acknowledged by the consulate
of the buyer's country.
IMPORT:
Importing is an international business activity that is the opposite of exporting. The
administrative aspects of import activities will be discussed here. In import activities, what is
very important is the issue of import duties.
One company that is very important in receiving imported goods is customhouse
brokers or EMKL (Expedition of Sea Shipload) and EMKU (Expedition of Air Shipload).
EMKL or EMKU is a company whose business activity is to assist importers in releasing
imported goods after arriving at the port or airport. In Indonesia, freight forwarders are also
commonly EMKL and EMKU activities for export activities. Many EMKL or EMKU also
import for companies that do not regularly import or whose business is too small to have their
own import license. EMKL or EMKU services also often include arranging transportation of
goods after leaving the port to be delivered to the importer's warehouse.
To help entrepreneurs who import a lot, the government issued regulations to allow
facilities to delay the payment of import duties. These facilities include: bonded warehouse
and foreign trade zone.
Bonded warehouse is a warehouse that is licensed for the storage of goods whose
import duties are delayed in payment, and can only be removed from the warehouse and used
when the import duties have been paid. The advantage for the company is that it does not
need to pay import duties for all imported goods, but only those needed for sale or for raw
materials or production auxiliary materials. Goods that are not yet going to be used can still
be stored in the bonded warehouse.
A foreign trade zone is an area in a country that is considered outside the authority of
the country's Customs Service. Companies can store their imported goods in the foreign trade
zone, and will only pay import duties on the goods when they are used or sold. In addition to
imports for the domestic market, many companies also import for export. A factory can be set
up in the foreign trade zone, so that all raw and auxiliary materials, or components that need
to be imported can pay no import duty, as long as they are used to produce the exported
goods directly from the factory. For finished products destined for the domestic market,
import duties need to be paid before the goods can leave the foreign trade zone.
PRACTICE QUESTIONS:
1.
Explain the flow of a transaction using a letter of credit between 2 countries.
2.
How does a company deal with export inability?
3.
What do you think are the advantages and disadvantages of importing goods over
domestic production of goods?
4.
Of the payment types prevalent in international trade, which one do you think is the
best?
5.
What documents are required for export? And what are the functions of these
documents?
6.
What do you think about Indonesia's export capacity
? Give us your analysis
7.
What do you know about Incoterm?
