::: Trade Talk :::
Entering New Frontiers
The Key Steps
Cos Mamhunze, an International Trade Specialist at saibl's Johannesburg office, discusses Trade Tips in the first of a series of articles on international trade. Look out for future articles on issues such a international trade law, trade finance and payments, export marketing and logistics, cargo movement, as well as international financial management.
A successful international export agenda should revolve around a "good, needs-satisfying, appropriately priced, promoted and distributed" product. It should never be an unplanned plunge. Proper steps have to be followed, to avoid assumptions which are dangerous. Treading the export path carefully can save you from embarrassment and unnecessary expenses. This article looks at the critical steps that you, as an SME, should take before embarking on the export journey:
1. Self-Examination: Go / No-Go Decision
It is a decision that has to be made, instead of hiding head in sand. This decision on whether to proceed, shelve or completely discard the export foray is, in the main, determined by both internal and external factors. More importantly, a company should take stock of its own systems, resources and facilities. A brutal export readiness assessment is essential. Such an assessment, which can be done in-house or outsourced, should look at the following key areas:
i) Product: Is it of export quality, can it be adapted to new markets, at what costs, etc?
ii) Capacity: In case of new and increased orders, do you have the capacity to produce more? Cases have been mentioned of small arts companies which, after attending an international show, get massive orders insisting on exactly the same piece of art. Only then does the company realize it has no capacity to handle such orders.
iii) Financial resources: Entering new markets calls for cash outlays to cover your research, promotional and other related costs.
iv) Human resources: Experienced personnel is critical. The experience could be in export administration, export marketing, trade law, trade finance, etc.
vi) Shareholder support: In cases where the manager is not the owner, securing shareholder support will make the exercise much easier. Financial and time resources that have to be expended have to be approved by owners of the company. The situation is different and much simpler in owner-managed enterprises.
saibl can help companies to conduct such assessments via the Company Diagnostic and the Export Readiness Assessment tools.
2. Research: Researching the Export Market Opportunities
After you are satisfied that the above key areas are fairly covered, you can proceed to investigate the foreign market opportunities and obtain information needed to meet your objectives for wanting to enter the export market. The research will unpack information like competitor activities, regulatory requirements, etc.
You may start with general information obtained via secondary (desk) research. Such information comes from trade statistics, publications and reports, financial institutions, international directories, newspapers, industry journals and the Internet. Social networks such as Facebook and Twitter are becoming good sources of information too - especially socio-economic, buyer behavior, and trends type of information. Adequate secondary data may alleviate the need for more in-depth primary research. However, primary (in-market) research, which involves more probing and more investment, provides more specific information such as appropriate distribution channels, cultural complexities, regulatory requirements, amongst others. The information avalanche on the Internet makes it much easier these days to collect information, and even makes in-market research a shorter exercise, mainly to fill up gaps identified from desk research.
Trade and Investment South Africa, embassies (foreign and local), trade and investment agencies (e.g TIKZN, TIL, GEDA, MEGA) are good sources of information. In addition, participating in trade missions provides an opportunity for some in-market research since you can meet with relevant entities like competitors, research agents, distributors/agents, retailers and end-users. As a participant you can also analyze buyer reaction to the products you are offering.
It is important to note that marketing research falls under the company's marketing information system. The latter is part of a company's structure that collects, processes and stores data from internal and external environments and disseminates it to marketing decision makers within the company.
3: Selection: Selecting the Export Target Market(s)
Comprehensive research will make the selection process painless. You will be armed with all essential information and thus able to make cautious decisions.
The selection process, which includes prudent market segmentation, is a result of careful analysis of the research results. The segmentation can be based on demographic, geographic or some other components to do with the market make-up of the researched market(s). Optimal markets should exhibit or at least meet the following criteria:
i) Accessibility (considering political, legal, risk and tariff barriers).
ii) Size and profit potential (consider cultural orientation, extent of economic development, existing competition).
iii.) Cost of doing business and long-term profitability (the costs should be adequately off-set by long-term profitability. The idea is to avoid costly and uneconomical markets.)
First-time exporters are advised to pursue a concentrated marketing coverage approach, which entails serving limited market segments. That way you don't over-spread yourself and you avoid the more costly coverage strategies such as undifferentiated strategy. For instance, if you are targeting the US market, you may focus on Florida, and start with Orlando, on a geographic segmentation.
In each selected segment, you can position yourself either next to current competition or by developing a new product. Your primary research information provides guidance in making this decision since you will now know if the market needs a completely new product, a better priced product, and so on.
4: Entry Strategy: Selecting the Appropriate Entry Strategy
Once you have selected your preferred or best segments, the next step is to consider the entry strategies. As an astute exporter who has done impressive homework thus far, you must not enter the new market shooting in the dark - you need a strategy. In order of increasing level of involvement and risk, the main export market entry strategies are:
i) Indirect exporting: Carries least risk, investment and involvement. In this case you have a distributor or trading house that carries all responsibilities, and you are relieved of most, if not all, export-related responsibilities.
ii) Direct exporting: In this case you are directly involved - your export team locally or branch in the foreign market or an appointed agent handles the export activities.
iii) Joint venturing: Involves licensing (more pronounced in manufacturing) and franchising (often applicable in service and retail set-ups).
iv) Foreign direct investment: Carries most involvement, risk and investment - an option for resource-rich and more established companies. After establishing the existence of a sustainable market, gauged from orders received, you can decide to invest part or all of your manufacturing activities. In this case you partially or wholly acquire a foreign company or establishing your own business in the export market.
These different export market entry strategies have their own advantages and disadvantages, which will be addressed in subsequent articles. You will have to analyze the pros and cons of each strategy carefully. Your medium- and long-term vision for your company, appetite for risk, need for control and the nature of the market play a pivotal role in this decision.
What has been found, especially when it comes to government opportunities, is that there is a trend towards preferential procurement. Most governments and large corporations are increasingly giving preference to locals. In such cases, you are encouraged to form strategic alliances with local businesses. There are South African companies that have tendered jointly with foreign partners, and have been successful.
5: The Marketing Mix: Developing an Appropriate Marketing Mix
Finally, you have to fashion a workable marketing formula - one that has an appropriate product, price, distribution and promotion mix, either to adapt or sell a standardized product. You may have to adapt your domestic marketing mix or develop a completely new one. Such a decision is also influenced by the selected market coverage strategy and research results, and takes in account cultural background, buyer behavior, distribution channels, as well as levels of personal disposable income of the target market segment.
By way of example: A small South African juice company, whose product is endorsed by a local soccer legend, would have to change its promotional message if entering new markets like Ghana, where the South African soccer legend is unknown. Ghanaians want their food hot, with pepper, and a food company entering this market has to adapt its product to meet locals’ needs that can’t just be changed. McDonald’s, which is an international company, has adopted its burgers to local needs.
On the other hand, due to economic globalization the world is becoming a village, getting smaller resulting in the need for adaption gradually falling away. Global brands such as Nike and Coca-Cola who target almost homogeneous groups internationally, have taken a standardization approach to their marketing mix.
Namibia has an interesting distribution channel scenario. Distributors of FMCG products in Namibia prefer distributing products that are already listed in South African chains such as Pick ‘n Pay, Spar and Shoprite. This means a South African company already supplying Pick ‘n Pay will find it easier penetrating Namibia.
Elsewhere in this article, the role social networks (e.g Twitter, Facebook) are playing as information sources was mentioned. These networks are also playing a major role in terms of promotion and distribution. You can ignore them to your own disadvantage! This is contrary to the initial perception that such networks were purely social. More and more companies and making sure they have a presence on social networks, over and above the traditional Internet presence.
Whilst the above systematic way of entering export markets is the ideal, there are instances where one gets an opportunity prior to any properly structured steps being taken, and strikes gold. Examples include when you are approached by a foreign buyer to supply him with your products. Also, the kind of business you are in, your prior experience and knowledge determine the level of involvement in this process.
You may not have time to religiously follow all the above steps. However, such cases are hard to come by. That is why we encourage you to think through your export marketing processes, to take calculated risks via a structured process. You can approach trade experts or experienced executives for guidance when you are not sure.
Subsequent articles will touch on the following areas: international trade law, international trade risks, trade finance and payments, export marketing and logistics, cargo movement, and international financial management.
Continue to Part 2: Trade Tips - Entering New Frontiers - The Entry Strategies >>>
Cos Mamhunze is an International Trade Specialist based at the saibl head office in Johannesburg. He is a student of international trade at the International Trade Institute of Southern Africa (ITRISA) - whose outline of steps in this article are included with their permission - and a member of IATTO (International Association of Trade Training Organizations). For more information, contact Cos at tel: +27 11 602 1273 or email: firstname.lastname@example.org