Markety-entry – Direct versus in-direct exporting
We have said that your first distribution decision will be how to enter the market; which we – not surprisingly – referred to as market-entry. Market-entry can broadly be further divided into two categories, namely in-direct and direct exporting.
In-direct exporting is when you sell your products to local companies in South Africa as though they were local sales, yet your products are then sold onwards by the buyer to foreign customers. For your firm, the sale is nothing more than a local sale; you are paid in rands and the sale is like any other domestic sale. Nevertheless, your products still end up crossing the border and being sold in other countries. In fact, you may not even be aware that your products are ending up overseas. On the other hand, you may well be aware that the local buyer is selling your products into foreign markets and this fact may have spurred you on to begin with your exporting endeavours. Alternatively, you may be quite happy to continue along this route as it requires very little effort on your part and represents a low risk route into exports. To learn more about the different types of in-direct exporting, click here.
Direct exporting is when you as the exporter are more involved and have some control over the exporting process. With direct exporting you will normally receive payment directly from abroad; that is, it is no longer a domestic sale as in the case of in-direct exporting. There are essentially three different types of direct market-entry channels available to you. These are:
- Those that involve selling directly to an overseas customer who may be the end-user, or through an intermediary such as an import agent, distributor, through your own sales subsidiary based in the foreign marketplace. Click here to learn more.
- Those that involve licensing, franchising and contracting, i.e. involving the sale of knowledge or skills to overseas buyers. Click here to learn more.
- Those that involve manufacturing abroad, e.g. a joint venture arrangement or the establishment of a wholly-owned off-shore manufacturing operation. Click here to learn more.
Factors affecting the choice of market-entry channel
The choice of market-entry channel will, of course, depend on:
- The company’s objectives in respect of the desired volume of international business, expected geographical coverage, etc.
- The size of the company in terms of sales and assets
- The company’s product range and the nature of its products, e.g. industrial or consumer, high or low price
- The competition in the foreign market
However, a number of other factors, which are unrelated to the company and its industry, will also need to be taken into consideration whenever entry into a new market or a change of established channels is contemplated:
- Channel availability: Different markets call for different approaches to market-entry. For example, some countries will not permit wholly-owned foreign operations; licensing may not be an option because of the lack of qualified licensees and in some small markets, the only reputable agent may already be representing the competition. Thus, the company might eventually opt for wholly-owned operations in some markets, marketing offices in others, and agents or distributors in the rest.
- Sales volume and profit objectives: Sales volume will depend to a large degree on the channel selected – a small marketing office in the capital city is going to generate fewer sales than a sales force that covers the entire national market. Estimating its long-term sales and costs, and comparing profit margins with sales volume can determine the profitability of a particular market-entry method. A 15% profit margin on a high sales volume may be preferable to a 20% margin on a lower sales volume.
- Operating costs: Estimated sales volumes should always be considered in relation to the cost of a particular market-entry method. Setting up a manufacturing operation in another country, will involve considerable initial investment and ongoing working capital. For other market entry channels, finance may be required for inventories or for extending credit facilities.
- Personnel requirements: Certain market-entry channels may be out of the question because it may not be possible to meet the necessary personnel requirements. The establishment of a production plant, for example, might require skilled managerial and technical staff.
- Risk: The greater the company’s investment in the foreign market, the higher the risk. Apart from capital investment, the company may risk inventories, receivables and may incur a financial loss because of exchange rate movements, etc. In general, the more direct and visible the entry of a company in the market, the more vulnerable the company is.
- Control: The degree of control that a company is able to exercise will depend on the market channel selected. A firm selling to a local trading company might have no control at all, whereas it would be possible to exercise firm control over an overseas marketing or manufacturing operation.
- Flexibility: Environmental and market conditions often change over time. The exporter may either want to expand its involvement in the foreign market to take advantage of new market opportunities, or to cut down its operations because of adverse developments. This should be borne in mind at the time of choosing a particular entry channel.