Lecture Sales and distribution management: Chapter 16 - Krishna K Havaldar, Vasant M Cavale

Chapter 16, international sales & distribution management. After studying this chapter you will be able: Understand differences with domestic markets; choosing the markets; economic, legal & cultural aspects of the environment; risks involved in international business; entry strategies for international markets;…

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LEARNING OBJECTIVES

• Understand differences with domestic markets

• Choosing the markets

• Economic, Legal & Cultural aspects of the

environment

• Risks involved in International business

• Entry strategies for international markets

• Pricing, financial terms and payment methods

• Information gathering about target markets

• Differences in distribution channels and factors influencing the choice

• Domestic competition has increased especially from imports.

• Outsourcing in manufacturing and services has

increased due to cost pressures & improvement in infrastructure

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CHOOSING THE MARKET

• Factors to be borne in mind while choosing markets:

• Size of the market

• Language & Culture of the market

• Competition in the market

• Proximity of the market

• Political and Financial stability of the country

• Ease of doing business

• Culture influences everything from taste &

preferences to consumption patterns and attitude to foreigners

• Culture influences communication modes

• Culture influences dress and behavior

• Culture influences usage of a product

• Language is very important in international business

to communicate effectively

• Important to know the local laws to do business – on

investment, management, employment, marketing, pricing, royalties, profit repatriation, taxation etc

• Developed countries have stringent laws on safety, pollution, intellectual property rights etc

• In times of disputes, which law will prevail – this

needs to be spelt out in contracts

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RISKS IN INTERNATIONAL BUSINESS

• Two main risks in international business:

• Political risks – involve disruption of contracts

or payments due to sudden political changes, expropriation of businesses etc

• Commercial & Financial risks – failure of the buyer to pay due to bankruptcy or sudden

changes in the exchange availability or rate.

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RISKS IN INTERNATIONAL BUSINESS

• Risks can be insured with agencies like the export credit guarantee corporation(ECGC) for a premium based on the country’s risk

• Letters of credit may be guaranteed by international banks located in major financial centers like London, New York, Singapore etc

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TRADE BETWEEN COUNTRIES

• Reasons for trade between countries include:

• Non availability of a product or resource

• Cost advantages in buying rather than making a product locally

• Differentiated products-Luxury products or better designed products in the same category may be available from different countries (cars, electronics, textiles and garments etc)

• Limited growth in home market

• Overseas markets offer large profitable opportunities

• Excess capacity which cannot be absorbed locally

• Cost advantage over international competitors

• Mitigating risk of increased domestic competition

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ENTRY STRATEGIES

• Exporting through local agent

• Exporting through foreign agent

• Exporting to foreign importer / distributor

• Setting up local office / representative

• In situations of low volumes, exporting through local

or foreign agents is cost effective

• As volume grows and in complex products or large value deals, using own sales personnel is preferable

• To be effective, it is preferable to have local

personnel in the sales force

• More important in international markets due to

distance and transportation time

• Importers, manufacturers and retailers are

increasingly asking for Just in Time deliveries

• Distribution strategy varies from market to market depending on size and local conditions

• Multiple channels may be used in countries

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DISTRIBUTION OPTIONS

• Depends on the volume of the business

• Positioning of the product

• Infrastructure of distribution in the country

• Local laws – some countries insist on local companies in the distribution business

• Internet as a channel of sales and distribution

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ROLE OF LOGISTICS

• Very important aspect of international selling

• Logistics can make up over 15% of the cost of the

product

• Involves multiple modes of transport – land, sea and air

• Considerable paperwork and formalities to be

completed in international trade

• Logistics providers now offer complete one stop

solution including distribution, invoicing and collection

of payment

• Pleasant and amiable personality

• Ability to adapt to foreign culture – especially food,

drink etc

• Conversant in one or more foreign languages

• Ability to act independently and decisively

• Ability to understand complexities of financing,

foreign exchange etc

• Some local sales persons in the force will be useful to overcome some barriers and leverage local networks for business development

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PRICING AND PAYMENT TERMS

• Common pricing terms are:

• Ex Works – at the mfrs factory gate

• FOT, FOR – free on truck / rail –loaded on truck/rail

• FAS – free along side – at port next to ship

• FOB – free on board – loaded on ship

• C&F – cost and freight – inclusive of to destination

• CIF – cost, insurance and freight – inclusive to

destination

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PRICING AND PAYMENT TERMS

• Payment terms can include:

• Cash in advance

• Cash on delivery – cash against documents

• Consignment basis – payable after sale

• Usance – payment … days after acceptance of

documents

• Letter of credit

• Long term credit financing – for machinery / projects

• Each method has risks for the buyer or seller The LC offers safety and comfort for both

riyals etc.

• This reduces the risk of exchange rate fluctuations for the buyer

• Exchange fluctuation is a major risk for sellers and

can be managed by hedging the currency

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PACKING AND SHIPPING

• Packing is of two types:

• Industrial packing – bulk for protection during

shipping & transport

• Consumer packing – to enhance sales appeal

• Packing could makeup up to 5% of product costs

• Countries have laws or practices in packing which must be understood and adhered to

• Packing depends on the product and must be

suitable for containerized shipping and mechanical handling

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Key Learnings

• Markets differ in culture, language, taste,

consumption patterns, economic strength, level of development of market and distribution infrastructure

• The main risks in international business are political and commercial and financial

• Currency fluctuation is major risk

• Risks can be mitigated by hedging or insuring

• Legal aspects of a country must be understood well before venturing in

currency, distributing the products based on the

market needs and infrastructure, in suitable packing for efficient handling and consumer appeal

• Payment terms must be acceptable to buyer and

seller with minimum risk to both

• Secondary market data can be collected from various sources before venturing into the market