Analysis Of The Advantages And Disadvantages Of Exporting Marketing Essay

The ability of a firm to export a proportion of its sales abroad is increasingly regarded as a an important competitive measure of performance at national and as well as regional level (O’Farrell et al, 1996).There ability to engage in exporting is purported to be necessary ingredient to ensure the survival and growth of new and small firms. Exporting is usually used as an entry strategy for most firms venturing abroad for the first time. It is the entry strategy most favored by small and medium enterprises (SMEs).

Many Companies begin their international ventures by exporting mainly because all things being equal, it is the least risky and easiest to recover from in case of things not working out as planned. It is very flexible as compared to other strategies as the exporter can both enter and exit from the market very easily. Some companies internationalize for different reasons, they are either reactive or proactive to the market i.e. firms may react to rivals’ action to go international and follow suit or perhaps anticipate its competition’s move by being the first mover and achieving the first mover advantage. However, there are quite a number of things that a firm should put in to consideration when exporting for the first time internationally. To ensure export, a firm should not overlook the following:

Assessment of the global market opportunities:

Before exporting goods or services, there are a number of questions a firm must put into consideration. The firm must analyze what kind of business it wants to get into, the products in question and the target market as whether it will accept the products or services being exported. The management of the firm should do a research before selecting the target market. The target market should be attractive and all other aspect like transportation, customs regulations and applicable tariffs and duties. Similarly, of at most importance is the culture of the country which must be evaluated in order to understand the implications to business opportunities and challenges. There must be a great understanding of customer needs and preferences, the competitors, the government regulations and the capabilities of the foreign intermediaries. The economic stability of the country is also an important aspect to the exporter.

Organizing for exporting:

For an organization to successfully export its products or services, it must learn how to transport its goods internationally, learn all the necessary procedures required at customs offices and all the necessary documentations. The organizations must adhere to all the requirements of the country it is exporting its goods to, failure to which can attract charges and penalties.

Acquiring of needed skills and competencies:

Hill (2007) is of the view that one way for the first time exporters is to identify the opportunities associated with exporting and to avoid many of the associated pitfalls is to hire an export management company (EMC) who act as the export marketing department or international department for their clients firms. It is important for organizations to acquire the right competencies and skills in order for the organization to survive in the market. The organizations must learn what is required of them to succeed in those markets before moving on to other markets. The more knowledge the organization acquires about the exporting strategies, the more competencies and right skills it gains and a clear picture.

Different Export Strategies Available To a Firm

There are two major strategies that an organization needs to consider in terms of exporting into another country. Under these two major strategies;

The first strategy is called an Autonomous Strategy or sometimes referred to as the go it alone. This strategy involves the organization choosing to go into another country alone. The Foreign Direct Investment (FDI) is one method that can be used.

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Foreign Direct Investments (FDI) is the strategy mainly preferred by Multinational National Enterprise and it is an equity or ownership form of foreign market entry in to other countries and the presence is especially critical in performing some activities in the market. This type of strategy is usually by big firms such as Toyota, Nokia etc which have massive FDI based operations around the world.

Another strategy is called the collaboration strategy which is concerned with the firm creating an ally with partners either up or down or the same level of the value chain, for example, licensing and franchising.

Franchising is a means of marketing goods and services in which the franchiser grants the legal right to use branding, trademarks, products and the method of operation is transferred to a third party the franchisee in return for a franchise fee. Doole and Lowe (2001)

International strategic alliances-This involves an exporting firm going into strategic alliances with local firms in the targeted countries. This strategy is categorized into three forms.

Non equity strategy alliance that is formed through the contractual agreement to supply, produce or distribute the firms’ goods or services with equity sharing. This may concern marketing and information sharing e.g. licensing and franchising.

An equity strategic alliance is the strategy in which partners own different percentages of equity in a new venture or project or an existing firm.

Joint Ventures where two or more firms create a separate co-operation whose stock is shared by partners.Cateora and Graham(2002) define a joint venture as partnership between two or more participating companies that join forces to create a separate legal entity. Joint Ventures are in essence a way of risks of expanding internationally.

Acquisition is” where an organization develops its resources and competencies by taking over another organisation”Johnson and Scholes (2002 p.375).An acquisition can be instantaneous and sometimes less expensive approach to market entry.Keegan and Schlegelmilch (2001).

Other strategies that a firm can use are:

The use of the Internet by setting up a website to advertise its products and or services to the world. This method has not only become popular due to the cost efficiency but also because of the instant huge volumes it reaches. The internet provides the means to export some types of services, ranging from airline tickets to architectural services.

Other facilities on this method include online advertising and catalogues where goods can be, selected, ordered and paid for remotely. This method however may apply to both autonomous and collaborative strategies.

Thus, the different types of international strategies represent different degrees of resources, commitments and risks. There are a number of questions managers must put into consideration before selecting an entry strategy in to a new market or country. The questions that need to be considered are such as what are the goals and objectives of the firm, does the firm have enough resources and capabilities to survive in the market especially in a foreign country where the firm may find stiff competition. It is also very important that the firm does it’s home work and understands its competitors in the market, unique conditions in the targeted country, balancing risk and return, competencies of the firm and characteristics of the product or services that the firm whishes to export.

The firm can also decide whether they want to use direct export or indirect exporting.

Direct Exporting is the strategy that a firm can use to sale directly to the customers in foreign countries by opening an export sales department which can create opportunities for the firm to establish a closer relationship with the foreign market and the end buyers. The firm can decide to use an export manager who will be charge of its direct export sales overseas to some countries where you can sale directly to the end user. This is common in the Middle East, Central America and in some Asian Countries. Firms wishing to pursue a long term position in a foreign market need to be more proactive in their approach to the market entry by becoming direct involved. Other direct export options are the use of export intermediaries.

Indirect Exporting is the other strategy that can be used by firms to export it products and or services. Indirect exporting may seem to be the better option to other businesses through using intermediaries may be a better alternative looking at the complex tasks and risks involved in direct exporting. In this strategy, the firm can decide to use the domestic Intermediaries that can perform market research and develop a marketing strategy on behalf of the firm.

Advantages of Exporting:

The following are the advantages of exporting as an international entry strategy for a new firm;

Increased sales volume resulting in improved market share as well the generation of profit margins that are often more favorable than the domestic market,

Increased economies of scale through the reduction of unit cost of manufacturing as the sales volumes rise

A diversified customer base thus reducing dependence on home markets.

Minimized risk and maximized flexibility compared to other entry strategies as the firm can easily and quickly withdraw from an export market.

Lower cost of foreign market entry as the firm does not have to invest in the target market or maintain physical presence especially through the use of agencies or franchises. The firm can therefore test the new market before committing greater resources through foreign direct investment.

It helps stabilize fluctuations in sales associated with economic cycles or seasonality of demand e.g. a firm can offset declining demand at home.

In a nutshell the low cost , low risk nature of exporting, combined with the ability to leverage on foreign partners makes exporting suitable to a new firm in the international business fraternity.

Disadvantages of Exporting:

Because exporting does not require the presence of the firm in the country it is exporting its goods or services, the firm usually does not meet with its customers as a result it does not get to learn about the interests of its clients, the competitors and the market.

It does not allow the firm to benefit from the location advantages of the host national.

The exporting firm has limited opportunities to gain knowledge of local markets and competitors as it does not dwell in the target market’s countries, hence posing a business risk.

There is serious exchange risks involved as the firm deals in foreign currency due to fluctuations in exchange rates. Without proper hedging, the organization may encounter significant exchange losses depending on the economic situation of the target foreign market and apart from losses, exchange rates may cause the exporters goods being expensive in the target market and therefore lose market share in the host national.

The exporting organization is exposed to trade barriers such as import duties/tariffs depending on the area of the host national whom it trades with. The existence of certain regional groupings may affect the exporting firm positively or negatively especially if the firm is from outside the region.

Exporting usually involves transporting goods for production companies involved in goods marketing and distribution. This may be a constraint in the smooth distribution and realization of business objectives of economic growth and profit generation. This may also depend on the location of the target market and the socio-economic situation in the host nations as well as infrastructural development.

The fact that the exporting firm does not dwell in the host country may result in limitations on the ability to respond quickly to customer demands as there may be no one from the firm on the ground to respond on time.

Exporting may create dependence on export intermediaries and therefore may not have the grip.

Another disadvantage of exporting is the high transportation costs that can make exporting uneconomical especially if the organization is exporting huge or bulk products.

Conclusion:

It can be concluded that a critical facilitator of internationalization of markets depends on three components as market drivers that is the presence of similar customer needs and tastes, the presence of global customers e.g. the growing trend in car components companies being internationalized as their customers become internationalized. In accordance to Yip (2003) costs may be reduced by operating internationally through increasing volumes beyond what a national market may support and therefore can give rise to economies of scale both on the production as well as on the purchasing side. Scale economies are particularly important in industries with high product development costs. It also noted that internationalization is promoted were it is possible to take advantage of country specific differences. Other drivers may be due to policy including tariff barriers, subsidies to local firms and license to trade.

Therefore among the methods of internationalization, exporting has proved to be more popular in certain types of business operations and largely depends on what stage a particular firm is in the process of internationalization. Mostly this method is used by firms in the initial stages of internationalization especially by small and medium sized enterprises (SMEs) and strategy becomes less popular as firms grow in size.

The two main strategies firms use to export is firstly by collaboration , where a firm goes into partnerships with other firms either locally or abroad to complete value chains in the business through joint ventures, licensing, franchising and other strategic alliances.

The second strategy is the go it alone or autonomous strategy were a firm going into export through the establishment of its own infrastructure in the target market such as a distribution office, its own employees. Therefore this strategy involves the foreign direct investment (FDI) with a view to establishing a long term commitment in the foreign market involved. However, it is less popular especially for firms going on the international market for the first time.

Through analysis of the export strategy, the method has got a lot of disadvantages despite having a lot of advantages and therefore the choice of using for internationalization will depend on various factors such as being an entry strategy, or depending on the economic conditions of a particular region, take advantage of market conditions prevailing at a particular time. This is after taking into account the various factors or drivers such as costs, competition, market condition and local and host government policies.