PART 4
ENTERING AND WORKING IN INTERNATIONAL MARKETS
CHAPTER 13
EXPORTING AND GLOBAL SOURCING
Instructor’s Manual by Marta Szabo White, Ph.D.
I. LECTURE STARTER/LAUNCHER
■ Market entry strategies consist of exporting, sourcing, foreign direct investment,
licensing, franchising, and non-equity alliances. This chapter explains one type of
foreign market entry strategy: Exporting, and in so doing, also discusses the counterpart
of exporting: Importing (also called global sourcing), as well as countertrade.
■ Explain to students that many companies begin their international ventures by
exporting, principally because, all else being equal, it is the least risky and the easiest to
recover from if things go wrong.
■ For example, if a SME (small or medium-sized enterprise) exports one shipment to a
foreign customer, and the shipment gets tied up unexpectedly in customs, or it arrives in
poor condition, or the product isn’t positioned properly in the new market, or if the
customer decides not to pay, certainly there are problems to solve. But it is still only one
shipment, and the loss of resources is limited and compartmentalized.
■ Explain how domestic companies can use exporting to extend the life cycle of their
products, to gain experience doing business internationally, and to compensate for slow
growth in the domestic market, among other reasons.
■ Some products are more appropriate to export to some countries than others. For
example, chances are that the market for consumer products such as clothing,
household goods, food, and health and beauty items is strong in China, but that foreign
products may be difficult to sell there on a widespread basis. This is because China has
established a strong capability to produce these items domestically in China, making the
cost of imported goods (except for some very high-end luxury items) quite prohibitive.
■ Tariffs and duties on imported items of that nature also tend to be high, in part
because the Chinese government wants to protect local industries from competition.
However, U.S. firms find the Chinese market is quite receptive to heavy machinery and
industrial equipment imports made in the U.S. because they have a reputation for
quality and reliability. Duties on these products tend to be low, and even small- and
medium- sized firms can be successful exporters if they conduct good research, identify
appropriate products, and carefully plan their export goals and deliverables.
■ One way to start this chapter on global sourcing, outsourcing and offshoring is to
admit that global sourcing, as discussed in the latter part of chapter, is controversial. It is
likely that many students will have either direct or anecdotal experience with
outsourcing, including its negative effects.
■ Ask students if they know of a company that has lost jobs to a foreign manufacturer,
or of an industry that outsources many of its jobs to another country, or if they
individually know of someone who has lost his or her job because it was offshored to
another country. Depending on their answer, you can begin to discuss the pros and
cons of global sourcing.
■ Suggest that the firm may experience increased complexity of managing worldwide
production, managing the global supply chain, lost influence over the outsourced
process, vulnerability to exchange rate changes, and other risks. Ask students if they
can think of benefits to shifting old jobs to other countries.
■ Ask students the difference between outsourcing and offshoring.
■ Then ask students what they think the advantages of global outsourcing might be.
They might name lowered costs, being closer to customers, better language abilities in
the case of telephone customer service to customers in other countries, access to
knowledge workers, and increased speed to market, among others. Then ask what the
disadvantages might be. Students might name the loss of local jobs, which might lead
to a lower standard of living, and perhaps a reduced ability of the home country to
compete in the world market. List the responses in the appropriate quadrant. This type
of analysis reveals that the advantages and disadvantages are complex, and operate at
various levels.
■ Suggest that more efficient companies make for a stronger national economy and
allow consumers to buy things at lower prices, benefiting buyers and firms which enjoy
greater market demand. Suggest that countries which outsource often benefit from the
ability to shift their labor force to performing higher value activities, which usually pay
better wages. For example, one bank shifted its domestic call-center operations to
India. It then re-employed the employees from its call center to perform telephone,
Internet, and mail based marketing activities in the home country.
■ Suggest that any lower wages resulting from job loss are balanced by lower prices for
products. This tends to increase consumer’s purchasing power and raise the standard
of living. Complete your introduction by reiterating that this analysis is still controversial.
Note that this chapter hopes to clarify the concepts of global sourcing, so students
better understand it as they work for companies and their careers
■ Try drawing a 2 x 2 matrix-type box on the board, and list the responses in the
appropriate boxes as follows:
GLOBAL OUTSOURCING
Advantages to the Firm Disadvantages to the Firm
Advantages to the Nation Disadvantages to the Nation
II. LEARNING OBJECTIVES AND THE OPENING VIGNETTE
LEARNING OBJECTIVES
After studying this chapter, students should be able to:
13.1 Understand exporting as a foreign market entry strategy.
13.2 Describe how to manage export-import transactions.
13.3 Explain identifying and working with foreign intermediaries.
13.4 Understand outsourcing, global sourcing, and offshoring.
13.5 Describe the benefits and risks of global sourcing.
13.6 Understand global sourcing strategies and supply-chain management.
Key Themes
■ In this chapter, there are six themes:
[1] Exporting as a foreign market entry strategy
[2] Managing export-import transactions
[3] Identifying and working with foreign intermediaries
[4] Outsourcing, global sourcing, and offshoring
[5] Benefits and risk of global sourcing
[6] Global sourcing strategies and supply-chain management
■ Chapter 13 first reviews the foreign market entry strategies, from exporting to equity
investment to contractual relationships. In selecting a strategy, managers must consider
the firm’s resources and capabilities, conditions in the target country, risks inherent in
each venture, competition from existing and potential rivals, and the characteristics of
the product or service to be offered in the market.
■ This chapter’s true focus is on home-based international trade activities: Exporting,
Importing, and Countertrade.
■ The authors explain why exporting is common for U.S. firms, and particularly
appropriate for SMEs, because of its relatively limited risk, expense, and knowledge
requirements of foreign markets. Among the organizational arrangements for exporting
are:
Indirect exporting
Direct exporting
Establishing a company-owned subsidiary
■ Exporting also requires knowledge of payment methods, such as cash in advance,
letter of credit, open account, consignment sales, and countertrade. INCOTERMS are
universally accepted terms of sale that effectively specify what is and is not included in
the price of a product sold internationally.
■ Sources of export financing include commercial banks, factoring, forfaiting, and
confirming, distribution channel intermediaries, intercompany financing, government
assistance programs, and multilateral development banks.
■ Importing is a big piece of the U.S. trade equation, and firms use it secure finished
products for retail sales, components for assembly, and raw materials for manufacturing.
■ Countertrade is both a way to get paid by certain types of buyers (say, those in
developing countries), as well as a distinct entry mode. There are four types of
countertrade: Barter is the direct exchange of goods without any money.
Compensation deals include payment in both goods and cash. Counterpurchase,
where the seller agrees to sell its product at a set price and receive cash payment from
the buyer, and the deal is contingent on a second transaction in which the seller agrees
to purchase goods from the buyer for the same amount as the first sale. Buy-back
agreements commit the seller to supply technology or equipment to construct a facility
and receive payment in the form of goods produced by the facility.
■ One of the key themes in this chapter focus on global sourcing. The chapter
distinguishes between outsourcing and off shoring, discusses trends in global sourcing,
the evolution of global sourcing, benefits and risks of global sourcing, the difference
between supply chain and value chain and ends with an interesting discussion about
corporate social responsibility the consequences of global sourcing for a country’s
public policy. The chapter also discusses supply-chain management, using global
sourcing as the example.
Teaching Tips
■ Ask students to review the international entry strategies [Exporting, Licensing,
Strategic Alliance, Acquisition, FDI (Wholly-Owned Subsidiary)]. This reinforces the
concept and lets you introduce exporting in the context of the others.
■ Then, review motives for internationalization and stages of the process, emphasizing
the need for the firm to have strong upper management support, a healthy cash flow,
risk tolerance, and entrepreneurial spirit.
■ Introduce the concept of exporting, which generally incurs less risk, expense and
requires less knowledge about foreign markets than other modes of entry. Stress that
exporting does have risks, however and care must be taken to do it for the right
reasons, with the right support, and in the right way to be successful.
■ Ask students to think about what kinds of expert advice managers might need as they
prepare to export. In addition to the firm’s internal export manager, a company should
discuss financing with the international department of their bank, transportation,
documentation and insurance with a freight forwarder or logistics/supply chain company,
and review the contract with an attorney.
■ Note that managers need to know when they need experts. It may be difficult for one
firm, especially a SME, to learn all the information needed to do business internationally.
But what every manager needs to know is when he/she needs help, and what kind of
help he/she needs.
■ Since global sourcing is a controversial topic, it has the ability to hold student interest.
Ask students to search local, regional, or national newspapers or magazines that have
stories about companies that have outsourced some piece of their value chain to
another country. You might need to help them by suggesting that they look for
companies in such industries as textiles, clothing, shoes, furniture, automotive parts,
machine tools, or consumer electronics, as well as back-office business processes,
such as accounting and call center customer support. New sources such as the
Financial Times, Wall Street Journal, and Business Week have many stories about
companies that have used global sourcing. Students can also research companies
using Hoovers.com, Standard & Poor’s, Merchant Online, and company websites to
learn about their experiences with global sourcing.
■ One risk of global sourcing is product liability. Students might remember the tainted
dog food and lead-painted toys produced in China.
■ In another case, Foreign Tires Sales, Inc., a small New Jersey import firm, was
ordered by the United States National Highway Traffic Safety Administration to recall
450,000 tires. The tires were sourced by a Chinese company, Hangzhou Zhongce, and
were found to be the cause of some U.S. accidents. Foreign Tires Sales had 13
employees and sold only 700,000 tires, therefore the recall was devastating to the
company. The owner of the company claimed that he tested the tires, but had limited
resources and testing capabilities to guarantee the quality of every single tire
(“Importers worst nightmare,” by David Welch. Business Week, July 23, 2007). Ask
students to update this case.
■ Ask students to think about how small companies can compete using global sourcing
with such large quality control issues looming.
■ Break students into small groups and ask each group to identify and present a
contemporary international product liability case involving global sourcing. Most
students bring laptops to class- give each group 10-15 minutes.
Commentary on the Opening Vignette:
EXPORTER’S DOGGED PURSUIT OF INTERNATIONAL CUSTOMERS
Key message
■ The president of Vellus Products, a small U.S. company that produces pet grooming
products, discusses her experience exporting products to over 30 countries, and to
more than 300 breeds of pampered pooches.
■ Sharon Doherty, president of Vellus Products started by selling $25,000 worth of
products to Taiwan in 1993, and grew the international side of her business gradually.
■ By 2008, Vellus launched first-time sales to Russia and Poland; in 2009 the addition
of Hungary, Switzerland and Denmark raised to 34 the number of countries that Vellus
exported to; today countries include: Australia, Canada, China, England, Finland, New
Zealand, Norway, Singapore, South Africa, and Sweden.
■ Foreign sales represent 50% of her revenues and management has registered the
Vellus trademark in 15 countries.
■ This vignette highlights the use of private and government (federal, state and local)
resources such as trade shows, trade associations, and directories to illustrate how an
SME such as Vellus can become ready to export.
Uniqueness of the situation described
■ The uniqueness of this case is the fact that Vellus is a SME.
■ Many students think that only large companies export, but in this case, a small,
single-business company that started with a solid but relatively small sale of $25,000 to
a Taiwanese importer now attributes 50% of its sales to exporting.
■ As an entry strategy, exporting is low cost, low risk, and uncomplicated.
■These are big advantages for smaller firms like Vellus that typically lack substantial
financial and human resources.
■ Exporting helps stabilize fluctuations in seasonal sales volume swings.
■ For example, because dog shows take place abroad during different parts of the year,
exporting helps stabilize Vellus’ overall sales levels.
● Sharon Doherty’s Advice:
■ Take advantage of support intermediaries located abroad provide.
■ Doherty often gives guidance to her foreign-based distributors, sharing her knowledge
and understanding of importing and supply chain management and marketing in the
dog-show network.
■ Advice is appreciated and helps in building long-term relationships.
■ Doherty also makes sure to do her homework on potential distributors. “Gather as
much information as you can,” she advises. “Don’t make any assumptions—the wrong
choice can cost your business valuable time and money.”
Classroom discussion
■ Ask students why SMEs might explore internationalization via exports.
■ What is it about Vellus’ products that make them attractive to buyers in Australia,
Canada, England, Norway, and other countries listed?
■ Are there any characteristics of these markets that suggest the company’s president
has a real strategy for her international expansion?
■ Her research must have shown that pet ownership, breeding, and showing is common
in most of her markets. Her products are high-end and may be categorized as
specialized for breeders and/ or as luxury items for individual pet owners.
■ Ask students to explore Leading Sectors for U.S. Export and Investment, in the
Country Commercial Guide for U.S. Companies regarding any of the countries listed
above to check if these types of products are included under Best Prospects. In looking
at Taiwan, Hygiene and beauty products, such as shampoo, etc. are included in this
category.
■ Further analysis reveals that Taiwanese Pet Market size was $782 million (2014). This
is important information for Vellus Products.
http://www.petfoodindustry.com/articles/5079-pet-food-market-update-asia-pacific
Accessed November 9, 2015
■ Also, there are some interesting facts regarding the Taiwanese pet industry, including
a suggested correlation between the lowest fertility rate worldwide and a steady
increase in pet ownership, resulting also in an increase in dog pampering. Apparently,
the trend is to postpone marriage; choose childfree lifestyles even after marriage; and
treat pets as children.