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Chapter 16

International Sales & Distribution Management

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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

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WHY GO INTERNATIONAL?

• The WTO agreement has resulted in opening up of new areas for freer trade (Textiles, Services & Agricultural products)

• China, Russia, India & the East European countries have embraced free market policies resulting in huge opening up of underserved populations.

• 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

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CULTURE & INTERNATIONAL 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.

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LEGAL ASPECTS OF INTERNATIONAL BUSINESS

• Laws vary from country to country – there is no “international law”

• 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)

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INTERNATIONAL TRADE – COMPANY PERSPECTIVE

• Companies may choose to sell internationally for the reasons given below:

• 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• Licensing / Franchising• Setting up Joint ventures for distribution /

manufacture• Setting up wholly owned manufacturing facilities

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ORGANIZING FOR INTERNATIONAL SALES

• Structure depends on volume of sales and nature of the product.

• 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

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DISTRIBUTION

• Distribution is a vital aspect of marketing – ensuring availability of the product in the right quantity, at the right time and right place.

• 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

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PROFILE OF AN INTERNATIONAL SALES PERSON

• 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

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CURRENCY OF PRICING

• The US Dollar is the most widely used currency for pricing international sales

• Importers in some countries may prefer invoicing in local currencies like Japanese Yen or Euro or Pound Sterling, Singapore Dollars or UAE Dirhams Saudi 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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MARKET INTELLIGENCE

• Secondary data is very easy to gather from various publications, agencies like chambers of commerce, trade bodies, embassies, trade shows, internet, banks etc

• Usually secondary data is sufficient to establish the feasibility of the market.

• Care must be taken to understand the data and the measures used before drawing conclusions.

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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

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Key Learnings

• The organizing for international markets starts with choosing the market, planning suitable entry strategies, staffing with salespersons of appropriate profile, pricing the products in an acceptable 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.