7/29/2017 - DEUkisi.deu.edu.tr/ozge.ozgen/ckr_ib4_inppt_13_ppt (1).pdf · Global Sourcing Learning...

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Copyright © 2017 Pearson Education, Inc.

International Business: The New Realities, 4th Edition

by

Cavusgil, Knight, and Riesenberger

Exporting and

Global Sourcing

Learning Objectives

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.

13-2Copyright © 2017 Pearson Education, Inc.

Exporting as an Entry Strategy

• Usually the firm’s first foreign entry strategy.

• Low risk, low cost, and flexible.

• Popular with SMEs.

• When we talk about trade, trade deficits, trade

surpluses, etc., we’re talking exporting.

• Most exports involve merchandise.

• Export channels:

o Independent distributor or agent; or

o Firm’s own marketing subsidiary abroad.


Services are Exported as Well

• Examples: Architecture, education, banking,

insurance, entertainment, information.

• However, many pure services cannot be exported

because they cannot be transported.

• Retailers offer their services by establishing retail

stores abroad, via FDI. Retailing requires direct

contact with customers.

• Overall, most services are provided to foreign

customers via entry strategies other than exporting,

especially FDI. 13-4


Advantages of Exporting

13-5

• Increase sales volume; improve market share.

• Generate better profit margins.

• Increase economies of scale.

• Diversify customer base.

• Stabilize sales fluctuations.

• Minimize the cost of foreign market entry.

• Minimize risk.

• Maximize flexibility.

• Leverage the capabilities of foreign distributors and

other business partners located abroad.


Disadvantages of Exporting

• Compared to FDI, exporting offers fewer

opportunities to learn about customers,

competitors, and other aspects of foreign markets.

• Firm must acquire and dedicate new capabilities in

international sales contracts and transactions,

international financing methods, and logistics and

documentation, all of which can strain

organizational resources.

• Exposes the firm to tariffs and other trade barriers

as well as fluctuating exchange rates.


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A Systematic Approach to Exporting


Export Intermediation Options

• Indirect exporting: Contracting with an intermediary in

the firm’s home country to perform all export functions,

often an Export Management Company or a Trading

Company. Common among firms new to exporting.

• Direct exporting: Contracting with intermediaries in

the foreign market to perform export functions, such as

distributors or agents. They perform downstream

value-chain activities in the target market.

• Company-owned foreign subsidiary: Similar to direct

exporting, except the exporter owns the foreign

intermediation operation; the most advanced option.


Alternative Organizational

Arrangements for Exporting


Export Documentation

The official forms and other paperwork required to

transport exported goods and clear customs.

• Quotation or pro forma invoice: Issued on request

to advise a potential buyer about the price and

description of the exporter’s product or service.

• Commercial invoice: Actual demand for payment

issued by the exporter when a sale is concluded.

• Bill of lading: Basic contract between exporter and

shipper. Authorizes the shipping company to

transport the goods to the buyer’s destination.


Export Documentation (cont’d)

• Shipper's export declaration: Lists the contact

information of the exporter and buyer, full description,

declared value, and destination of the products being

shipped. Used by governments to collect statistics.

• Certificate of origin: The "birth certificate" of the

goods, showing country where the product

originated.

• Insurance certificate: Protects the exported goods

against damage, loss, pilferage and, sometimes,

delay.


Incoterms (International Commerce Terms)

• A system of universal, standard terms

of sale and delivery.

• Commonly used in international sales

contracts and price lists to specify how

the buyer and the seller share the cost

of freight and insurance, and at which

point the buyer takes title to the goods.


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Examples of INCOTERMS


Methods of Payment

METHOD ADVANTAGES DISADVANTAGES

Cash in

Advance

Best for the seller. Risky from the buyer’s

standpoint, and thus

unpopular; tends to

discourage sales.

Open

Account

Easy for the exporter, who

simply bills the buyer, who

is expected to pay at some

future time as agreed.

Risky unless there is strong

established relationship

between exporter and buyer

Letter of

Credit

A contract between the

banks of the buyer and the

seller. Largely risk-free, it

helps establish instant

trust.

Requires following a strict

protocol, specified in the

contract. Can involve much

paperwork.


Letter of Credit Cycle


Countertrade

• An international business transaction in which all or

partial payments are made in kind rather than cash.

Similar to barter.

• Used when conventional means of payment are

difficult, costly, or nonexistent.

• Accounts for between 10% and 1/3 of all world trade.

• Common in large-scale government procurement.

• Risky. May involve inferior or hard-to-price goods;

may lead to price padding; Can be complex,

cumbersome, and time-consuming.13-16


Types of Countertrade

• Barter: Goods are directly exchanged, without the

transfer of any money.

• Compensation deal: Payment in goods and cash.

• Counterpurchase: Entails two distinct contracts. In

the first, the seller agrees to a set price for goods and

receives cash from the buyer, contingent on a

second contract in which the seller agrees to

purchase goods from the buyer.

• Buy-back agreement: Seller agrees to supply

technology or equipment to construct a facility and

receives payment in the form of goods produced by

it.13-17


Examples of Countertrade

• Boeing traded aircraft for oil, in Saudi Arabia.

• Caterpillar received caskets in Colombia and wine in

Algeria, in exchange for earthmoving equipment.

• Goodyear traded tires for minerals, textiles, and

agricultural products.

• Coca-Cola received tomato paste from Turkey, oranges

from Egypt, and beer from Poland, in exchange for

Coke.


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Overview on Countertrade


Sources of Export Financing

• Commercial banks.

• Distribution channel intermediaries.

• Buyers.

• Suppliers.

• Government assistance programs (e.g.,

Export-Import Bank, Small Business

Administration).


Types of Exporting Intermediaries

Foreign distributor: Based in the foreign market. Works

under contract for the exporter, takes title to, and distributes

the exporter’s products in a national market or territory, often

performing marketing functions such as sales, promotion, and

after-sales service.

Manufacturer’s representative: Contracted by the exporter to

represent and sell its merchandise or services in a designated

country or territory.

Trading company: Engages in import and export of a variety

of commodities, products, and services.

Export management company (EMC): Based in the home

market. Acts as an export agent on behalf of a client company.


Sources of Information to

Identify Potential Intermediaries

• Country and regional business directories such as Kompass

(Europe), Japanese Trade Directory, and Foreign Yellow

Pages.

• Trade associations e.g., National Furniture Manufacturers

Association; National Association of Automotive Parts

Manufacturers.

• Government ministries and agencies e.g., Austrade in

Australia, Export Development Canada, U.S. Department of

Commerce.

• Commercial attachés in embassies and consulates abroad.

• Branch offices of government agencies located in

exporter’s country, such as the Japan External Trade

Organization.13-22


• The exporter relies on intermediaries for much of

the marketing, physical distribution, and customer

service activities in the export market.

• The exporter should cultivate mutually beneficial,

bonding relations; respond to the intermediary’s

needs; demonstrate commitment; and build trust.

• Intermediaries prefer handling

good, profitable products,

and desire various

types of support.

Working with Foreign Intermediaries


Common Dispute Areas with Intermediaries

• Compensation arrangements.

• Pricing practices.

• Advertising and promotion practices and the extent

of advertising support.

• After-sales service.

• Return policies.

• Adequate inventory levels.

• Incentives for promoting new products.

• Adapting the product for local customers.13-24


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Criteria for Evaluating Export Intermediaries


Sources: Based on Business International, “How to Evaluate Foreign Distributors,” pp. 145–149 (May 10, 1985); S. Tamer Cavusgil, Poh-Lin

Yeoh, and Michel Mitri, “Selecting Foreign Distributors: An Expert Systems Approach,” Industrial Marketing Management 24, No. 4 (1995), pp.

297–304; International Trade Administration, Basic Guide to Exporting: The Official Government Resource for Small and Medium-Sized

Businesses (Washington, DC: International Trade Administration, 2011); Franklin Root, Entry Strategies forInternational Markets (Hoboken, NJ:

Jossey-Bass, 1983/1998).13-25

Global Sourcing

• Also called global outsourcing, global procurement

or global purchasing; it amounts to importing.

• Involves a contractual relationship between the

buyer and the foreign supplier, in which the

performance of a specific value-chain activity is

subcontracted to the firm's own subsidiary or to an

independent supplier.

Procurement of products or

services from suppliers located abroad for

consumption in the home country or a third country


Sourcing for Dell Inspiron Notebook Computer


Sources: Based on “Dell’s Current Suppliers,” 2015, www.dell.com; Thomas Friedman, The World Is Flat 3.0 (New York: Picado, 2007);

13-27

Drivers of Global Sourcing

1. Technological advances in

communications, especially the

Internet and international telephony.

2. Falling costs of international business.

3. Entrepreneurship

and rapid economic

transformation in

emerging market

countries.


Two Key Decisions Regarding Global Sourcing

Decision 1: Outsource or Not? Decide whether each

value-adding activity should be conducted in-house or

by an independent supplier. Known as the ‘make or

buy’ decision. Firms usually internalize activities that

are part of their core competence or that involve the

use of valuable intellectual property.

Decision 2: Where in the World Should Value-

Adding Activities Be Located? Firms configure their

value-chain activities in specific countries to cut costs,

reduce transit time, access favorable factors of

production, and access competitive advantages.


Example of Worldwide Value Chain Configuration

• BMW employs more than 60,000 factory personnel at 30

sites in 14 countries to manufacture its vehicles.

• The Munich plant builds the BMW 3 Series and supplies

engines to other BMW factories abroad.

• A plant in South Carolina makes 350,000 vehicles per

year.

• A plant in NE China makes cars in a local joint venture.

• A plant in India makes BMWs for the Asia market.

• BMW configures sourcing to minimize costs (e.g., by

producing in China), access skilled personnel (by

producing in Germany), remain close to key markets (by

producing in China, India and the United States). 13-30


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Business Process Outsourcing (BPO)

• Outsourcing of business functions to independent

suppliers such as accounting, human resource

functions, IT services, and customer service.

• BPO includes:

▪Back-office activities, including internal, upstream

business functions such as payroll and billing, and

▪ Front-office activities, which

includes down-stream,

customer- related services

such as marketing or technical

support. 13-31Copyright © 2017 Pearson Education, Inc.

Contract Manufacturing

Arrangement in which the focal firm contracts with an

independent supplier to manufacture goods according

to well-defined specifications. E.g., Nike, IKEA.

Example:

Patheon is a leading contract manufacturer

in the pharmaceutical industry, providing drug

development and manufacturing for pharmaceutical

and biotechnology firms worldwide. Operates 11

factories in North America and Europe, producing

over-the-counter drugs and numerous top

prescription drugs for leading pharmaceutical firms.


Global Sourcing from

Subsidiaries versus Independent Suppliers

• In global sourcing, the focal firm has two major choices.

It can source from:

(1) Independent suppliers, or

(2) Company-owned subsidiaries and affiliates.

• Global sourcing from independent suppliers involves

outsourcing production to a third-party provider abroad.

• Captive sourcing is sourcing from the firm’s own

production facilities located abroad. Production is

carried out at a foreign facility that the focal firm fully or

partly owns through direct investment.


Nature of Outsourcing

and Global Sourcing


Sources: Based on B. Kedia and D. Mukherjee, “Understanding Offshoring: A Research Framework Based on Disintegration,

Location and Externalization Advantages,” Journal of World Business 44, No. 3 (2009), pp.250–261; Information Economy

Report 2009 (New York: United Nations, 2009); World Investment Report 2004 (New York: UNCTAD, 2004).

Offshoring

• A natural extension of global sourcing, it refers to the

relocation of a business process or entire

manufacturing facility to a foreign country.

• MNEs shift production of goods or processes to foreign

countries to enhance their competitive advantages.

• Common in the

service sector,

including banking,

software writing,

legal services, and

customer service

activities.

Example

Large legal hubs have emerged in India that

provide services such

as drafting contracts and patent applications

with lawyers in North America and Europe

costing $300 an hour or more, Indian firms

can cut legal bills by 75 percent.


Choices in Outsourcing Value Chain Activities

13-36


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Benefits of Global Sourcing

• Cost Efficiency, due to lower wages abroad, leading

to improve profitability.

• Ability to Achieve Strategic Goals

▪ Faster corporate growth.

▪ Access to qualified personne.l

▪ Improved productivity and service, especially when a task is outsourced to a firm specialized in that task.

▪ Business process redesign.

▪ Increased speed to market.

▪ Access to new markets.

▪ Technological flexibility.


Risks in Global Sourcing

• Lower-than-expected cost savings.

• Environmental factors, such as exchange rate

fluctuations, trade barriers, and labor strikes.

• Weak legal environment, which can affect protection

of intellectual property.

• Inadequate or low-skilled workers.

• Overreliance on suppliers.

• Risk of creating competitors.

• Erosion of morale and commitment among home-

country employees, due to outsourcing jobs.13-38


Labor Cost per Hour of

Typical Workers in Various Locations

Sources: Based on Eurostat: Hourly Labor Costs, at ec.europa.eu; International Labour Organisation (ILO), Statistics

and Databases, www.ilo.org; Labour Bureau, Government of India, at http://labourbureau.nic.in.13-39


Overview on India

• Leading offshoring destination for software

development and back-office services such as call

centers and financial accounting activities.

• A leading world center in the IT industry, employing

more than two million people.

• Strong English language skills.

• Abundant pool of educated

engineers, managers, and

other specialists.

• Low labor costs.13-40Copyright © 2017 Pearson Education, Inc.

Corporate Social Responsibility

• Global sourcing can lead to three

major problems in the home country:

▪ Job losses

▪ Reduced national competitiveness

▪ Declining living standards

• MNEs may be ineffective or indifferent about:

▪ Protecting the environment

▪ Promoting human rights

▪ Labor practices and working conditions abroad


Source: Roger Bamber/Alamy

Useful Public Policy for

Minimizing the Harm of Global Sourcing

• Global sourcing involves creative destruction. It may eliminate jobs, but it creates new advantages and opportunities, that benefit firms, increase profits, and often lead to the ability to create better jobs.

• Governments should strive to:

• Keep the cost of doing business low (e.g., via appropriate economic and fiscal policies).

• Ensure a strong educational system, that supplies engineers, scientists, and knowledge workers.

• Maximize worker flexibility to help those who lose jobs find other positions.


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Ethical Connections

• If you call customer service for a computer or cell phone,

you may reach someone on the other side of the world.

• Outsourcing to countries where labor is cheaper helps

companies lower labor costs and improve profits.

• In a global economy, domestic workers compete with

overseas workers for jobs whose output can be

transmitted by telephone or the Internet. Jobs once done

by domestic workers are effectively shipped overseas.

• Working conditions in emerging markets occasionally

amount to sweatshop conditions.

• At the same time, global sourcing from emerging markets

creates jobs for those who may otherwise face poverty.


Strategies for

Minimizing Risk in Global Sourcing

• Go offshore for the right reasons. The best

rationale is strategic, such as enhancing the quality

of offerings, improving productivity, and freeing up

core resources.

• Get employees on board. Poorly planned

sourcing projects creates unnecessary tension with

existing employees.

• Choose carefully between a captive operation

and a contract with outside suppliers.


Strategies for Minimizing Risk (cont’d)

• Choose suppliers carefully. There are many

options to choose from. A sourcing broker can

help.

• Emphasize communications and collaboration

with suppliers. Minimize problems by developing

clear and effective relations with suppliers.

• Safeguard interests in terms of maintaining the

firm’s reputation, building a stake for the supplier,

keeping open options for finding alternate partners

if needed, and withholding key intellectual property.


Global Supply Chain Management

• Global supply chain: The firm’s integrated network

of sourcing, production, and distribution, organized

on a world scale, and located in countries where

competitive advantage can be maximized.

• Sourcing from numerous suppliers scattered around

the world requires efficient supply-chain

management.

• Third party logistics providers (3PLs) as well as

independent logistics service providers such as

FedEx, TNT, and UPS are useful facilitators.13-46


Stages, Functions, and

Activities in the Global Supply Chain

13-47


Features of Global

Supply Chain Management

• The costs of physically delivering a product to an export market may account for as much as 40% of the total cost.

• Firms use information and communications technologies (ICTs) to streamline operations, reducing costs and increasing distribution efficiency.

• Logistics involves physically moving goods through the supply chain. Incorporates information, transportation, inventory, warehousing, materials handling and similar activities associated with the delivery of raw materials, parts, components, and finished products.


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Transportation Modes

• Land transportation is via highways and railroads

Ocean transportation is via large container ships.

• Air transportation involves commercial or cargo

aircraft.

• Ocean and air transport are common in international

business because of the long distances. Ocean

transport is the cheapest and most common.

• Ocean transport was revolutionized by the

development of 20- and 40-foot shipping containers.


Comparing Ocean, Land, and Air Transport

Ocean Transport Land Transport Air Transport

● Accounts for

about 90 percent of

international

shipments

● Relatively slow

● Relatively

inexpensive

● Revolutionized by

the development of

40-foot shipping

containers

● Usually more

expensive than

ocean transport but

cheaper than air

● Exporters often

opt for ocean

shipping even when

land transport is

available. For

example, some

Mexican firms send

goods to Canada by

ship.

● Accounts for only 1

percent of international

shipments.

● Fast and predictable

● Expensive

● Used mostly for:

-- perishable products

(e.g., food, flowers)

-- products with a high

value-to-weight ratio

(laptop computers)

-- urgently needed

goods (medicines,

emergency supplies). 13-50



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