HOW A COMPANY CAN GROW BY GOING GLOBAL
Today the question for a growth-oriented company is not “Should we go global? But “when should we go global?” There are many reasons why entrepreneurs must consider the global market even as early as the development of their original business plan. For one thing, because of rapidly changing technology, product lives are growing increasingly short. With R&D so expensive, companies are forced to enter several major markets at once to gain the maximum advantage from brief windows of opportunity. Entrepreneurs who attend world trade shows know that their strongest competition may as easily come from a country in the Pacific Rim as from a country next door. Entrepreneurs also know that they may have to rely on other countries for supplies, parts, and even fabrication to keep costs down and remain competitive.
Furthermore, with increasing competition, and saturated markets in some industries, looking to global markets can add a new dimension to the entrepreneur’s business. Many entrepreneurs have found new applications for their products in other countries or complementary products that help increase the sales of their products domestically. Although a global strategy should be contemplated in any business planning, a new venture may not be able to export until it is somewhat established and is offering a high quality product or service at a competitive price. Nevertheless, more and more “global start-ups” take a global strategy from their very inception
Researchers have found that the number of global start-ups appears to be growing. Even though some failed for various reasons, those that failed tended to exhibit fewer of the success characteristics in those that survived. These success characteristics include:
- A global vision from the start.
- Internationally experienced managers.
- Strong international business networks.
- Preemptive technology.
- A unique intangible asset, such as know-how.
- Closely linked product or service extensions. (The company derives new and innovative products and services from its core technology.)
- A closely coordinated organization on a world-wide basis.
However, going global is also a risky proposition. Building a customer base and a distribution network is difficult in the domestic market; it is a colossal challenge in foreign markets. Moreover, financing is more difficult in global markets. Those concerns are not unfounded. Many small entrepreneurial companies have made their first foray into global marketplace via a single order from a potential customer in another country. If that one transaction goes smoothly, the entrepreneur may forge ahead under the mistaken impression that doing business in another country is easy.
Exporting is a long-term commitment that may not pay off for some time. In the meantime it may be necessary to adapt the product or service somewhat to meet the requirements of the importing country and develop good relationships with agents in the country. If the entrepreneur is dealing in consumer products, it is a good idea to target countries that have disposable income like developed countries. If, however, the entrepreneur is dealing in basic or industrial products, it might be wise to look to developing countries that need equipment and services for building infrastructures and systems.
Export Financing
To make a sale in the global market, a company needs funds to purchase the raw materials or inventory to fill the order. Unfortunately, many entrepreneurs assume that if they have a large enough order, getting financing to fill the order will be no problem. Nothing could be further from the truth. Export lenders, like traditional lending sources, want to know that the entrepreneur has a sound business plan and the resources to fill the orders.
Entrepreneurs who want to export can look for capital from several sources including, bank financing, internal cash flow from the business, venture capital or private investor capital, and prepayment, down payment, or progress payments from a foreign company placing the orders. A commercial bank is more interested in lending money to a small exporter if the entrepreneur has secured a guarantee of payment from a governmental agency such as the Import-Export Bank, because such a guarantee limits the risk undertaken by the commercial bank. Asking buyers to pay a deposit up-front, enough to cover that purchase of raw materials, can also be a real asset to a young company with limited cash flow.
Foreign Agents, Distributors, and Trading Companies
Every country has a number of trade representatives, agents, and distributors who specialize in importing foreign goods. It is possible to find one agent who can handle an entire country or region, but if a country has several economic concerns, it may be more effective to have a different agent for each center. Sale representatives work on commission; they do not buy and hold products. Consequently, the entrepreneur is still responsible for collecting receivables, which, particularly when one is dealing with a foreign country, can be costly and time consuming.
Using agents is a way of circumventing this problem. Agents purchase a product a discount (generally very large) off list and then sell it and handle the collections themselves. They solve the problem of cultural differences and the related difficulties inherent in those transactions. Of course, using an agent means losing control over what happens to the product once it leaves the entrepreneur’s hands. The entrepreneur has no say over what the agent actually charges customers in his or her country. If the agent charges too much in an effort to make more money for him or herself, the entrepreneur may lose a customer.
Entrepreneurs who are just starting to export or are exporting to areas not large enough to warrant an agent should consider putting an ad in trade journals that showcase the country’s products internationally. For products the entrepreneur is manufacturing, it may be possible to find a manufacturer in the international region being targeted that will let the entrepreneur sell his or her products through its company, thus providing instant recognition in the foreign country. Ultimately, that manufacturer could also become a source of financing for the entrepreneur/s company.
Another option is to use an export trading company (ETC) that specializes in certain countries or regions where it has established a network of sales representatives. ETCs often specialize in certain types of products. What typically happens is that a sales representative may report to the ETC that a particular country is interested in a certain product. The ETC then locates a manufacturer, buys the product, and sells it in the foreign country. Trading companies are a particularly popular vehicle when a company is dealing with Japan.
Choosing an Intermediary
Before deciding on an intermediary to handle the exporting of products, entrepreneurs should undertake some due diligence. Specifically, they should check the intermediary’s current listing of products to see whether there is a good match, understand the competition and question whether the intermediary also handles these competitions, and find out whether the intermediary has enough representatives in the foreign country to handle the market. They should also look at the sales volume of the intermediary, which should show a rather consistent level of growth. And they should make sure the intermediary has sufficient warehouse space and up-to-date communication systems, examine the intermediary’s marketing plan, and make sure the intermediary can handle servicing of the product.
Once a decision has been made, an agreement detailing the terms and conditions of the relationship should be drafted. This is very much like a partnership agreement, so it is important to consult an attorney who specializes in oversea contracts. The most important thing to remember about the contract is that it must be based on performance, so that if the intermediary is not moving enough products, the contract can be terminated. It is best to negotiate a one- or two-year contract with an option to renew should performance goals be met. This will probably not please the intermediary, because most want a five- to ten-year contract, but it is in the best interests of the entrepreneur to avoid a longer-term contract until the intermediary proves that he or she is loyal and can perform.
Other issues should be addressed in the agreement. Retaining the ability to use another distributor is important. The entrepreneur should negotiate for a nonexclusive contract to have some flexibility and control over distribution. Another issue concerns the specific products the agent or distributor will represent. As the company grows, the entrepreneur may add or develop additional products and may not want this agent to sell those products. Specific geographic territories for which the agent or distributor will be responsible should be outlined, as well as the specific duties and responsibilities of the agent or distributor.
Finally, the agreement should include a statement of agreed-upon sales quotas and should indicate the jurisdiction in which any dispute should be litigated. This will protect the entrepreneur from having to go to a foreign country to handle a dispute.
Choosing a Freight Forwarder
The job of the freight forwarder is to handle all aspects of delivering the product to the customer. The method by which a product is shipped has a significant impact on the product’s cost or on the price to the customer, depending on how the deal is structured, so the choice of a freight forwarder should be carefully considered. Filling shipping containers to capacity is crucial to reducing costs. Freight forwarders can present documents to a bank for collection. They should also prepare the shipping documents, which include a bill of lading (the contract between the shipper and the carrier) and an exporter declaration form detailing the contents of the shipment. The entrepreneur, however, is responsible for knowing whether any items being shipped require specific licenses or certificates, as in the case of hazardous materials and certain food substances.
Growth can be an exciting time. And although a company’s growth rate won’t resemble a hockey stick for long (if ever), strong growth can be sustained if entrepreneurs plan for it and keep scanning the horizon for changes.
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