Tekle Sebhatu introduces key factors and questions every company must consider before deciding its approach -- or approaches -- to its import/export strategy and operations.

The approach your company pursues to its import/export operation depends on host of factors. With several approaches available, choosing the best for your company can be a daunting task. When selecting a specific approach companies should carefully evaluate management commitment, available resources, competition, nature of transaction anticipated and employee know-how of import/export business. Before selecting the best approach for your company, answer the following questions and they will help your decision process to be less painful.

Management commitment

• Is management willing to take risk? Political, economic and transactional risk?
• Will management set aside funds to develop import/export markets?
• How long is management willing to wait before the company achieves it's break-even point? Profit?
• Will management envisage import/export business activities with targeted marketing approaches?
• What will be management's preferred way of selling or buying through agents, distributors, export management companies, export trading companies or direct, middleman located in the import/export country?

Available resources

• Will the company have access to external funds, if needed to pursue import/export business?
• Is management ready to compensate international personnel higher than equivalent positions to personnel in the domestic business?
• How will the import/export organization be structured? As a separate functional area? Or will it be incorporated with the purchasing or sales department?
• Will management allocate enough funds for market research and competitive analysis?

Competition

• What are the company's competitive advantages?
• What strategies will the company use to enhance its competitiveness?
• How will the company use technology, and in particular, the Internet, to remain competitive?
• Who are the major competitors and what market share do they have? Is their market share growing or shrinking?
• Will there be any difficulty obtaining accurate market and competitive analysis in the target country?
• What pricing strategy will the company use? Is the price competitive in the domestic markets? International markets?

Nature of transactions

• Will management accept unsolicited orders?
• Will the envisaged transaction be isolated with a limited number of transactions or ongoing ones?
• Is the company familiar with all 13 Incoterms 2000 and which specific Incoterms to use?
• Which payment method will be acceptable (open account, advance payment, consignment, document collection, letter of credit)?
• Is management pursuing international business to supplement domestic sales?

Degree of know-how

• Does company staff have knowledge of foreign cultures, business practices and international transactions?
• Will the company provide training for its employees and customers? What about follow up services?
• How knowledgeable is the company staff in documentation requirements, payment options, shipping, insurance and Customs regulations, including marketing in foreign countries?
• Will the company participate in trade shows? Who will attend? What kind of training will be provided?

Now that your company has answered all the above questions, it is time to find out which approach might be best for your company. Remember that your company may use one or a combination of approaches from the following to jump start it's import/export operations.

1- Import/Export Approaches:
This approach requires passively filling orders or buying from domestic buyers and sellers that are conducting business in domestic markets. For some companies, this approach may not be that different from domestic transaction. While the company might give up some control due to selling or buying domestically this approach may help the company avoid costs associated with selling directly to foreign buyer or purchasing from foreign supplier.

2- Proactive:
This approach involves seeking out domestic importers/exporters that represent foreign companies. If a company wishes to use this approach, it must solicit domestic companies that are actively engaged in importing or exporting. The company will then be able to negotiate price, promotion and time of delivery including receiving or sending samples.

3- Indirect:
This proactive approach makes use of intermediaries such as management or trading companies.

• Export Management Companies (EMC) are private firms that serve as the export department of several producers of goods or services. EMCs, conduct market research, exhibit products at trade shows, seek foreign contacts, select foreign representatives, arrange financing and ship products for a commission, they generally work on salary or retainer plus commission. While most EMCs do not purchase products for resale from producers, there are some who do. Companies should be aware when hiring an EMC that they may lose control over foreign sales. Importers can work very closely with EMC's to compare quality and price and request samples of products their company wants to purchase.
• Export Trading Companies (ETC) facilitates the export of goods and services. Like an EMC an ETC, it can either act as the export department for producers or take title to the product and export for its own account. In the U.S., for example' Congress passed the Export Trading Company Act 1982 for the following goals:
  a) To promote and encourage the formation of export management and export trading companies.
  b) To expand available options for export financing and reduce restrictions on trade finance provided by financial institutions.
  c) To reduce uncertainty about applying U.S. antitrust laws to export operations.

The underlying reason for any government to encourage the establishment of ETC is because ETCs play an extremely important role in creating jobs through exporting. Check with your government trade agency to see whether your country has incentives for establishing an ETC.

4- Direct:
If your company wishes to pursue this approach, it will engage in both the selling and buying process. For companies that have an import or export department, this approach can be very cost-effective simply because intermediaries are eliminated.

• Direct Importing/Exporting: Sales by an exporter directly to a buyer located in a foreign country or importer directly purchasing goods from foreign supplier. The advantage of direct importing/exporting is that the company will have more control over its product along with the import/export process. This approach helps create a closer relationship with overseas buyers/sellers.
• Foreign Sales Agents: An individual or a firm that serves as a foreign representative of the importer/exporter and seeks sales abroad.
• Foreign Distributors: Is a merchant who purchases from the seller and resells it for a profit. The distributor provides support and service for the product stocks inventory and usually carries a range of noncompetitive but complementary products.
• Foreign Retailers: Many consumer goods may be sold to or purchased from retailers. Selling through retailers relies directly contacting the foreign retailer with no other intermediary involved.
• Foreign-End Users: Involves directly selling to the final user of the product. Businesses, government agencies and non governmental organizations purchase directly from producers for their own use.

Note: Companies should be aware that if the direct approach is the preferred payment collection, shipping, insuring, documenting, marketing and after sale services are the responsibility of the company unless other arrangements are made.

The choice on how to approach your import/export business must be based on the limitations of your company. Reactive and proactive approaches to import/export probably represent a substantial portion of companies that enter this business. If a company chooses the indirect approach, even though the intermediary will perform all the tasks, the company should actively engage in all activities conducted by the intermediary; this will help the company in the future if the decision is made to go direct. If the company decides on the direct approach, it should recognize that payment collection, documentation requirements, shipping, insurance, marketing and after-sales services are the sole responsibilities of the company.

References

A Basic Guide to Exporting (U.S. Department of Commerce, et al.)
The Export Trading Company Guidebook (U.S. Department of Commerce, 1987)

More articles from Tekle Sebhatu:

• SMEs and making import-export decisions
• Essentials to import-export 
• Import agents and customs brokers
• Preventing fraud when sourcing from overseas