Going global offers many benefits to small and medium-size businesses. You will have more customers and profits, and you also will become more efficient at what you do. This is because economies of scale tend to make companies more efficient, which increases profit margins, which flows directly to the bottom line; Wal-Mart is an example of this.
Depending upon your resources and tolerance for risk, you have numerous options to reach global markets.
Exporting is a relatively low-risk option that requires minimal investment. You can start exporting by hiring a middleman. One example is an export management company, which specializes in establishing a marketing presence in foreign markets -- in effect, finding buyers. Alternatively, export trading companies can function as distributors that take title to the product, or they can provide export shipping, warehousing and logistic services. The distinctions between EMCs and ETCs are becoming increasingly blurred today.
Licensing and Franchising
With the exception of technology licensing, which is in widespread use, licensing is a tactic often used to enter foreign markets that may not be attractive otherwise: lower sales-potential markets that discourage imports and direct investments. Fr example, as the owner of a brand name, you would give a license for usage rights to foreign manufacturers. They would manufacture the goods in their own country, sell them using your brand name, and pay you a fee in exchange.
Licensing allows you to evade high tariffs and other trade barriers that still exist in many developing countries.
Franchising, while low-risk, requires a great amount of time and effort to navigate complex legal and regulatory requirements prevalent in countries that regulate franchises. Moreover, successful franchising is dependent upon finding and training the right franchisees and selecting countries already identified as key franchise markets by the International Franchise Association.
According to a University of Texas at Arlington white paper, contract manufacturing is generally used to complement other entry strategies. A fast-food retailer might set up a contract manufacturing facility to produce and sell the special ingredients for its fried chicken recipe to its foreign franchisees. The food retailer's core activity is marketing fried chicken franchises. Contract manufacturing to supply franchisees with the ingredients is a non-core activity, but still helps produce income from sales activity taking place in foreign locations.
If you are considering using a contract manufacturing firm to produce goods for sale in foreign markets, due your due diligence and select a contract manufacturer capable of delivering the quality and quantity you require in a timely manner. This will reduce the chances of having supply-chain disruptions and disgruntled customers.
Joint Ventures and Strategic Alliances
A joint venture is a autonomous business enterprise formed by two or more companies. Joint venture participants allocate resources, risks and remuneration and assign operational responsibilities to each participant. Small and medium-size businesses entering the Chinese market frequently work with Chinese partners that know the market and have established government relationships and selling networks.
Despite the ability of joint ventures to expedite entry into markets such as China, research shows that 50 to 70 percent of joint ventures fail because of poor leadership, cultural differences and poor planning.
Similar to a joint venture, a strategic alliance is less formal and may be formed when one company gives another permission to use technology and marketing rights. Strategic alliances are not separate entities. Moreover, alliances only last an average of seven years, and commonly culminate in a joint venture, merger or acquisition.
Foreign Direct Investment
Direct investment strategies that involve either buying a foreign company or building an operation from scratch present the greatest profit opportunities. Direct investment circumvents trade barriers, avoids government hassles about local production, expands your production capability and gives you the most control over your investment. It also carries the greatest risk. The worst-case scenario is the expropriation of your assets without compensation.
“Think globally, and act locally” is the mantra mainly of multinational and transnational firms concerned with extending their global reach by integrating into different cultures and developing local leadership. The concept may not have the same importance for small and medium-size businesses singularly focused on selling products and services abroad. Consequently, these operators usually employ less risky strategies to reach global markets as a first step before plunging into direct investments.
- Learn Marketing: International Marketing, Market Entry Methods
- Olympic College, Bremerton, WA: Doing Business in Global Markets [PPT]
- Lief International: Why Go Global? 6 Benefits of International Expansion
- The Manzella Report: Is International Expansion Through a Joint Venture or Foreign Acquisition Right for Your Company?