Managing Import and Export Business Effectively
Import and export trade are the key components of international trade. Export trade refers to selling of goods and services to countries across the borders while import trade refers to the buying of goods and services from other countries. International business differs from domestic business in that a firm operating across borders must deal with the sources of three kinds of environment – domestic, foreign and international. “In contrast, a firm whose business activities are carried out within the borders of one country needs to be concerned essentially with only the domestic environment” (Ball 12). Ball describes the environment is the sum total of all the forces surrounding and influencing the life and development of the firm (13). The forces themselves can be classified as internal or external. External forces represent the factors beyond control of a firm’s management such as competition, distribution, economic growth of a country, and financial trends in a country. Internal environment represent the controllable environmental factors such as capital, raw materials, production and marketing over which a firms management must administer in order to adapt to the uncontrollable variables.
Both large and small firms export to increase sales. Some begin to export accidentally while others seek foreign customers. A Large multinational may decide to export in order to serve markets where they have no manufacturing plants or their local plant does not produce all the product mix. Some host governments require an affiliate to export while many other firms export to remain competitive in the home market. Many companies use export as an inexpensive means of testing their products in foreign markets. Export also serves to extend the life of products to markets with
Less advanced technologies, as is the case with reconditioned machineries and motor vehicles.
Review of available literature indicates that in export and import business, the value of international business comes from a combination of higher prices, increased volume, decreased costs that are achieved through economies of scale, and the effects of international trade on product quality and design.
Woods suggests that in import business, value may be created through lower prices, greater variety, increased quality, and diversification of sources of supply (11).
A firm’s management must be privy to the fact that international trade may also affect the risks faced by importers and exporters alike. Risks may be reduced by spreading sales among various markets and diversifying sources among various producers. Risks may equally be increased through greater exposure to the effects of trade restrictions, exchange rate movements, demand and supply, and price fluctuations in foreign markets (McCulloch 408). Managers in import and export trade must therefore always seek to balance increased profits with the changes in risks to maximize the value of the firm through its international trade operations.
The management of a firm must always bear in mind that the goal of import and export operations is to increase the value of the firm; trade for trade’s sake is never the goal in international business. Similarly, the main reasons countries engage in international trade is to increase national income rather than just increasing exports and decreasing imports. Exports in general and of specific product are not a ‘good’ in and of themselves while imports in general and specific produce are not ‘bad’ (Lecraw 25). Yet this assumption is perceived to be the presumption behind government trade policies that try to promote exports and impede imports of general and specific product. In fact, Lecraw further asserts that exports might be considered a ‘bad’ since they reduce the amount of a country’s output that is available fro domestic use; while imports could be considered a ‘good’ since the increase goods and services available for domestic use (26). Exports are only ‘good’ to the extent that they allow a country to import or to service its accumulated international debt. Similarly, accumulating foreign exchange reserves are only beneficial to the extent to which these reserves may allow a country to smooth out the effects of short-term fluctuations in export receipts and imports payments and to import products in future (Lecraw 27)
This view of value creation as the driving force behind import-export trade raises the question of what factors lead a firm or a country to produce a product for export or to import a product from abroad. Why is value created when products are exported while others imported? The answer to this fundamental question of international trade requires a thorough insight into the theories if international trade. Understanding the theories of international trade is a very important requirement for managers of export-import business. The trade theories can be thought of as the tides beneath the waves of day-to-day international trade activity. The theory of absolute and comparative advantage state that trade enhances the welfare of both countries (McCulloch 137). However the distribution of gains among participants within each country and among the countries is not uniform. The theory further states that a country will always have a comparative advantage in some product or group of products.
The main objective of this research is to find out the problems that are encountered in the import and export trade by firms engaging in international trade and suggest the appropriate ways to overcome these problems. The research was carried out through questionnaires and research from existing literature. The research provides an insight into a several demonstrative case studies which exist as successful models for replication by other firms.
Research focused on the problems faced by firms in export and import business as a result of poor management skills of international business affairs. For example, many new export firms fail to obtain qualified export counseling and develop a master market international plan before starting an export business. The research also focused on the level of commitment by top management of export firms to overcome the initial difficulties and financial requirements of exporting. The tendency of export firms exercising insufficient care in selecting overseas distributors for their export products was also explored. All these problems are encountered frequently in the export and import business and this research aims at providing managers in the international trade with the key management techniques for conducting successful and profitable export and import business.
The first step in a firm’s analysis of its international trade position must always be to analyze the forces in the national economy which give rise to some form of comparative advantage or disadvantage (Lecraw 35). The firm’s management must analyze what competitive advantage the firm has or can develop either based on the country’s comparative advantage or on ‘ownership advantages,’ such as economies of scale, marketing management, research and development, which cannot be easily duplicated by other competitors worldwide. In general, the more close a firm’s exports are aligned with the firm’s comparative advantage, the more easily it can develop, maintain, and increase its competitive advantage (Lecraw 43).
Once the firm’s management analyzes the basis for the firm’s competitive and comparative advantage in its own market and in the export markets, the second block of analysis should shift towards the potential of the existing export markets (44).
Woods points out that as much as firm may have a product with competitive advantage, it is also prudent to identify the markets in which users value the firm’s product above the products that are currently available in the market from domestic producers and exporters from other countries (17). This may call for a three-step analysis that involves export markets segmentation, selection of export entry point and taking of long-run export strategies.
It is therefore imperative that the management for firms engaged in import-export trade must duly understand the driving forces behind the international flow of goods and services. As with any form of voluntary exchange between independent, value-maximizing agents, international trade takes place when value is created by the participants in the transaction, above the value they can receive through alternative uses of their resources.
Segmenting world markets is an important step towards determining the most appropriate markets for export products. According to Ball, market segmentation lies at the heart of marketing for many products that have become increasingly important in international trade (35). There are four main questions that must be addressed while segmenting export markets abroad. (a) Is there a market segment in the potential export market which will value the product characteristics of the export product? (b) Is this segment large enough to justify the costs of exporting? (c) Is this segment adequately served by existing domestic producers or other exporters? (d) Can the market be accessed by the exporter?
Market segmentation can be approached in a number of ways. The guiding framework should however be based on the product qualities and product features. The two segmentation preferences bear direct implications on a products price. High product quality and numerous product features lead to high production and marketing costs that eventually translate to higher prices. “One important characteristic of international market is the wide range of quality and product characteristics that are in demand by a group of potential buyers” (Ball 36).
Good export management requires that due consideration be given to the differences among countries in the segmentation process. For instance, segmented markets in large countries such as the United States may have more segments (with enough demand in each segment to make the segmentation effort pay off) than in smaller countries. The proportion of the market in each segment often differs among countries. For consumer products, differences in age distribution of the population, income level and growth, and the distribution of income may affect segment size and relative importance. If for example the firm’s export product is of high quality or has unique design features, one starting feature should be to segment countries by GNP per capita (as a proxy for personal disposable income) and then to focus on countries with high GNP per capita (Lecraw 48).
Consumer tastes also form key component of determining segment size. For example, consumers in Japan place considerable value in product, quality and design features and prefer to buy a limited number of high quality high priced items than a large number of low quality low priced items (Kenen 43). Different weather conditions for different countries must also be taken to account during the segmentation process.
Kenen further warns that a firm’s management would however adopt a slightly different approach for determining market segmentation for industrial machinery and inputs (45). Factors such as the level and dispersion of technical skills and composition of industrial output affect the size and importance of market segments. Very high technology, highly automated, but flexible products may be targeted at U.S., Europe, Japan or Canada; averagely standardized mass products may be directed at the newly industrializing countries such as Asian economies; while older standardized products would be targeted at the developing countries (Kenen 46).
Determination of the export market entry strategy to the identified segments is also a key step towards achieving a sustainable competitive advantage. In choosing the appropriate market strategies, proper considerations must be given to the viability of a product in to a country’s market needs. For example, in the 1960’s Japanese automobiles firm’s initially entered the U.S. markets by adopting a niche strategy that targeted the low end of the market that consisted of low income buyers who wanted a second car and buyers who were only interested in basic transport than in quality features (Lecraw 25).
Strategy adoption does not just end with matching product characteristics to market preferences. It further incorporates channels of distribution, sales and advertising techniques. Channels of distribution and export marketing refer to the process that products undergo right from the exporter to the ultimate buyers and the ways through which potential buyers can learn of the products value and availability. There are four main important characteristics of the channels of distribution that link producers from one country to buyers in another.
First, channels of distribution are usually more complex and have more layers than the channels in the domestic market. Unlike the domestic market, the channel of distribution for export would be:
Producer – export agent – import agent – major wholesaler – retailer
Secondly, costs of international channels are usually higher than those of domestic channels, so that a higher percentage of the final price to the buyer from the costs of building, accessing and operating through international channels of distribution.
Thirdly, an exporter may have to operate through different types of channels of distribution on export markets that it uses in domestic markets. While in a firm’s domestic market may be a well developed system of independent distributors for the firm’s products; whereas in the export market, such a distribution system may not exist, or may not have the skills required to distribute and sell the firms products effectively.
Fourthly, International channels of distribution are often also often the source of information to the firm about conditions in its export markets and how and why its product is succeeding or failing in these markets. In such a situation, a firm must either forward into distribution and sales, place some of its personnel in the export market, or develop close ties and good information flows between itself and its distributors abroad.
For these reasons, a firm’s strategy towards and management of, its international channels of distribution are usually relatively more important, more costly, and more difficult for export marketing than are its channels in domestic channels of marketing and domestic markets.
It is at this point that a firm’s management should adopt either direct export or indirect export procedures. Direct export involves a firm establishing its own export staff, marketing and distribution network in destination countries while indirect export involves selling export products directly to agents who take it upon themselves to sell the products (McCulloch 411).
McCulloch notes that firms entering export markets are often caught in a bind when selecting distribution channels for their products. When selecting that channels of distribution, a firm’s products would be favored if the distribution channels of destination export markets closely resemble the firm’s domestic markets channels (412). Such a probability portends higher levels of success.
Proper product pricing is one important but very difficult decision that the management of an export-import firm must endure. However managers can adopt international markets pricing strategies to determine competitive and acceptable prices for a firm’s export products. There are four pricing strategies that are unique to export markets: the first strategy requires that prices on export markets should yield higher returns that are available in the domestic markets; the second strategy involves pricing to yields lower returns, or even losses, on export markets – at least in the short-run; the third strategy focuses on accepting prices that yield similar returns on domestic and export markets; and the fourth strategy emphasizes on pricing to sell production in excess of the needs of the domestic market so long as these sales make a contribution to fixed over-heads and profits.
Effective management of international trade operations in a firm also entails an analysis of movements of real exchange rates which serves as a crucial component for determining success in export markets and success in competing with imports. For example, even if United States had a comparative advantage in sophisticated machine tools but had its currency overhauled by 50 percent, the United States would be priced out of the export market on the one hand and under threat of import competition on the other (Lecraw 53). It is therefore prudent for a firm’s management to keep a close trail of real exchange trends of export destination countries.
There are several indicators that a firm’s management can use to keep track of foreign exchange rates in a foreign country. Changes in a country’s real exchange rates may be brought about by different economic factors. For instance, if there is a gap between investment demand and domestic savings, real interest rates will rise and capital will flow in from abroad, thereby driving up the real exchange rates (Woods 91). Woods further warns that the inevitable imbalances that will be precipitated by such an appreciation in the exchange rate will be a mounting external debt that will eventually stir a sudden unwillingness of investors abroad to hold more debt. Capital inflows will decline and real exchange rate will fall.
Such a precedent is best illustrated by a similar situation that occurred in the United States between 1977 and 1985. High investment demand due to an expanding economy and low savings rate (necessitated by low personal savings and huge bank deficits) led to high real interest rates, capital inflows, a rise in real exchange rate and deterioration of its trade account from 1977 to 1985. Over the 1985 to 1988 period, private investors outside the United States became reluctant to hold more U.S. dollar denominated debt. Subsequently, capital inflows from these sources declined, and real exchange rate declined (Woods 92).
Real exchange rates can also increase if a country’s terms of trade move in its favor. If such a change remains permanent, then the real exchange rate will remain at this high level. A country’s exchange rate can also appreciate when new natural resources are discovered in the country. Such was the case when oil was discovered in the shores of Holland.
The implications of the analysis of the effects of movements of the real exchange rates on the management of a firm are threefold. The first implication dwells on the short-term movement of in real exchange rates on the firm’s competitive ability. Such short-term effects must always be taken into account when making decisions as to whether to change the volume and price of exports in response to exchange rate movements or to absorb the impact of these changes in profitability of export operations.
The second implication focuses on the firm’s ability to identify the times when their home country’s real exchange rate is above its long-run equilibrium level and when a destination country’s real exchange rate is below this level. As such, the firm’s management would be able determine profitable export market opportunities, since overvalued and undervalued exchange rates will ultimately move to the equilibrium levels.
The final implication lies on the ability of a firm’s management to forecast on future short-run and long-run movement of real exchange rates and how such movement is likely to impact on threats and opportunities rising from international markets.
For effective management of export import business, a firm’s management must always be proactive and adaptive to international market trends. The process of adaptation does imply that managers should wait passively for changes to occur, to which they then react (Kenen 61). In fact, the most successful administrators are those who are so knowledgeable about the environmental forces that they are not only prepared and waiting, but also contribute to changes.
Effective management is also coupled by proper organizational skills. For instance, proper documentation is vital for success of any export venture (McCulloch 508). While engaging in export or import business, proper attention must be given to shipping documentation such as packing list, export licenses, export bills of lading, shippers export declaration and insurance certificates. For import procedures, collection documents include commercial invoices, consular invoices, certificates of origin, and inspection certificates. McCulloch insists that It is also important to consider the safety of the goods because most newcomers are often so pre-occupied with making a sale and handling the extra paper work that they end up forget about physical movement of the goods (511). Good management practices may involve the use of innovations in material handling in sea and air transport. Made up of burglar proof container, LASH (Light aboard Ship) and RO-RO (Roll on-Roll off), the innovations minimize loss and theft incidents which enable exporters to reach new markets.
This research has provided a deep insight into the main short falls that characterize firms that engage in international business processes. In order to phase out these problems this research recommends the following measures:
Firms seeking to engage in export and import business for the first time must always seek export and import counseling and develop a clear master international marketing plan before starting an export business.
A firm’s management must always commit sufficient resources to overcome the initial difficulties and financial requirements of exporting.
A firm’s management must always exercise sufficient care in selecting overseas distributors and agents.
Firms must always seek to establish profitable operations and orderly growth plans that include marketing in export destinations countries rather than relying on temporary and unreliable orders.
Ball and McCulloch. International Business: The Challenges of Global Competition.
Kenen, Peter. The International Economy. Cambridge: University Press, 1996
Lecraw, Killing, and Beamish. International Management: Text and Cases. Irwin,
Sloan Management Review. Developing Leader for Global Frontier. Massachusetts
Institute of Technology, 1988.
Wood, Margaret. International Business. England: Chapman Hall, 1995.