Small Business Management: A Planning Approach

Joel Corman Suffolk University, Emeritus Robert Lussier Springfield College Lori Pennel Bunker Hill Community College

Copyright Atomic Dog Publishing, 2005

PART 5 Global Business CHAPTER 15 Taking the Small Business Global

Copyright Atomic Dog Publishing, 2005

15-1 Why Should the Small Business Go Global?

• • • • The international company conducts business in more than one country.

Going global is the planned process of contracting to do business in foreign countries.

Other motives for globalization:     Better market opportunities in the global market.

Inquiries from possible foreign clients Saturation of domestic market Insufficient domestic market volume for attaining competitive research and development The biggest draw is the growth and an interest in going where the customers are.

Copyright Atomic Dog Publishing, 2005

15-1a Small Businesses Are Going Global

• • • • Easier for small businesses to go global compared to larger ones. Small businesses can more easily seize opportunities.

Small companies can usually change faster than large companies.

Many large businesses are shrinking, and some are spinning off parts of their company as smaller businesses to compete more effectively in the global market.

Copyright Atomic Dog Publishing, 2005

15-1b International Small Business Examples

• • • • Board Street Books, never intended to be a global company, saw market opportunities in Europe for its books and went after them.

Rosenbluth Travel, which specializes in making global travel arrangements for large multinational companies to help them control travel expenses.

Pall Corporation, which expanded to Europe, is now the world’s largest manufacturer of specialty filters. John Tschohl, took up the opportunity to sell customer service training videos in the free-market countries of the former Soviet Union.

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15-1c Global Opportunities

• • • Going global offers a much larger target market to the small business than otherwise.

Most global U.S. companies are going to Europe, where the 15 members of the European Union have signed a pact removing trade obstacles and creating a unified European market of 378 million people.

European union includes fifteen countries that are unified with one set of trade agreements.

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15-1c Global Opportunities (contd.)

World map

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15-2 Strategies for Going Global

• • • • Exporting Contractual agreements Joint ventures Establishing international locations Copyright Atomic Dog Publishing, 2005

15-2a Exporting

• • • Exporting involves selling goods made in one country to buyers in other countries.

Exporting plays a major role in small businesses obtaining global stature.

Exporting is considered a minimal financial risk approach.

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15-2a Exporting (contd.)

• Exporting is recommended when:  Sales potential for the target market is high.

      Estimated production costs are lower at home.

Product adaptability requirements are not needed or are simple.

Import and export restrictions are favorable.

Raw materials are less costly at home.

Political climate abroad is relatively unstable.

Firm has limited financial resources.

• The twelve most common export mistakes:  Failure to obtain qualified export counseling and develop a master international marketing plan before exporting.

Copyright Atomic Dog Publishing, 2005

15-2a Exporting (contd.)

      Insufficient commitment to overcome initial difficulties and financial requirements.

Insufficient care in selecting overseas distributors.

Chasing orders from around the world instead of establishing a basis for profitable operations and orderly growth.

Neglecting export business when the U.S. market booms.

Failure to treat international distributors on an equal basis with domestic counterparts.

Assuming that a given market technique and product will automatically be successful in all countries.

Copyright Atomic Dog Publishing, 2005

15-2a Exporting (contd.)

     Unwillingness to modify products to meet regulations or cultural preferences of other countries.

Failure to print service, sales, and warranty messages in locally understood countries.

Failure to consider use of an export management company.

Failure to consider licensing of joint-venture agreements.

Failure to provide readily available servicing for the product.

Copyright Atomic Dog Publishing, 2005

15-2b Selecting the Target Customer or Country

• • • • Must consider the time, effort, and money they are willing to invest in exporting.

Export-trading companies buy goods outright and sell them abroad.

Export-management companies perform a variety of export tasks for the client.

 Locate buyers, draft paperwork for billing and shipping, locate financing, ensure that goods meet foreign labeling and testing laws, and display products at trade shows Foreign distributors offer a low-cost and low-risk way to position products overseas.

Copyright Atomic Dog Publishing, 2005

15-2b Selecting the Target Customer or Country (contd.)

• The international distributors purchase the product, provide the sales team, and find the buyers in foreign countries.

• The following are important rules to follow when selecting an international distributor:     Evaluate prospective distributors based on their organizational and technical ability.

Get to know and feel comfortable in a working relationship before signing an agreement.

Involve an attorney in drawing up the contract.

Check out cultural differences.

Examine local laws in the country.

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15-2c Shipping

• • The exporter must ship the goods to the customer.

A freight forwarder arranges the transportation of products to and from the United States.

• The freight forwarder or agent will handle these tasks:  Proper packaging   Filling out general customs documents Other related paperwork Copyright Atomic Dog Publishing, 2005

15-2d Collecting Your Money

• • • • • • Collecting foreign accounts can be more complex and take longer than collecting domestic accounts.

Financing foreign sales often involves special credit arrangements, such as letters of credit and bank drafts.

To avoid bad debts, select customers carefully and be sure to check credit references.

Be sure the sales contract or purchase agreement specifies the currency payment.

Cash in advance is the safest way to do business.

You can purchase transit insurance and credit insurance too.

Copyright Atomic Dog Publishing, 2005

15-2e Contractual Agreements

• • Common contractual agreements:  Licensing    Franchising Contract manufacturing Management contracting Some other forms are:     Reciprocal marketing Swapping of new products and models Supply agreements Research and development consortia Especially helpful to the small business that cannot afford to pay the high cost of R & D by themselves Copyright Atomic Dog Publishing, 2005

15-2f Foreign Licensing

• • • Licensing involves selling for a free or royalty the rights to use patents, trademarks, copyrights, technology, processes, products, or other rights.

• Relatively easy way to enter foreign markets with little extra work for extra income The licensee takes most of the risk by investing money to take the U.S. concept and commercialize it in a foreign country, paying based on sales.

Can result in a total loss of product control and profit.

Copyright Atomic Dog Publishing, 2005

15-2g Franchising

• • • • Franchising is a form of licensing, and is an attractive vehicle for international expansion.

Five hundred U.S. franchisers operate outlets in foreign countries.

According to the IFA:    Expansion affords growth and increased revenue.

Increased brand recognition Larger market share The top four success factors:     Supporting Recruiting Training Controlling the activities of the international partner Copyright Atomic Dog Publishing, 2005

15-2h Contract Manufacturing

• • • • Involves turning over the production function to others while retaining the marketing functions With contract marketing, the product can be made in a foreign country for less money and sold in the same country and/or exported to other countries.

A way to increase revenue without investing more money in plant and equipment.

Beneficial when labor relations are difficult or there are problems getting supplies and getting government cooperation Copyright Atomic Dog Publishing, 2005

15-2i Management Contracting

• • • • Involves providing only management skills; the production facilities are owned by others Low-risk approach to international marketing No commitment to fixed facilities is made.

Beneficial in unstable countries where riots and war cause a concern, or where governments are not favorable Copyright Atomic Dog Publishing, 2005

15-2j Joint Ventures

• Advantages of Joint Ventures:  Foreign joint venture: a domestic firm enters into a partnership with a firm in the target nation.

Penetrating protected markets Lowering cost Sharing the risk and high R & D costs Gaining access to marketing and distributing channels Gaining access to the partner’s know-how Copyright Atomic Dog Publishing, 2005

15-2j Joint Ventures (contd.)

• Disadvantages of Joint Ventures:  Some of the common problems that lead to failure: Improper selection of partners Incompatible management styles Failure to establish common goals Inability to be flexible Failure to trust one another Insufficient management skills Copyright Atomic Dog Publishing, 2005

15-2j Joint Ventures (contd.)

• Finding a partner  Finding a suitable partner is difficult.

   Too many Americans jump at the first foreign partner they meet.

Before scouting for a partner, define the characteristics the foreign partner should process.

Precautions to take: Set performance standards.

Audit results as a means of guarding profits.

Maintain a strong presence.

Copyright Atomic Dog Publishing, 2005

15-2k Establishing International Locations

• • Establishing ones own international locations is the most costly and risky alternative to going global.

Two major strategies for acting independently when establishing international locations:   Start the business from scratch.

Buy an existing business through mergers and acquisitions.

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15-2k Establishing International Locations (contd.)

Global strategies Copyright Atomic Dog Publishing, 2005

15-3 Large versus Small Global Business Strategies

• Six critical areas for global success:       Global strategy Global management team Global operations and products Global technology and R & D Global finance Global marketing • Developing the small business strategy:    Determination and commitment of the entire organization.

Develop a master strategy to include elements from the six critical areas of success.

Develop the market entry strategy along with appropriate export and transaction procedures.

Copyright Atomic Dog Publishing, 2005

15-4 Sources of Assistance in Going Global

• • • • Export-service companies  ETC or EMC route Agents  Provide services to plan global strategies of contractual agreements, joint ventures, or establishing international locations.

The National Export Assistance Center  Free assistance to small businesses in entering the export market.

The United States Commerce Department   Federal help is cheap and abundant but slow.

Have computerized market data on nations and contracts.

Copyright Atomic Dog Publishing, 2005

15-4 Sources of Assistance in Going Global (contd.)

       Agent/distributor services Help locate, screen, and evaluate agents, distributors, representatives, and other foreign partners.

Commercial news USA Catalog and video shows Trade shows Matchmaker missions Market reports Other publications: -

A Basic Guide to Exporting

-

Overseas Business Reports

Copyright Atomic Dog Publishing, 2005

15-4 Sources of Assistance in Going Global (contd.)

• • The Small Business Administration  Consulting    Seminars Export Legal Assistance Network (ELAN) Publications Other resources       Network Overseas Private Investment Corporation (OPIC) Insurance Freight forwarders Publications American Express Copyright Atomic Dog Publishing, 2005

15-4 Sources of Assistance in Going Global (contd.)

• Make yourself known to:  Members of the United States Department of Commerce       International Trade Administration United States and foreign commercial services Trade specialists State’s international trade representative serving your location Customs and Excise senior local officer Freight forwarders Copyright Atomic Dog Publishing, 2005

15-5 Sources of Financing for Going Global

• • • • The U.S. Export-Import Bank State development agencies Small business administration Trade finance houses Copyright Atomic Dog Publishing, 2005

15-5a The U.S. Export-Import Bank (

www.exim.gov

)

• • • • The U.S. Export-Import Bank is run by the government to spur export financing.

Eximbank maintains a special office to provide information on the availability and use of export credit, insurance, guarantees, and services abroad.

Businesses new to exporting are not likely to get a loan to build inventory without a third-party guarantee.

All businesses will need foreign orders in hand to get loans.

Copyright Atomic Dog Publishing, 2005

15-5b State Development Agencies

• Some states have special finance programs to encourage international trade. Copyright Atomic Dog Publishing, 2005

15-5c Small Business Administration

• The SBA has an Export Revolving Line of Credit guarantee loan program Copyright Atomic Dog Publishing, 2005

15-5d Trade Finance Houses

• • • The cost is high, with interest rates of up to 18% or profit cut of up to one-third However, loans of up to 100% can be obtained without firms having to sell off part of the business to raise cash.

Taking the small business global is risky, but the rewards can be great.

Copyright Atomic Dog Publishing, 2005