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Going Global: an SME guide

26/08/2012

Going global: an SME guide

Posted 07 October, 2012 by under Featured, Trade.

Dr. Ashraf Mahate of Dubai Exports, outlines the key factors SMEs should incorporate into their exporting plans.

Exporting offers a company numerous benefits and opportunities. The massive restructuring of political boundaries, the opening of new consumer markets, historic trade agreements, abolition of quotas, and the World Trade Organisation (WTO) have created unprecedented opportunities for businesses to export. Any exporter stands a much greater chance of success, if as a first step, they start thinking about their objectives in terms of what to export, where to export, and how to export.

Lack of a definite set of goals or objectives will lead to dissipation of efforts in wrong direction and a waste of resources. The objectives need to be realistic, should take into account the existing situation of the market and the exporter’s position in the market and competition. The objectives should be neither too ambitious, or too modest. The objectives should not be modified constantly if the same is not attained in the target period.

Efforts should be intensified and resources should be redirected effectively to attain an objective in time. The decision to export is only one part of the equation and successful exporting requires the SME to be aware of a number of aspects.

Export pricing

A common mistake that exporters tend to make is that they convert their domestic price into the foreign currency. It is important to remember that foreign products compete with domestically produced goods and therefore price is an important consideration. This is more so the case where consumers are price sensitive. Even though consumers may be willing to pay a premium for quality products, it may not be as large as the home country.

Therefore, the importance of accurate export pricing cannot be over-emphasised as any error in this area can lead to either losing foreign orders, or the possibility of making losses. Moreover, export pricing can be an important tool for promoting sales and competing in the international arena. The important factors that determine the foreign price of a good or service are cost, demand and competition.

In the case of cost, one needs to ensure that all costs including those incurred in the foreign country are incorporated into the final price. At the same time, the exporter needs to be aware that their product or service is competing with other products and services from all over the world. Therefore, the price has to be realistic while ensuring that the exporter receives an adequate return for conducting business in a foreign location.

There is no fixed simple formula for successful export pricing. It differs from exporter to exporter depending upon the good or service in question and the level of customer loyalty that it can attract.

Target market

One of the most important decisions that an exporter needs to make is to select the correct foreign market for their goods or services. Selecting the correct market can lead to immediate success; while an incorrect market cannot only lead to substantial losses, but also to long-term damage to the company’s operations.

Therefore, appropriate foreign market selection is an important challenge for the exporter and cannot be left simply to subjective decision making. In order to select the correct foreign market. An exporter needs to go beyond personal preferences and intuition. The process of market selection requires the exporter to undergo three essential steps, the first being data collection, wherethe most recent information on potential export markets is obtained.

Secondly, the exporter needs to make appropriate comparisons between the different markets. Finally, an exporter needs to appreciate that he cannot enter every single market at the same time and needs to prioritise markets based on current resources and market potential.

Entry strategy

Firms seeking to export their products or services into foreign markets have a number of different types of agents and distributors.

Commissioned agents

They act as brokers, who link an exporter’s product with a foreign buyer. Usually, the agent does not fulfill the orders, but passes them to the exporter for acceptance. These agents can sometimes assist with export logistics such as packing, shipping and export documentation.

Export management companies (EMCs)

EMCs act as an exporter’s off-site export department, representing the exporter’s product to potential foreign buyers. The EMC searches for business on behalf of the export firm and takes care of all aspects of the export transaction.

Hiring an EMC is often a viable option for smaller exporters who lack the time and expertise to break into foreign markets on their own. An EMC provides a range of services from negotiating export contracts to providing after-sales services. Usually, EMCs operate on a commission basis, however, some take title to the products they sell and make a profit on the mark-up.

Export trading companies (ETC’s)

ETCs perform many of the functions of EMCs. However, they tend to be demand-driven and transaction-oriented, acting as an agent between the buyer and seller. Most ETCs will take title to your goods for export and will pay your company directly.

This arrangement practically eliminates the risks associated with exporting. However, the exporter needs to make sure that appropriate checks are made regarding the ETC. More often than not, an ETC can be a good source of export opportunity.

Contract

A written contract helps to solve disputes that may arise during the execution of a business transaction ensuring that the rights and duties of the parties involved in the trade deal are safeguarded.

Therefore, to guarantee the smooth running of the business transaction, it is necessary to draft the contract carefully by including comprehensive and precise terms and conditions on all important aspects of the trade deal.

The obligations arising out of a contract for the sale of goods might differ according to the law which will apply to the contract. For this reason, some internationally accepted contracts and forms have been prepared by the United Nations (UN) and the International Chamber of Commerce (ICC).

Selecting these forms make it easier for the exporter to handle the contractual part of export and avoid conflicts of law that are always cumbersome. The International Chamber of Commerce (ICC) has developed standard terms of delivery (Incoterms 1990) which can be incorporated into contracts for the international sale of goods. Each Incoterm provides clear obligations for each party.

It must be said, however, that some countries will apply their own law. In this respect, the United Nations Commission for International Trade Law (UNCITRAL) has prepared a model law for international sale goods, which is known as the Vienna Sales Convention, which has been ratified by many countries. It is a very clear and simple instrument.

The convention will automatically apply if the buyer and the seller are nationals of countries which have ratified the convention. It can also apply if the parties agree upon its application in the contract.

Cultural issues

One important issue that affects a firm’s performance in global markets is cultural differences between countries. More formally, culture is defined as a comprehensive system of behaviour patterns that tend to be gradually absorbed, as opposed to being inherited.

These behaviour patterns differentiate members of a particular society to another. Such patterns can include a range of aspects such as customs, religion, language, material artifacts to those of a psychological nature like attitudes and feelings.

Of course, one would not expect a business owner or manager to be a master of all the culture across the globe. Nevertheless, it is important to be aware of the key aspects of culture of a country that a company has selected to target as a potential export market. Globalisation and an increased level of tourism have opened up once closed countries thereby making people more aware of different cultures.

At the same time the Internet, and media have tended to reduce cultural differences. Even though cultural differences have been reduced they nevertheless exist, and as a general rule exporters should respect the culture and traditions of the country with which they wish to do business with. The golden rule of business etiquette is to be open-minded, non-judgmental and flexible.

Packaging

In general, packaging is described as the process of protecting products for distribution, storage, sale and use. Packaging plays a very important role in the customer buying process, and therefore the design and art is imperative.

It is essential that for the packaging to be successful, both the technology and the design work well so as to adequately deal with the transport, warehousing, logistics, sale and end use. At the same time, one needs to bear in mind that packaging is also regulated because it comes into close contact with the final product.

Packaging protects and stores goods before, during and after shipment. When products are being packaged, their particular characteristics must be kept in mind. Different products need different types of treatment.

Packaging product factors

  • Fragility
  • Durability
  • Resistance to abrasion
  • Value
  • Susceptibility to moisture
  • Chemical reactions such as oxidation and corrosion
  • Chemical stability
  • Deterioration or shelf life

These are some of the key factors that are important for SMEs to succeed in the global marketplace. However, the most important factor for success is for SMEs to learn from their experiences.

 

About

Dr. Ashraf Mahate
Dubai Exports

Dr. Ashraf Mahate is the Head of Export Market Intelligence at Dubai Exports (formerly known as the Dubai Export Development Corporation), which is an agency of the Dubai Economic Department. Dr. Mahate is also the Vice Chair of the Economic Policy Committee with the Dubai Economic Committee with the Dubai Economic Department. He has written a number of journal articles, chapters in books and edited books in the areas of economics, finance and banking. He has also presented papers at major international conferences. Dr. Mahate has provided extensive consultancy services to various organisations in the areas of banking, economics and finance. He has been a director of a number of companies including a venture capital company and a private equity fund.

Dr. Mahate received his doctorate from Cass City University Business School in London (UK) which was ranked by the Financial Times newspaper as the 12th best university in the world for finance. He read Economics at University College London, followed by a Masters in International Economics and Banking at the University of Wales in Cardiff. Dr. Mahate is a professional educator and received his training at the Institution of Commercial Management (UK). He is also a member of the Association of Certified Anti-Money Laundering Specialists. (ACAMS)