How to succeed in the global marketplace

July 1, 1996
Key steps are to adopt a global view, set up the right international distribution channels, and provide effective post-sales support.

How to succeed in the global marketplace

Key steps are to adopt a global view, set up the right international distribution channels, and provide effective post-sales support.

Duncan MacVicar

The chances are that your electro-optical product has appeal to customers outside your own country. It`s a rare product that doesn`t. Given that foreign markets are almost always larger than your domestic market, it makes sense to create an organization to go after international business.

There are two good reasons besides increased market potential to go international. First, because the economic cycles of nations are usually out of phase, you`ll be hedging against economic downturns at home. Second, by challenging foreign competitors on their home soil, you will learn a lot about them and put them on the defensive.

Opportunities for international business continue to expand. The fast-growing economies of Latin America and the Pacific Rim are soaking up imports. Also, there is a trend toward reduction of trade barriers, especially on a regional basis--witness the ever-strengthening European Community and the North American Free Trade Agreement.

The international frame of mind

The first step in developing international business is to adopt a global view. You want to design products that address the special needs of international customers and compare them to the offerings of competitors around the world. You don`t necessarily have to sell internationally right away (it`s often wise to gain a stable domestic foothold first), but your worldwide position should be part of your planning from the start. Next, you need to set up international distribution channels. Doing this can take time, much personal effort, and a hefty travel budget. But most companies find these investments worthwhile, even though the returns may take a long time (while international relationships mature).

Manufacturers` representatives (often in the form of trading companies) are a common channel. It`s very difficult to sell directly overseas, due to geographic and language barriers. So companies with direct mail or direct sales forces at home supplement their capability with international sales representatives. Usually, they sell to the rep at a discount rather than paying a commission as you would to a domestic rep. Commodity-like products will usually be sold through a stocking distributor.

If you`re in the USA, you might find a domestic foreign sales corporation that addresses your markets in key foreign countries. This is a convenient means of selling internationally, but it has disadvantages: it`s costly because it is an additional middleman between you and the foreign agent, and you`re also quite isolated from the customer.

Joint ventures with foreign companies, ranging from simple licensing arrangements to the creation of new companies, can be quite effective. Through the right partner, you can acquire a powerful sales and/or manufacturing organization and strong established business relationships. But be sure that the terms of your agreement preserve your business interests in case the venture fails. This advice is not idle--very few joint ventures survive the test of time. In fact, most companies seem to view them as temporary.

There is another channel that you are likely to encounter--international arbitragers. These are brokers who bring together buyer and seller for a fee. Stay away from them. They have no interest in either the long-term satisfaction of the buyer or the business success of the seller. In the long run, they`re always more expensive than any short-term profit opportunity they may present to you.

Once your international channels are established, you will need a support organization for them at your factory. This organization is needed to manage the channels, to provide them with a communications link to manufacturing, and to answer the innumerable questions that foreign partners need to have answered in order to do their jobs well. You will also need to travel to visit your overseas partners regularly and to support their local promotional programs, such as trade shows.

No matter what form of international channel you choose, you must appear to be local. Customers around the globe all feel more comfortable buying from their countrymen, where they find familiar language, culture, and business practices. As your business grows in another country, you should consider a local office to manage and support your channel. Eventually you may decide to create a subsidiary to service, sell, and perhaps manufacture your products.

Uniphase (San Jose, CA) sells component lasers to OEMs, using a direct channel in the USA. Their international organization holds several lessons for us. Mostly, they have a network of reps and distributors. In the UK and Germany, however, the company has subsidiaries, due to the size of those markets. In Japan, Uniphase is part owner of a distributor, which the company believes gets them the most effective local presence. Says Lindsay Austin, director of marketing and sales, "Reps and distributors add value both in the front-end design cycle and later on, where they maintain the good relationships we need with OEM customers."

Post-sales support overseas

Designing a means to deliver quality post-sales support to international customers is a challenge. Some countries, like France, require that the operating and service manuals accompanying shipments be written in the local language. Are you prepared to make that commitment? Even getting repair parts and consumables into some countries is problematic--for example, India has notoriously high import duties on parts.

For many electro-optical products, the biggest challenge is repairing a broken system. It usually isn`t practical to ask customers to ship capital equipment back overseas to the manufacturer to get it repaired; it must be repaired on site. Training someone in a foreign country to repair your products is difficult, but it must be done. Basically, you have two choices: bring the repair technicians to your factory or send your trainers to their office. Either method works, but I favor bringing the technicians to your factory. They will learn about your company, they`ll receive better training, and the fact that their company has to commit to paying at least part of the travel cost is a good test of their commitment to the relationship.

If you can`t support the customer in a foreign country, you shouldn`t be accepting orders from there. When I was at Quanta-Ray Division of Spectra-Physics (Mountain View, CA) years ago, I was distressed to receive a call from a customer in Brazil. His $100,000 laser system was down, and he did not have the capability to repair it. What to do? When I learned that we didn`t have any other systems in South America, I saw that sending a repair technician to Brazil was too expensive an investment for the small return we could expect. We ended up giving the customer unlimited telephone time with our best technicians to walk him through the problem. We also gave him free repair parts (which, by the way, avoided a big import duty obstacle), providing he would order a kit of spare parts for future use. But the bottom line is that we should never have sold him that system. It simply was not feasible to devise a support scheme that made sense.

International pricing

A sad fact that all of us marketeers eventually learn is that it costs more to do business outside your country than inside (see table). US-based companies have a special problem in that their home market is more efficient sales-wise than any other, due to its size and homogeneity. When it comes to setting international prices, then, you have to choose between charging more or accepting a lower profit on your international business. In my experience, accepting widely different profit margins on identical or similar products causes big problems when your mix changes. My conclusion is that in most cases, it is wise to mark up your prices for international sales.

You might be tempted to accept low margins on international business under the theory that this business is incremental--just a supplementary source of profits--and should not be burdened with your usual overhead charges. Don`t do it. International business is anything but incremental. In fact, there are many electro-optics manufacturers with a majority of their sales in the international arena. I once observed a major company in the industry price incrementally to secure market share in Japan. As that part of their business grew, they slid from a profitable business to a losing one, largely due to international prices that were too low.

An issue related to pricing is payment terms. New international relationships are often set up using the letter of credit, a scheme that guarantees your payment once you`ve shipped the product. A similar but rarely used technique is the sight draft, an automatic account withdrawal triggered by a shipment. Once business relations are well established, electronic transfers of funds work well.

A sticky problem

It is axiomatic that one must follow the business practices of the country in which you`re doing business. In some countries, these include heavy discounting, the use of middlemen, and other practices that are unfamiliar to most of us. Some of these practices may seem marginally ethical or downright illegal to you. My advice: First, learn about the practices of the country you`re about to enter. You must be flexible and allow your usual biases to bend, in order to accommodate the expectations of customers and business partners. After all, you`re exporting hardware, not culture. But at the same time, you must feel comfortable with the end result. You cannot be expected to violate your sense of professional propriety. Perhaps you can find another way of accomplishing the same goal, or perhaps you`ll decide that you can`t do business in that country. o

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The four major international distribution channels--manufacturers` representatives, joint ventures, stocking distributors, and domestic foreign sales corporations--offer a variety of approaches to selling your electro-optic product into an overseas market. Your choice of channel may determine how quickly you succeed in the global marketplace.

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