Business Question

I have attached the doctor’s presentation      slides to read and reflect the related information.

Regarding the doctor’s message for this assignment:

ChaPtEr 13 • ExPorting and global sourCing
CloSinG CaSE
401
Barrett Farm Foods: A Small Firm’s International
Launch
Philip Austin, general manager of Barrett Farm Foods, was thrilled
after returning from the food industry trade fair in Cologne,
Germany—the largest food and beverage fair in the world. Barrett
Farm Foods, based in Melbourne, Victoria, is Australia’s sixth-largest
food company. It distributes both bulk agricultural commodities and
processed food products. Among others, it sells macadamia nuts, cereal bars, garlic, ginger, dried fruits, and honey throughout Australia.
Barrett has had a healthy rate of growth over the past decade, and
its sales reached USD $215 million last year. Although Barrett is well
known in the domestic market, its international experience has been
limited to responding to occasional, unsolicited orders from foreign
customers. In completing these export orders, Barrett has relied on
intermediaries in Australia that provided assistance for international
logistics and payments. Yet Austin is enthusiastic about substantially
expanding the export business over the next few years.
Recognizing an Opportunity
What prompted Austin to attend the Cologne fair was a report from
Austrade, the Australian government’s trade promotion agency,
which highlighted the potential of Australian foodstuffs exports.
According to Austrade, Australian food exports exceeded AU $30
billion last year. Austrade believes processed foodstuffs are the coming trend and wants to boost exports.
This raises a dilemma. Much of Australia’s current exports are
primarily raw foods, not processed foods. If just 10 percent of processed food value-adding were done in Australia, the country’s balance of trade would improve. For example, instead of exporting raw
grains to Europe, Austrade wants Australian producers to process
the grains into bread and other bakery products, thereby creating
jobs for Australians. Austrade believes meat, cereal, sugar, dairy
commodities, and marine products have the most potential for food
processing.
Meeting with Potential Export Customers at the
Cologne Fair
At the Cologne fair, Barrett’s nut-and-honey cereal bars and butterlike spread were a hit. Luigi Cairati, a senior executive with the
Italian supermarket chain Standa, was keen on doing business
with Barrett. He pointed out that, over the past decade, there has
been an explosion of interest among European supermarkets for
exotic foods and vegetables, with each group competing to display
produce from around the world. Standa was seeking new products
from other countries, partly to meet off-season demand for fruit and
vegetables. Gabrielle Martin, purchasing manager for French food
group Fauchon, also confirmed her interest in showcasing exotic and
high-quality food in Fauchon stores. She added that Europeans view
Australia as exotic and pollution-free and as a producer of quality
products. In addition, the market for canned fruit is opening up as
the fruit crop from trees in Europe declines over time.
Austin also met Peter Telford, an agent from the United
Kingdom who showed interest in representing Barrett in the
European Union (EU). Telford emphasized his knowledge of the
market, extensive contacts, and prior business experience. He noted
that other Australian firms, such as Burns Philip, Elders-IXL, and
Southern Farmers, are already doing business in Europe. He pointed
to several success stories, including Sydney-based pastry manufacturer, C & M Antoniou, which established a small plant in Britain to
avoid the wall of agricultural duties in the EU market. The company
now supplies several British supermarket chains, including Marks &
Spencer, Tesco, and Sainsbury’s. Another Australian group, Buderim
Ginger, expanded its operations from Britain into continental Europe
by opening an office in Germany.
Creating a Task Force
After the fair, Austin created a three-person task force among his
senior managers and charged them with implementing an export
drive. He felt an export volume of USD $30 million for the first year
was reasonable. To identify the most promising exports, Barrett
would examine its current product offerings. It would appoint an
agent, such as Peter Telford, to facilitate EU sales. The people Austin
met at the Cologne fair were potential customers to contact for
immediate sales. Barrett could also forward some product and company literature to European importers, identify and appoint one or
more distributors in Europe that have access to supermarkets and
other large-scale buyers, and revamp its website to attract export
business.
Although Barrett senior managers shared Austin’s enthusiasm
about exporting to Europe, they did not share his optimism. Barrett
had little internal expertise to deal with the complexities of international shipping, export documentation, and receiving payments from
export customers. In addition, they knew export transactions take
time to complete, and the firm would have to arrange for financing
of export sales. Most important, senior managers felt they would
have to invest in creating a small export team and hire or train employees in export operations.
Food is a complex business, in part because it is perishable,
often requiring special equipment for distribution. Europe also has
many differences in national tastes, regulations, and market structures. Whereas Australians love Vegemite—a brown, salty breakfast
spread made from yeast—the product enjoys little popularity outside
Australia. With no name recognition in Europe, Barrett may have to
resort to store branding, which will generate lower profit margins.
Barrett would have to rely on foreign intermediaries with access
to well-known supermarket chains to distribute its products. Is
Peter Telford the right choice? What is the appropriate commission
structure for compensating intermediaries? With many larger, more
experienced competitors in the EU, Barrett must keep its pricing
competitive, although the complexity of pricing can overwhelm
inexperienced managers. Barrett’s senior managers also realize that
prices strongly affect sales and profits. The euro, Europe’s common
currency, simplified pricing strategy, but numerous challenges remain. Prices are affected by transportation costs, buyer demand,
exchange rates, tariffs, competitors’ pricing, regulatory compliance,
and the costs of marketing and physical distribution.
402
Part 4 • EntEring and Working in intErnational MarkEts
AACSB: Reflective Thinking Skills, Analytic Skills
Case Questions
13-4. Do you see any problems with Philip Austin’s plan for
European expansion? Do you support his entrepreneurial approach to exporting? What should be the features of a more
systematic approach to exporting?
13-5. Why did Barrett choose exporting as its entry strategy for
Europe, as opposed to foreign direct investment or licensing?
What advantages does exporting provide to Barrett? What
are the potential drawbacks of exporting for Barrett?
13-6. What challenges can Barrett expect in its export drive? What
types of new capabilities does the firm need to acquire to
manage its export transactions?
13-7. How should Barrett choose between direct and indirect
exporting? What are the ideal characteristics of European
intermediaries for Barrett? Where can Barrett turn for
financing its export sales?
13-8. There are already numerous companies selling processed
foods in Europe. What can Barrett do to compete successfully
against these firms?
13-9. Why does Austrade want Australian firms to focus on
exporting processed foods? Why is exporting high value–
added products good for Australia?
Barrett is a fictitious company.
End of ChaptEr rEviEw
MyManagementLab
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.
key terms
barter 384
business process outsourcing
(BPO) 389
buy-back agreement 384
captive sourcing 392
company-owned subsidiary 379
compensation deals 384
configuration of value-adding
activity 390
contract manufacturing 392
counterpurchase 384
countertrade 383
direct exporting 379
documentation 380
exporting 376
export management company
(EMC) 386
foreign distributor 386
global sourcing 380
global supply chain 399
importing 380
Incoterms 381
indirect exporting 378
letter of credit 382
manufacturer’s representative
offshoring 393
outsourcing 389
trading company 386
386
Summary
In this chapter, you learned about:
• Exporting as a foreign market entry strategy
Exporting is producing at home and then shipping products
abroad, to be sold and delivered to foreign customers through
intermediaries. It is the strategy most firms favor when they
first internationalize. It is also a relatively flexible entry strategy, allowing the firm to withdraw readily in case of problems in the target market. A systematic approach to exporting
requires managers to perform a global market opportunity
assessment, make organizational arrangements for exporting, acquire needed skills and competencies, and design and
implement the export strategy. Among the organizational
arrangements for exporting are indirect exporting, direct
exporting, and establishing a company-owned subsidiary.
• Managing export-import transactions
Management must become familiar with customs clearance,
international goods transportation, and documentation,
the required forms and other paperwork used to conclude
Chapter 9:
Exporting and
Global Sourcing
International Business: The New Realities, 4th Edition, Global Edition
by
Cavusgil, Knight, and Riesenberger
Copyright © 2017 Pearson Education, Ltd.
Learning Objectives
13.1 Understand exporting as a foreign market entry
strategy.
13.2 Describe how to manage export-import
transactions.
13.3 Explain identifying and working with foreign
intermediaries.
13.4 Understand outsourcing, global sourcing, and
offshoring.
13.5 Describe the benefits and risks of global sourcing.
13.6 Understand global sourcing strategies and supply-chain
management.
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13-2
Exporting as an Entry Strategy
• Usually the firm’s first foreign entry strategy.
• Low risk, low cost, and flexible.
• Popular with SMEs.
• When we talk about trade, trade deficits, trade
surpluses, etc., we’re talking exporting.
• Most exports involve merchandise.
• Export channels:
o Independent distributor or agent; or
o Firm’s own marketing subsidiary abroad.
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Services are Exported as Well
• Examples: Architecture, education, banking,
insurance, entertainment, information.
• However, many pure services cannot be exported
because they cannot be transported.
• Retailers offer their services by establishing retail
stores abroad, via FDI. Retailing requires direct
contact with customers.
• Overall, most services are provided to foreign
customers via entry strategies other than exporting,
especially FDI.
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Advantages of Exporting
• Increase sales volume; improve market share.
• Generate better profit margins.
• Increase economies of scale.
• Diversify customer base.
• Stabilize sales fluctuations.
• Minimize the cost of foreign market entry.
• Minimize risk.
• Maximize flexibility.
• Leverage the capabilities of foreign distributors and
other business partners located abroad.
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Disadvantages of Exporting
• Compared to FDI, exporting offers fewer
opportunities to learn about customers,
competitors, and other aspects of foreign markets.
• Firm must acquire and dedicate new capabilities in
international sales contracts and transactions,
international financing methods, and logistics and
documentation, all of which can strain
organizational resources.
• Exposes the firm to tariffs and other trade barriers
as well as fluctuating exchange rates.
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A Systematic Approach to Exporting
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Export Intermediation Options
• Indirect exporting: Contracting with an intermediary in
the firm’s home country to perform all export functions,
often an Export Management Company or a Trading
Company. Common among firms new to exporting.
• Direct exporting: Contracting with intermediaries in
the foreign market to perform export functions, such as
distributors or agents. They perform downstream
value-chain activities in the target market.
• Company-owned foreign subsidiary: Similar to direct
exporting, except the exporter owns the foreign
intermediation operation; the most advanced option.
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13-8
Alternative Organizational
Arrangements for Exporting
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Export Documentation
The official forms and other paperwork required to
transport exported goods and clear customs.
• Quotation or pro forma invoice: Issued on request
to advise a potential buyer about the price and
description of the exporter’s product or service.
• Commercial invoice: Actual demand for payment
issued by the exporter when a sale is concluded.
• Bill of lading: Basic contract between exporter and
shipper. Authorizes the shipping company to
transport the goods to the buyer’s destination.
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Export Documentation (cont’d)
• Shipper’s export declaration: Lists the contact
information of the exporter and buyer, full description,
declared value, and destination of the products being
shipped. Used by governments to collect statistics.
• Certificate of origin: The “birth certificate” of the
goods, showing country where the product
originated.
• Insurance certificate: Protects the exported goods
against damage, loss, pilferage and, sometimes,
delay.
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Incoterms (International Commerce Terms)
• A system of universal, standard terms
of sale and delivery.
• Commonly used in international sales
contracts and price lists to specify how
the buyer and the seller share the cost
of freight and insurance, and at which
point the buyer takes title to the goods.
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Examples of INCOTERMS
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Methods of Payment
METHOD
ADVANTAGES
Cash in Best for the seller.
Advance
DISADVANTAGES
Risky from the buyer’s
standpoint, and thus
unpopular; tends to
discourage sales.
Open
Easy for the exporter, who Risky unless there is strong
Account simply bills the buyer, who established relationship
is expected to pay at some between exporter and buyer
future time as agreed.
Letter of A contract between the
Requires following a strict
Credit
banks of the buyer and the protocol, specified in the
seller. Largely risk-free, it contract. Can involve much
helps establish instant
paperwork.
trust.
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Letter of Credit Cycle
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Countertrade
• An international business transaction in which all or
partial payments are made in kind rather than cash.
Similar to barter.
• Used when conventional means of payment are
difficult, costly, or nonexistent.
• Accounts for between 10% and 1/3 of all world trade.
• Common in large-scale government procurement.
• Risky. May involve inferior or hard-to-price goods;
may lead to price padding; Can be complex,
cumbersome, and time-consuming.
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Sources of Export Financing
• Commercial banks.
• Distribution channel intermediaries.
• Buyers.
• Suppliers.
• Government assistance programs (e.g.,
Export-Import Bank, Small Business
Administration).
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Types of Exporting Intermediaries
Foreign distributor: Based in the foreign market. Works
under contract for the exporter, takes title to, and distributes
the exporter’s products in a national market or territory, often
performing marketing functions such as sales, promotion, and
after-sales service.
Manufacturer’s representative: Contracted by the exporter to
represent and sell its merchandise or services in a designated
country or territory.
Trading company: Engages in import and export of a variety
of commodities, products, and services.
Export management company (EMC): Based in the home
market. Acts as an export agent on behalf of a client company.
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Working with Foreign Intermediaries
• The exporter relies on intermediaries for much of
the marketing, physical distribution, and customer
service activities in the export market.
• The exporter should cultivate mutually beneficial,
bonding relations; respond to the intermediary’s
needs; demonstrate commitment; and build trust.
• Intermediaries prefer handling
good, profitable products,
and desire various
types of support.
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Global Sourcing
Procurement of products or
services from suppliers located abroad for
consumption in the home country or a third country
• Also called global outsourcing, global procurement
or global purchasing; it amounts to importing.
• Involves a contractual relationship between the
buyer and the foreign supplier, in which the
performance of a specific value-chain activity is
subcontracted to the firm’s own subsidiary or to an
independent supplier.
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13-26
Sourcing for Dell Inspiron Notebook Computer
Sources: Based on “Dell’s Current Suppliers,” 2015, www.dell.com; Thomas Friedman, The World Is Flat 3.0 (New York: Picado, 2007);
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Drivers of Global Sourcing
1. Technological advances in
communications, especially the
Internet and international telephony.
2. Falling costs of international business.
3. Entrepreneurship
and rapid economic
transformation in
emerging market
countries.
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Two Key Decisions Regarding Global Sourcing
Decision 1: Outsource or Not? Decide whether each
value-adding activity should be conducted in-house or
by an independent supplier. Known as the ‘make or
buy’ decision. Firms usually internalize activities that
are part of their core competence or that involve the
use of valuable intellectual property.
Decision 2: Where in the World Should ValueAdding Activities Be Located? Firms configure their
value-chain activities in specific countries to cut costs,
reduce transit time, access favorable factors of
production, and access competitive advantages.
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Example of Worldwide Value Chain Configuration
• BMW employs more than 60,000 factory personnel at 30
sites in 14 countries to manufacture its vehicles.
• The Munich plant builds the BMW 3 Series and supplies
engines to other BMW factories abroad.
• A plant in South Carolina makes 350,000 vehicles per
year.
• A plant in NE China makes cars in a local joint venture.
• A plant in India makes BMWs for the Asia market.
• BMW configures sourcing to minimize costs (e.g., by
producing in China), access skilled personnel (by
producing in Germany), remain close to key markets (by
producing in China, India and the United States).
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Business Process Outsourcing (BPO)
• Outsourcing of business functions to independent
suppliers such as accounting, human resource
functions, IT services, and customer service.
• BPO includes:
▪ Back-office activities, including internal, upstream
business functions such as payroll and billing, and
▪ Front-office activities, which
includes down-stream,
customer- related services
such as marketing or technical
support.
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Contract Manufacturing
Arrangement in which the focal firm contracts with an
independent supplier to manufacture goods according
to well-defined specifications. E.g., Nike, IKEA.
Example:
Patheon is a leading contract manufacturer
in the pharmaceutical industry, providing drug
development and manufacturing for pharmaceutical
and biotechnology firms worldwide. Operates 11
factories in North America and Europe, producing
over-the-counter drugs and numerous top
prescription drugs for leading pharmaceutical firms.
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Global Sourcing from
Subsidiaries versus Independent Suppliers
• In global sourcing, the focal firm has two major choices.
It can source from:
(1) Independent suppliers, or
(2) Company-owned subsidiaries and affiliates.
• Global sourcing from independent suppliers involves
outsourcing production to a third-party provider abroad.
• Captive sourcing is sourcing from the firm’s own
production facilities located abroad. Production is
carried out at a foreign facility that the focal firm fully or
partly owns through direct investment.
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Nature of Outsourcing
and Global Sourcing
Sources: Based on B. Kedia and D. Mukherjee, “Understanding Offshoring: A Research Framework Based on Disintegration,
Location and Externalization Advantages,” Journal of World Business 44, No. 3 (2009), pp.250–261; Information Economy
Report 2009 (New York: United Nations, 2009); World Investment Report 2004 (New York: UNCTAD, 2004).
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Choices in Outsourcing Value Chain Activities
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Benefits of Global Sourcing
• Cost Efficiency, due to lower wages abroad, leading
to improve profitability.
• Ability to Achieve Strategic Goals
▪ Faster corporate growth.
▪ Access to qualified personne.l
▪ Improved productivity and service, especially when
a task is outsourced to a firm specialized in that task.
▪ Business process redesign.
▪ Increased speed to market.
▪ Access to new markets.
▪ Technological flexibility.
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Risks in Global Sourcing
• Lower-than-expected cost savings.
• Environmental factors, such as exchange rate
fluctuations, trade barriers, and labor strikes.
• Weak legal environment, which can affect protection
of intellectual property.
• Inadequate or low-skilled workers.
• Overreliance on suppliers.
• Risk of creating competitors.
• Erosion of morale and commitment among homecountry employees, due to outsourcing jobs.
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Strategies for
Minimizing Risk in Global Sourcing
• Go offshore for the right reasons. The best
rationale is strategic, such as enhancing the quality
of offerings, improving productivity, and freeing up
core resources.
• Get employees on board. Poorly planned
sourcing projects creates unnecessary tension with
existing employees.
• Choose carefully between a captive operation
and a contract with outside suppliers.
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Strategies for Minimizing Risk (cont’d)
• Choose suppliers carefully. There are many
options to choose from. A sourcing broker can
help.
• Emphasize communications and collaboration
with suppliers. Minimize problems by developing
clear and effective relations with suppliers.
• Safeguard interests in terms of maintaining the
firm’s reputation, building a stake for the supplier,
keeping open options for finding alternate partners
if needed, and withholding key intellectual property.
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Global Supply Chain Management
• Global supply chain: The firm’s integrated network
of sourcing, production, and distribution, organized
on a world scale, and located in countries where
competitive advantage can be maximized.
• Sourcing from numerous suppliers scattered around
the world requires efficient supply-chain
management.
• Third party logistics providers (3PLs) as well as
independent logistics service providers such as
FedEx, TNT, and UPS are useful facilitators.
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Stages, Functions, and
Activities in the Global Supply Chain
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Features of Global
Supply Chain Management
• The costs of physically delivering a product to an
export market may account for as much as 40% of the
total cost.
• Firms use information and communications
technologies (ICTs) to streamline operations, reducing
costs and increasing distribution efficiency.
• Logistics involves physically moving goods through
the supply chain. Incorporates information,
transportation, inventory, warehousing, materials
handling and similar activities associated with the
delivery of raw materials, parts, components, and
finished products.
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