FRAMEWORK & PRINCIPLES OF INTERNATIONAL BANKING THE BUSINESS INTERNATIONALIZATION PROCESS

Transcription

1 FRAMEWORK & PRINCIPLES OF INTERNATIONAL BANKING THE BUSINESS INTERNATIONALIZATION PROCESS

2 INDEX 1. Introduction 3 2. Domestic and foreign markets Positive and negative aspects of exporting The decision to internationalize 8 3. International trade: importing and exporting Deciding upon internationalization the main stages Direct export Local intermediaries: agents or distributor companies Cooperative undertaking agreements The decision to set up an establishment abroad Freixenet s internationalization process The Mango group the internationalization of fashion Appendices

3 1. INTRODUCTION Businesses have to assess the degree to which it is in their interest to be present in international markets before taking the decision to enter them. The business internationalization process is not easy and entails a wide range of challenges, such as legislations, cultures and geographical distances. While it is true that a company can survive selling in its domestic market and there are indeed many cases that have demonstrated this, awareness of the existence of international markets is equally important. This relates to an ability to assess the degree to which it is in their interest to be in these markets, or at minimum understand their main characteristics, in order to appropriately make a decision at the time when internationalization arises as a possibility. The presence of companies in different countries is nowadays a reality plain to see in many cases, some of which can be clearly categorised as unqualified successes. To name just a few of them, multinational groups such as Inditex and Telefonica have a presence in many markets around the world; what is more, in some cases they are leaders in these foreign markets. However, it is important not to jump to conclusions. The route is not easy and includes numerous challenges. Different legislations, cultures and geographical distances add extra degrees of difficulty to that which is always a factor when starting a new business. This being so, a thorough assessment of the pros and cons of initiating a process of this kind must be carried out in all cases. Furthermore, the investment of a significant amount of resources will always be required, and the return on this investment will take some time

4 Show what you know Indicate whether the following statement is true or false. The key to a company s success is its internationalization. a. True b. False Correct answer: b - 4 -

5 2. DOMESTIC AND FOREIGN MARKETS An Internationalization process may be proposed when there is not enough room in the national arena and horizons must be widened. Internationalization requires a study and analysis similar to those made for other types of strategic decisions taken by companies. While it is true that foreign markets have been in mind of companies for a long time, it is also true that the economic crisis that began in 2008 helped underline their importance at this moment in time. Many managers saw their opportunities in a domestic market where they had performed very well up until that point come to an end. This left them with little choice but to search for other sources of revenue in order to survive. It should be noted that some of these companies had already started out on this task before the financial crisis appeared on the horizon. These firms were therefore at a certain advantage, while those that were starting from square one found themselves working against the clock. Internationalization may be proposed when it is seen that there is not enough room in the national market and horizons must be widened. It may be all part of a project the company has put in place previously, having made a strategic decision to internationalize. Nevertheless, it can also arise as a consequence of a customer s requirement to be served in a new country where it has recently established itself. Here is an example. Imagine that your company produces a component for a car manufacturer, one of the most important players in its sector

6 If the manufacturer decides to set up a production line in a third country, it may ask that your company have to do the same, and carries out some of its production from that country, too. This would make a lot of sense if the two parts of the vehicle are closely related and the production centres need to be highly coordinated in terms of production and logistics. All told, this could help avoid a situation whereby one of your competitors steals your client and takes over the role your company had been fulfilling up until then Positive and negative aspects of exporting From a macroeconomic point of view, export activity provides a country with clear benefits. It helps to improve important aspects such as the balance of payments or trade deficit the country may have. However, this cannot be directly extrapolated to all of the companies in one specific economy. An exhaustive analysis must be carried out to ascertain whether exporting is worthwhile in the case of each individual firm. We are going to look at some of the main advantages gained, but not without also taking into account the risks involved. The most significant advantages are as follows. Diversifying the risk of the business Accessing foreign markets makes it possible to diversify the risk of commercial transactions. By having a wider customer base, there is less dependence on each one. And if these customers are located around the world, it is more likely that potential crises that might affect one customer will not affect others

7 Increasing sales and reducing costs As a result of the above circumstances the company s sales should increase. This will bring additional benefits; unit cost per product will go down given that greater production volume will generate synergies the company can use to its advantage. Learning from experience By expanding into foreign markets companies benefit from a learning experience that can serve them well for the future, and may even do so in the present, improving the way they perform their activities. Companies enter into a learning curve, meaning that they will find it increasingly less challenging to adapt potential future changes. Providing new opportunities Entering a foreign market can bring new opportunities for a company s products. Specifically, it can represent an opportunity for mature products, or in other words, are close to the end of their useful life. Usually developing markets welcome products that are much less attractive in other more developed. We find a good example in the automotive industry. You can see some cars that have reached a certain age, but were made by strong leading brands in developing countries. Driving competitiveness The global competition that the company will face will force it to remain constantly alert to new developments, and avoid obsolescence. In other words, it will force it to be competitive. Meanwhile however, it is important not to ignore the risks associated with expanding into foreign markets. Related costs Expanding into a foreign market may entail costs that are unavoidable. It may be necessary to change the labelling or to present products differently due to the current regulation in the host country. Approvals Relevant product approvals can be another hurdle that exporter companies must deal with. Even if the products meet all of the established technical requirements and there are no reasons why they should not be sold, the obligation to go through the approval process will entail an spent of time and money by the exporter company

8 Qualified personnel Foreign expansion requires appropiate personnel. Although the exporter company may work with a third party such as a local distributor, it needs a minimum level of knowledge (technical, languages, etc.) to be able to provide management of the overall process. Logistics and distribution The logistics and distribution in a foreign market will always be more complex than in the local market. This relates not only to the organisational aspects, but also to the distances between the company s different locations. As will become clearer later on, this aspect depends on the way in which the foreign markets are accessed. Legislation In addition to the risks ever-present in the start-up of a company, related to foreign expansion are some legal and administrative aspects, and the possibility of being unaware of regulation in the destination country. Payment methods and transactions The payment methods and transactions with trade counterparts will require specific instruments that are different to those used in the domestic market. Other risks In addition, risks associated with any trade operation (loss or deterioration of the goods, default or difficulty in the recovery management procedure) are more pronounced in the case of international trade, due to the geographical distances and the differences in language and culture involved The decision to internationalize It must be clearly understood that a making a decision on internationalization (i.e. exporting or making an investment abroad) requires a study and analysis similar to those made for other types of strategic decisions taken by companies. Aiming to provide a comprehensive list, there are some aspects that must always be taken into account and evaluated

9 > Legal aspects > Legal certainty and legislation in the destination country > Aspects relating to tax, logistics and macroeconomics > The economic situation in the country > Financial aspects > Sources of financing and the financing cost There are three dimensions that must be taken into account. 1/ Firstly, whether or not the company is prepared at the present moment in time to undertake an internationalization process; 2/ secondly, an estimation of the impact it would have on the company s future in terms of increased business; and 3/ thirdly, an evaluation of whether it is feasible to go ahead with the decision based on the financial resources required and the company s capacity in this regard. From a strictly financial point of view, the aspects to consider can be grouped into two main blocks. > Economic block > Aspects relating to the revenue the business will bring in and the costs implied. > Financial block > Aspects relating to the cash flows and financing. If it is simply a matter of direct exporting to another country (foreign sales), the investment required will be lower than it would be for a foreign establishment

10 Show what you know Complete the sentence with the correct option. From a macroeconomic point of view, export activity provides a country with clear benefits. This [can/cannot] be directly extrapolated to all of the companies of the country. Correct answer: cannot

11 3. INTERNATIONAL TRADE: IMPORTING AND EXPORTING International trade consists of both the purchases and the sales that companies make abroad. Customers have different purchasing habits depending on their location, but in the end, consumers needs are relatively similar wherever you go. By the term international trade we mean all commercial exchanges done by companies in different countries. As such, international trade consists of both the purchases and the sales that companies make abroad. All the same, when looking at the internationalization of businesses the focus is on those that are looking to sell to foreign companies. If a company is an importer of goods (i.e. it purchases from a foreign supplier), it will be the supplier that brings the operation to the country of the buyer. Firstly this will be to convince the buyer that they are a good choice of supplier. If the transaction goes ahead, they will then have to deliver the goods to the buyer s country. It should be made clear what exactly is to be understood by the term international sales. Traditionally, the domestic market has been considered as one in which goods could be moved freely without any kind of customs restrictions. This has usually been associated with countries borders. However, this situation has changed somewhat in recent decades, particularly in Europe. In this sense, a membership association of states such as the European Union can be considered as a kind of single domestic market. In reality, this situation involves a mixture of domestic and international aspects. On the one hand there is no type of customs restrictions (there exists

12 the free movement of goods, capital and people), but on the other hand it is necessary to take care of specific documentation for sales made within the trade area. Technically speaking, a specific name has been given to this type of operation: intra-community transactions. What are the main aspects a company must take into account if it wants to sell around the world? Nobody can fail to recognise that selling abroad entails a number of difficulties and obstacles that are greater than those involved in selling in the domestic market. In this regard, without any intention to cover all of these aspects, a general overview can be made of the main differences to consider. This list would include the differences between the legal, customs and communication systems, as well as differences in trade practices and language. While it is true that customers have different purchasing habits depending on their location, in the end, consumers needs are relatively similar wherever you go. They want to satisfy a need and want to do so at a reasonable price. They will therefore evaluate the different alternatives and choose whichever appears to suit them best. In many cases it is proven that the obstacles are greater in the mind of the seller than the difficulties that actually may exist. While these barriers have not disappeared completely, it is certain that progressively over recent years the way has been smoothed considerably thanks to the work of entities such as the World Trade Organization (WTO). Competition between companies helps to reduce different types of costs, such as transportation and the improvement of logistics. The current increase and ease of communications also facilitates exchanges and trade transactions between companies located in different parts of the world

13 All of this does not change the fact that specific knowledge about the market in which the business would like to operate is always required. Having a proper understanding of a place s customs and receiving the correct advice about the applicable legislation are essential requirements for a company to operate successfully. Show what you know Aiding and stimulating international trade is the objective of which global organization? a. GATT b. WCO c. WTO Correct answer: c

14 4. DECIDING UPON INTERNATIONALIZATION THE MAIN STAGES Business reality is complex, and each company must take a different route on its process of internationalization. With direct exports, rather than delegating its operations the selling company performs them itself. There are two types of local intermediaries: commercial agents and distributor companies. Cooperative undertaking agreements make it possible for companies to come together with the objective of sharing risks, responsibilities and potential profits. The establishment of a company abroad requires a long-term investment, which will see a return in the long term. Once a company has made the decision to start selling abroad it must develop a specific plan. If the key variables that need be considered have been assessed and the result is in favour of foreign expansion, it s time to go ahead. One of the tools most often used to evaluate strategic business decisions is the so-called SWOT analysis, which aims to address the company s principal strategic dimensions. Appendix 1 shows an example of this type of analysis. From the perspective of classical theory, the internationalization process was a product of a company s evolution. It was part of a linear progression, a chronological chain of events. According to this approach: Stage 1 A company would begin by developing in the domestic market

15 Stage 2 Stage 3 Stage 4 Stage 5 If things went well, the company would later begin to make some exports, although not on a regular basis (i.e. more as a result of orders made directly by buyers, not because of the company s own specific actions). If this proved to be profitable and interesting to the company, it would seek out independent agents to drive this kind of sales. If the turnover provided by this type of business is considered satisfactory, thoughts could turn towards establishing a subsidiary a company in the foreign country belonging to the domestic company. The final stage could be to establish a subsidiary in the foreign country producing the company s goods. This may be one way that internationalization of a firm can happen, but business reality is complex, and each company must take its own route. Very often companies engage in a mixture of various types of action. They may export to some countries, have subsidiaries in others because the important amount of sales there, and in other more distant countries have just an agent to commercialize their products. When you consider the differing levels of control a company may want over its activities abroad, the risks it is willing to take and the resources it will employ for its international expansion, it is clear that there is a range of different options. Source: La empresa española y los mercados internacionales. ICEX The different types of international sales can be seen in greater detail in appendix

16 4.1. Direct export This concept represents one of the first steps that can be taken in the process of international expansion. Rather than delegating in a third party its operations, the selling company performs them directly. It will be necessary to conduct market research, contact customers, negotiate sales agreements and establish the logistic structure needed to carry out the transaction. This type of sales carries significant advantages through the low level of investment required. There is no need to train staff, or to spend large amounts of money setting up facilities abroad. However, there are also notable disadvantages. 1/ The lack of a physical presence in the same place where is the buyer makes it harder to maintain personal contact that is often needed to achieve repeated sales. 2/ The service provided to the customer may be lower; without being close to him they are unlikely to feel that they are being well looked after. The seller is also faced with added difficulties from a financial perspective. It is harder to get well acquainted with the customer or to obtain data on them, meaning that it is more difficult to evaluate their credit capacity. It will also be hard to get reliable references for the customer as they are not located nearby, and it may likewise be difficult to speak to other companies they usually work with. Financial entities can play a decisive role in reducing this uncertainty. There some financial products for international use that are designed for the avoidance of risks (and to facilitate international transactions) between parties located in different countries

17 Different reasons for direct export There are some reasons why this type of sales method is chosen in preference over others that require greater effort by the selling company. 1/ Once a purchase order has been received, for example as a result of having taken part in a trade fair or a trade mission. In that case, no great sales effort is required, and is offered to the company an opportunity and makes the most of it. In many cases this type of contact is the first for companies. 2/ It also makes sense when despite having a certain level of international activity, the company does not have a large enough client base (a few dozen) to justify creating a more ambitious structure. 3/ When companies are involved in big transactions, the salespeople can travel to the destination country to close the deal, as the sales margin allows for this. 4/ Also, in the event that the products are of a particularly technical nature (and require support and advice), this type of sale is likely to be chosen. The selling company will prefer that the sale is conducted by its own staff, thus having greater control over the process and the ability to provide the customer with better service Other ways of exporting directly When people talk about direct foreign sales it does not always mean that the seller has direct contact with the buyer. Many manufacturers use external channels to get their products to the public, and this applies to the domestic and international markets equally. Local manufacturers may have two alternatives as regards external channels that help them to export directly: selling to major retail chains or selling online

18 A) Through major retail chains The situation regarding large retailers has become more favourable in recent decades as large commercial groups dedicated to this practice have grown considerably. In need of large purchase volumes to fulfil their objectives, these companies search worldwide to find the best supplier for their interests. There are three distinct types: Superstores Department stores Purchasing centres The most famous examples of this type of companies would include Walmart, from the United States, and Tesco, from Great Britain. They buy goods in order to then sell them under their own brand name (distributor brands or white-label products). They usually work using tenders, i.e. with approved suppliers. This category includes retailers such as Marks & Spencer in the United Kingdom and JCPenney in the United States, which buy brands known worldwide to be sold in their stores. They normally buy these products from intermediaries in each different country. Rather than companies making purchases to sell to final consumers, this category relates to organizations that buy goods to sell to other companies which in turn sell the products on. Central purchasing bodies are companies whose purpose is to group together a large number of buyers in order to achieve the best possible price for their products. It is a good way of approaching foreign markets, but it requires either a largescale production capacity or a product that benefits from clear differentiation (for example due to its design, quality or prestige) and is also attractive to the trading partners. This will result in the manufacturer gaining an international presence (it will become known in places outside of its local sphere) but it is very likely that there will be the flip side of having to sell at lower sales margins. B) Online The next method to look at for direct international sales is over the internet. E-commerce uses the internet as a communications platform and also incorporates the payment methods to complete the sale

19 This channel has grown exponentially over recent years, benefiting greatly from high levels of security and an improvement (and cost reduction) in transport and logistics. It has been clearly seen that the arrival of the internet and its manifold communication possibilities has increased the number of markets for everyone. In addition, the payment methods developed by banks and card issuers have also favoured e-commerce. A company does not need to have a large volum of sales in order to have a virtual point-of-sale terminal. Firstly, because they are secure areas where many of the potential fraudulent activities committed can be avoided to a large extent; and secondly, because their usability has improved significantly, with intuitive websites that make it very easy to do your transactions Local intermediaries: agents or distributor companies Local intermediaries can be divided as follows: Commercial agent Commercial distributor A commercial agent is usually an individual although it can be a company whose occupation is to work as a broker facilitating commercial transactions on behalf of third parties (which may be the manufacturers or the distributors of a product). They earn money just for the transactions that are completed, but do not take on any of the risks (for example, the risk of default on payment). The buyer in the destination market may be known as a distributor, an importer or a retailer. All these terms imply subtle differences, but they all have one common trait: they have deep knowledge of the market where they operate, and selling these types of products is their main occupation. They provide the exporter company with knowledge they do not possess and could not easily acquire. These two figures are analysed in more detail next

20 Commercial agent An agent is a professional who remains independent from the companies that pay them. The agent runs their business according to their own individual needs, with no employment ties specifically requiring them work to a timetable or be present at a certain place for working hours. At the same time, they are entitled to fewer rights. Rather than earning a fixed amount, they are only paid for the number of transactions they close. Their main strength is their ability to match supply and demand. In other words, they have knowledge of both parties and of their needs (who needs the product and who can provide it), and are thus able to close the deals. If the market is regulated, with offers that are made clearly and publicly, the role of commercial agent will be of less significance. When the goods being traded have a specific component or are traded in very high volumes, these agents are usually known as brokers. In terms of contractual aspects, the exporter company and the agent do not usually sign many documents. There may be a letter of intent, or perhaps details of the volume of commissions written down. Sometimes it is simply a matter of an exchange. In terms of financing and banking transactions, the normal procedure is for the commissions to be paid via a simple and direct instrument such as an international transfer. For an exporter company this type of arrangement has significant advantages. Significant cost reduction The agent is only paid for the sales they really done, which makes him a variable expense for the exporter company. In the case of an exporter s with his own staff, it would have to pay out fixed costs (e.g. salaries and travel) even if no transactions were made. With a commercial agent, exporter company avoids this scenario

21 Spreading risks When working with a distributor in a country, all of the risks tend to be centred on said distributor. The exporter company only works with that distributor, selling them large amounts. When working with agents, the normal scenario is that they have a range of different customers, so the risk is spread across all the buyers. Furthermore, the agent is usually someone with a strong knowledge of the market, with quality information about potential customers Commercial distributor This is almost certainly the most common way in which companies enter foreign markets. For retailer businesses, for example those selling low-value goods, this is a very appropriate channel. Exporters that decide to sell with the help of a distributor should be clear about certain aspects of this operation. Objectives Host market Points of sale The intention for an exporter is to achieve as many sales as possible (it is understood that the reduced sales margins this entails are accepted), or alternatively the exporter has a strategy that focuses more on position better the product, looking to raise it up and make it more profitable. The host market may have large distribution companies that are dominant, or on the other hand it may have many retailers operating in a market of specialist shops and small businesses. As regards its points of sale, the exporter company may prefer to intensify distribution and to reach as many points of sale as it can, or it may wish to be selective and only have a presence in certain locations, having identified these places as being of greater interest in terms of strategic positioning. There is no one type of distributor that is perfect for all companies. Each company must seek out the distributor that best fits its specific characteristics. It must get a good understanding of its working methods, and then, decide if it can deliver whatever is being sought in the foreign market. Prices and margins are key issues but they cannot be the only factor taken into account. It is also important to bear in mind that this is a long term relationship, meaning that negotiations must account for the present time but also for potential difficulties that may arise in the future. These contingencies must be identified, and the agreement must be reached as to what actions will be taken by the different parties

22 When a company is faced with deciding between working with an agent or with a distributor, it should evaluate the pros and cons of each option, but the big issue is around the amount of services each of them can provide. Typically, a distributor company will be of greater size and capacity, while an agent will not be able to offer the same range of services. Appendix 3 shows a table summarising the main differences between the two figures Cooperative undertaking agreements The growing complexity of the markets has made it necessary to create different initiatives to try to find space for all of the contingencies that may arise in relationships between companies. As a result, there is a range of different international agreements through which companies find ways to share risks, responsibilities and potential profits with their partners. Each of these agreements will have specific regulations, but there are some common elements that help to make them an option for expanding into foreign markets. 1/ Firstly, the exporter company does not carry out all of the international operation, as part of this is transferred to the counterpart. 2/ This type of agreement is reached because there is complementarity between the companies involved. There must be a mutual interest which go beyond the economic benefit to be obtained by the incumbents. Perhaps one of the companies has already established a sales network to distribute the products, and wants to make good use of it and extend it with sales of the goods manufactured by the exporter

23 3/ Partners have to have a common background that make them complementary with one another. If it is not a cultural aspect, it could be that the companies are of a similar size or operate in such a way that they can cooperate very easily. 4/ It is usual to put down in writing the agreements that have been reached. It may be a temporary agreement, later on it could evolve either towards a greater interest in collaborating, or perhaps even a merger. 5/ There does not tend to be a large structure or great complexity around this type of undertaking. There are other types that could be taken into account, but the following are the most typical. Piggyback Joint venture Licensing Franchising Piggyback A piggyback is a type of agreement where the company that wants to enter a foreign market uses the distribution network of another company already established there. When is this option a good idea? If the two products are placed in the same point of sale, do not compete against one another and may in fact complement one another, this type of agreement makes sense. For the exporter, this will greatly reduce the investment to be made, increasing its chances of penetrating the foreign market. For the company providing the distribution network there is the benefit of extend it product portfolio, and it will most likely be able to increase its profitability by taking advantage of the

24 synergies created. Greater production volumes will help to achieve better conditions with both customers and suppliers. In addition, this type of agreement may be either unilateral (one company sells its products to the other) or bilateral (each sells its products to the other). Given the high level of involvement between the two companies, the most normal thing is to agree exclusive supplier contracts not seeking out other partners in that business area. Joint venture Joint ventures go beyond a simple agreement, creating an structure made together by two or more companies which may be from different countries that become partners for the joint performance of an activity. The companies must have a lot of things in common, one of the first of these being that they belong to the same industry, with complementary activities. When is this option a good idea? It may be the case that the two companies sell very similar products in their respective countries, and that they create a joint venture in order to attempt expansion to a third country. In this scenario, one company could provide a more extensive marketing network while the other might provide more advanced technology. A common situation is that one of the two companies is already established in the country where the activity will be carried out. Circumstances such as these mean that protectionist barriers are negated, which can be very important in some parts of the world. In addition, an agreement of this kind enables a good level of control over the production and business organization established

25 What are the disadvantages? In terms of disadvantages, note that a large investment in capital and human resources is required, and there is also the cost of negotiating the agreement with the local partner and handling potential discrepancies that may arise from time to time in the course of events. In a joint venture initiative, a number of matters may be discussed, but there are some that must be dealt with without fail. Contribution by each of the partners What each will provide and in what format. They might provide cash, technology or capital goods, to name just a few examples. The venture s strategy Strategy implies many different things: establishing objectives, determining which customers are to be targeted, distribution channels, etc. All of the aspects associated with running a company. Organizational method The bodies that it will consist of, and how decisions will be made. In this aspect it is important to make sure that rules are clear; this relates not only to how problems will be solved, but also who will have the last word in the business s most critical decisions. Financial plan Once it is clear how much money is needed and what it is going to spent trying to achieve, all of this must be brought into relation with the company s financial reality. It must be seen the amount of working capital and if it is necessary to seek additional financing, and also the payout policy must be established. One of the key aspects for the success of this type of venture is the compatibility and the shared characteristics. Two companies with comparable sizes and cultures and similar management methods have a much greater chance of working well together than a large multinational and a small family company

26 Licensing A licensing agreement is one that authorizes a foreign company to manufacture a product, transferring it all of the rights necessary to do so. In this type of arrangement there is the role of the licensor (who grants the licence) and the licensee (who receives it). The licensee will take it upon itself to manufacture the products in accordance with the authorizations received and will have to sell them it the designated areas. When is this option a good idea? This is a good solution when a company has a product with much potential but its preference is towards not taking the risk to enter directly in other countries. It is especially appropriate for products that entail special risks. This is a situation that could arise if the destination country has legislation that is restrictive towards foreign investment, or if there are significant customs barriers or very high transport costs due to long distances. Franchising International franchising is the same idea of what occurs at a national level. Franchising is the right a firm acquires from another firm that allows to sell a good or service, under the name of a specific firm. It consists of the transfer of a product, its branding and its sales management to a manager or company, which, in the case we are looking at here, would be based abroad

27 The party transferring the licence is the franchiser while the party receiving it is the franchisee. When is this option a good idea? This is a usual way for establishing business abroad, and clearly has great advantages. The franchiser will obtain income directly from their foreign expansion (even before the points of sale are operational), while the franchisee has the benefit of running a business with a brand and procedures that have already been tested successfully already. What are the disadvantages? Disadvantages include the fact that franchiser must keep a very close eye on the sales people in order to avoid transferring its rights to a party that might end up causing it damage. Meanwhile, the franchisee has the disadvantage of high investment costs that are typically required to set up this kind of business. Appendix 4 shows some types of franchise in detail The decision to set up an establishment abroad In a standard internationalization process, the steps described above are the first to be carried out. And if the company already has a certain level of experience abroad and is working in different countries, it would be normal for it to think about the opportunity of a permanent presence in another country, especially in whichever countries offer the best business outlook. Although this is something to be studied in greater detail later on, the main differences between the two types of presence abroad are the level of commitment and the risks inherent in each option. A permanent establishment requires a long-term investment, which will pay off over an extended period of time, therefore entailing a commitment to remain in the destination country for a greater length of time

28 This is a key decision undertaking of great consequence for the future of the company. It must come as a result of a deep study that weighs up some of the main advantages to be had from the foreign establishment, in relation with the ability to compete with domestic companies in that market. Obtaining advantages in production A relocation of manufacturing facilities is often carried out for cost reasons. Sometimes it is because the new production centre is closer to the sources from which the raw materials are obtained, but frequently it is the labour cost that ends up being the key issue. Being closer to the customer In certain business, companies that manage to situate themselves closer to their customers in order to deliver the product faster (or to provide a higher quality of service) can obtain a competitive advantage. Increasing production needs If a company needs to increase its production capacity, one option it may consider is to go abroad. This may be beneficial in terms of logistics, costs or other important departments of the company. Better control over sales Being closer to the customer makes it easier to have a greater degree of control over all of the sales process. This includes prices and negotiation as well as communications with the market. Appendix 5 presents a diagram with the three main possibilities available to companies for obtaining a presence abroad. In order of investment made, from less to more, these possibilities are as follows: sales branch, sales subsidiary and production subsidiary

29 Sales branch If the company wants just to gain presence in a foreign market, this would be the way. It is an extension of the parent company but without legal capacity or the ability to close the deals by itself. The structure tend to be minimal. Very often it is a small office with staff limited to sales workforce and perhaps a small amount of administrative work. It is comparable to having a commercial agent as part of the company s staff with an office to receive and meet with customers. The office will usually have a limited decision-making capacity, and basically acts upon the orders it receives from the parent company. Its administrative tasks may include the reception of purchaising orders and managing documentation in coordination with the headquarters. When is this option a good idea? A commercial delegation is a good way of having your ear to the ground in one country. A commercial delegation enables a company to have deep knowledge of the market, to strengthen its relationships with its customers there, to gain access to further customers (who may feel more comfortable working with a company that has an establishment in the area) and finally to assess whether it would make sense to set up a subsidiary in that country Sales subsidiary This case involves an establishment that has its own business name and legal entity. Although it remains completely under the control of the parent company, it acts in its own name and is responsible for its

30 operational risks. It will purchase the products from the parent company, but will sell them in its market independently. When is this option a good idea? The main reason for establishing a commercial subsidiary is to benefit from the local knowledge that can be gained and the direct relationship with the market. If a sales delegation gives customers the idea of presence, then with a subsidiary they will see an even greater commitment from the foreign company. It is worthy of note that in many cases a large proportion of the staff employed by this type of company are from the host country, helping the firm to gain a better connection with the new market. All of this leads to better knowledge of the destination country s regulations and of the usual business practices to be expected there. In terms of logistics and administration, this work should be simplified for a company owning a subsidiary, as the subsidiary would normally assume responsibility for many of the tasks that would usually done by the parent company. The subsidiary should perform its accounting, reception of purchase orders and execute them at the corresponding time. In other words, they perform all the standard work carried out by any company. For the parent company of the subsidiary, it becomes something similar to a distributor, with its corresponding payment cycles and operations. As mentioned previously, a subsidiary entails a larger initial outlay, and there are other implications related to the fact that it is a firmer undertaking. This means that the decision over where to establish the subsidiary may be considered at greater length. Among others, it is important to take the following aspects into account

31 Sales matters Logistical matters Legal matters Having a ground presence in the country, it will be most logical to be close to the main customers and the most populous areas. It is also true that, depending on the country, there are some population concentrations that relate to sectors and do not necessarily coincide with the country s leading cities. In any case, the main cities are first option for companies looking to set up an establishment. Another important aspect for determining where to locate the subsidiary is its connections. This is not only so that products can be transported faster and more safely, but also to account for the fact that executives will frequently have to travel and from that place. The closeness to a country s economic free zones is also influential in the decision, as it may lead to significant cost savings. Not all countries have one uniform legislation for all of their territory. Sometimes there are incentives to develop certain areas, or in some cases the opposite may be true, with areas that have special protection, clearly discouraging companies from setting up there Production subsidiary This is the highest level of involvement a company can have in a foreign country. It may involve the creation of a centre for the complete manufacture of a whole range of products, or just a part of it (a line of products). This decision ties the company to a large investment, and it is not simply a case of having to think carefully about it, but of knowing that once the investment has been made, it will be very difficult to change if problems arise. When is this option a good idea? Although this decision can be taken by any kind of company, it is one usually taken by companies that have a great turnover volume and extensive experience abroad. There are various possible reasons why a company may want to set up a production centre abroad. One factor that is influential very often is related with cost savings. This may be because overall labour costs are lower or perhaps because the economic incentives for companies to

32 set up there are significant. Another common possibility is that production centres are built in order to be closer to key customers. If two of these reasons apply at the same time, it will be of great interest to foreign investors (as can be seen in China). In this type of scenario there are different ways to enter into the country, three of which are now highlighted. Create a new company This has the advantage of adapting the structure created to the specific needs of the organization. This can help to match the investment forecasted to the amount that will actually be spent. One disadvantage is having to start from scratch, with the cost in time and training that this entails. Purchase of an existing company This involves trying to find a company to buy that is in the desired sector and has the size and other characteristics sought. It is a very fast way of entering the market, achieving a sales volume in the foreign country as of day one. Disadvantages include the potential cultural differences that may exist and the possibility of needing to restructure the company. Another issue is the price that has to be paid for the company, and whether it is proportional to the benefits expected for the buyer. Joint venture This is an option that was discussed previously, which combines the creation of a new company with an association with an existing one. Although all of these processes are complex and expensive, there are consultants specialized in these types of project. ICEX (the Spanish institute for overseas trade) has a tool that simulates the costs of establishing a firm abroad, with an interactive function that lets you calculate various aspects (legal, fiscal, corporate, etc.) for every country market. This may be very useful for making comparisons between different countries when weighing up the alternatives. Appendix 6 has a diagram summarising the main activities to perform in this kind of process

33 Show what you know Which of the following cooperative undertaking agreements is most appropriate in the case of a product with strong potential but no desire to take the risk of direct entry into a foreign market? a. Licensing b. Franchising c. Joint venture d. Piggyback Correct answer: a

34 5. FREIXENET S INTERNATIONALIZATION PROCESS Freixenet has extensive experience in foreign markets, in which it has established itself in different ways. History of the group Freixenet is a company with roots in Casa Sala, founded in 1861 by Francesc Sala in Sant Sadurní d Anoia. It was the marriage of his granddaughter Dolors Sala to Pere Ferré that led to the creation of the company Freixenet as it is known today, this event happening in The company always had its eye on foreign markets, having faith in them for its growth and the promotion of its product. In terms of strategy, the defining change occurred in the 1970s when the company decided to prioritize export sales in preference over competing in the domestic market. Route into the international market Freixenet has extensive experience in foreign markets, in which it has established itself in different ways, depending on the country. United States Freixenet s presence in the USA goes back to the 1970s when it signed a contract with a representative in New Jersey, Frank M.Haley, who had exclusive rights to sell its product around the whole country. However, it was not a successful strategy, the USA was too large to be managed to just one source of distribution. Later it went on to expand its range of distributors to one in each state. Although sales grew, they did not do so at the desired speed, so the firm decided to create a subsidiary, Freixenet USA Inc. This then became a marketing company that provided support to around fifty importer-distributors. China Early in 1989 Freixenet signed a deal with Chinese corporation Chang Yu Pioneer to work together on the production of a type of cava. They created a joint venture

35 for the production of this cava to be sold in China and to sell their standard cava in various other countries. The initiative failed. Later on another attempt was made at this market with the creation of the subsidiary Freixenet Far East, in Hong Kong. Japan However, in Japan the option was to work with the largest distributor in the country, Nihon Shurui Hanbai, which obtained exclusive rights for the distribution of Freixenet s products. Venezuela Freixenet has also signed some contracts with a role that is the opposite to its usual business. For example, it committed to distributing the rum products of Venezuelan group Santa Teresa, making the most of its existing distribution network. Germany The German market has been really important to Freixenet for decades. However, getting there was neither fast nor straightforward. Initially in the 1980s it created a subsidiary, but sales did not really take off until it signed an agreement with distributor Eckes in the 1990s. As shown above, in the case of Freixenet a multitude of different decisions were taken in order to approach the international market. As shown in the following tables, there has been a wide range of contract types. Table 1. Freixenet subsidiaries 1973 Freixenet (DWS), Ltd. England 1980 Freixenet USA 1984 Freixenet Alemania GmbH Freixenet México 1986 Freixenet Pacífic 1989 Freixenet Atlantic 1990 Freixenet France 1991 Freixenet Japan 1992 Freixenet Australasia 1993 Freixenet Far East

36 1994 Freixenet Moscú 1996 Freixenet Iberoamérica Freixenet Canada Table 2. Freixenet growth Year Country Partner Subsidiary 1933 United States of America Own plant 1960 United Kingdom 1961 United States of America Direct Wine Suppliers Frank. M. Harley Distribution contract Distribution contract 1973 United Kingdom 1980 United States of America Freixenet (DWS), Ltd. England Freixenet USA Inc. Marketing co Germany Freixenet GmbH Durscon Nort Europe Marketing co Mexico Freixenet México Production subsidiary 1984 Spain Domeq Brand creation (Lembey) 1984 Germany Henkell Troken Investee co. (Don Cristobal) 1985 United States of America Freixenet Sonoma Champagne Cavas Production subsidiary 1985 France Henri Abelé Purchasing cavas 1985 United States of America 21 Brands (owner Paul Cheheau) 1986 United States of America 1989 United States of America Freixenet Pacífic Freixenet Atlantic 1989 Austria Schulumberger Freixenet Austria Joint venture 1990 France Freixenet France 1991 Japan Freixenet Japan 1992 Australia Freixenet Australia 1992 Hong Kong Freixenet Far East 1993 Japan Nihon Shurui Hanbai Distribution contract 1994 Russia Freixenet Moscú 1995 Germany Eckes Distribution contract

37 Year Country Partner Subsidiary 1996 Argentina Freixenet Iberoamérica 1996 Canada Freixenet Canada 1996 Chile Viña Tarapacá Production contract 1996 Venezuela Santa Teresa Distribution contract Show what you know In which country did Freixenet choose to distribute its products with the largest distributor of alcohol in the country? a. USA b. China c. Japan d. Venezuela Correct answer: c

38 6. THE MANGO GROUP THE INTERNATIONALIZATION OF FASHION The Mango group is currently the second largest exporter of textiles, second only to the Inditex group, and its ownership is 100% Spanish. History of the group Mango s story is very well-known. Isak Andic and his brother, the owners of the group, were born in Istanbul but moved to live in Barcelona when they were teenagers. While they were at secondary school they tried earning themselves some extra money selling shirts they imported from India and other parts of Asia to people they knew. With a bit of experience in sales under their belt, they decided to open their first shop on Passeig de Gràcia, Barcelona, in This was a massive success and just a year later they already had five points of sale. Route into the international market Mango s international expansion began in 1992, having already established a successful business model in Spain, and started to gain recognition. It first attempt abroad was to one of the countries closest to its headquarters, Portugal. Since then, openings of its shops have continued unendingly. According to its 2012 data the group had locations in 109 countries and a total of close to 2,600 shops. In its sales figure of almost 1.7 billion euros, 84% was from foreign countries. Its model for international expansion has been based almost exclusively on granting franchises in the different countries. This allowed it greater room for manoeuvre as it required less investment

39 Furthermore, if the brand was not successful in one area, the losses were much less than if it had established its own shops and had to close them down. It is clear that one of the keys to this model is the certainty that the brand worked well in most countries, which attracted the interest of further investors looking to be franchisees. Of course, there were some cases where it was not immediately successful or not the right move. For example, it first entered the market in Argentina in 1999 with its own shops. However, it decided to pull out in 2003 due to the low profitability of the shops and the instability of the Argentinian peso. In fact, if you look at the 2015 data you can see that last year it was present in 105 countries. That is to say that it has pulled out of some countries: Brazil, Slovenia, Monaco, Montenegro and Bulgaria. There are a number of reasons for pulling out, for example disagreements with local partners or administrative complications. The first of these examples happened in Monaco and the second in Brazil. According to newspaper Cinco Días, the decision for this latter case was taken because of the country s administrative difficulties and its high import taxes. In cases such as Slovenia and Montenegro it maintains a presence through e-commerce. On the other hand, the biggest country for Mango is the United States of America, where it has 551 shops. In 2015 Spain was second with 331 shops. Next in order in this list were France, Russia and Germany. Table 1. Number of shops per country Country Own shops Franchises Total Albania Algeria Andorra Argentina Armenia Aruba

40 Country Own shops Franchises Total Australia Austria Azerbaijan Bahrain Belarus Belgium Bermuda Bosnia and Herzegovina Brazil Bulgaria Cambodia Cameroon Canada Chile Colombia Costa Rica Croatia Cuba Cyprus Czech Republic Denmark Dominican Republic Ecuador Egypt El Salvador Estonia Finland France Georgia Germany Gibraltar (UK) Greece Guatemala Honduras Hong Kong (China)

41 Country Own shops Franchises Total Hungary India Indonesia Iran Iraq Ireland Israel Italy Ivory Coast Japan Jordan Kazakhstan Kosovo Kuwait Kyrgyzstan Latvia Lebanon Libya Lithuania Luxembourg Macau (China) Macedonia Malasia Malta Mexico Moldavia Monaco Montenegro Morocco Myanmar Netherlands Netherlands Antilles Nigeria Norway Oman Pakistan Panama

42 Country Own shops Franchises Total Paraguay People s Republic of China Peru Philippines Poland Portugal Qatar Republic of Benin Republic of Mauritius Romania Russia Saudi Arabia Senegal Serbia Singapore Slovakia Slovenia South Africa South Korea Spain Sri Lanka Sweden Switzerland Syria Taiwan Thailand Tunisia Turkey Ukraine United Arab Emirates United Kingdom United States of America Uzbekistan Venezuela Vietnam TOTAL 902 1,696 2,

43 Chart 1. Distribution of turnover 2012 EUROS Spain Rest of the EU Rest of the world Turnover net amount Chart 2. Internationalization process by countries and years

44 Chart 3. Evolution of the number of countries with a Mango presence Show what you know Which expansion model was chosen by Mango? a. Licensing b. Franchising c. Joint venture d. Piggyback Correct answer: b

45 7. APPENDICES Appendix 1. SWOT analysis example Appendix 2. Different types of export sales > Direct export > Direct sales to final customers > Sales to major retailers > Sales online > Indirect export > Commercial agent > Distributor/importer/retailer > Trading company > Cooperative undertaking agreements > Piggyback > Joint venture

46 > Licensing > Franchising > Establishment > Sales delegation > Sales subsidiary > Production subsidiary Appendix 3. The differences between commercial agents and distributors Type of activity Size of the business Risk level Remuneration Control of the market Information Services Communication Level of commitment Agent Works for the company externally, not on the payroll. Self-employed worker, not very structured. The agent does not take responsibility for operational risks, as they do not buy the goods. Commissions on the sales completed (expenses refunded in certain cases). Less the exporter knows and deals with customers directly. The agent must provide the exporter with detailed information on their market. Generally they are not able to manage the operational aspects of the foreign trade. No influence in the exporter s decisions regarding communications. Low short-term relationship to test the market and see what possibilities it holds. Distributor Works as an independent company. Commercial company with a developed structure. Takes on operational risks, making a forward transaction of the goods. Sales margin between the purchase and selling prices. Greater the customers belong to the distributor, not the exporter. They may sometimes keep the most valuable information on their market and customers for themselves. They have means to carry out each stage of the export process (transport, storage, distribution, after-sales). Active participation in the communication strategies and actions. High intention to establish a long-term relationship that is stable and beneficial for both parties

47 Appendix 4. Types of international franchises Industrial franchise (manufacture and sales of products) The name of the product and the know-how needed to manufacture it are transferred. In addition, basic ingredients or components to manufacture the product may be supplied, ensuring some control over the quantity and quality of the goods produced. One example would be the restaurant industry. Commercial franchise (sales of products) The franchiser supplies the products to the franchisees and also provides them with commercial know-how, merchandising, advertising material, etc. The franchisees manage the point of sale and, unless there is an agreement to the contrary, commit to only selling the franchiser s products. This is what happens most often in the textile sector. Services franchise The franchiser transfers know-how regarding the provision of services. This usually requires a standardising of the image and the fittings and furniture, leading to an import of products (furniture, signs) from the franchiser s country of origin. One example is that of dry cleaning franchises. Master franchise This is the most common way to set up franchises in far-off countries in which the selection of franchisees and control over the sales network would be difficult and costly for the franchiser. It involves granting a company known as the master franchise the operational rights within a defined territory, normally a country or group of neighbouring countries. These rights are in turn granted by the master franchise to subfranchises, maintaining the territorial exclusivity. The master franchise often withholds the operation rights for certain points of sale in the best locations. Desplegable 5: Shop-in-shop franchise The objective for this type of franchise is to have a presence in department stores and shopping centres in a country s main urban areas. Stands or sales areas must be designed that convey the same image across the network. This distribution method is compatible with a network of shops owned by the franchisee, but it should offer a product range that is different, or control the retail price in such a way that no conflicts arise between the two channels. This is used most prominently in sales of high-end footwear and textiles products and luxury items

48 Appendix 5. Different options for a presence abroad Appendix 6. Process of establishing a business abroad Stage 1: Creating the project Selecting a location Evaluating technical, human and commercial needs Estimating financial resources and sources of financing Identifying and contacting potential partners Analysing the fiscal impact of the operations Choosing the right legal form and drafting the statutes Identifying institutions and programmes that offer support (locally, in the parent company country, and multinational bodies)