Don’t depend on everyone else’s answers on exporting. Before taking the big leap, planners need to ask themselves (and their organizations) if they have the answers to some key questions. Then, begin the research and planning to develop a new export market.
The biggest market may not be the best export market for an organization to enter. To succeed in exporting, first answer some questions about the goals and capabilities, and then weigh the market opportunity and risk.
When it comes to examining the opportunities in exporting, Frank Lavin, CEO of Export Now, has strong opinions based on his private sector experience and his service as U.S. Undersecretary of Commerce for International Trade and U.S. Ambassador to the Republic of Singapore (2001 to 2005). At the center of his discussion is the observation for the need to become learning organizations to make the changes necessary to be successful exporters.
His message to small and medium enterprises (SMEs) plays just as well for larger companies looking at new exporting opportunities.
Export awareness is on the rise, Lavin notes, adding that there is a consciousness and awareness of the importance of overseas markets. But, there are two questions any company considering exporting (or expanding its exporting) should ask.
Global Awareness
The first question deals on a macro level: “Where is the world going?”
What defines the world we are operating in, he asks, rhetorically. There are three trends that have unfolded in the last decade, and they affect us all, Lavin continues.
According to Lavin, in the first trend American organizations have added 3 billion new customers through exporting. A pessimist might take the view that the United States has added 3 billion new competitors, he quips, but the point is that in the last 30 years, China has shifted to more of a market economic philosophy. India followed China into the global sphere by deregulating, and the whole Eastern European bloc that had been under the influence of the former Soviet Union has moved very quickly into a market economy.
None of these facts are breaking news, but there are second-order effects that result from these trends taking place in Sub-Saharan Africa, South America and South Asia, he says. The result: the commercial size of the world has doubled in just 30 years.
Lavin describes the second trend as the death of distance. The cost of organizing across boundaries has dropped almost to zero, he points out. Our ability to collaborate or compete with people around the world is open ended.
These factors lead into the third trend, which is the erosion of trade barriers. Lavin explains that when the United States helped establish the General Agreement on Tariffs and Trade in 1947, the United States’ average tariff rate was about 40 percent. Now it is around 4 percent. That same trend has followed in the European Union and in other markets, he continues. It is an enormous change in trade architecture; one that makes it much easier for companies to move among global markets.
“The lesson from globalization is, it’s never been easier,” says Lavin. “It’s never been easier for good news to happen, and it’s never been easier for bad news to happen.”
Self Awareness
With a sense of where the world is going, the next step is one of self awareness. It leads to asking Lavin’s second question: “Where are we going?”
The vertical skills and expertise a company has developed in its domestic market are important and have allowed the company to achieve a level of success, says Lavin. But the organization will need to develop horizontal skills as well – navigation skills, Lavin calls them.
Management needs to be asking, “How do I adapt, learn, grow and apply all that I’ve learned in my home market to a new market,” he continues. Do not abandon the model if the business is working, he says. These are the skills in assembly, manufacturing, distribution, marketing etc. Much of what organizations are doing will likely work in the new market as well, but with necessary changes for that new market.
Avoiding Mistakes
Lavin makes an interesting observation from his early days promoting exporting: there is no correlation between corporate excellence and success in exporting. The most frequent internal problem, he says, was not having a clear idea of where they wanted to go with their goals and motives for exporting.
Being unable to answer the question “Why do you want to do this?” or lack of a consensus answer is often a problem. The organization needs some kind of collective understanding of what it is trying to accomplish. Lavin offers a short list of common reasons companies export. Some want to learn or experiment; others want to diversify their markets or deny market territory to competitors. But, the most common reason companies give for wanting to export is what Lavin abbreviates as MOTS – more of the same.
Put another way, MOTS is described as improving scale. Companies that are doing well in their home markets want more revenue and profit, especially in mature markets; the way to increase scale is MOTS in a new market.
Keep it Simple
Once the decision has been made to go forward into the export market, the biggest stumbling block, says Lavin, is usually country selection. Companies are all upside oriented, he says; they looking at the opportunity. But, organizations must balance that opportunity against costs and risks.
Lavin’s advice: keep it simple. Proximity and similar markets will help reduce both cost and risk. And here, it may be better to forego the largest market for one that is faster and easier to enter. Everyone looks at China because it is the largest, but Canada and Mexico are very large U.S. export markets and they are much easier to enter – not only because of the North American Free Trade Agreement, but also because the business cultures are easier to understand and the trade infrastructure is in place.
Free trade agreements (FTAs), such as those recently signed with Colombia, Panama and South Korea, are good to consider in an export strategy. It is important to understand that with new FTAs there is a “phase-in” period. It can take 10 years for the full agreement to come into force, but there are some front-loaded elements and some that evolve later.
In many countries where a new FTA is put in place, much of the local economy is agriculture based. In that case, the last thing a large population of farmers wants is competition from U.S. produce exports. So, says Lavin, agricultural components of the FTA are likely to be back loaded. On the front end of those agreements are manufactured goods and consumer products.
Pointing to the number of FTAs the United States has in place, Lavin notes that most U.S. exports are going to midtier economies. Taken together, they may account for over 40 percent of the U.S. GDP, but they are still less than 10 percent of the global GDP. That suggests there are plenty of market opportunities in countries where the United States already has an FTA in place. And, with progress on the TransPacific Partnership, this will expand – along with competition.
One of the advantages of exporting to a country where the United States has an FTA (beyond the obvious lack of tariff barriers) is that there will already be other American companies there. That means the trade infrastructure will be in place for a U.S. company to begin exporting.
Part of the “keep it simple” approach includes aligning goals with capabilities. Here, Lavin suggests an incremental business model with feedback mechanisms. Experiment and test the markets and be willing to adjust.
But, before you get there, do your research, says Lavin. Know the costs and risks and understand the trade barriers. Execution is seldom as easy as planning, he warns.
Summarizing, Lavin says, every market is worth something. And, every market is worth something, on a different basis, to every company. Understanding that premise is key to exporting success. The value of a potential export market will be a function of the size of the economy, the local competitors, cultural similarity and other factors. It is important to allocate resources in a manner that correlates with the value of that market to your company. In market selection and market allocation (of resources) weight the opportunity against the costs and risks.
If you are interested in entering the export market, you'll want to check out these related posts:
