Understanding the implications
Mexico City, July 28, 2019
Andrew L. Davis
The export strategy is an intriguing opportunity for many SMEs (Small and Medium-Sized Enterprises) in emerging economies. Uncharted markets, new business partners waiting to be courted, the intricacies of cultural experiences, understanding new legal and logistical processes; all bode a fascination and even the mysterious for the entrepreneur, used to the relentless humdrum of national business.
Having worked with SMEs on export projects and organized several trade missions, I have found that executives frequently turn cold when they find out that doing business internationally requires much more perspiration than inspiration.
“… doing business internationally requires much more perspiration than inspiration.”Andrew L. Davis
One of the motivations behind organizing trade missions and supporting companies with export consulting is the chance to show a new ray of hope and an opening for growth in the eyes of the entrepreneur. Unfortunately, this should not be confused with a way out of being trapped in a corner. Companies must see internationalization as a logical progression from consolidation in the home market. This way, the risk of a failed initial overseas marketing effort can be offset by stable home sales. Furthermore, the added credit requirements from international payment terms can be endured with the financial stability created from an established home base. Executives will seldom admit it, but too many companies decide to internationalize because it is a last resort, or it seems like a quick solution to slow home revenues.
Necessarily, this brings me to the next point: that internationalization must be compatible with the company’s strategic goals. Clients who have approached our services with a strategy in mind, or companies who have already done some research and planning, logically take the idea more seriously and have a greater chance of success. Those international entrepreneurs who have not thought the process through, however, are normally not willing to take the reins, even when he/she has been presented with an attractive feasibility study. Internationalization needs to be a strategic priority; business managers with good intentions but with vague ideas have only considered the international idea during after-hours over a drink or a coffee.
In practice, this is especially true for agroindustry in the rural areas of Central/Southern Mexico, where managers focus more on technical issues such as production or quality rather than marketing. In metropolitan zones (in the prepared foods industry, for example), companies tend to be more focused on medium and even long-term strategy with clear ideas as to preferred export markets and desired promotional methods. As an illustration, one must always be careful with clients who instruct the consultant to “go out and see what is in the market” in foreign countries; this is a clear sign of a company with an enormous desire to succeed in international business, but with little preparation or confidence in its capabilities, exportable products/services, market knowledge, etc.
Leonard Bernstein, a great orchestral conductor, was once quoted as saying “To achieve great things, two things are needed: a plan, and not quite enough time.” We have already touched on the importance of having the plan, but SMEs all-too-often forget the simple fact that an international plan implies doubling the time commitment already taken up by domestic strategy. This means that skilled human, as well as financial resources, must, of course, be committed. And do not forget commitment itself; the leader must transmit long-term enthusiasm and allegiance to the international cause in order that the whole organization may follow. More than an optional extra, business internationalization must be seen as a priority for all relevant departments: production, marketing, research & development, administration, human resources…not just for the export department.
Many micro businesses have the nasty habit of paying the freelance public accountant extra to “look into” all of the details of export for the business owner. This is a tell-tale recipe for failure, normally meaning that the business leader is not really committed and that there is no real understanding of the time, knowledge, personnel and financial resources necessary for the project.
Always evaluate export markets objectively, and try not to base decisions on trade leads only. Stable internationalization strategies should focus on the attractiveness of markets as a whole, considering such elements as market size/potential, the workings of distribution channels, a thorough competitive analysis, an understanding of pricing to see if one’s product is competitive with the local offerings, and the political/legal/cultural/economic environment of the country.
A commodity trader once told me that he was interested in exporting coffee to the European Union. After doing some grilling, we deduced that the most practical format would be k-cups. The manufacturing process would not be so complicated and roasted ground coffee was readily available as his company was in a coffee industry cluster. Interestingly, he was more interested in the European idea itself than getting the product ready for the market! When we informed the client of the extensive requirements to get the product ready for the European market (packaging, size of capsules, quality standards, etc.), and that the US market would be more practical and easier to penetrate, the client objected, simply because it went against his pet preference for Europe.
Companies should choose a product which is easily exported without severe modifications, and which has no question marks in terms of quality or reputation. For the first time exporters, at times it is best not to be so ambitious and to choose a product which already complies with the necessary requirements demanded by the export market. This is especially true of B2B products, which do not have to worry about so many cultural issues when being prepared for different countries. As an illustration, I remember working with a metalworks and industrial machinery company which was keen to export shell and tube, heat exchangers. The company CEO gave the impression that the company was developing the product and was willing to design the product according to the needs of the client, as well as abide by norms/regulations and generally accepted certifications. He was also interested in the Louisiana/ Oklahoma/ Texas oil refinery industries as market segments. This was all very logical until we found out that the products had already been produced for a domestic client, that the sale had not gone through, and that the inventory had been sitting around in the plant idle for a year! Basically, they were trying to get rid of excess capacity. This was not going to be an acceptable product for potential clients in a highly competitive industry, and if a sale were to materialize, the business relationship would have ended badly. Always make sure the product is exportable and that it is suitable for the client’s needs.
SMEs often forget that successful internationalization strategies require investment in production growth and excess production capacity. As soon as an export order is processed, products are required and pallets of finished products must be available for shipping. Once the exporter fails to meet delivery dates, importers lose interest and will never regain confidence. Remember that the first impression is the last impression. Consequentially, if the first delivery is satisfactory, more and larger orders will be placed, meaning that greater volumes will need to be programmed. A particular client was a producer of craft “torito”, a cocktail from the Mexican State of Veracruz consisting of firewater, milk, tequila, and fruits.
Being an artisan operation, the production of the drink was limited, meaning that sales to local supermarkets in the domestic markets were taking up production capacity. An export order would require further investment in production and more personnel. The company was ill-prepared and for the subsequent four years has been stuck with the combination of an excellent market opportunity in the United States and insufficient funds for exploiting the export opportunity. There are many examples of small artisanal prepared sauce and mole companies which are already actively promoting products in the United States and Europe, with little excess capacity to be able to fulfill export orders when they materialize.
I have witnessed occasions when traders of basic products such as commodities are unwilling to do more than make basic modifications or adjustments to their products for foreign markets when cultural differences dictate otherwise. I once worked with a coffee exporter who dealt in green coffee beans; his goal was to enter the Chinese export market with roasted ground coffee at the retail level. After exploring the Chinese market, we found that the Chinese consumer for coffee in the foodservice distribution channel required a certain roasted quality, very different from that typically prepared by roasters in Mexico, and that market penetration through retail was a distant proposition; instant coffee was still the standard presentation there. The exporter found the need to differentiate the product for a new market for cultural reasons to be a hindrance and decided against dedicating a portion of production to what could have been an excellent market opportunity. Again, the illusion of exporting is outweighed by not wanting to meet the necessary requirements.
Exporting SMEs are faced with more disadvantages in times of economies of scale, business integration, and greater international competition. As more companies look abroad to expand sales, potential buyers become scarcer and suppliers need to pay more attention to differentiating products and creating effective international business strategies. All of this leads to a greater urgency to commit the right combination of attitudes and resources to the job, rather than viewing oversees activity as a mere extension of our domestic operation.
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