Despite common misconceptions, exporting can provide profitable opportunities for businesses of all shapes and sizes. A quick review of trade association websites around the world suggests that exporters tend to experience faster sales growth then their importing counterparts, and are often better positioned to survive fluctuations in their local economies.
However, it’s not uncommon for a company to enter foreign markets due to chasing a sale or lead, instead of strategically selecting markets based on company goals. This often results in company resources and values being misaligned, which ultimately leads to business failure.
The accidental exporter
Consider the following scenario. A sales manager decides to chase an “opportunity” based on a distributor enquiry from a conference in China, or an increase in website hits from the UK. Excited about this opportunity, the sales manager kick-starts a companywide chain-reaction:
- Procurement secures additional components to meet potential new demand.
- The Engineering team redesigns the product for the new market.
- A contract for the first large sale is secured in exchange for cash up front.
- The logistics team researches documentation, licensing, and compliance requirements.
- The sales invoice is quoted in the customer’s currency which is stronger than the company’s local currency at the time, exposing the company to currency risk.
Nine months later the customer finds a new source willing to offer 90-day payment terms at a cheaper rate. Excess inventory builds up, currency fluctuation makes it difficult to offer stable pricing, and there is no luck finding new sales in this market. Management is understandably upset.
How can your company avoid a situation like this?
Start with a solid strategy
To get it right the first time, you must have a business strategy in place that encompasses international trade. Importantly, your strategy must assess whether your current structure can cope with the expansion, and whether management is truly committed to supporting this effort long term.
Ask yourself the following:
Are you exporting in a particular market and don’t know why or how you got there? Time to take a step back and consider whether this move makes sense for your business.
Have sales in a market drastically decreased for no apparent reason? This is not uncommon when a company hasn’t properly researched and planned its market entry.
Is your export strategy draining resources rather than boosting business? It’s highly likely you were unprepared for the additional work and finances required to make this expansion a success.
Are you struggling to mitigate the impact of currency volatility on your business? It’s critical to have a currency hedging strategy in place, to help ensure you can budget and forecast accurately in foreign markets.
Replicate the dynamics of success at home
Your strategy should use your core competencies and values to drive your approach to foreign markets and be maintained throughout the life of your international ventures.
Think about what your current customers buy from you, and the one thing you absolutely must get right in order to successfully deliver this value. Then ask yourself whether this ‘value proposition’ can be replicated in a foreign market.
- What need is your product/service fulfilling?
- What is your competitive advantage or disadvantage in the new market?
- What is the lifecycle of your product or service in this market?
- Does your company’s story resonate and translate in this market?
If you can’t deliver your core competency in your chosen market, perhaps due to regulatory issues or something as simple as selling DVD players in a country where TV sales are low, then you may need to consider a different international opportunity.
Develop your company’s value proposition and determine which market it applies to best. Speak to industry professionals and analyse the exporting potential of your product/service in each market. Often the first market you consider won’t end up being the most viable.
Consider the financial implications your foreign market
Does it make sense to export to this market when you factor in the cost of things like shipping, regulations, tax, product modifications and market research? One of the more challenging aspects of exporting is the impact of foreign currencies on your pricing and budgeting activity.
Currency exchange rates are in constant flux, which can cause unexpected changes in revenues and expenses. The price you set for your goods or services today may not meet your business objectives in two months’ time if the exchange rate has shifted against you. When formulating your export strategy, it’s critical that you factor currency risk into your plans and establish a policy for managing its effects. Your ability to monitor cash flow and budget accordingly will be diminished without a solid currency hedging strategy.
Spend some time thinking about the level of currency risk your business is comfortable accepting, and research which hedging tools* are best suited to meet your needs. Forward contracts are the most common form of FX risk management. They allow you to lock in an exchange rate for a specific date in the future, so you know the cost of a foreign transaction in your local currency. Option contracts allow you to lock in an exchange rate to protect you from unfavourable currency shifts, while allowing you to benefit if the market moves in your favour.
Making local currency payments, or accessing holding balances, can also make up an FX risk management strategy. Ideally you should work with a specialist in this area to help you identify the right tools for your business.
Prepare yourself for export success
Too many companies enter foreign markets only to lose money when they may have been better off investing elsewhere. There is no point entering a new market for the sake of a sale or two, instead your business must conduct the necessary due diligence to understand of the opportunity presents a suitable return on investment.
Management must be committed from the start to ensuring that all global decisions maximize your core competency, and that this new venture will enhance your overall business strategy. Exporting your goods and services can be a great opportunity to expand your horizons, experience new challenges, and most of all grow your business. But take the time to do your homework first.
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* When selecting the right tool for your business it’s important to remember that derivative financial instruments may expose a business to risk if cover is no longer required. These types of financial instruments may be suitable if the business has a high level of understanding and accepts the risks associated with derivative financial instruments that involve foreign exchange and related markets. If your business is not confident about understanding derivative financial instruments, or foreign exchange and related markets, it is strongly suggested you seek independent advice before making the decision to use these instruments.