Step 1. Estimate Future Revenue

Revenue – Start by calculating the profits you anticipate in the new market. Begin by determining the size of the market. In particular, research figures of equivalent products, if any, and estimate the number of prospective customers deciding on the portion of the market niche you seek to net. You may be lucky enough to claim the entire market share, but don’t overestimate your initial success. ABC Industries will want to multiply its estimate by a price the market can tolerate, taking into consideration the prospect of domestic and international competitors, landed cost, respectable profit, and converting this price into its own currency.

ABC Industries anticipates the following pricing and demand for its products (see Figure 2-1):

• Fighter Aircraft: Sale price of $350,000 per plane; projected demand of 100 units this year.

• Commercial Aircraft: Sale price of $200,000 per box car; projected demand of 50 units this year.

• Helicopters: Sale price of $15,000 per car; projected demand of 1,000 units this year.

Figure 2-1. Revenue Calculation

Step 2. Estimate Your Variable Costs

Variable Costs are those monthly costs to you of the goods or services you’ll sell as part of achieving your sales estimate. They’re called variable, or sometimes incremental, because they go up or down depending on the volume of products or services you produce or sell (see Figure 2-2). They commonly include these:

• Direct materials – charges to expense when the associated products are sold.

• Sales commissions – charges an international representative earns when sales transactions are completed.

• Billable labor - charges to expense when the associated sales transactions are completed.

• Labor – costs incurred for employee labor based on the number of units produced.

• Tariffs – costs charged by a foreign government applied to imported goods.

• Packing - costs incurred to ensure delivery arrives in tact for customer use.

• Shipping – depending on the Incoterms of sale you negotiate with your customer for costs incurred by freight forwarders and actual transportation expense incurred in delivering the product.

Figure 2-2. Variable Expense Calculation

Step 3. Estimate Your Fixed Costs

Fixed costs are business expenses that do not depend on the level of goods and services you offer. Initial operating costs distinguish international versus domestic markets. Researching the market will consume staff time, if you don’t outsource market research. Research costs include those costs you will incur in uncovering regulatory/legal issues; cultural behavior; translation; and finding the in-country assistance you might require, such as representation. If you elect to manufacture product in-country, you’ll need to also estimate and include the cost of assets and their operation associated with that effort (see Figure 2-3).

Figure 2-3. Fixed Expense Calculation

These you will subtract from your price as well (see Figure 2-4).

Figure 2-4. Profit Potential Calculation

Step 4. Calculate Your Gross Profit Margin

It’s also useful to know your gross profit margin. Gross profit margin measures the difference between the costs of producing a product or providing a service and what you’re selling it for. In short, it lets you know how profitable your products and services are.

To get your profit margin, divide your estimated average monthly gross profit by your estimated monthly sales. Generating this calculation is beyond the scope of this illustration. What’s a good profit margin? The answer varies across industries and your own requirements. Without looking at the costs of a company’s overhead, such as marketing and administration, profit margins don’t give the whole picture of a company’s profitability. So it is worth examining this aspect of profitability as well.

Of course, the preceding figures are fictitious, but they do depict the type of analysis you and your firm need to thoroughly conduct before launching into foreign markets. Given these figures, one might question whether or not your firm should expand to international markets. Realize expanding into international markets can mean positive growth for your company and a hedge against economic downturns in your home marketplace, providing your market research warrants the effort and expense involved in taking that step.

Exporting

Exporting, or selling products made in one’s own country for use or resale in other countries, is normally subject to few restrictions for exports of most ordinary trade goods when they are exported under a U.S. Department of Commerce “general export license”; however, some goods are subject to export restrictions especially when considering the following:

• Products can potentially have military use or dual use (commercial [civilian] and military). Confer with The Bureau of Industry and Security^v of the U.S. Department of Commerce to whether or not your product is exportable to eliminate any uncertainty.

• The Bureau of Industry and Security of the U.S. Department of Commerce website “Where are you Exporting”^vi lists countries for which there are product export restrictions. You may violate export restrictions by selling a product to a buyer that you know, or should know, intends to re-export the product to a country to which direct exports from the United States are prohibited.

• Export sales to some purchasers may be restricted. Consult the “do not sell” lists maintained by the Bureau of Industry and Security of the U.S. Department of Commerce (“Who Will Receive Your Item”)^vii and by the Office of Foreign Assets Control of the United States Treasury Department.^viii Under U.S. law you have an affirmative obligation to “know your customer,” including the ultimate buyer or end user if your customer re-exports the product(s) you sold him. You will not be able to plead ignorance, if your customer sells your products to restricted purchasers and you knew or should have known that this was your customer’s intention.

• Be clear. It is possible to unconsciously make a prohibited export of technology “embedded” in your product’s controls. And you may be “deemed” to export technology merely by giving individuals from a foreign country access, in the United States, to that technology by a variety of means (data-fax, telephone, one-on-one meetings – sufficient to enable those individuals to take that technology back home with them).

• Retain a reputable freight forwarder to ensure your company complies with the laws and regulations that govern exports. Retain an export control/compliance specialist as well to ensure you avoid unconsciously making a prohibited export.

Contracts for the Sale of Goods

The following issues, among others, should be considered in international contracts for the sale or purchase of goods:

Payment Mechanisms for financing exports and imports have evolved over the centuries in response to a problem that can be particularly acute in international trade: the lack of trust that exists when one must put faith in a stranger. That said, “Any sale is a gift until you have been paid!” This is especially true for international transactions where the buyer and seller could be 12,000 miles or more away. Therefore, be sure to undertake proper due diligence when qualifying your customer. While it is prudent to make use of the various credit reporting companies active in your customer’s country, you should also ask for trade references, especially for other domestic firms that you could easily contact.

Currency Exchange Risk arises from the possibility that an unexpected change in exchange rates will alter the home currency value of the payment both upward and downward. To avoid this prospect it is best to propose and sell in your home country currency, preferably one that is heavily traded in financial markets such as the U.S. dollar. If the specifics of your transaction disallow quoting and selling in your domestic currency, it is best to consider hedging. Commercial banks and regulated foreign exchange brokers^ix are among the best foreign exchange service providers offering a number of techniques for managing exchange rate exposure.

Terms of Sale. In any sales agreement, it is important that there is a common understanding of the delivery terms since confusion over their meaning can result in a lost sale or financial loss, so YOU, as the exporter, must know the terms before preparing a quotation. A complete list of important International Commercial Terms (“Incoterms”), which are internationally recognized standard terms of trade used in sales contracts, are detailed in Incoterms 2010, issued by the International Chamber of Commerce.^x Incoterms are used to make sure the buyer and seller each know which of the two parties is responsible for transporting goods sold, including insurance, taxes and duties, the locations at which the goods should be picked up and transported, and which of the parties is responsible for the goods sold at each step during their delivery.

Dispute Resolution. Every agreement for the sale or purchase of goods, but especially agreements dealing with transnational transactions, should prescribe how disputes will be handled: whether by arbitration or court proceeding; what law will govern; and where the arbitration or court proceeding will take place. Don’t dismiss these provisions as an unacceptable burden may be imposed on you by a foreign language trial in a distant continent under unfamiliar law before a judge from your customer’s home country.

If your contract for the sale or purchase of goods is made by use of a standard form of quotation, purchase order, or acceptance, the terms and conditions of sale or purchase printed on that form should be reviewed by legal counsel for applicability in foreign markets.

Exporting

Most companies start their international expansion with exporting, which for many small businesses is the sole alternative for selling goods in foreign markets and, with more experience, switching to another mode of market entry. Companies that plan to export have a choice between three broad options: indirect, cooperative, and direct exporting. Indirect exporting entails outsourcing all of the export steps to a third-party trading company or an export management company. These intermediaries can get your product into an international market with minimal risk, but leave you and your firm with a lot less product control over the brand and how it is marketed.

With cooperative exporting, your firm enters into an agreement with either a local or foreign company in which the partner agrees to use its distribution network to sell your goods using the resources (local cultural and marketing knowledge and overseas distribution network of another company [local or foreign]) for selling its goods in the foreign market. Selecting a partner requires due diligence and entrusting the partner with your product and brand. You will find governments in emerging countries strongly favor your establishing cooperative exporting agreements with in-country partners. Satisfying this government requirement requires your establishing criteria, locating a suitable partner that satisfies your marketing criteria, and negotiating a distributor or representative agreement. In that event, seek the assistance and advice of local and in-country legal counsel.

Direct exporting entails establishing your own internal export organization relying on an in-country representative, a distributor, or your own in-country resources. In selecting an in-country representative, the intermediary does not take product title and you, as the manufacturer, assume both the risk of loss to product and profit. A distributor, on the other hand, takes the title and full responsibility for profit or loss after taking title to product for resale, but only according to how you manage it through a distributor agreement and back-up plan, should it not perform to your satisfaction. As a direct exporter, you have far more control and greater sales and profit potential allowing you to build up a foreign network. You also incur the cost of performing the exporting tasks—choosing the target market, identifying and selecting a representative in the foreign market, and performing scores of logistics functions that consume company resources and capital. Regardless of the alternative you choose, there is no escaping responsibility for product warranty and liability just as would in your home market.

Turn-key Projects

Turn-key projects^xii typically involve government agencies of host country clients contracting for the design, construction, and testing of special large scale process technologies or productions facilities, for example, power plants, telecommunications, and chemical/petrochemical facilities. Efforts such as these are likely beyond the capability of small- to medium-sized businesses and are more likely performed by large engineering or chemical/petrochemical construction companies, given the magnitude of the projects they undertake. You need not rule out this prospect as many small- to medium-sized firms become subcontractors and suppliers^xiii on turn-key projects.

Large engineering or chemical/petrochemical construction companies typically handle all the details for the host country client turning the operational project or new plant/facility over to the host country client on project completion. Turn-key projects, for those contractors engaged in this mode of market entry, have the potential of creating potential industrial competitors. Turn-key projects are disadvantageous to firms that want to establish a long-term presence in a host country when their main competitive advantage is the knowledge and expertise they sell to foreign governments and customers.

Licensing

You can also penetrate foreign markets via licensing,^xiv a contractual transaction where the firm—the licensor—offers some proprietary assets or intellectual property to a foreign company—the licensee—in exchange for royalty fees. Assets that can be part of a license agreement include trademarks, technology expertise, production processes, and patents. Royalty rates range between one-eighth of 1 and 15% of sales revenue the licensee generates. Licensing appeals to small companies that lack the resources to invest in foreign facilities. Companies use licensing to lower their exposure to political or economic instabilities in foreign markets. In high-tech industries, rapid penetration of global markets allows the licensor to define the leading technology standard and to rapidly amortize research and development expenditures. Your tasks in establishing a license agreement are vetting the prospective licensee, defining the licensed territory [country/countries, region(s)], the term of the agreement [year(s)] with terms that enable you to monitor/collecting royalties from the sale of the product identified in periodic sales reports, and conducting audits of the licensee performed by mutually acceptable sources. You will need legal assistance in preparing the license agreement. The risk in transferring your company’s intellectual property under a license agreement is the prospect of creating a competitor within the licensed territory. So be judicious about the extent of intellectual property you are willing to provide a licensee.

Small- to medium-sized businesses, as licensors,^xv may reach agreement with another company, the licensee, allowing that company to produce and market one of its products, apply its brand name, or use its patented technology. Thus, licensing can enable a small business to support its research and development costs, increase the visibility of the firm and its products in the marketplaces, spread its marketing costs across more items, and add volume to its manufacturing operations. To provide a better understanding of licensing arrangements, global retail sales of licensed merchandise grew 2.7%—or over $4 billion—in 2016 to reach $167.5 billion, according to The Licensing Letter’s Annual Licensing Business Survey.^xvi The major source of growth were brands from the United States and Canada, which now make up almost 65% of the global market for licensed goods compared to European-based properties that account for 15.5% of total share. Any product appearing on the Internet is dominating the world stage as globalization increases its impact on global consumption and manufacturing. With a 21.4% share, corporate trademarks/brands grew almost reaching $36 billion in licensed retail sales. The merchandise categories experiencing the biggest increases were in home-related goods, food, and beverages (see Figure 2-5), but one should also consider other product categories such as the following:

• Accessories

• Apparel

• Consumer Electronics

• Footwear

• Furniture and Home Furnishings

• Gifts/Novelties

• Health and Beauty Products

• Infant Products

• Pet Products

• Sporting Goods

• Toys and Games

• Video Games and Software

• Trademarks/Brands

Figure 2-5. Retail Sales of Licensed Merchandise

Take the real-life licensing case example of teen specialty retailer Aéropostale’s^xvii aggressive effort to turn its sinking sales around through retail and product licensing agreements with two of the largest and strongest retailers in Indonesia with PT Mitra Adiperkasa TBK (MAP) and in India with Arvind Lifestyle Brands Limited after the retailer successfully launched its brand in the Philippines and Singapore. The mall-based specialty retailer of casual apparel is now positioned to capitalize on strong income growth prospects while its partners are largely assuming the cost of operations. Above and beyond those countries, its CEO anticipated ending 2015 with over 300 locations across 17 countries.

Given the potential profitability and business expansion that the entry mode of licensing can offer, your small business may be weighing the choice of approach between manufacturing in-house or licensed production. Among the factors you should consider are the product, your firm’s core capabilities versus those of a prospective licensee. Assessing your company’s unique skills and abilities may lead to licensing one or more specific manufacturing processes over manufacturing and marketing the end product. If you conclude that manufacturing in-house is the better, more profitable approach, it is best to proceed with that alternative; otherwise a smarter approach is to find a qualified licensing partner. This consideration equally applies to licensing non-core technologies and may even lead to marketplace opportunities and advantages you never imagined.

Franchising

Scores of service industry companies, like McDonald’s^®, Kentucky Fried Chicken (KFC^®), BrightStar (senior) Care^®, Mr. Handyman^®, and Build-A-Bear Workshop^®, use franchising^xviii to capture income opportunities in the global marketplace. This key market entry option exports the American dream.^xix By creating a recipe of know-how and methods, franchising allows your franchisee to take control of its financial futures and success. As a franchisor, you grant the franchisee the right to use your business concept and trade name in exchange for royalties. The franchise “package” might include your marketing plan, operating manuals, standards, training, and quality monitoring, much like what a franchise package would include in your home market. You gain the benefit of capitalizing on a winning business formula in expanding overseas with a minimum investment, limiting political risk, and capitalizing on the local franchisees’ knowledge of the local marketplace, customers, and laws. Further, your franchisee’s profits are directly tied to its efforts; franchisees are highly motivated. A major concern is the lack of control over the franchisee’s operations so your franchise agreement must include rights to audit its operations and income. Cultural hurdles you are unaware of can also create problems to accomplishing the audit and collection of income. You don’t want to “kill the goose that lays the golden eggs” so to speak.

Real-life examples for franchising include Dunkin’ Donuts^® and Baskin-Robbins^®. Since 1950, Dunkin’ Donuts has grown from a single coffee shop in the Boston area to one of the world’s largest coffee and baked goods chains. Over 7,700 locations in nearly 50 countries later, it seeks even more franchise candidates to grow all around the globe.^xx Since 1945 Baskin-Robbins has developed into the world’s largest ice cream specialty shops with nearly 7,700 locations in almost 50 countries.^xxi Of course, international franchising opportunities are not limited to food and exist for a multitude of opportunities in a variety of industries, for example, multi-format signage (Fast Signs^®xxii), fitness training (F-45 Training^®xxiii), and executive search (CNA International^®,^xxiv).^xxv By growing a strong presence in a market where there is no, or limited competition, a franchise concept establishes market dominance.^xxvi Global Franchise magazine^xxvii identifies franchising market opportunities in India, Myanmar, Cambodia, Malaysia, Hong Kong, mainland China, Indonesia, Japan, Singapore, and Dubai and North Africa.^xxviii Without a doubt, one should enter the franchising market with eyes open realizing that international franchising can be challenging, but nonetheless rewarding. This is a call to investigate and consider the possibilities and parameters a franchise should take into consideration when taking a U.S. franchise brand to other countries. One method would be to examine the EGS, Inc. Franchise Country Ranking tool (Figure 2-6). This tool is updated quarterly. Visit http://​edwardsglobal.​com to view the latest version.

Figure 2-6. EGS, Inc. Franchise Country Ranking (Courtesy of Edwards Global Services, Inc.)

Contract Manufacturing

With contract manufacturing, you arrange for the manufacture of parts or even the entire product in a foreign market. The cost of marketing and distribution is still your responsibility, should you wish to generate sales there. You can obtain significant competitive advantage for labor-intensive production processes by sourcing the product in a low-wage country of your choice. You can achieve tax savings, lower costs on energy, raw materials, and overhead. Subcontracting likely reduces exposure to political and economic risks and is not very demanding on your company resources, thus allowing access to markets that would otherwise be closed. However, contract manufacturing does raise the “nurture-a-future competitor” concern. Because of this risk, you may prefer to make high-value end items or products that involve proprietary design features and technology in-house. Other challenges that you will need to look out for are very low labor productivity and a history of bad labor relations that some low-labor cost countries are infamous for. Monitoring quality and production levels is a must, especially during start-up. When you screen foreign subcontractors, your ideal candidate should be flexible and geared toward just-in-time delivery^xxix (reducing your exposure to any quality issues), be able to meet quality standards and integrate with your business, have a solid financial footing, and have a contingency plan to handle sudden changes in demand.

Joint Venture

For many companies that want to expand their global operations, joint ventures^xxx prove to be the most viable way to enter foreign markets, especially in emerging markets. With a joint venture, your company agrees to share equity and other resources with other partners to establish a new entity in the target country. The partners typically are local companies, but they can also be local government authorities, other foreign companies, or a mixture of local and foreign players. The key issues to consider are ownership, control, the length of the agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Depending on the equity stake, three forms of partnerships can be distinguished: the majority (more than 50% ownership), 50-50, and minority (50% less than ownership) ventures. Huge infrastructure or high-tech projects that demand a large amount of expertise and money often involve foreign and local partners. A major advantage of joint ventures is the return potential. Joint ventures also entail much more control over the operations than most of the previous entry modes discussed so far. There are a number of ways for the company to gain more leverage starting with a majority equity stake; however, government restrictions often rule this out. Companies could deploy expatriates in key line positions thereby controlling financial, marketing, and other critical operations of the venture. Strongly consider each of the following as joint ventures have been known to fail for these reasons. The joint venture agreement must also be drafted to cover every contingency, including dissolution of the joint venture entity the partners create, including the following:

• Reasons to form a joint venture

• Compatibility of any prospective partner

• Joint venture versus strategic alliance

• Identifying the joint venture’s purpose

• Selecting the form of entity

• Implications for existing operators

• Capitalizing the joint venture

• Management issues

• Economic and tax issues

• Restrictive covenants

• Dispute resolution

Wholly Owned Subsidiary

Setting up a wholly owned operation in a new international market offers less of the “quick” advantages of other market entry modes as it involves a time-consuming effort to establish a presence in foreign markets where your business may have little knowledge of the local market. Companies often prefer to enter new markets with 100% ownership and control. Ownership strategies in a foreign market can essentially take two routes: acquisitions, where the company buys up existing companies; or green-field operations that are started from the ground up. As with other entry modes, full ownership entry entails certain benefits to your company but they also carry substantial risks. Wholly owned subsidiaries give your company full control of its operations. It is often the ideal solution for companies that do not want to be saddled with all the risk and anxieties associated with partnerships like those that joint venturing involves. Full ownership means that all the profits go to your company. Presence in-country also entails host country tax liability and the prospect of taxation on re-patriated profits sent home. Fully owned enterprises enable all the investors to manage and control their own processes and tasks in terms of marketing, production, and sourcing decisions. Setting up fully owned subsidiaries also sends a strong commitment signal to the local market. In some markets, China, for example, wholly owned subsidiaries can be erected much faster than joint ventures with local companies that may consume years of negotiations before their final take-off. The latter point is especially important when there are potential advantages of being an early entrant in the target market.

These entry mode alternatives are all viable and there are many factors that need to be taken into consideration such as these:

• Your marketing objectives – volumes you wish to sell, time frame, and coverage of key market segments.

• Resources required to support the level of international business activity you are planning.

• Suitability of a market entry strategy – some countries only allow a restricted level of imports but welcome manufacturing facilities that provide jobs and limit the outflow of foreign exchange. Also, there may not be any qualified distributors or agents to sell and service your product.

• Your appetite for risk.

Your task is to consider the options and their ramifications carefully, both the advantages and disadvantages and then consult with the professionals—attorneys, insurance, logistics professionals, tax, finance, and marketing specialists to ensure your global markets entry approach works to your advantage. It is important to make an informed assessment before launching into a foreign market.