Warm up: Selecting foreign markets

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In this training session we’ll take a look at how to plan an analysis of target markets and classify them so we can make an easier and more logical choice.

We should point out first of all that any method or technique used will not exempt the working group from subsequently assessing the data resulting from the analysis within the framework of the company Business Plan. Let’s just say that the market selection method must give an “organized” input into subsequent stages of strategic assessment and always remain open to continual review.

We can identify reactive or proactive inputs to the analysis. The reactive approach is based on previous signs of success of your product: information requests received from potential customers in the area, past sales, competitors’ activities or feedback from existing customers. If you manage to identify trends rather than individual or sporadic events, all the better.

The proactive approach, on the other hand, places an emphasis on analysing factors and indicators that are completely independent of previous performance. Geographical location, macroeconomic data, growth rates for the specific sector, efficiency of the importation channels and the presence of infrastructure, regulations tied to use of the product, etc.

Regardless of your basic strategy, it is important for you to make a first selection of markets. 15-20 target countries that might seem promising for your product.

Using this analytical method will lead immediately to a major benefit: that of encouraging the team to conduct a structured analysis of key factors and get a better knowledge of the strengths and weaknesses of the product and of the company BEFORE entering a market. This will also let you identify and limit risk factors.

We therefore have to identify the relevant indices and enter them in a matrix that enables them to be classified by priority.

Some suggestions:

– Limit the relevant indicators to no more than 10 or 12. These are more than enough to cream off the best candidates and create a ranking of countries;

– Look for the indicators which express the total size of the target market;

– Prefer quantitative indicators. They are precise. Qualitative indicators are more difficult to catalogue and measure;

– Always enter at least one indicator reflecting the import flows into the individual countries;

– Use the same source to extract information about the countries you are analyzing. That way you will avoid distortions in the definitions and measurement of data;

– Always enter an indicator of the complexity of doing business from the standpoint of market entry methods. Especially if you intend to invest directly. Therefore, the legal, political, financial and fiscal aspects, etc.;

– Enter an indicator that expresses the level of tariff and other barriers.

Now you have to attribute a weight to these indicators and convert the data obtained into a score. Depending on your specific business, some indicators will have more weight than others.

– The weight/importance of the indicators can be expressed using a scale from 0 to 100, with 100 being the total of the levels of importance of all the indicators taken into consideration.

– Conversion of data into a score. Use a scale from 1 to 10. Assign 10 points to the country that obtained a value higher than all the others (top indicator). Then calculate as follows:

Country points = (value of each country/value of the top indicator) x 10

Scores of less than 1 point will be rounded up.

Here is an example of a matrix showing a country by country analysis:

 

How to use the results of the matrix.

As said at the beginning, the results of the analysis should serve as a starting point for discussions, further assessment and verification of consistency with the company’s business strategies.

It is important to compare the results obtained with the company’s organizational structure. Availability of personnel to be sent abroad, language skills, financial resources and tangible opportunities.

It is also worth identifying the points of contact among the listed countries. Are there any similarities that can be exploited as a common factor for approaching a group of countries? Some classic examples: countries located within a geographic area or countries which share the same language or are parties to trade agreements. Common strategies can be devised, so that the choice will fall on some countries in the list rather than others.

Note: in this case as well Project Management has a part to play. It is important to plan these activities within the framework of an “Internationalization Project” which explicitly defines the objectives, human and financial resources, responsibilities, breakdown into phases, time frame and costs.

That’s all for this training session!

The next topic will be: Where to get information for our analysis.

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Warm Up: How to catalogue your products

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In this training session we are going to analyze an aspect that may seem to be of a strictly technical-logistical character but can also serve to identify potential markets, complete profit and cost assessments and gauge the competition.

Why should you catalogue your products? And what is the Harmonized System?

In order to get a better idea of the importance of cataloguing exports we can use a very simple example.

Your company has selected a product to export. OK. First step done!

You’ve identified one or more promising target markets. Not bad!

You’ve worked out a method for entering the market and a price policy. That’s good too.

You’ve organized the logistics for transportation and delivery to the destination. We’re almost there!

But what happens if the customs authorities in the country you are exporting to considers your product differently from you? They could unexpectedly classify it using a secondary (in your eyes) feature and consequently apply particularly high customs tariffs. This very often occurs as a means of protecting local industry. Everything would have to change and to do this afterwards would be difficult. The prices have been set and agreements made with the distributors and final customers!

Although such discrepancies between countries may always occur, the Harmonized System (HS) has enabled this problem to be drastically reduced by classifying goods on an international level. In short, a large majority of the countries engaged in trade have decided to describe all goods using 6-digit codes.

The first six digits serve to classify goods in a global, harmonized manner: each country may then further break down these categories of goods under more specific headings. From the seventh digit onwards, the various customs tariffs might differ, but with a minimal or no impact on your activities of analysis.

How to read an HS code.

Example: HS 83.0990

– The first two digits identify the chapter

– the third and fourth the customs heading in the chapter

– the fifth and sixth the statistical position under the customs heading.

Let’s see it applied to a real product. A metal closure for packaging. The classic jar cap.

 

The HS code is 83.0990, i.e.:

– 83 Miscellaneous articles of base metal

– 8309 Stoppers, caps and lids …

– 830990 Stoppers, caps and lids …., of base metal

Unfortunately, it’s not always easy to catalogue your products at first glance and though there are some rules which help to determine the correct HS code it’s always better to consult your logistics department or a transport agency. However, we can use some online tools in order to do a search and start getting some idea:

Agenzia delle Dogane [Italian Customs Agency]:

https://aidaonline7.agenziadogane.it/nsitaric/index.html

Free consultation and search by both code and keywords.

Global Trade Solutions

https://www.dutycalculator.com

Free trial and consultation for a fee. It offers the possibility of calculating import tariffs and duties based on the HS code, country of origin and destination country.

World Trade Organization

https://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm

Free consultation subject to registration.

Calculation of tariffs for different countries and statistical analyses of the import-export flows of one or more countries.

Global Trade Information Services

https://www.ihs.com

It provides information about the import and export flows of numerous countries, with the option of breaking down goods sector by sector. A subscription fee is charged.

Let’s see a few examples of “exercises” we can do by crossing the information obtained from these sources (but there are also others).

  • A positive import flow of a given product into a market may indicate a growing interest due either to an increase in demand or an inability of local competitors to meet existing demand in terms of quantity or quality. Conversely, a negative trend in importation might signal an increase in local competitiveness or the introduction of laws and regulations that do not favour foreign products.
  • For each product it is possible to draw up a ranking of foreign countries that import most in the market you are interested in. This will let you find out from where competition may come and whether you can be competitive in terms of delivery times.
  • Calculating import tariffs will enable you to start a price analysis and determine the best method of getting into the country.

As you can see, there are several reasons for cataloguing your products and this should be done at the beginning of your analysis. As noted, the product code is always the same irrespective of where you are going to sell it.

In the next training session we’ll see how to select markets!

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Warm Up: Solid financial bases

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In this training session we’ll take a closer look at the financial aspects tied to an export project. In the previous section we hinted at some strategies that might be adopted and their implications from a financial standpoint. It is worth mentioning them briefly:

– Direct or indirect entry into the new market

– Time frames for entering one or more new markets

– Sales & marketing strategy

 When you start up an export project, having a solid financial basis does not mean having enough cash to finance your activity… if that were the case, very few companies could afford to export.

Having a solid financial basis means being able to use a financing strategy capable of best supporting penetration into a new market.

So how shall we proceed?

  • Definition of an exhaustive, detailed budget. Identifying the costs to be borne in the start-up phase of the export project is fundamental to ensure that the project is managed efficiently and with due awareness. Constant monitoring of these costs will be necessary in order to verify and correct any deviations from forecasts and thereby avoid incurring unexpected expenses that might affect the company’s “ordinary” cash flow, for which it will be necessary to undertake further unanticipated steps (project revision, recourse to other financial resources, modification of the mechanism of penetration into the new market, …);
  • Clear identification of the expected returns from the export activity. Staying on course with a clear view of the objective to be reached will enable you both to simplify the decision-making process in the various stages of managing the activity and identify the strategy to be adopted in your approach to new customers and the formulation of sales policies. We can identify two common mistakes in the initial stages:
  1. An unstructured, and above all unrealistic approach to analysing the expected return times. The “Best, Base and Worst case scenario” continues to be highly recommended.
  2. Starting off without having properly identified the business opportunities on the different export markets, so that you end up dissatisfied or disappointed, or adopting the wrong approach so that you won’t be able to conclude sales contracts that are strategic for developing this area of business in future years.
  • Identification of the most suitable financial sources on which to rely to start up your export activity. How to finance export activity is a question that has various answers. The company’s financial structure, the project characteristics and the public support offered by the State will all be factors that will guide you to the best choice. A company can consider it more advantageous to turn to on sources (public) that support export initiatives, or better to opt for self-financing, or else rely on bank loans.

 Finally, a brief mention goes to Project Sales Management. When setting up your project team dedicated to exports remember to make sure you have someone from the Finance Department capable of grasping and reflecting on the inevitable changes to plans that will need to be made along the way in different financial scenarios.

The second fundamental ingredient is to set up a flow of information created ad-hoc (in terms of times and contents) and aimed at the member of the company’s top management responsible for overseeing financial activities (typically the CFO).

In the next training session we’ll see how you should classify your products!

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