Terms and Conditions of Purchase or Sale/Modes of Entry-Relationships
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Unit 5.1-Terms and Conditions of Purchase or Sale |
Introduction | Modes of Entry | Terms of Sale | Applying Your Knowledge | Commercial Agreements | Summary | Resources | Activities | Assessment
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Contents
Modes of Entry – Relationships
The modes of entry used by an exporter will depend on the product or service being sold as well as the country targeted for entry. Each mode of entry has its advantages and disadvantages based on the relative risk of a buyer and target country. These advantages and disadvantages will obviously affect the costs of the venture/transaction and ultimately the profitability of the international business. The experience of a seller as well as the company support in terms of personnel and finances will also help to determine the best mode of entry. Remember that the mode of entry is just that, the entry. Once the relationship has been established and experience and critical mass gained, it can be changed. It may cost to make a change, but long term profitability should be increased.
Agent
An agent will represent the manufacturer in the target market and be responsible for making contacts with potential buyers, conducting sales presentations and demonstrations and negotiating transactions. An agent normally does not take possession of merchandise since it is usually shipped directly to a buyer. An agent is paid a commission for the sale. The rate of the commission depends on industry standards as well as the value of the product, the value of the transaction and the market restrictions. An agent may be based in the country of export or import. Before signing an agent agreement with an individual based overseas, it is imperative that an international manager be aware of the local laws governing agent contracts and the labor laws that may apply.
- Advantages to the seller
- low cost
- quicker entry
- lower time commitment
- can be a domestic sale
- US laws pertain
- Disadvantages to the seller
- low return
- reduced control
- no market experience
- increased market costs due to middleperson
Distributor
A distributor is normally located within the target market and is responsible for purchasing, stocking, and reselling merchandise. In many cases, a distributor is focused on a specific industry, trade, or channel of distribution and may provide sales, marketing and logistics services as well.. The level of service will depend on the price of the products and profit margin for both parties. The responsibilities of each party should be clearly spelled out in the contract.
- Advantages to the seller
- market entry control
- higher return
- development of relationships
- experience in export marketing
- Disadvantage to the seller
- increased costs
- increased time for market entry
- reduced knowledge base for international expansion
- fewer market targets
- increased time commitment from company resources
The differences found between agents and distributors are as follows:
- Agent
- exclusive or non
- small company
- fewer resources
- may be domestic sale
- commission- based
- do not take ownership of product
- no responsibility of market relationships
- agent protection laws do not favor exporter
- Distributor
- exclusive or non
- usually larger than agent
- in-market relationships
- usually takes ownership of products
- more market responsibility
Licensing
A licensing agreement will provide an overseas manufacture the right to produce products in a certain manner and use the name or logo of the product. A seller must provide specific and detailed instructions for manufacturing and will either require that all products be sold back to a seller or available for sale by the licensee. If the licensee is allowed to sell the products, an upfront fee as well as a percentage of sales is normally paid to the licensor.
- Advantages to the licensor
- decreased capital needs
- increased return on research investment
- decreased risk to local government issues
- access to market faster – market test
- extends life cycle of technology
- Disadvantage to the licensor
- less control – no marketing exposure
- can steal technology after contract up
- create own competitor
- brand, quality and image must be protected
- contract – negotiations must be thorough and complete
Franchising
Franchising provides the right to conduct business in a certain manner to a franchisee. This form of business, which is normally found in the service sector, has become increasingly popular in developing countries since successful business models can be bought and quickly established. The franchisor is normally paid an upfront fee as well as a percentage of sales and often required marketing support fees.
- Advantages to the franchisor
- duplicate time
- reduced market investment
- increased income
- duplicate business model
- build International Brand
- entry to controlled markets
- Disadvantage to the franchisor
- loss of control
- need to adapt to local market demands
- loss of proprietary information
- must be a business model that can be duplicated
Joint Venture
A joint venture allows a foreign company to establish an overseas presence by partnering with local or international companies. Each partner may contribute different resources to a venture, so their risk and reward will be based on the level of investment. In some countries, a local partner is required; in others one may not be required.
- Advantages to the partners
- reduced investment
- access to controlled markets
- in market contacts
- in market knowledge
- in market presence
- Disadvantage to the partners
- reduced control
- reduced ROI
- chance to lose market with a buy out
- creates local competitor
Direct Foreign Investment (DFI)
A direct foreign investment is established when an overseas presence is created by a foreign company. It is a single venture that does not include local or foreign partners. The joint venture may be structured in the form of an overseas corporation or subsidiary of the parent company. This type of venture can be accomplished only if the foreign investment, property and labor laws of the overseas country allow for it.
- Advantages to the seller
- market control
- local presence
- increased return on investment (ROI)
- developing relationships
- in market knowledge
- Disadvantage to the seller
- increased investment of time
- increased investment of financial resources
- increased risk of buy out
- increased investment of personnel resources
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