Chapter 15 Outline

The Promise and Pitfalls of Exporting

The great promise of exporting is that huge revenue and profit opportunities are to be found in foreign markets for most firms in most industries. Artais had a very solid competitive position in the United States, including an 80 percent share of the US market for automated weather observing systems, but that was insufficient to guarantee continued strong growth in revenues and profits. The company found that the opportunities for growth in foreign markets can more than make up for any lack of opportunities in the United States. What is true for Artais is also true for a large number of other enterprises of all sizes based in many other countries. The international market is normally so much larger than the firm's domestic market, that exporting is nearly always a way of increasing the revenue and profit base of a company.

Despite the obvious opportunities associated with exporting, studies have shown that while many large firms tends to be proactive about seeking opportunities for profitable exporting, systematically scanning foreign markets to see where the opportunities lie for leveraging their technology, products, and marketing skills in foreign countries, many medium sized and small firms are very reactive.³ Typically, such reactive firms do not even consider exporting until their domestic market is saturated and the emergence of excess productive capacity at home forces them to look for growth opportunities in foreign markets. Also, many small and medium-sized firms tend to wait for the world to come to them, rather than going out into the world to seek opportunities. Even when the world does comes to them, they may not respond. An example is MMO Music Group, which makes sing-along tapes for karaoke machines. Foreign sales accounted for about 15 percent of MMO's revenues of $8 million in the mid-1990s, but the firm's CEO admits that this figure would probably have been much higher had he paid attention to building international sales during the 1980s and early 1990s. At that time, unanswered faxes and phone messages from Asia and Europe piled up while he was trying to manage the burgeoning domestic side of the business. By the time MMO did turn its attention to foreign markets, other competitors had stepped into the breach and MMO found it tough going to build export volume.⁴

MMO's experience is common, and it suggests a need for firms to become more proactive about seeking export opportunities. One reason more firms are not proactive is that they are unfamiliar with foreign market opportunities; they simply do not know how big the opportunities actually are or where they might lie. Simple ignorance of the potential opportunities is a huge barrier to exporting.⁵ Also, many would-be exporters are often intimidated by the complexities and mechanics of exporting to countries where business practices, language, culture, legal systems, and currency are all very different from the home market. This combination of unfamiliarity and intimidation probably explains why exporters still account for only a tiny percentage of US firms, less than 2 percent according to the Small Business Administration.⁶

To make matters worse, many neophyte exporters have run into significant problems when first trying to do business abroad and this has soured them on future exporting ventures. Common pitfalls include poor market analysis, a poor understanding of competitive conditions in the foreign market, a failure to customize the product offering to the needs of foreign customers, lack of an effective distribution program, and a poorly executed promotional campaign in the foreign market.⁷ Neophyte exporters tend to underestimate the time and expertise needed to cultivate business in foreign countries.⁸ Few realize the amount of management resources that have to be dedicated to this activity. Many foreign customers require face-to-face negotiations on their home turf. An exporter may have to spend months learning about a country's trade regulations, business practices, and mores before a deal can be closed.

Exporters often face voluminous paperwork, complex formalities, and many potential delays and errors. According to a UN report on trade and development, a typical international trade transaction may involve 30 different parties, 60 original documents, and 360 document copies, all of which have to be checked, transmitted, reentered into various information systems, processed, and filed. The United Nations has calculated that the time involved in preparing documentation, along with the costs of common errors in paperwork, often amounts to 10 percent of the final value of goods exported.⁹