Export to Explode Cash Flow and Profits: Creating New Streams of Business in Asia, Africa, and the Americas with Little Investment
A Leverage Point Strategy™ book
by Lauri E. Elliott
Published by Conceptualee, Inc. at Smashwords
Copyright 2010 Conceptualee, Inc., creator of Afribiz™, Afristrat™, and GlobalBizconcierge™ brands
Discover other titles by Lauri Elliott at Smashwords.com (https://www.smashwords.com/profile/view/laurielliott).
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Table of Contents
The following is a list of major sections in this strategy book:
Introduction – Why Export, Why Now?
Characteristics and Challenges of Exporting
Leverage Point 1: Leverage Point Strategy™
Leverage Point 2: Demand-Driven Exporting
Leverage Point 3: Consumer Demographics
Leverage Point 4: Language and Culture
Leverage Point 5: Cities and Economic Hubs
Leverage Point 6: Economic Zones and Clusters
Leverage Point 7: Trade and Investment Agreements
Leverage Point 8: Regional Economic Communities
Leverage Point 9: Diplomatic Missions
Leverage Point 10: Chambers of Commerce and Business Councils
Leverage Point 11: Multinational and Micro-Multinational Corporations
Leverage Point 12: Export-Focused Organizations
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Preface
I moved my consulting work from Michigan to Washington, D.C., in the late 1990s in anticipation that the Michigan market was not diversified enough to withstand a major slowdown in the automotive industry. Even today, we can see that the Washington job market is growing while many parts of the U.S. have stagnated.
In 2005 I took a similar step by moving to South Africa, anticipating that emerging markets, particularly Africa, had a lot of untapped potential that would provide many business opportunities in the next ten to 20 years. In 2007 I began to share with colleagues my view that the U.S. was headed for an economic downfall or correction based on what I observed – i.e., extremely over-leveraged consumers as the norm instead of the exception. The global economic crisis came the next year in 2008, and while Western economies contracted, many emerging markets still grew.
Both instances demonstrate what I learned as an entrepreneur – anticipate, proactively respond to, and innovate for emerging business patterns. In many cases, though, I think it is simply logic and common sense. You go where demand is or will be.
What I see now is a new configuration of consumer markets globally and different trade flows, which will require new arrangements of business models even for small to medium-sized enterprises (SMEs) and entrepreneurs. This is really the reason for the current focus of my work and this book. It's not about the technical aspects of exporting. Rather, it’s the strategic facets of incorporating exporting into a firm's business model by leveraging available assets to catalyze exporting opportunities and overcome challenges in exporting. The focus is not on large companies or those with a lot of assets but on SMEs. What you will discover are new configurations for doing business successfully to match new market opportunities.
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Introduction – Why Export, Why Now?
Exporting, the sale of goods and services to another country, is one of the options for conducting international business. It involves some degree of investment on the part of the exporter to make it work, and it has challenges. However, this book takes the strategic view of exporting as one of many means to expand and sustain business in the long term with short-term and medium-term opportunities and resources available to catalyze a company's export strategy.
The next five years will be a window of opportunity for U.S. exporters to enter emerging markets. So yes, companies should seriously consider exporting, and they should do it now. The question is – why now?
First, the global economic crisis of 2008 and the slow, jobless economic recovery present great challenges for businesses of all sizes. However, in the midst of this period there is another picture of which many U.S. businesses are not aware – emerging markets’ growth slowed but continued to grow and rebounded more quickly than developed markets. The imports of developing nations are up 2% above their highs before the economic crisis, while developed nations’ import levels are about 19% lower than their highs before the economic crisis, according to the report entitled A Global Economy with Multiple Growth Poles by Justin Yiafin Lin. So, while consumer markets in the U.S. and Europe have tightened, they are expanding in developing regions. This is the first reason to consider exporting to emerging markets.
Second, the U.S. became a consumption society instead of an exporting nation. Shifting, or balancing, these two elements is one of many things it will take to get the U.S. economy going. According to the report Opening Markets, Creating Jobs, by the U.S. Chamber of Commerce, exporting to countries with which the U.S. has free trade agreements (FTAs) already contributed $1 trillion to the U.S. GDP in 2008. The report also indicates that the FTAs support 17.7 million U.S. jobs and are responsible for 5.4 million U.S. jobs directly.
U.S. firms that export will gain more immediate, direct benefit through the Obama administration's National Export Initiative (NEI), initiated in 2010. The goal of the NEI is to double U.S. exporting within five years with a focus on SMEs, the engine of growth for any economy. There is an increase in resources, support, and momentum in U.S. government organizations, such as EXIM Bank, to assist U.S. firms to export. So, U.S. firms wishing to export can now tap into more support than ever before.
Third, the largest, growing markets for the next 40 years will be those emerging in South America, Africa, and Asia. By starting exports to emerging markets now, U.S. firms will position themselves for long-term growth and sustainability.
So, there is plenty of reason to consider exporting now. However, exporting needs to be incorporated into a company's overall strategy. As you read different parts of this book about leverage points for exporting, consider overall questions for developing an export strategy:
How does exporting support your overall strategy?
How can you use an export strategy to expand and sustain your business?
What local, regional, and global emerging business patterns suggest exporting opportunities for your company in general?
What markets present the best exporting opportunities?
What internal capacity and assets can be dedicated to planning and implementing your export strategy?
What are the short-term and medium-term export opportunities that will catalyze or develop your long-term export strategy?
What can you use to overcome or minimize challenges in exporting?
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Characteristics and Challenges of Exporting
This book is about leveraging to overcome weaknesses, challenges, and obstacles in exporting. However, to properly do so, a business needs to understand the elements involved in exporting.
Exporting is one dimension of international business. International business is simply when individuals or firms conduct a business transaction between different countries. International business is divided into three main areas – income, investment, and trade – according to the International Monetary Fund (IMF), which tracks trade across countries.
Income involves return on investment and earnings for creditors, shareholders, and employees. For example, interest payments on debts spanning different countries are income.
Investment involves either direct or portfolio investments. A direct investment is when an investor sets up or acquires, in part or in full, a business in another country. A portfolio investment is investing in financial instruments, either equity or debt.
Trade is when international transactions involve goods or services. Exporting falls within this category. The trading process generally involves three steps: (1) buyer and seller interact before contract, (2) buyer and seller negotiate and sign contract, and (3) the contract is completed and enforced.
Buyer and seller interaction starts with both each searching for the other. The buyer will search channels, including business networks, the Internet, etc., to find a seller for the product or service he or she desires, whereas the seller will make sure that he or she can be found by potential buyers. In the process, both the buyer and seller may learn more about trading between countries.
As the buyer and seller seriously consider completing a contract, there may be samples provided and references requested on both sides. In larger or long-term transactions, buyers and sellers may meet face to face – the buyer may visit the seller’s facilities, for example.
Contract negotiations involve providing details on product or service specifications, price, and quality. Also, time and place for delivery and form and time of payment are agreed upon.
When the contract is ready to be signed, both buyer and seller should institute precautions like having payment intermediaries – e.g., an escrow account, a letter of credit, or even PayPal. They should also consider insurance against non-payment or non-performance, if available.
And finally, if the contract is signed and completed but something doesn't work out, buyers and sellers have to consider how to collect on and/or remedy the contract. This may lead to mediation, litigation, or insurance claims.
These international trade transactions can be harder and riskier. You will want to prevent discovering problems after the contract is signed. There are several factors at work in international trade, which make it more complex, so consider the following questions as you work through an export opportunity:
How does the physical distance, as well as the environmental differences – e.g., cold versus tropical, mountainous versus flat – between countries impact this export opportunity?
How do the differing political systems between countries impact this export opportunity?
How do various social and business networks, as well as cultural differences, impact this export opportunity?
How do the differences in national development, or economic development, between countries impact this export opportunity?
The International Chamber of Commerce (ICC) developed a set of international commercial, or sales, terms. Exporters should manage risk by not agreeing to terms that would hold them responsible for import clearance, including payments, or any other costs or risks at the buyer's end. For example, Delivered Duty Paid (DDP) means you would supply goods or services to a designated place in the country of importation at your own risk and expense. DDP is something you likely want to avoid.
And finally, higher costs are also a consideration for international trade and exporting. Spulber (2007) laid out four types, or "Ts,” of costs. The first is tariff and non-tariff costs like regulations that restrict trade and investment, duties on imports, and anti-pollution standards. Second, there is the transaction cost of doing business at a distance, which results from differences in business practices, as well as political, social, and legal climates. Third is the transport cost of getting goods and services to market. And fourth is the time cost, meaning the time that it takes to get a product to market, as well as the lag in communication between agents in the value chain.
Spulber noted that trade and marketing costs can account for the majority of the expense of providing products and services overseas. In the case of manufactured goods, Anderson and van Wincoop (2004) found that trade costs are 170% above the manufacturing cost of a product on average. The trade costs can be broken down as internal costs of trading (55%); cost of crossing borders, including tariffs (44%); transport cost (21%); currency differences (14%); language differences (7%); and other costs like information (9%).
In summary, understanding these challenges and costs of exporting will help you formulate a better export strategy, using leverage points. As you look over the challenges and obstacles faced in exporting, consider the following questions:
What leverage points can be used to overcome or minimize challenges and obstacles?
What challenges and obstacles most affect your "go" or "no-go" decision to take an export opportunity?
Will the "show-stopping" challenges and obstacles change for the better within a year or two during which time you could prepare to export?
Is the potential reward in exporting significantly larger than the risk?
Can you limit your risk by scaling back on the initial export strategy and using the first rollout as a staging platform to expand?
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Leverage Point 1: Leverage Point Strategy™
Using the Leverage Point Strategy™ is a leverage point itself. The Leverage Point Strategy™ is a specific methodology, which I developed, based on the concept of leverage. Leverage is the ratio of change in input to the change in output. Greater leverage is gained when a small force multiplies output. The goal is to see a small force produce as much change in output as possible.
Leverage points are those forces, or points, that create the rate of change in output. The power of leverage points is on a continuum from low to high. The best scenario is to locate high leverage points, because, in these cases, the smallest amounts of force effect the greatest change or results.
A very clear picture of a leverage point is the rudder of a ship. It is a small part of the ship in comparison with the size of the ship, but it creates a small force that is able to turn the ship in a new direction. In practical terms, maximizing leverage points makes use of small, but significant, forces.
Leverage points are related to tipping points. A tipping point is a point at which an object is displaced from one place to a new and different state. Leverage points are used to create the tipping point.
Malcolm Gladwell wrote the book The Tipping Point: How Little Things Make a Big Difference. He identified three key factors, or types of leverage points, for creating tipping points: the Law of the Few, the Stickiness Factor, and the Power of Context.
The Law of the Few is when a few key types of people champion and catalyze an idea or concept to critical mass. The types of people are Connectors, Mavens, and Salesmen. When all three types of actors advocate an idea, the concept is more likely to reach a tipping point. Connectors, Mavens, and Salesmen are examples of leverage points. Each is a small force that can wield significant results.
The Stickiness Factor is something that sticks in the minds of individuals and influences their behavior in the future. And the Power of Context is when the right environment, or time, aligns with your business opportunity to create momentum.
Each of the leverage points highlighted by Gladwell can induce a tipping point, but it is more likely that the combination of these leverage points will actually force a tipping point.
Another category of leverage points is the types of capital. In essence, these are the strengths you bring to the business opportunity overall. According to Dr. Bruce Cook of Kingdom Venture Capital, there are 13 types of capital:
Economic includes currency, liquid assets, and finance.
Social includes community-focused or social good activities, such as relief work, charity, and scientific research.
Spiritual refers to strength drawn from faith.
Knowledge is what you and your team know, both the intellectual and mental processes.
Political refers to formal political affiliations and influence.
Environmental refers to assets in the global "green" movement, like carbon credits.
Creative includes your creativity, artistic expression, and intellectual property.
Positional refers to the roles, titles, and authority you hold both formally and informally.
Institutional includes formal reputation, influence, status, alliances, and partners.
Physical refers to your body's capacity, including energy and fitness.
Generational refers to legacy, heritage, family lineage, and wealth that are passed down in families.
Closeness refers to the ability to draw close and also to be vulnerable, or open, in relationships.
Relational refers to the span and depth of your relationships both vertically and horizontally.
You may wonder how some types of capital (e.g., social) can serve as leverage points for business, but any form of capital can exert influence over business opportunities. For example, a young African-American attorney, Carlton Owens, moved to Ghana and established a gold mine. His gold mine sits on land on which a local indigenous tribe lives. In addition to getting a mining concession from the government, he had to form an agreement with the local chief on how the operation would benefit the community beyond jobs. Carlton agreed to build a school, among other things. In emerging markets business is not separated from the complex system of society.
In actuality many things are leverage points, including situations and circumstances. However, the leverage point might be in your favor or in someone else's, and the leverage point may have low or high impact. Your goal is to find a series of leverage points in your favor with high-impact potential.
The process of applying the Leverage Point Strategy™ works in conjunction with completing an environmental analysis, as well as a SWOT analysis, of your export opportunity. Following these analyses, apply the Leverage Point Strategy™ by asking yourself the following questions:
What are the key leverage points that will make this export opportunity work?
Which of the key leverage points have high, medium, or low impact?
Which combinations of key leverage points will have the most impact?
How will the key leverage points help to override the weaknesses and threats in the export opportunity?
In general, how will I incorporate the high-leverage points and high-leverage-point combinations into the business model?
How will I know if the leverage points are working?
Once you have applied the Leverage Point Strategy™ to your analysis of the export opportunity, incorporate the leverage points into your business model appropriately. The business model gives a complete picture of how to implement the business, or export, opportunity successfully. It answers the question, "How do you logically create value?" Johann Wallin, in the book Business Orchestration: Strategic Leadership in the Era of Digital Convergence, says a business model "defines the value-creation priorities of an actor (business) in respect to the utilization of both internal and external resources. It defines how the actor (business) relates with stakeholders, such as actual and potential customers, employees, unions, suppliers, competitors and other internal groups. It takes account of situations where the actor’s (business') activities may (a) affect the business environment and its own business in ways that create conflicting interests, or impose risks on the actor (business) or (b) develop new, previously unpredicted ways of creating value."
In the book Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, Alexander Osterwalder and Yves Pigneur pose key questions to consider when developing a solid business model. The following is an adaptation focused on leverage points: "What key leverage points will you use to…"
Activate your customer segments?
Maximize your revenue streams?
Improve offerings for your customer segments?
Better relate to your customers over time?
Maximize resource allocation to run the business?
Improve efficiency and effectiveness of key activities in running the business?
Better utilize and leverage the "people" assets used to run the business?
Increase and improve outputs of key activities?
Maximize partnerships, alliances, and collaboration?
Maximize network and distribution channels to reach customers?
Manage and reduce costs of running the business?
In summary, leverage points are simply tangible and intangible assets, resources, situations, etc. that can be used to gain and sustain momentum in the business environment. As you analyze a business opportunity or problem, identify leverage points. And use leverage points to help you assess opportunities, as well as incorporate the best leverage points and combinations into the business model and operations.
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Leverage Point 2: Demand-Driven Exporting
According to Lemak and Arunthanes (1997), there are four types of international sales strategies: Domestic-Based Export Strategy, Domestic-Based Value-Added Strategy, Worldwide Value-Added Strategy, and Worldwide Volume Maximization Strategy. In the first two strategies, a firm's focus is on selling to the home market. International sales take only a small portion of a firm's total production, and the firm is therefore not dependent on international sales for sustainability. The difference between the first two strategies is that in the Domestic-Based Value-Added Strategy, more than 10% of a firm's production will occur outside the home country. In the last two international sales strategies, international sales account for more than 30% of a firm's success.
For small businesses and entrepreneurs, the first international sales strategy – Domestic Export-Based Strategy – is typically considered. Lemak and Arunthanes describe this strategy as one in which firms "manufacture or assemble products in the home country to sell in the domestic market...(And) export a small portion of total production to foreign users with little or no modifications via distributors, agents, and/or their own sales subsidiaries." If a firm can find an international market with demand that allows it to sell its products with little or no modification, I would call this a leverage point with potentially high impact. This situation reduces the upfront cost to enter a new market by not having to adapt the product significantly.
Another important aspect to exporting is to quickly operate in the black, say within six to 18 months. Small firms typically cannot absorb losses for any great length of time. So, it's also important to find means to generate sales and cash more quickly.
Finding markets with high demand and with limited supply is one way to accelerate operating in the black, particularly in emerging markets. The Financial Times Lexicon defines demand as "the amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price."
In emerging markets there is demand for many different things as consumers move up the socioeconomic scale. Even basic services like housing, water access and sanitation, and transport are lucrative markets. For example, housing markets in many African markets like Nigeria, Ghana, and Angola remained strong during the economic crisis. As a whole, construction grew over 12% in Nigeria for each of the last five years, including 2008 and 2009, when the economic crisis hit, according to the African Statistical Yearbook 2010 by the African Development Bank (ADB).
There are also short-term demand opportunities, which exporters can use to catalyze a long-term strategy. Some businesses saw a golden opportunity to enter the South African market with the 2010 FIFA World Cup. The largest suppliers of the "vuvuzela" horn happened to be Chinese manufacturers like Ninghai Jiying Plastics Manufacturing Company, which exported the vuvuzelas to South Africa. While they barely generated a profit on the vuvuzelas, the Chinese companies can now grow into the South African market with other products that have longer-term demand.