Global Trade Practices
28/11/20012012/1/4
Two Key Decisions
Global Trade Practices
Chapter 7
Traditional Path
Direct Export with NO product
modification
The Risk
Market Potential stymied
Competitors may overtake efforts by
product modification or reconfiguration
Direct or Indirect?????
Identify strengths
Determine priorities
Balance risk and rewards
Most cost effective
approach
Learning needed
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College of Business, University of Northern Iowa
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Global Trade Practices
28/11/20012012/1/4
Benefits of Indirect Exporting
No international experience is
required
Management not distracted
Quicker market entry
Minimal financial requirement
Risk minimized
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WTP-Chris Schrage
Disadvantages of Indirect Exporting
Loss of control
Choosing the wrong distributor or the
wrong market
Market feedback insufficient
Sales not to potential
Risk derived from other listed
factors
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DIRECT Exporting
Benefits
Challenges
Direct control
Feedback
controlled
Potentially better
sales
Greater investment
Time--toTime
to-market
increased
Higher risk
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WTP-Chris Schrage
College of Business, University of Northern Iowa
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Global Trade Practices
28/11/20012012/1/4
Product Modification ???
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WTP-Chris Schrage
Localization Pressures
Adaptation due to:
Technical standards
Variation in consumer
Behavior
Needs
Ability to purchase
Government standards
and restrictions
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Standardized Products
Theodore Levitt
1925 to 2006
Provocative view on
markets and
product
standardization
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WTP-Chris Schrage
College of Business, University of Northern Iowa
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Global Trade Practices
28/11/20012012/1/4
Standardization pressures
Cost
Experience Curve
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Experience Curve
Learning effects:
Economies of Scale:
Cost savings that come
from “learning by doing.”
More significant in
complex tasks.
Decline then cease after
two years.
Decline after this point
comes from economies of
scale..
scale
Reduction in unit cost
achieved through
volume production.
Sources:
Spread fixed costs over
volume.
Employing specialized
equipment or personnel.
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The Experience Curve
Unit Costs
Strategic Significance
Moving down the curve reduces
the cost of creating value.
B
A
Accumulated Output
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WTP-Chris Schrage
College of Business, University of Northern Iowa
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Global Trade Practices
28/11/20012012/1/4
Pressures for Cost Reduction and
Local Responsiveness
High
Company
C
Generally reflects
the position of most
companies
Company
B
Cost
pressures
Low
Low
High
Pressures for local responsiveness
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WTP-Chris Schrage
Cost Reduction
Mass producing a
standardized product
at an optimal location.
Intense:
•
•
•
•
•
in commodity industries.
Where competitors are in
low cost locations.
Where there is persistent
excess capacity.
Where there are low
switching costs.
Because of greater
international competition.
Local responsiveness
Arise from:
Differences in
consumer taste and
preferences.
Differences in
infrastructure and
traditional practices.
Differences in
distribution channels.
Host government
demands.
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Local Responsiveness
Taste and
preference
Distribution
channels
Delegate production
and marketing to
national subsidiaries
Host
government
Infrastructure
and
practice
Delegate marketing to
national subsidiaries.
Delegate manufacturing
and production to foreign
subsidiaries.
Manufacture
locally.
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WTP-Chris Schrage
College of Business, University of Northern Iowa
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Global Trade Practices
28/11/20012012/1/4
Strategic Choices
International
create value by
transferring skills to
local markets where
skills are not present.
Multidomestic
oriented toward
achieving maximum
local responsiveness.
Global
increase profitability
through cost reductions
from experience curve
effects and location
economies.
Transnational
Exploit experienced
based cost and location
economies, transfer core
competencies within the
firm, and pay attention
to local responsiveness
needs.
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WTP-Chris Schrage
College of Business, University of Northern Iowa
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