Chapter 7: Avoiding and Managing Common
Mistakes and Problems
7-1 COMMON PITFALLS
• There are 4 categories of errors that businesses
make:
• Costing: correctly calculating
• Standards for manufacturing, sizing, labeling,
packaging etc.
• Marketing: need to do research and understand
foreign markets
• Infrastructure.: problems can arise from
transportation, material resources, communication
systems, health and safety bureacracy etc
Potential Costing Errors
• Case example:
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A Canadian purchasing agent is
acting on behalf of a Canadian
retail chain that wants a new and
interesting line of preserves (jam)
for its upscale customers.
The agent visits a trade show in
France to look for suitable
European suppliers.
One booth at the show displays a
dozen different jams, jellies, and
compotes that are not available in
Canada.
All look delicious and are
beautifully packaged. The buyer
knows that these products would
be perfect for the client. The price
of each jar of jam is marked at
1.50 Euro.
• To make a profit a retailer must sell a product at a
standard markup, which is usually twice the products
cost.
• Opportunities for error in determining the actual cost are
considerable.
• Besides the price of the product, 1.50 Euro, the buyer
must consider
• tariffs and duties,
• brokerage fees,
• transportation cots,
• insurance costs for goods in transit,
• currency exchange rates and any
• other hidden costs.
• A costing error can negate (cancel out) any
advantage provided by the foreign trade.
Exchange Rates and Currency
Strategies
• The first step in pricing a
product is to convert its cost
from its currency into Canadian
dollars.
• The euro like the Canadian
dollar is a hard currency, which
means that it can easily be
converted to another currency
by most banks.
• Many countries like China,
Russia, or the Ukraine have
soft currency, which is a
currency that fluctuate in value
and as a result do not covert
into Canadian dollars easily.
• Currency is rated from “AAA”
to the lowest at “D”.
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A currency’s rating is based
on the country’s degree or
confidence in the world market
that is judged but its political
and economic stability.
• Hard currency’s are rated
“BBB” and above.
• Canada’s rating has recently
been reestablished in the
triple-A category.
• Businesses usually only deal
in hard currencies. Some
countries restrict the amount of
foreign currency that people
can own or purchase.
Protection Agents Currency
Fluctuations
• To secure the price of a product companies
often buy forward. (purchase the amount of
currency needed at the time of the order)
• This protects them agent’s fluctuations in
exchange rates.
• To minimize the effect of currency exchange
and guarantee the price of the product suppose
the Canadian importing company can buy
euros at $1.39 CAN exchange rate when the
order of a product is placed. Then if the
exchange rate changes the value of the product
for the Canadian market will not change.
• The seller makes the same amount regardless,
because the price is fixed in its currency.
• However the importers are in the business to
sell products for a profit, (not to speculate in
currency )so exchange rates are important to
make competitive pricing decisions.
Letters of Credit
• The Jam manufacturer will want to be sure that it
will be paid when the transaction is completed.
This is where banks come in. The Canadian
bank can issue a letter of credit to the French
bank.
• an important method of reducing risk in
international business.
• allow an importer to give the exporter a
guarantee that they will be paid.
• After all costs have been calculated, the importer
applies to the issuing bank for a letter of credit
for the entire amount of the transaction.
• The importer must provide collateral for the
letter such as stocks, bonds, or other financial
assets.
• If the issuing bank approves the buyer’s credit, it sends
the letter of credit to the advising bank, which tells the
seller that it has been received.
• Now the seller can ship the jam to Canada. The
advising bank monitors the shipment, and when it
reaches its destination, it will pay the exporter.
• The issuing bank then pays the advising bank and
collects the money from the importer. After the buyer
pays the bank, the bank will give it documents that allow
it to pick up the jam.
• If one country has a bad banking system, it will be
difficult or impossible to arrange a letter of credit.
• Without a letter of credit, the companies involved in the
transaction must have a great amount of trust in each
other.
• Few businesses are willing to take the risks of trusting
another business to this extent. Most international
businesses will only trade with countries that have a
good bank system in place.
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Tariffs and duties
People can get good jams from companies
inside of Canada. The import of foreign jams
could affect the sales of domestic products, so to
protect the Canadian companies, the
government levies taxes on imports that
compete with Canadian made goods.
Tariffs increase the price of a foreign product,
which allows the Canadian product to be more
profitable.
Tariff rates depend on product being imported
and on Canada’s relationship with the source
country.
Jam from France enters Canada under a MostFavoured-Nation tariff, so it would be about
8.5%.
The WTO facilitates discussions among
countries about the setting of tariff rates for each
product.
Each member must agree about these rates.
Countries can negotiate lower tariff levels with
each other if they have good trade history.
Where free trade exists, tariffs are removed;
however, certain goods may still have tariffs.
Transportation
• Charges for transporting goods are
affected by five factors:
• The agent and shipping company for
freight forwarder
• The shipment method
• The weight of the goods
• The size or volume of the goods
• The distance to their final destination
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Shipping companies are very
competitive.
They specialize in particular destinations
Some offer special rates for large
shipments, some specialize in smaller, or
those with special requirements, such as
refrigeration.
Many businesses use a shipping agent
that can help the exporter or importer
select the most appropriate firm.
An agent’s commission is based on the
values of the goods shipped.
The cost to ship goods is one of the
largest components of the landed cost.
Any goods being shipped overseas must
travel either by water or air for a portion
of the journey, while importers must
weigh cost against speed.
The faster a shipping method is, the
more it will cost. Most shipments are
trucked to an airport, or dock where they
are then shipped across the world.
Hidden Costs
• hidden costs in transporting
can be substantial.
• Importers may have to
travel in order to find the
right merchandise needed
as well as make shipping
arrangements.
• Importers need to estimate
the hidden costs and add
them to the expected
charges for shipment to
calculate the total cost per
item or unit.
• Only then they can arrive at
an accurate price for the
product in the Canadian
market.
E.D. Smith & Sons
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Ernest D’Israeli & Sons started a
fruit production company in 1882
This was the first commercial jam
manufacturer in Canada
In 1992 they expanded into
Mississippi
In 1996, they closed the
Mississippi plant due to costly
errors
In 1995 they contributed to the
founding of CCL – Cross Canada
Logistics Inc. – a consortium of 12
major food companies
In 2002 – E. D. Smith & Sons was
sold to a Toronto Merchant Bank –
the Imperial Capital Corporation
See Case Questions on p. 223
7.2. Problems with Standards
• The Three Main Types of
Standards that May be
Different in Other
Countries:
• Production Standard –
differences in the way
products are made, e.g.,
size, electrical current, etc.
• Clothing size
standards:
• A Canadian size 10
jeans = size 77 in
Korea
• The International Organization for
Standardization (ISO) was formed to help
establish technical standards worldwide,
e.g. the format of the credit cards, phone
cards, toy safety, water quality, window
glass quality, insulation etc.
• Service
Standards –
warranties,
guarantees, ease
of repair, etc.
• Ethical Standards
– use of child
labour,
environmental
standards, health
standards for
employees, etc.
7.3 REALISTIC MARKETING
• If 1% of China’s population was to purchase your
product, you would have sold 10 million items. This type
of profit draws businesses to China. Poor market
research however, leads to failure of many of these
businesses.
• There are 3 interrelated types of marketing errors:
1. Miscalculation of composition, size, and distribution
channels of target market.
2. Lack of research in branding, packaging, and timing of
product introduction.
3. Misunderstanding the culture, customs, and
appropriate advertising and promotion among potential
consumers
• For example, a company selling
toasters in China would not
have much success. China’s
staple of choice is rice, not
toast.
• Exxon did years of research to
find a name that had no
negative connotations in other
countries
• People look at the population
and see huge potential.
• But doing business in China is
very different from Canada.
• Surveys show only 40% of
businesses in China were
making a profit.
• Many success stories are those associated with
Business-to-Business relationships (B2B).
• A Canadian company sets up a joint venture
with a Chinese firm to manufacture products in
China.
• Both companies share cost and profit. For
example, a DVD player made by the Chinese
APEX may have Canadian plastic in it.
• Nortel Networks is one company that managed
to succeed in China through patience, research,
experience, and understanding.
• Businesses looking for a quick profit should,
however, turn their attention away from China.
Size and Composition of the Market
• Perhaps one of the most
significant errors a company
can make when thinking about
international markets is to
overestimate consumer
demand.
• Businesses have to answer
two questions before they
import or export a product.
#1 “Will anyone buy it?”
#2 “Is anyone else already
selling similar product?”
• A market of 500 million people
is significant market only if it’s
composed of people who
actually need or want your
product or service or who may
reasonably be persuaded to
want or need it through
marketing efforts.
• To properly research a
product in a foreign
market it is a good idea
for businesses to hire
marketing research
companies that are
familiar with the market
composition of the target
country.
• Some might think that
Tim Horton’s would do
well in Britain – but it is
important to note that the
British still prefer tea.
John Gruetnzer – International
Business Consultant
• Executive Vice-President of
Intercedent Ltd.
• Consulting company that
advises clients in worldwide
markets
• He is the International
business consultant
• Lives in Toronto, but is in
Asia 2/3 of his time
• Read profile p. 232 – answer Ques
1 &2
Branding, packaging and
labeling
• Companies that have
developed a brand in their
own country cannot expect
that brand to transfer to
another without
complications.
• One problem is that these
companies spend very little
money on advertisement and
marketing of their products in
the foreign market.
• The exporting company must
examine the logo, slogan
and brand name to ensure
that the brand identification is
appropriate for the new
market.
• In 1988, the General Electric
Company (GEC) and Plessey
combined to create a new
telecommunications giant. A
brand name was desired that
evoked technology and
innovation. The winning
proposal was GPT for GECPlessey Telecommunications.
• A not very innovative name
and not suggestive of
technology and a total disaster
for European branding.
• GPT is pronounced in French
as “J’ai pété” or “I've farted”.
• Gerber, the name of
the famous baby food
maker, is also the
French word for
vomiting. It becomes
a bit limiting when you
go global... Gerber is
therefore not in
France, and although
Gerber has a French
Canadian web page
• Many companies have different environmental
standards from those required for products sold
in Canada.
• Companies risk consumer rejection if they do
not consider that countries environmental
concerns.
• Potential consumers will look on the packaging
for information on these qualities; they will buy
products that make “green” claims over other
packages.
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Packaging for imported products
must conform to Canadian labeling
requirements.
• These labeling requirements have
been established in accordance with
the
1. Consumer packaging and Labeling
Act
2. Weights and measures Act
3. the Canadian Agricultural Products
Act.
• One of the roles of the officials of the
Canada Customs and Revenue
Agency at our borders is to ensure
that that products entering Canada
are labeled correctly. Products that
are incorrectly labeled can be
impounded until the labeling problem
is corrected.
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All pre-packaged foods and beverages
sold in Canada require the following on
their labels:
Country of origin
Bilingual labeling
Product identity declaration, with the
product’s common name as prescribed
by regulations.
Declaration of net quantity or volume,
specified metrically
Minimum type of font size relative to
display surface
List of ingredients and their
components, when necessary, in
descending order of proportion by
weight. Ingredients must be in
common name.
Company identification and principal
place of business to identify where the
pre packaged product was
manufactured
Shelf life, when a food or beverage
has a shelf life of 90 days or less. A
“best before” date is required
Artificial flavors when used alone of
with natural favoring agents.
• Labeling requirements for Canadian
products entering another country are very
strict. Failure to research these
requirements before a trade deal could
lead to serious expenses for a Canadian
manufacturer.
Culture and Customs
• Culture and customs
have a major impact on
consumers buying habits
and product use.
Examples such as
Pumpkins, Christmas
lights and mother’s day
cards are in demand in
one country but may not
be in demand for another
due to a lack of market
for these products.
• It depends on how
multicultural a country is
for a market to develop
for certain products.
7.4. Infrastructure and Services
• If one company wants
to trade in another
country or to set up a
business there, it is
crucial that the
company’s
management study the
infrastructure of the
foreign country to be
sure that they can
provide the necessary
services and facilities.
The Major components of a
country’s infrastructure include:
• Transportation
systems – the roads,
highways, airlines,
airports, rail systems,
trucking businesses,
and other methods of
transportation
available in the
country
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Communication
systems – phones,
cellular systems,
Internet providers,
faxing capabilities,
telex systems, print
and broadcast
media
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Government services
– support for and
regulations of business
Other services –
accommodation, food,
health care, safety,
education, financial,
business support
services, and
embassies and
consulate facilities
The Infrastructure of Kenya
• What infrastructure
problem would be the
most difficult for
Canadians doing
business in Kenya?
Why?
• (see p. 238)