(5588) MBA Executive
Roll # AB 523655 Semester: Spring 2010
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Strategic alliances are business coalitions among companies that provide strategic benefits to the partners? What conditions are best for a successful strategic alliance? Explain in detail? (20)
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“A Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.” Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.
TYPES OF STRATEGIC ALLIANCES
There are four types of strategic alliances: joint venture, equity strategic alliance, non-equity strategic alliance, and global strategic alliances. Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage. Equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage. No equity strategic alliance is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitive advantage. Global Strategic Alliances working partnerships between companies (often more than 2) across national boundaries and increasingly across industries. Sometimes formed between company and a foreign government, or among companies and governments
STAGES OF ALLIANCE FORMATION
A typical strategic alliance formation process involves these steps:
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Strategy Development: Strategy development involves studying the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy. Partner Assessment: Partner assessment involves analyzing a potential partner’s strengths and weaknesses, creating strategies for accommodating all partners’ management styles, preparing appropriate partner selection criteria, understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner. Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high caliber negotiating teams, defining each partner’s contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood. Alliance Operation: Alliance operations involves addressing senior management’s commitment, finding the caliber of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance. Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocates resources elsewhere.
WHY STRATEGIC ALLIANCE ?
Strategic alliances are necessary to: 1. 2. 3. 4. Satisfy customer demands. Share R&D costs. Fill knowledge gaps. Make scale economies.
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5. Make scope economies : Alliances can enlarge dramatically the scope of a company’s operations. Alliances focusing on scope help counter the ever- shorter product cycle of modern technology. 6. Jump market barriers. 7. Speed in product introduction. 8. Pre-empt competitive threats 9. Use excess capacity. 10.Reduction in costs.
ADVANTAGES OF ALLIANCES
Alliances are the quickest way to grow a company, particularly in times of damage. Without implementing difficult and time-consuming internal changes, they allow a company to: Rapidly move to decisively seize opportunities before they disappear. Respond more quickly to change. Adapt with greater flexibility. Increase a company’s market share. Gain access to a new market or beat others to that market. Quickly shore up internal weaknesses. Gain a new skill or area of competence.
Alliances can rapidly meet a company’s need for key resources such as more customers, additional capital, new/better products, new distribution channels, additional facilities, increased production capacity, or competent personnel etc.
CONDITIONS FOR STRATEGIC ALLIANCES
“Strategic” may be one of the most over-used words in business today. This observation is especially valid in the world of alliances, where managers must distinguish between those alliances that are merely conventional and those that are truly strategic. As companies gain experience in building alliances, they often find their portfolios ballooning with partnerships. While these partnerships may
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contribute value to the firm, not all alliances are in fact strategic to an organization. This is a critical point, since, as those alliances that are truly strategic must be identified clearly and managed differently than more conventional business relationships. Due to the levels of organizational commitment and investment required, not all partner relationships can be given the same degree of attention as truly strategic alliances. The impact of mismanaging a strategic alliance or permitting it to fall apart can materially impact the firm’s ability to achieve its core business objectives.
THE FIVE CONDITIONS FOR A “STRATEGIC” ALLIANCE
What is it that makes an alliance truly strategic to a particular company? Is it possible for an alliance to be strategic to only one of the parties in a relationship? Many alliances default to some form of revenue generation—which is certainly important— but revenue alone may not be truly strategic to the objectives of the business. There are five general conditions that differentiate strategic alliances from conventional alliances. An alliance meeting any one of these criteria is strategic and should be managed accordingly. 1. Critical to the success of a core business goal or objective. 2. Critical to the development or maintenance of a core competency or other source of competitive advantage. 3. Blocks a competitive threat. 4. Creates or maintains strategic choices for the firm. 5. Mitigates a significant risk to the business. The essential issue when developing a strategic alliance is to understand which of these criteria the other party views as strategic. If either partner misunderstands the other’s expectation of the alliance, it is likely to fall apart. For example, if one partner believes the other is looking for revenue generation to achieve a core business goal, when in reality the objective is to keep a strategic option open, the alliance is not likely to survive.
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Examining each of the five strategic criteria in depth provides insight into how the strategic value of alliances can be leveraged. 1. Critical to a business objective While the most common type of alliance generates revenue through a joint go-tomarket approach, not every alliance that produces revenue is strategic. For example, consider the impact on revenue objectives if the relationship were terminated? Clearly, a truly strategic relationship would have a great bearing on the prospects for achieving revenue growth targets. In addition to a single strategic alliance, related groupings of alliances—networks or constellations - may also be critical to a business objective. Sun Microsystems has established a group of integrator alliances that function as an effective marketing channel and drive significant revenues for the company each quarter. This category also includes alliances with high potential, such as alliances that have large but unrealized revenue opportunity. Consider the impact of new Industry standards that make it possible for products from different manufacturers to work together. This can unlock customer value and boost the revenue potential of new, technology-based products. From writable DVD formats to next-generation wireless technologies, technical standards are democratically determined in consortiums of interested industry participants. With product development racing in parallel, the first mover’s advantage can be substantial, and hence alliance development and lobbying within an industry become paramount to financial success. Cost reduction may also be a core business objective of the alliance, particularly among supply-side partners. By investing together in new processes, technologies and standards, alliance partners can obtain substantial cost savings in their internal operations. Again, however, a cost-saving alliance is not truly strategic unless it has an underlying business objective, such as “to achieve an industryleading cost structure.”
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2. Competitive advantage and core competency Another way in which an alliance can prove to be strategic is to play a key role in developing or protecting a firm’s competitive advantage or core competency. Learning alliances are the most common form of competitive/competency strategic alliances. An organization’s need to build incremental skills in an area of importance is often accelerated with the help of an experienced partner. In some cases, the learning objective of the relationship is openly agreed between the partners; however, this is not always the case. Learning alliances work best when: 1. The objectives are openly shared 2. There is little chance of future competition (such as when the partners are in adjacent industries) 3. The cultures of the organizations are similar enough to enable process and methods to be leveraged, and 4. The governance structure of the alliances is established to promote learning at the executive, managerial and operational levels. 3. Blocking a competitive threat An alliance can be strategic even when it falls short of establishing a competitive advantage. Consider the case of an alliance that blocks a competitive threat. It is strategic to bring competitive parity to a secondary segment of a market in which the firm competes, when the absence of parity creates a competitive disadvantage in the related primary segments of that market. For example, competing in the high and medium price range of a market with a premium product may leave the firm vulnerable to a low-priced entry. If the firm’s manufacturing processes do not permit the creation of a low-priced product entry, a strategic alliance with a volume partner in an adjacent market can successfully block the competitive threat. Another example of strategic alliances that block competitive threats are the airline alliances that permit route-sharing among carriers. The two primary determinants of customer flight selection are routing and cost. Therefore, the
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adoption of route-sharing alliances by the airlines blocks the competitive threat of preferential routing in the specific markets in which the airline chooses to compete. In essence, strategic alliances within the airline industry ensure competitive parity with respect to routing and force other factors such as on-time departures and customer service to become the bases for competitive differentiation. 4. Future strategic options From a longer-term perspective, an alliance that is not fundamental to achieving a business objective today could become critical in the future. For example, in 1984, a U.S. consumer products company needed to expand distribution beyond the Midwestern states. Faced with the prospect of European competition at some point in the future, the firm made a strategic decision to invest in an alliance with a distribution and support services company that had incremental distribution capacity in the U.S. and a similar presence in Europe, rather than invest in expanding its own local distribution capabilities. With the option to expand into European distribution at any point, the firm could work to sew up the U.S. market before expanding too quickly internationally. 5. Risk mitigation When an alliance is driven by intent to mitigate significant risk to an underlying business objective, the nature of the risk and its potential impact on the underlying business objective are the key determinants of whether or not it is truly strategic. Dual sourcing strategies for critical production components or processes are excellent examples of how risk mitigation can become the context for supply-side strategic alliances. As process manufacturing companies advance the yield of their operations, suppliers often collaborate with the manufacturer to ensure their new products fit within its new operations. The benefits of such an alliance are cost savings to the manufacturer and accelerated product development for the supplier. In
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situations where the supplier’s product is critical to the manufacturer’s operation, it may be necessary for the manufacturer to have strategic alliances with two competing suppliers in order to mitigate such risks as unilateral cost increases or degradation in quality of service. The real reason that most alliances fail is the constant change in the business environment. Trust allows the parties in a strategic alliance to have the difficult discussions that will transform the alliance over time and give it longevity. When corporate strategies change as a result of a changing business environment, the assumptions upon which the strategic alliance was originally based also change. What was once a strategic investment may no longer remain strategic without modification to the terms of the alliance. In the most extreme cases, the trust built between the two companies enables the adaptability—even renegotiation of the financial terms—to accommodate changes in market or other conditions that impact one of the partners. Strategic alliance organizations are feeling increased pressure. As critical personnel become stretched and financial resources become scarce, strategic alliance organizations must allocate their resources in the most efficient manner possible so that truly strategic alliances can support and accelerate the strategy of the business. The five strategic criteria outlined in this article are primary determinants of the strategic value of an alliance. Using these criteria to identify genuine strategic alliances in the portfolio today and as a guide for developing future strategic alliances are the first steps to improving the impact of an alliance organization. The management principles, also described above, are the next steps towards improving the effectiveness of the strategic alliances themselves. Reference: En.wikipedis.com www.scribd.com
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Political risk is a type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with proper aforethought and investment. What can be the possible strategies in managing political risk at the pre-investment stage? (20)
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Political risk is a type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with proper aforethought and investment.
Political Risk & Foreign Investment
Investors might become exposed to a range of political risks when investing in a foreign country. Political risk refers to the potential losses to foreign investors from adverse political developments in the host country. Political risks cover a wide range of risks from outright expropriation of investor’s assets, to concern about changes in the tax laws that may hurt the profitability of foreign projects.
Classification of Political Risk
Depending on how firms or investors might be affected by an incidence, political risk can be classified into 3 categories: 1. Country specific risks (Macro risks) • Political & Economic stability of the country, attitude of government and public in the host country towards government of foreign investors • Host country’s political & government administrative infrastructure. For example, number of political parties, frequency of change in governments, (this can cause frequent policy changes, and inconsistent & discontinuous economic and political environment. • Track records of political parties and their relative strength, e.g. what type of ideology they support, what is the ideology of the main party?
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2. Firm specific risk (Micro risks) • Conflict between the activities/goals of firm and those of the host country as evidenced by existing regulations. 3. Global specific risks
1. Country specific risks (Macro risks)
These affect MNCs at the project and corporate level and originate at the country level. They include: 1) Transfer risk, which arise from uncertainty about cross-border flows of capital payments and know-how, unexpected imposition of capital controls inbound or outbound, blocked funds, withholding taxes on dividend and interest payments, etc. 2) Operational risks, these are associated with uncertainty about the host country’s policies affecting the local operations of MNCs, some overlap with firm specific risk, e.g. unexpected changes in environmental policies, sourcing local content requirements, etc. 3) Cultural & institutional risks, related to ownership structure, human resource norms, minimum wage laws, religious heritage, nepotism and corruption, intellectual property rights, and protectionism.
2. Firm specific risk (Micro risks)
These affect the MNC at the project/corporation level. These are of three types: 1) Interest rate and Foreign exchange risks, these arise from fluctuation in host country’s interest rate or currency vis-à-vis home currency. 2) Business risks, arise from factors affecting cash flows and hence profitability of the firm, such as change in taxation for foreign firms, or local disputes with trade unions or suppliers, etc.
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3) Governance & Control risks, arise from uncertainty about the host country’s policy regarding ownership, and control of local operation, restriction on access to local credit facilities, goal conflict between a MNC and the host government.
3. Global specific risks
These too affect the MNCs at the project or corporate level but originate at the global level. Examples are:
• Terrorism • Anti-globalization movements • Environmental concerns • Poverty • Cyber attacks Problems in assessing Political Risk
Difficulties in anticipating: 1. If any change is likely to occur over the life of the project. 2. How those changes might affect the host country’s goal priorities? 3. How new regulations might be implemented to reflect new priorities? 4. What might be the likely impact of such changes on the firm’s operation?
PREDICTING COUNTRY-SPECIFIC RISK
In order to assess country specific risks, one needs to assess political & economic stability of a country in terms of; 1) Evidence of turmoil or dissatisfaction
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Indicators of economic stability Trends in cultural and religious activities
Data can be assembled by; a) b) c) d) e) f) Watch for: Significant changes are rarely identified in advance. Economic indicators may not continue moving in the same direction in the future. Assessment of only one rating company is not sufficient. Consider ratings of a number of agencies that assess county risks, such as: • S&P • Moody’s • EIU • Euromoney • Institutional Investor • International Country risk guide • Milken Institute Capital Access Index • Overseas Private Invest Corp. monitoring the local media (local newspapers, radio & TV broadcasts. publications of diplomatic sources Tapping knowledge of outstanding expert consultants Contact other businesses who have had recent experience in the host country Conduct on site visits Examine reports of the ratings agencies
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Managing Country-Specific Risks
Prior to making an investment, a firm should assess the impact of blocked funds on: • Expected return on investment • Desired location of financial structure • Optimal links with subsidiaries During the operations a firm can move funds through variety of repositioning. Funds that cannot be moved must be reinvested in local country such that, avoid deterioration in the real value due to inflation or exchange rate depreciation.
Pre-investment strategy to Anticipate Blocked Funds
Assess both temporary and long term impact of funds’ blockage on expected return of investment. Minimize the effect of blocked funds by; • Borrow locally to avoid problems of repayment of external loans. • Arrange swap agreements Link sourcing & sales with subsidiaries to maximize potential for moving blocked funds.
Strategies for Moving Blocked funds
1. Provide alternative conduits for repatriating funds. 2. Use transfer pricing between related units of the MNCs. 3. Lead and lag payments 4. Use fronting loans (parent company deposits fund with an international bank and that bank lends to the firm. In case of hostility between the
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parent country and the local country, the local govt. may still allow funds to be repaid to the international bank). 5. Create unrelated exports (some new exports can be created to move the profits out). 6. Special dispensation (Bargain to get at least some part of the blocked funds out). 7. Beware of self-fulfilling prophecies (some actions may backfire and cause full blockage of funds).
Temporary blockage • invest in money market (if available), or deposit in banks (even though the rate of return might be low) Long term blockage • invest in bonds or bank time deposits or lend to other businesses No possibility of short or long term investment, • invest in another related line of activity, e.g. in Peru an airline co. invested in hotels • purchase other assets that might better cope with inflation, e.g. buy land, office buildings, or commodities that can be exported to global markets • Stockpile inventories that can be sold at a later stage.
Managing Country-Specific Risks
Cultural and Institutional Risks
There might be a number of Cultural &/or Institutional differences between MNCs & the local country:
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• Differences in allowable ownership structures - Countries may require majority local share ownership. In particular in certain industries such as banks, national defence, etc. • Differences in human resource norms - Requirement to recruit locally might cause difficulties in firing some workers Employment of women managers may face resistance • Differences in religious heritage - Religious differences might restrict the activity of the firm Firm’s link with HQ/subsidiary in some countries may cause problem • Nepotism and corruption in the host country - These may restrict the ability of the firm to operate efficiently. They might also add more costs in terms of corruption or adversely affect firms reputation at home in terms of Corporate Social Responsibility. • Protection of Intellectual Property Rights (IPR) - Need to some legal agreement with the host country to protect IPR. draw
• Protectionism - Need for awareness about the sectors that are highly protected, e.g. defence, agriculture, etc.
PREDICTING FIRM SPECIFIC RISKS
Main objective: anticipate the effect of political change on activities of a specific firm. Different firms have different degrees of vulnerability to change in policy or regulations. For example, a food chain franchise may not experience similar risks as a car manufacturer, or a firm involved in hotel and catering. Need for tailor-made studies by in-house analysts for a firm specific activity. Outside analysts may not have full view of position of firms and changes that are taking place.
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Need to plan protective steps to minimize risks of damage from unanticipated changes.
Firm-Specific Governance Risks
This is related to ability to exercise effective control over firm’s operation within a country’s legal & political environment. Government goals might be different from firm’s goals. Governments try to protect their constituencies, firms try to protect their shareholders. Possible areas of conflict; Impact of firm’s activity on the economy Perceived infringement on national sovereignty Foreign control of key industries Sharing or non-sharing of ownership and control with local interests Impact on a host country’s balance of payments Influence on the foreign exchange value of the country’s currency Control over export markets Use of domestic versus foreign executives and workers Exploitation of national resources.
Reduce Governance Risks by Negotiating investment Agreement
To avoid future conflicts it is better to anticipate future problems and negotiate in advance. Investment agreement should spell out managerial and financial policies on the following issues; i. ii. iii. The basis on which funds may be remitted, e.g. dividends, management fees, royalties, patent fees, and loan repayments. The basis for setting transfer prices. The right to export to 3rd country markets.
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iv. v. vi. vii. viii. ix. x.
Obligations to build or fund social & economic overhead projects, such as schools, hospitals, and retirement system. Methods of taxation, including the rate & type of taxation, and means by which the base rate is determined. Access to host country capital markets, particularly for long term borrowing. Permission for 100% foreign ownership versus required local ownership (joint venture) participation. Price controls, if any, applicable to sales in the host-country markets. Requirements for local sourcing versus import of raw materials and components. Permission to use expatriate managerial and technical personnel, and to bring them and their personal possessions into the country free of exorbitant charges or import duties. Provision for arbitration of disputes. Provision for planned divestment, should such be required, indicating how the going concern will be valued and to whom it will be sold.
Investment Insurance and Guarantees
Insure political risk with a home country public agency. For example, Overseas Private Investment Corporation (OPIC) in the USA. Some of the risks insured in developed countries: Inconvertibility (risk of not being able to convert profits, royalties, fees, or other income, as well as the original capital invested). Expropriation (risk of host government preventing the investing firm to take control over the use of property for one year) War, revolution, insurrection, civil strife (risk of damages to the property and activity of investor and firm’s inability to repay a loan)
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Business income (risk of loss of business income resulting from damages incurred due to political violence)
Reducing Political Risks
MNCs should secure some bargaining points. Local sourcing (purchase of raw material & components locally can reduce political risk but increase commercial and financial risk) Facility location (production facilities can be located such that to minimize risk. Resource oriented activities have to be near resources, but footloose and market oriented activities can move to other locations to reduce risk, e.g. oil wells and refineries) Control of transportation (can substantially influence the bargaining power of both local governments and MNCs, and hence political risk. E.g. oil pipelines cross national frontiers.) Control of technology (control over key patents can reduce political risks for firms.) Control of Markets (firms can increase their bargaining power by controlling the markets where their products are sold, e.g. petrol stations back at home. Some governments try to bypass this, e.g. Q8) Brand name and trademark control Keep control of brand name ad trademark. Thin equity base - borrow locally rather than financing all the capital externally Multiple-source borrowing - If funds need to be raised externally, then it is better to borrow from a number of different banks in different countries rather than just from home banks
PREDICTING GLOBAL SPECIFIC RISKS
More difficult to predict than the other two types Sometimes impossible, e.g. Sept. 11th
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Once something happens various protective measures may be taken in anticipation of further attacks. Assess the following: Type of terrorist threats Their location Potential targets
Terrorism and War Support government efforts to fight terrorism & War Manage Cross-Border Supply Chain by: Keeping larger Inventory Work more closely with local suppliers Evaluate air Transportation vis-à-vis land MNCs have been criticised for their role in globalization, global warming & poverty Hence are exposed to extreme reactions by activists. Attacks might happen both at home and in foreign countries. Need for government support to manage the risk
Reference: Political Risk Analysis by Dr. Sima Motamen
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Because of the distance between markets, place (distribution) is the primary focus of the study of international marketing. In this regard, what are some of the alternative middlemen choices that one has when developing an international distribution system? (20)
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INTERNATIONAL DISTRIBUTION SYSTEMS
When planning for international markets, distribution plays a very important role. Sometimes distribution may be the biggest constraint to successful marketing as getting the product to the target market can be a costly process if barriers in a distribution structure cannot be overcome. Distribution channels differ to a great extent from one country to another on a number of dimensions, due to influencing factors such as culture, tradition, customs, legal requirements. There are, however a number of things that are common to all channels regardless the product category or the market. Marketing channels have been defined by Bradley as a set of independent organizations involved in the process of making a product or service available for use or consumption. One of the main differences in establishing a domestic or an international distribution system consists of the complexity of the variables involved in the choice of “international activities”, when each foreign market has a different distribution system. Main aspects that a company must consider when making international channel decisions are given below. In order to decide over the distribution strategy in a particular country, a company should study: What are the general distribution structures in a country. What are the specific (wholesaling, retailing) distribution patterns in a certain industry. What are the middlemen choices in that country. What are the factors affecting the choice of the distribution channel. How to locate, select, motivate, evaluate and terminate channel members. What alternative distribution strategies can be used.
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What are the main logistic decisions to be taken.
TYPES OF INTERMEDIARIES
There are two basic decisions that the company has to take when choosing intermediaries to serve a particular foreign market. The first is to determine what type of relationship to have with intermediaries, the alternatives being distributorship or agency relationship. The second is that the company has to decide whether to use indirect exporting, direct exporting or integrated distribution to penetrate a foreign market. Distributorship or agency relationship? A distributor (merchant) is a company that purchases the product from the producer and sells it further. Therefore, it has more independence than the agency, being able to better control the marketing activity for product lines carried. The main characteristics are that they take title to manufacturer’s goods, assume trading risks and are less controllable by the manufacturer. An agent operates based on commission, does not usually handle physical goods and has less freedom of movement than a distributor, meaning that the manufacturer has more decision power over marketing activities. The main characteristics are that agents work on commission and do not take title to the merchandise. Middlemen are differentiated according to the fact they take title to the goods or not. Middlemen in different countries have different names but regardless the names they have, that sometimes can be misleading, the marketer should study what are the functions that the middlemen fulfill. Many middlemen in international markets wear many hats and they can be clearly identified only in the relationship with a specific firm. A middleman can fulfill all distribution functions for some companies or only some distribution functions for other companies, meaning that the same
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company can be an agent for a client and a merchant/distributor for another company. Indirect exporting, direct exporting or integrated distribution? Indirect exporting means to sell your products to another domestic firm that acts as sales intermediary and usually takes over the producer’s operations on the international side. Indirect exporting is practiced by firms in their early stages of the internationalization process. Direct exporting means that the company takes direct responsibility for its products abroad by either selling directly to a foreign customer or finding a local foreign representative to sell its products in the market. Integrated distribution means that the company makes an investment into the foreign market in order to sell its products in that market or more broadly. Such investment can be a sales office, a distribution network or even a manufacturing facility. Table below presents possible types of middlemen that can be involved in international marketing. The use of multiple channels. Another decision that the company has to make is either to go through a single distribution channel or more distribution channels. The addition of new distribution channels is meant to offer alternative ways for current and potential customers, so that to have customized channel approaches for each distinct consumer segment in the market. For many products the use of multiple distribution channels becomes a necessity as one of the executive managers of Bloomingdale, one of the major USA retailers stated, that each product should be sold in three channels at the same time: brick-and-mortar store, catalogue and on-line channel. However, where multiple channels are managed together, the potential for channel conflict is great.
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INTERNATIONAL CHANNEL INTERMEDIARIES
Domestic (Indirect) Agents (commission based) Is a low cost agent that Broker brings buyers and sellers together Is an individual middleman that has a short term relationship with the manufacturer for whom provides a selling service in one or two markets. Foreign (Direct) Agents (commission based) Works based on commission and deals with commodities, operating on a country or on a group of countries basis. Manufacturer’s Does not take physical representative possession of goods, but takes the responsibility for the producer’s goods in a city, regional market area, entire country or several countries. Managing Conducts business in a agent foreign nation under an exclusive contract with the parent company, compensation being based on percentage of the profits.
Export management company (EMC)
Works under the name of manufacturer, as a low cost independent marketing department with direct responsibility to the parent firm. Export jobber Deals mostly with the commodities and work on a job-lot basis assuming responsibility for arranging transportation. Merchants (take title of goods) Global retailer Buys from local suppliers /wholesaler and sells in their subsidiaries abroad. Trading Accumulates transport and company distributes goods from many countries. Generally located in the developing countries. Buying office Purchase merchandise on request and does not have long term relationship. Complementary Arrangements to distribute marketing the product of another company. Also called piggybacking.
Merchants (take title of goods) Complementary Arrangements to distribute marketing the product of another company Distributor / Has the exclusive rights in a dealer foreign country to sell the products of the manufacturer. Retailer / wholesaler Purchasing agent Buys from foreign manufacturer and sells the goods further Purchases goods from manufacturer and sells them to wholesalers and retailers.
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The logical steps to be followed when developing international distribution channels, as part of the channel management are: 1. Locating middlemen. 2. Selecting middlemen. 3. Motivating middlemen. 4. Controlling middlemen. 5. Terminating middlemen. Locating and selecting middlemen are the first steps in the process. In order to locate middlemen, the company establishes a number of criteria to be used in evaluating middlemen. Most companies emphasize on actual or potential productivity of the middlemen, but there are more criteria that should be taken into consideration. Table below presents a model for channel member selection. Criteria for channel member selection
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Motivating middlemen. Once middlemen have been selected, the manufacturer should motivate them in order to keep a high level of interest in the manufacturer’s products. The main motivational tools that can be used are: • Financial rewards- incentives (discounted products) and margins. • Psychological rewards- publicity, local newspaper, trips in the country of the manufacturer. • Communication- letters, periodicals with information, personal visits. • Support- credit, special product information, technical assistance, product service, advertising support. • Close relationship- long term relationship, friendship in some cultures (Arab, Japan, Latin America). Controlling and evaluating middlemen. The company wants to exert enough control over channel members to help guarantee that they interpret and execute the company’s marketing strategies. The company has to make sure that local intermediaries implement price, sales, advertising and service policies. The issue of control becomes more difficult at international level due to the usually longer chain on the one hand and due to differences in culture, tradition, legal systems in distribution on the other hand. The issue of control becomes important when there are no integrated distribution systems and when the company distributes its products through independent intermediaries mainly. There are two types of control a company may pursue when controlling its distribution systems in a country: Control over the system Control at middlemen level Terminating middlemen There are two main questions related to the middlemen termination: When do we terminate middlemen and how do we terminate middlemen?
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When? Middlemen will be terminate when they cannot be controlled, when they do not perform by not meeting the planned sales volume and when the market situation changes and the distribution strategy has to change. How? Middlemen can be terminated through simple dismissal, as in USA or Romania or with compensation because of legal protection. In some countries, legal protection makes it difficult to terminate a relationship with a middlemen. In Columbia, for instance, when a manufacturer terminates an agent, it is required to pay 10% of the agent’s average annual compensation multiplied by the number of years the agent served, as a final settlement. In other countries in order to determine whether the relationship should be ended the company has to go through an arbitration process. Whenever contracts are signed with middlemen competent legal advice is very important, so that termination conditions to be stipulated in the distribution agreement.
References: Global marketing Strategy by Chee H and harris R.
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(a) What is the difference among ethnocentricity, polycentricity and geocentricity? (10) (b) How MNCs are identified in terms of size, structure, performance and behavior? (10)
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The form and substance of company’s response to global market opportunities depend greatly on the management’s assumptions or beliefs, both conscious and unconscious, about the nature of the world. The worldview of company’s personnel can be described as ethnocentric, polycentric, regiocentric and geocentric. Management at a company with a prevailing ethnocentric orientation may consciously make a decision to move in the direction of geocentricism. The orientations collectively known as the EPRG framework are summarized in below figure.
ORIENTATIONS OF MANAGEMENT AND COMPANIES
Polycentric Each host country is unique; sees differences in foreign countries
Ethnocentric Home country is superior; sees similarities in foreign countries
Regiocentric Sees similarities and differences in a world region; is ethnocentric or polycentric in its view of the rest of the world
Geocentric Worldview; sees similarities and differences in home and host countries
ETHNOCENTRIC ORIENTATION A person who assumes his or her home country is superior compare to the rest of the world is said to have an ethnocentric orientation. The Ethnocentric orientation means company personnel see only similarities in markets and assume the product and practices that succeed in the home country will, due to their demonstrated superiority, be successful anywhere. At some companies, the
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ethnocentric orientation means that opportunities outside the home country are ignored. Such companies are sometimes called domestic companies. Ethnocentric companies that do conduct business outside the home country can be described as international companies; they adhere to the notion that the products that succeed in the home country are superior and, therefore, can be sold everywhere without adaptation. In the ethnocentric international company, foreign operations are viewed as being secondary or subordinate to domestic ones. As ethnocentric company operates under the assumption that “tried and true” headquarters’ knowledge and organizational capabilities can be applied in other parts of the world. Although this can sometimes work to a company’s advantage, valuable managerial knowledge and experience in local markets may go unnoticed. For a manufacturing firm, ethnocentrism means foreign markets are viewed as a means of disposing of surplus domestic production. Plans for overseas markets are developed utilizing policies and procedures identical to those employed at home. No systematic marketing research is conducted outside the home country and no major modifications are made to the product. even if the consumer needs or wants in international markets differ from those in the home country, those difference are ignored at headquarters. POLYCENTRIC ORIENTATION The polycentric orientation is the opposite of ethnocentrism. The term polycentric describes management’s often unconscious belief or assumption that country in which a company does business is unique. This assumption lays the groundwork for each subsidiary to develop its own unique business and marketing strategies in order to succeed; the term multinational company is often used to describe such a structure. GEOCENTRIC ORGANIZATION A company with a geocentric orientation views the entire world as a potential market and strives to develop integrated world market strategies. A company
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whose management has a regiocentric or geocentric orientation is sometimes known as a global or transitional company. The geocentric orientation represents a synthesis of ethnocentrism and polycentrism; it is a ‘worldview’ that sees similarities and differences in markets and countries and seeks to create a global strategy that is fully responsive to local needs and wants. A regiocentric manager might be said to have a worldview on a regional scale; the world outside the region of interest will be viewed with an ethnocentric or polycentric orientation, or a combination of the two. The ethnocentric company is centralized in its marketing management, the polycentric company is decentralized and the regiocentric and geocentric companies are integrated on a regional and global scale, respectively. A crucial difference between the orientations is the underlying assumption for each. The ethnocentric orientation is based on a belief in home-country superiority. The underlying assumption of the poly centric approach is that there are so many differences in cultural, economic and marketing conditions in the world that it is impossible and futile to attempt to transfer experience across national boundaries.
Reference: Global Marketing by Keegan
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The multinational corporation (MNC) is considered as the most potent and institution in the world today. Globalization, the process that has a significant impact on how the world operates today is mostly driven by the expansion of MNCs. Since the end of the Cold War in 1991, governments have sought to reduce the role of the state in the economy and lower barriers to the international movement of goods, services, capital, ideas and technology. Globalization has paved the way for the elimination of boundaries between nation states and now Multinational Corporation are spreading across the world in search of new markets, opportunities and resources.
THE MULTINATIONAL CORPORATION
A multinational corporation can be defined as one having a subsidiary or a branch or a place of business in two or more countries or operates in two or more countries or territories. Therefore, a multinational can be called so by virtue of its physical presence in two or more countries or by virtue of geographical scope of its operations in two or more countries. Multinationals are sometimes also referred to as ‘transnational corporations’. The term ‘multinational’ is more of an American term whereas the term ‘transnational’ is European. Conservatively counted there are about 63,000 multinational corporations in the World. Among the Fortune 500, all major multinational corporations are either American, Japanese or European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW. On one side, they create jobs and wealth and improve technology in countries that are in need of such development and on the other hand, they may have undue political influence over governments, exploit developing nations and create a loss of jobs in their own home countries. Very large multinationals have budgets that exceed those of many countries. They can be seen as a power in
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global politics. Multinationals often make use of outsourcing as a strategy to produce certain goods for them.
Wal-Mart is bigger than Norway, Royal Dutch/Shell Group is bigger than South Africa and General Motors is over twice as big as Nigeria. Of the largest 100 economic actors in the World today, 51 are corporations and 49 are countries. It has been estimated that the World’s 500 largest companies controlled at least 70% of World trade, 80% of foreign investment, and 30% of global GDP. The 100 largest had assets of $28,813 billion, of which 40% were located outside their home countries. Multinationals World over are termed so due to there are ability to market their products and services in various countries. However, they are binational or national in terms of ownership and management personnel. To take an example,
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Royal Dutch/Shell Group is binational in ownership and managerial personnel but multinational in product/services. The Prolasca in Nicaragua is national in production but multinational in ownership, marketing, finance and management. On the other hand, Unilever, which is now been multinational in terms of ownership as well as product/services is a complete multinational. Thus, multinational companies may have their management as binational and their functions as multinational. We could also have multinational companies based on their pattern adopted in each of the functions such as marketing, production, finance and management. The first multinational appeared in 1602 and was the Dutch East India Company (Source: www.sabrizain.demon.co.uk/malaya/dutch1.htm). These corporations originated early in the 20th century and proliferated after World War II. Typically, a multinational corporation develops new products in its native country and manufactures them abroad, often in third World nations, thus gaining trade advantages and economies of scale. India was an appendage of Great Britain and the imperial preference policy of Great Britain converted India into an agricultural hinterland. The East India Company used to import raw materials from India at throwaway prices and export the finished goods at high price leaving their colony impoverished as a debtor country. During the last two decades of the 20th century many smaller corporations also became multinational, some of them in developing nations. STAGES OF EVOLUTION OF MNCs There are three stages of evolution of a multinational company which are listed and described as follows: 1. Export stage Initial inquiries – firm rely on export agents Expansion of export sales Further expansion of foreign sales branch or assembly operations (to save transport cost) 2. Foreign Production stage There is a limit to foreign sales (tariffs, non tariff barriers)
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Direct foreign investment vs. licensing. Once the firm chooses foreign production method of delivering goods to foreign markets, it must decide whether to establish a foreign production subsidiary or license the technology to a foreign firm. 3. Multinational stage The company becomes a multinational enterprise when it begins to plan, organize and coordinate production, marketing, research & development, financing and staffing function. For each of these operations, the firm must find the best location. CATEGORIES OF MULTINATIONAL CORPORATIONS Sloman and Sutcliffe (2000), identified three classifications of Multinational Corporations. These are: 1. Horizontally Integrated Multinational – This type of multinational seeks to produce essentially the same product in different countries. The primary objective of this strategy is to achieve growth by expanding into new markets. 2. Vertically Integrated Multinational – In this case, the multinational undertakes various stages of production in different countries for a core business. Thus in some countries it will go backwards into the business’s supply chain to the components or raw materials stages, and in others it will go forwards into the product’s assembly or distribution. The principal motive behind such a growth strategy is to be able to exert greater control over costs and reduce the uncertainty of the business environment. 3. Conglomerate Multinational – Such multinationals will produce a range of different products in different countries. By this process of diversification, conglomerate multinationals will look to spread risks, and maximize returns through the careful buying of overseas assets.
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REASONS BEHIND THE EMERGENCE OF MULTINATIONAL CORPORATIONS 1. Reduction is Costs Nations like individuals are not equally endowed with factors of production. Some nations are rich in labor, some in capital, and some in raw materials. In other words, individual nations might have specific advantages over others. Because such factors of production are largely immobile, especially between nations, businesses respond by becoming multinational: that is, they locate where the necessary factors of production they require can be found (Sloman and Sutcliffe 2000). 2. Growth Strategy Once markets within the domestic economy have become saturated, and opportunities for growth diminish, dynamic firms may seek new markets and hence new opportunities by expanding production overseas. Businesses can look to expand in one of two ways: through either internal or external expansion. Expanding by becoming multinational enables the business to spread its risks, and in addition, it enables the business to exploit any specific advantages it might have over its foreign rivals in their home markets (Sloman and Sutcliffe 2000). Such advantages, according to Sloman and Sutcliffe (2000), might include the following: The ownership of superior technology. Given the dominant market positions that many MNCs hold, their possession of the most up-to-date technology is to be expected, and likely to be one of the principal key to success. Such ownership will not only enhance productivity levels of the MNC, but probably also contribute to the production of superior-quality products. Entrepreneurial and managerial skills. Research and development capacity. Like big business generally, MNCs are likely to invest heavily in research and development in an attempt to
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maintain their global competitiveness. MNCs are often world leaders in process innovation and product development. 3. Competitive Advantage One way in which the MNC might exploit its dominant position is by extending the life cycle of a given product. By shifting production overseas at a particular point in the product’s life cycle, the business is able to reduce costs and maintain competitiveness. In the domestic market, it might be faced with growing competition and static demand. Rivals might also be busy copying its technology. By extending its production to different geographical locations, where demand is still growing, where there is less competition and where it has a technological advantage over local companies, its profitability can be more effectively maintained in the long run (Sloman and Sutcliffe 2000). MULTINATIONALS : ADVANTAGES AND DISADVANTAGES
ADVANTAGES The foray of multinationals into a country requires labour thereby ensuring new job opportunities. They will bring in advanced technology and management style. The pressure of competition forces companies to undertake product innovation as a result of which new and better products flock the market. Better logistics management and financial strength enjoyed by multinationals sets new standards in the prevailing markets Expands and creates new markets. DISADVANTAGES Share of profit remitted to the parent company reduces the amount of money created. A strict money-making oriented approach of multinationals may prove to be non beneficial. High and regulated transfer prices may increase the costs of operations.
Improves the income to the exchequer by way of direct and indirect taxes.
The enormous financial strength and influence enjoyed by multinationals may be selfishly utilized through political pressure. Multinationals may abuse resources such as labour and natural resources to gain competitive advantage in international markets. Employees in developed nations are always under the threat of low job securities or loss of jobs.
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Provides economic support for developing nations.
Advance Law Lexicon by P.Ramanatha Aiyar, Wadhwa Publications
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Explain the following in detail? (a) (b) (c) Letter of Credit Packing List (7) (7) Commercial Invoice (6)
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LETTER OF CREDIT
The English name “letter of credit” derives from the French word “accreditif”, a power to do something, which in turn is derivative of the Latin word “accreditivus”, meaning trust. A letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay for goods or services. A bank or finance company issues a letter of credit on behalf of a buyer, authorizing the seller to obtain payment within a specified timeframe once the terms and conditions outlined in the letter of credit are met. The letter of credit acts like an insurance contract for both the buyer and seller and practically eliminates the credit risk for both parties, while at the same time reducing payment delays. A letter of credit provides the seller with the greatest degree of safety when extending credit. It is useful when the buyer is not well known and when exchange restrictions exist or are possible. The LC can also be the source of payment for a transaction, meaning that a will get paid by redeeming the letter of credit. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common Traveler's cheques. Elements of a Letter of Credit A payment undertaking given by a bank (issuing bank) On behalf of a buyer (applicant) To pay a seller (beneficiary) for a given amount of money
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On presentation of specified documents representing the supply of goods Within specified time limits Documents must conform to terms and conditions set out in the letter of credit Documents to be presented at a specified place PARTIES TO AND ASSOCIATED WITH THE LETTER OF CREDIT 1. Applicant The applicant is the party who requests and instructs the issuing bank to open a letter of credit in favor of the beneficiary. The applicant usually is the importer or the buyer of goods and/or services. The applicant can also be another party acting on behalf of the importer, such as a confirming house. The confirming house is equivalent to a buying office, it acts as an intermediary between buyer and seller, and it can be located in a third country or in the seller’s country. 2.Beneficiary The beneficiary is entitled to payment as long as he can provide the documentary evidence required by the letter of credit. The letter of credit is a distinct and separate transaction from the contract on which it is based. All parties deal in documents and not in goods. The issuing bank is not liable for performance of the underlying contract between the customer and beneficiary. The issuing bank's obligation to the buyer, is to examine all documents to insure that they meet all the terms and conditions of the credit. Upon requesting demand for payment the beneficiary warrants that all conditions of the agreement have been complied with. If the beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank. 3.Issuing Bank The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the letter of credit. Under the provisions of the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable amount of time after receipt
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of the documents to honor the draft. The issuing banks' role is to provide a guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due and to examine the documents, and only pay if these documents comply with the terms and conditions set out in the letter of credit. Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill and an insurance document; but there are many others. Letters of credit deal in documents, not goods. 4.Advising Bank An advising bank, usually a foreign correspondent bank of the issuing bank will advise the beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter of credit is valid. In addition, the advising bank would be responsible for sending the documents to the issuing bank. The advising bank has no other obligation under the letter of credit. If the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay. 5.Confirming Bank The correspondent bank may confirm the letter of credit for the beneficiary. At the request of the issuing bank, the correspondent obligates itself to insure payment under the letter of credit. The confirming bank would not confirm the credit until it evaluated the country and bank where the letter of credit originates. The confirming bank is usually the advising bank. DIFFERENT FIELDS OF LETTER OF CREDIT FROM :( NAME & ADDRESS OF OPENING BANK ) This clause contains details of bank which has opened the Letter of Credit, and it works on the behalf of the buyer of goods. The opening bank plays the first step in the whole process of letter of credit. TO :( NAME & ADDRESS OF ADVISING BANK )
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This clause shows the details of bank which plays the foremost role in the process of letter of credit. The advising bank belongs to the country of seller. It plays the role of middleman between the seller and the opening bank TYPE OF L/C :IRREVOCABLE This clause shows the type of L/C in which it is being made. Various types of L/C’s are Revocable, Irrevocable, Commercial, Negotiable etc. L/C Number : The clause shows a particular number for L/C and every L/C has different number so that difference can be judged between different L/C’s. DATE OF ISSUE : This clause shows that date on which the opening bank has issued the L/C. DT. & PLACE OF EXPIRY : This shows about the date and the place in Pakistan the L/C will get expired, means that financial institution where the L/C is send by the opening bank. NAME & ADDRESS OF THE: APPLICANT It contains detail about the buyer of the goods. It gives complete address of the buyer. BENEFICIARY It shows details of the seller of goods, like seller’s name, address, country to which he belongs. AMOUNT OF CREDIT IN : US DOLLARS /EURO/ANY OTHER FREELY EXCHANGEABLE CURRENCY (IN FIGURES & WORDS) It shows the currency in which the deal is been made, the code for that currency as well as the amount of the goods
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PERCENTAGE CREDIT : AS PER CONTRACT AMOUNT TOLERANCE Sometimes the amount in the letter of the credit and the exact amount of the goods does not match. There can be a difference between the both. So a specific percentage of amounts of goods specified in L/C is given as a tolerance and the exact amount of goods can be in between the minimum and maximum tolerated limits. CREDIT AVAILABLE WITH: This part shows the details of that party from where the amount can be reimburses by the seller. This state’s either a specified bank in Pakistan or any bank in Pakistan. USANCE OF THE DRAFTS : This clause shows whether the draft is payable at sight or at any date in future. DRAFTS TO BE DRAWN ON: It tells about the party which acts as a drawee. Generally the opening bank acts as a drawee. PARTIAL SHIPMENT : AS PER CONTRACT This clause contains details whether the shipment of goods is allowed through one shipment or the goods can be sending through various shipments. TRANSHIPMENT : AS PER CONTRACT Transshipment means when the goods are send, SHIPMENT FROM : It tells about that place from where goods are send by the seller. SHIPMENT TO : It’s that place where the goods are sending by the seller. And generally its that country where the buyer lives.
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LATEST SHIPMENT DATE : It’s that date till which the goods should reach to the buyer. After that date, it’s the choice of the buyer whether he accepts the goods or not. DESCRIPTION OF GOODS : Description of Materials Size ( in mm) and Quantity (in MT) Specification Tolerance Quantity Quantity Tolerance Price per MT (in USD/Euro/any other freely exchangeable currency) DOCUMENTS REQUIRED : Beneficiary’s Commercial Invoice - one original plus two signed copies covering materials shipped. Invoices will be raised on the basis of (THEORETICAL/ ACTUAL/ DRAFT SURVEY) WEIGHT. DOCUMENTS NEED FOR L/C Letter of credit documents are required to be arranged in the following series: By seller (duplicate documents) Bill of exchange Bill Goods lorry receipt Party acceptance letter Debit note Packing list Original letter of credit By seller’s bank (Duplicate documents) Letter Bill of exchange Bill
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Goods lorry receipt Party acceptance letter Debit note Packing list Letter of credit (duplicate) By buyer’s bank (Original documents) Bill of exchange Bill Goods lorry receipt Party acceptance letter Debit note Packing list Letter of credit (DUPLICATE)
A commercial invoice is a document used in foreign trade. It is used as a customs declaration provided by the person or corporation that is exporting an item across international borders. Although there is no standard format, the document must include a few specific pieces of information such as the parties involved in the shipping transaction, the goods being transported, the country of manufacture, and the Harmonized System codes for those goods. A commercial invoice must also include a statement certifying that the invoice is true, and a signature. A commercial invoice is primarily used to calculate tariffs. A sample commercial invoice format
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A packing list is a shipping document that accompanies delivery packages, usually inside an attached shipping pouch or inside the package itself. It is also known as shipping list, packing slip, bill of parcel, unpacking note, packaging slip, delievery list or customer receipt. It commonly includes an itemized detail of the package contents and does not include customer pricing. It serves to inform all parties, including transport agencies, government authorities and customers about the contents of the package. It helps them deal with the package accordingly. CONTENTS OF THE PACKING LIST When you prepare your goods for shipment, you may be required to prepare a detailed export packing list. This is a formal document that itemizes quite a number of details about the cargo such as: The name of the exporter (referred to as the shipper) and their contact details (tel, fax, cell, e-mail), including physical (not postal) address The name of the importer (referred to as the consignee, meaning the person or firm to whom the goods are to be sent) and their contact details (tel, fax, cell, e-mail), including physical (not postal) address The gross (i.e. the weight of the product and packaging - that is, the total weight), tare (i.e. the weight of the packaging without any contents) and net (i.e. the weight of the product only) weights of the cargo The nature, quality and specifications of the product being shipped The type of package (such as pallet, box, crate, drum, carton, etc.) The measurements/dimensions of each package The number of pallets/boxes/crates/drums, etc. The contents of each pallet or box (or other container) The package markings, if any, as well as shipper's and buyer's reference numbers Reference to the associated commercial invoice such as the invoice number and date
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A purchase order number or similar reference to correspondence between the supplier and importer An indication of who the carrier is (airline, shipping line or road hauler) Reference to the Bill of Lading or Air Waybill number PURPOSE OF THE PACKING LIST The packing list should be attached to the outside of a package in a waterproof envelope or plastic sheath marked "Packing list enclosed". The list is used by the shipper or forwarding agent to determine (1) the total shipment weight and volume and (2) whether the correct cargo is being shipped. In addition, customs officials (both local and foreign) may use the list to check the cargo. Packing lists come in fairly standard forms and can be obtained from your freight forwarder.
References: www.12manage.com www.enwikipedia.com
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