Export Marketing of Small and Medium-Sized Enterprises in the South Baltic Region

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1 Export Marketing of Small and Medium-Sized Enterprises in the South Baltic Region Edited by Hanna Treder Przemysław Kulawczuk Gdańsk University Press

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3 Export Marketing of Small and Medium-Sized Enterprises in the South Baltic Region

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5 Export Marketing of Small and Medium-Sized Enterprises in the South Baltic Region Edited by Hanna Treder Przemysław Kulawczuk translation Monika Kowalska Gdańsk University Press Gdańsk 2012

6 Reviewer Edyta Rudawska Editor Łukasz Jaroń Cover and title pages design Filip Sendal Desktop publishing Michał Janczewski Publication partly financed by the European Regional Development Fund Copyright by Uniwersytet Gdański Wydawnictwo Uniwersytetu Gdańskiego ISBN Wydawnictwo Uniwersytetu Gdańskiego ul. Armii Krajowej 119/121, Sopot tel./fax , tel wyd.ug.edu.pl, kiw.ug.edu.pl

7 Contents Foreword (Hanna Treder and Przemysław Kulawczuk) Motives of initiating export activity in the Baltic Sea Region (Andrzej Poszewiecki) An evaluation of benefits from export activity Assessing the risk related to export activity Decision process related to initiating export activity Searching for the sources of export information in the South Baltic Region (Andrzej Poszewiecki) Export-related information needs Market report and its structure Internet monitoring Sources of business information Market entry strategies in the South Baltic Region and on third markets (Przemysław Kulawczuk) Enterprise technological and market development and its impact on exploitation of export opportunities Export as an innovative business model The main strategies of export entry modes on foreign markets and their practical application Criteria of choosing an entry strategy Export entry strategies from the perspective of an accepted business model and the level of technological and market development Creating a strategy of entering a new export market Distribution channels on the foreign markets (Eugeniusz Gostomski) Distribution as a marketing tool Types of distribution channels Intermediaries in selling goods on the foreign markets Choosing distribution channels on the foreign markets Using the Internet to distribute goods on the foreign markets Organizing export activity in an enterprise (Bohdan Jeliński) Forms of conducting business activity on the foreign markets Creating an organizational structure for conducting export activity Task ranges of export units in an enterprise Creating and implementing an export business plan (Bohdan Jeliński, Przemysław Kulawczuk) Business plans and an export development plan Structure and creation of an export development plan for processed goods and services Product strategy Price strategy Distribution strategy... 88

8 6 Contents Communication and promotion strategy Safeguarding the interests, including the strategy of protecting intellectual property Formulating market targets Financing a business plan of export development Exporters action when facing tensions and difficulties in the course of implementing the export development plan Organizing an export transaction (Hanna Treder) Preparing a transaction in the course of a transaction cycle Creating the concept of an export transaction Trade customs and terms Risk management in an export transaction Negotiating and making contracts (Bohdan Jeliński) Negotiations as the basis for making contracts and negotiation strategies The essence of export negotiations and negotiation tactics Negotiation styles and features of a good negotiator on the South Baltic markets Basic areas of potential disputes and contractual mistakes Methods of avoiding potential conflicts in the contracting process Forms and procedures of dispute settlement Establishing a long-term corporate identity on the foreign market (Anna M. Nikodemska-Wołowik) The essence of corporate identity of an enterprise operating in the international environment The idea of corporate identity and its practical application Corporate identity of an enterprise versus its image and overall identification Corporate identity of an enterprise versus its brand Attributes of corporate identity of an enterprise and their communication Classification and criteria of choosing the key attributes displayed on the foreign market Trust and CSR as the attributes appreciated on the Scandinavian markets New challenges for creating the identity attributes Creating the overall identification system in an enterprise Visual, behavioural and information subsystems and their role in the performance of a business entity Referring selected elements of the overall identification system to the international environment Practical methods of strengthening the OI system Overall identification programme Recommending the activities performed at particular stages of implementing the overall identification programme Tools for researching corporate identity and guidelines for their implementation Cooperation with the OI consultants Financial and legal aspects of corporate identity

9 Contents Cultural differences in conducting business in the South Baltic Region (Dorota Simpson) The essence, elements and layers of culture A comparison of cultural dimensions typical of the South Baltic countries International business communication in the South Baltic Region The Jante Law as a key to understanding the attitudes and behaviours of Scandinavian entrepreneurs An attitude towards time in mutual business contacts Practical recommendations for entrepreneurs interested in developing business undertakings in the South Baltic Region Organizing joint ventures and strategic alliances in the South Baltic Region (Eugeniusz Gostomski) The notion and types of strategic alliances Motives of forming strategic alliances Forming a strategic alliance and its management The essence, types and benefits of a joint venture Formation and performance of joint ventures Dangers related to the formation and performance of joint ventures Polish-Swedish investment cooperation Sources List of figures List of tables

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11 Foreword Export marketing helps entrepreneurs to make decisions related to entering and maintaining their position on the foreign markets. In order to achieve strategic aims of business entities operating in a highly competitive environment, it is required from entrepreneurs to take an active part in searching for new market expansion forms. Geographic proximity, similar institutional frameworks in national economic systems and particularly the EU membership create a unique opportunity to benefit from establishing partner relationships of an economic type among enterprises in the South Baltic region. However, despite these conducive premises, international cooperation among small and mediumsized enterprises in the South Baltic region is still below the expectations. There exists a huge potential for international cooperation in different spheres of manufacturing and service industries. In order to give support to entrepreneurs from the SME sector who are interested in developing international business contacts, in , the project referred to as Catching the future (CTF) was implemented. The project was co-financed by the European Regional Development Fund and its main aims were specified within two frameworks mentioned below: developing cooperation between partner communes from Northern Poland and Southern Sweden within the scope of fostering local entrepreneurship and supporting business initiatives taken by entrepreneurs from the SME sector who are interested in establishing cooperation with foreign partners. Within the framework of the CTF project, Polish and Swedish entrepreneurs were thoroughly prepared by being provided with theoretical knowledge necessary to establish business cooperation. They took part in a series of trainings, both in Poland and Sweden. The participants were familiarized with different legal, economic and cultural aspects of business undertakings on the other sides of the Baltic Sea. The CTF project also accounted for numerous meetings, workshops and international seminars regarded as an excellent opportunity to establish direct business contacts. As part of training activities performed within the CTF project, the publication Export Marketing was prepared. This publication resulted from the need expressed by training participants who expressed their wish to provide entrepreneurs with a concise written guide containing basic information necessary to devise the strategy of entering foreign markets. The guide includes a wide scope of issues and problems which require solutions from commercial practice developed on the foreign markets. Theoretical elements were supplemented with practical examples. A reader also receives numerous specific guidelines related to different decision-making situations in an export enterprise. Export Marketing is aimed at the CTF project participants and all entrepreneurs interested in expanding their business activity on the foreign markets as well as at students of economic-related subjects who prepare themselves to start their professional career in international business. We wish you an enjoyable and fruitful reading experience. Hanna Treder and Przemysław Kulawczuk Sopot 2012

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13 Andrzej Poszewiecki 1. Motives of initiating export activity in the Baltic Sea Region 1.1. An evaluation of benefits from export activity As compared with the 21 st century inventions which have revolutionized our lifestyle, constantly evolving computer and telecommunication inventions at the turn of the 20 th and 21 st century heavily influence the global culture and economy. As a result, even a micro company is currently able to create and use the communication and IT infrastructure which would be envied by big corporations several years ago. Whilst the second half of the 21 st century belonged to transnational corporations, the beginning of the 21 st century belongs to micromultinationals, that is young companies which easily engage themselves in complex cooperative undertakings on an international scale, and which are able to operate on the global markets. Another English term for multinationals is born globals, meaning start-ups entering the international markets just after being established ( from birth ). It is likely that we do not know and even will not hear about the majority of micromultinationals. As compared with other small companies, they mostly end their activity or are acquired by bigger corporations. However, some names, e.g. the Estonian Skype or Finnish Rovio, a producer of Angry Birds, a popular game for mobile devices, entered the everyday language. Currently, even software elements constitute global artefacts produced by dynamic small companies: Linux started its activity in Finland, Apache in the USA, MySQL in Sweden and Python in Holland. However, entrepreneurs start business activity on their local or regional market. At a given moment (according to the above-mentioned information, the process is quicker), some enterprises consider not only local or domestic operations (local or domestic markets become too tight ), but foreign or even global expansion. Making a decision about foreign expansion is insignificantly related to the company size. Currently, export activity is not a privilege of big companies. As a result of opening the markets within the European integration and the Internet access, medium-sized and small companies are common and they successfully operate abroad. In the era of globalization, small and medium-sized companies more frequently participate in international trade 1. This situation has been taking place for years and the internationalization process of these companies is gaining in importance. One of the factors which considerably facilitated international activity and export expansion of small companies is the Internet development. SMEs (small and medium-sized companies) play a significant role in export (their share in the Polish export value increased in 1993: 23% and in 1999: 47%) 2. Next, this share decreased, e.g. as a result of a considerable increase of export activity conducted by big corporations with foreign capital. The role of SMEs and their importance in international trade is also emphasized as a result of current occurrences in the global economy. New growth perspectives for North America, Europe and the remaining parts of the developed world resemble the stagnation of the Japanese economy mixed with the employment slump, which makes it more urgent to effectively react to this situation. However, no solution has brought expected results so far. It is not surprising. Traditionally, mecha- 1 J. Bednarz, E. Gostomski, Działalność małych i średnich przedsiębiorstw na rynkach zagranicznych, Wydawnictwo Uniwersytetu Gdańskiego, Gdańsk 2009, p Ibidem, p. 52.

14 12 Andrzej Poszewiecki nisms of political interventions are generally created around the interests of the existing business entities rather than start-up companies which are currently a key source of growth and job creation. It is worth remembering that the entire net growth of workplaces in the USA in was related to the companies operating on the market shorter than 5 years 3. Interestingly enough, in , every year more than 2,5 m people created their own workplaces by becoming entrepreneurs. Every year, they additionally created more than million paid workplaces 4. In other words, 65% of all workplaces in the USA at that time were created by entrepreneurs themselves. It means that small entrepreneurs are a more important source of employment and significant, yet undervalued, entities of modern business activity. The European data are similar. Around 32,6 m people are classified as self-employed, which constitutes more than 15% of the overall employment 5. Micromultinationals underlie this fundamental change in creating new workplaces and economic value added. Traditionally, such small service-based companies created on an independent initiative should be described as small and medium-sized enterprises. However, the Internet, new business platforms and a growing openness of the global economy make it possible for such companies to quickly enter the foreign markets searching for the sources of their advantage, reducing bureaucracy and overheads. Contemporary technology expands the reach and scale of small companies which incur low costs. In this regard, small companies become similar to big corporations. Technology is the most important driving force of SMEs. Those companies which benefited the most from modern technologies use new Internet services in order to perform the functions which earlier required creating departments in big corporations. It becomes obvious why SMEs using Internet technologies on a large scale grow and export twice as much as other companies. They also create twice as many new workplaces. A strong presence in the Internet brings benefits not only for the companies themselves, but also for the entire economy. For example, in the United Kingdom 71% of SMEs use the Internet with a middle or high intensity and the share of the Internet in the British GDP is around 5,4%. To compare with, in Russia only 41% of SMEs use the Internet with a middle or high intensity and the Internet contributes to the creation of 0,8% of the Russian GDP 6. The decision about initiating export activity by SMEs should be carefully thought-through and based on a reliable and detailed analysis of possibilities and factors which could delay or disrupt the course of selling abroad. It is also necessary to consider that it results from a certain stage of enterprise development and the part of a bigger process consisting in conducting business activity. Balancing activities and proper time coordination of an undertaking is extremely important from the perspective of a company. In practice, many entrepreneurs unwillingly regard export as a form of development. When noticing barriers, restrictions and dangers, they forget about basic export advantages: increasing the number of potential customers; reducing unit production costs (economies of scale resulting from greater sales); recognizing global economic trends (up-to-date knowledge of the global economy); reducing the risk of conducting business activity viewed holistically; acquiring greater prestige (according to market research and analyses, an exporter is associated with a reliable company focusing on quality, which gives him/her greater prestige). 3 A. Mettler, A.D. Williams, The Rise of the Micro-Multinational: How Freelancers and Technology-Savvy Start- Ups Are Driving Growth, Jobs and Innovation, Policy Brief, Vol. V., No. 3 (2011), p Ibidem. 5 Ibidem. 6 Ibidem.

15 Motives of initiating export activity in the Baltic Sea Region 13 Ivona Software In 2001, Łukasz Osowski finished his studies and his friend, Michał Kaszczuk was a third year student of the Faculty of Electronics, Telecommunications and Informatics. During their studies, they were both interested in the issue of speech synthesis and although their specializations were different (computer algorithms and networks), they wrote their MA theses about what they were interested in. The IVO company (an initial company name) started its activity in At the beginning, the founders worked 15 hours a day. After 5 months of intensive work, in September 2001, the first product, SPIKER, was ready. It was not a perfect product, yet more functional that other products used in Poland at that time. SPIKER made it possible for blind people to use a computer independently. The program was updated five times and its version for mobile devices, Speaker Mobile, won the medal Gdynia bez barier ( Gdynia without any barriers ). Another important step in the company s development was participating in 2006 in the international competition Blizzard Challenge, organized by the Carnegie Mellon University in the USA, which ended with their victory and made Ivona the best technology of speech synthesis. The product, enabling e.g. listening to the s, books and messages read out by a human voice, was assessed by 135 world experts. The pioneers from Gdynia managed to defeat 13 best research groups from the USA (i.a. Microsoft and IBM), Japan (Nagoya Institute of Technology), Germany, Israel, China and the UK. This success paved the way for the export development a Polish company intensively expanded its activity on the foreign markets (in the USA, the UK, Germany, Spain and France etc.). In 2010, as much as 70% of revenue came from export. Based on A. Poszewiecki, Komputerowa synteza mowy jako narzędzie otwierania świata niewidzących. Studium przypadku Ivo Software sp. z o.o., [in:] Przedsiębiorczy Uniwersytet, edited by M. Bąk, P. Kulawczuk, IBnDiPP, KFKP, Warszawa 2009 and also based on the webiste The second perspective of exporting is excessive optimism. It happens that enterprises decide ad hoc about export activity and follow the conviction let s hope it will be OK. However, switching into global thinking is not as easy and obvious as it might seem. The motives of initiating export activity may also be presented with reference to the motives of SME internationalization. The main motive groups of enterprise internationalization include 7 market motives, cost-related motives, supply-related motives, political motives. The most frequent motive, regardless of the enterprise size, is the market motive. A company seeks new sales markets. This situation may happen when the domestic market is stagnant or if the development potential of an enterprise creates the chances for the expansion outside the domestic market. Additionally, such decision serves diversifying the activity (e.g. when an exporter is worried about the demand slump on the domestic market). Export may be also regarded as an image element, which establishes prestige of an enterprise on its own market. Cost-related motives refer to reducing unit production costs and increasing profitability. Supply-related motives are primarily associated with seeking cheaper resources or other factors of production. Political motives result from adjusting to governmental activities creating an incentive system for expansion (e.g. by export subsidies). One of the reasons for export development may be also the possibility of obtaining additional EU resources for the enterprise development (the EU funds). Export activity is reflected in the financial standing of an enterprise. It may result from the fact that export companies may be managed in a more effective way and have better machinery parks 8. Conducting export activity also translates into improving the quality of products offered. One of the reasons for this situation is stronger foreign competition and an accelerated learning process happening among the entities dealing with foreign trade, e.g by comparing domestic products with foreign products 9. Participating in international trade also helps to seek new market niches and establish 7 J. Rymarczyk, Internacjonalizacja i globalizacja przedsiębiorstw, PWE, Warszawa 2004, p J. Bednarz, E. Gostomski, op. cit., p K. Białecki, T. Kaczmarek, Eksportowa działalność małych i średnich przedsiębiorstw. Od przygotowania do realizacji transakcji eksportowej, Difin, Warszawa 2009, p. 13.

16 14 Andrzej Poszewiecki cooperative relations. These new relations lead to the emergence of further cooperation possibilities and to the improvement of flexibility related to enterprise activity. Polish entrepreneurs are strongly convinced about export. In 2012, Polish companies generated a record sales value and during the period of the EU membership the sales value has doubled. More than ¾ of export goes to the EU countries (Germany is the major trading partner). The figure below presents the value and structure of Polish export Export Jun 2007 Mar 2008 Jan 2009 Nov 2009 Aug 2010 Jun 2011 Apr 2012 Fig. 1. Value of Polish export Source: Central Statistical Office (GUS). As has been presented in the Figure 1, the value of Polish export is increasing and, despite some fluctuations, it is systematically reaching higher numbers. Another figure presents the structure of Polish export. Other products Electromechanical products Metal products Ceramic products Light industry products Wood and pulp products Leather products Chemical products Mineral products Food and agricultural products Fig. 2. Structure of Polish export in 2010 as compared with the years 2009 and 2005 (in %) Source: Poland Foreign trade report, Ministry of the Economy (Polish title: Polska Raport o stanie handlu zagranicznego), Warszawa 2011 p. 45. As has been presented in the Figure 2, Polish export is dominated by electromechanical products. Consecutive places are occupied by chemical, metal as well as agricultural and food products, yet with a considerable smaller export share.

17 Motives of initiating export activity in the Baltic Sea Region 15 Table 1. The biggest recipients of Polish export (countries labelled in red were outside the first ten places). Country Germany 25,89% 25,05% 26,14% 26,11% 26,07% Italy 6,60% 5,97% 6,95% 5,93% 5,36% France 6,09% 6,20% 6,86% 6,78% 6,13% Great Britain 5,94% 5,76% 6,41% 6,28% 6,42% Czech Republic 5,54% 5,70% 5,85% 5,98% 6,20% Russia 4,62% 5,20% 3,66% 4,18% 4,53% Ukraine 3,96% 3,74% 2,51% 2,48% 2,49% Holland 3,83% 4,02% 4,25% 4,39% 4,36% Sweden 3,22% 3,17% 2,68% 2,96% 2,84% Hungary 2,91% 2,78% 2,70% 2,83% 2,56% Spain 2,89% 2,52% 2,62% 2,66% 2,40% Slovakia 2,18% 2,45% 2,28% 2,70% 2,43% Other 31,40% 32,41% 31,88% 31,86% 33,04% Source: As has been presented, Sweden is placed high among the countries towards which Poland directs its export. However, it must be noted that the export share to Sweden has gradually decreased during , yet it is not a significant change. Export to Sweden Swedish business environment is modern, open and conducive to business. Specialists with high qualifications, simple business-related procedures and openness to international companies these factors help to conduct business activity there. Information is easily available, open and transparent. It is quick and easy to establish a company in Sweden. The information about starting business activity and necessary forms is easily available in the Internet, also in English. International companies operating in Sweden frequently praise this country for the quality of local consulting services and business partners. Sweden, with its 0,2% of the world population, has the share of 2% in foreign trade. The country has strong international relations, educated and qualified staff, low company taxes and administration conducive to entrepreneurs. Swedish geographical location strengthens its position as a natural business centre for Scandinavian and Baltic countries as well as for Russia. It is possible to expect that a Swedish business partner will be focused on technical and scientific issues and interested in innovations which are associated with practice. Importantly enough, the Swedish way of thinking makes the country a unique market for testing products. Swedish people attach great importance to punctuality. In general, they are good and credible business partners, who prefer a direct attitude and quickly come to the point. Negotiations are frequently formal and do not take much time. After making an agreement, formalism quickly changes into friendly relations. Task delegation and free organization deprived of hierarchy make it possible to adopt an input attitude towards solving problems, which is very effective. Although labour law grants employees a series of privileges, such as paid leaves, maternity leaves, etc., effectiveness remains at a high level. Exporters may reap many benefits from maintaining business relations with Sweden. One of the possible ways is entering the skill and technology market in industrial clusters and research institutions. Special attention should be paid to pure technology industries, ICT, natural sciences as well as car industry. These are the areas in which Swedish companies achieve the best results and compete at the highest international level. Although Stockholm is a political, financial and cultural capital of Sweden and a geographical centre of ICT companies, more than 40% of Swedish industry is located within 300 km from Göteborg (Western Sweden) inhabited by 2,3 m people. Western Sweden is the centre of car, chemical, petrochemical, clothing and textile industry. Malmö, located in the Southern part of the country, is an economic region together with Copenhagen and creates 25% of Danish and Swedish GDP in total. The Northern part of Sweden is the centre of mining, forestry and hydro power industry. As the EU member, Sweden does not create barriers for Polish companies wishing to develop business activity in this country. In 2011, the economies of Poland and Sweden belonged to the group of the EU countries developing the most. In 2011, GDP in Poland increased by 4,3% and in Sweden by 3,9%. According to the forecasts for 2012, GDP in Poland will increase by 2,5% and in Sweden by 0,7%.

18 16 Andrzej Poszewiecki Fig. 3. The biggest business entities of the Swedish economy Source: Doing business in Sweden, UKTI 2010, p. 6. The Tables below present data related to Swedish, Danish and Finnish trade flows. The Tables show the trading partners of these countries and the share of particular countries in their export/ import. Table 2. Swedish import and export in 2011 The most important positions Major trading partners (share in export/import) Export (USD 103 bn) Machinery and transport equipment 44,1% Chemical and rubber products 13,4% Food, clothing, textiles and furniture 12% Wood and paper products 11,7% Germany 10,1% Norway 9,9% United Kingdom 7,6% USA 7,3% Denmark 6,5% Import (USD 97.2 bn) Machinery and transport equipment 41,8% Food, clothing, textiles and furniture 19.6% Mineral fuels and electricity 13,5% Chemical and rubber products 12,8% Germany 18,3% Norway 8,7% Denmark 8,5% Holland 6.4% United Kingdom 5,7% Source: Self-study work based on In Sweden, the major trading partners are Germany and Norway. The most important position in international trade (both in the case of export and import) is occupied by machinery and transport equipment. Table 3. Danish import and export in 2011 The most important positions The main partners (share in export/import) Export (USD 111 bn) Machines and equipment Meat and meat products Pharmaceuticals Furniture Germany 16,9% Sweden 13,2% United Kingdom 9,9% Norway 5,7% USA 5,5% Import (USD 102 bn) Machines and equipment Raw materials Chemical products Wheat and food Germany 20,8% Sweden 13,6% Holland 7,1% Norway 6% China 5,4% Source: Self-study work based on

19 Motives of initiating export activity in the Baltic Sea Region 17 For Denmark, Germany is also the major trading partner. The second place is occupied by Sweden. Machines and equipment play the most important role in export and import. Table 4. Finnish import and export in 2011 The most important positions The main partners (share in export/import) Export (USD 78.8 bln) Electrical and optical equipment Machines and transport equipment Paper and pulp Chemical products Sweden 12,1% Germany 10,2% Russia 9,5% Holland 6,9% United Kingdom 5,3% Import (USD 80.4 bln) Food Petroleum and petroleum products Chemical products Transport equipment Russia 18% Sweden 14,1% Germany 13,9% Holland 7,8% China 4,3% Source: Self-study work based on For Finland, the most important trading partner is Sweden, then Germany and Russia. Russia is the major import partner, then Sweden and Germany Assessing the risk related to export activity 10 Risk means the possibility of a negative or unwanted occurrence, which may be classified according to the probability of its emergence and the importance of an occurrence that may happen. To be more formal, an expected cost of an unwanted occurrence equals the costs of a negative occurrence s results multiplied by the probability of its emergence 11. Every entrepreneur starting business activity is uncertain about future effects. Risk results from making decisions about the future. The same risk may appear in the case of export. We may claim that it is inextricably linked with business activity and accompanies every economic decision. Taking this risk requires responsibility, which means bearing consequences for our own business behaviours and the behaviours of our employees 12. Expanding outside the mother country is an important decision for a company. Then, a distinct environment must be faced. This difference results from the following premises: different level of a given market sensitivity to business cycle-related factors (different sensitivity to global economy turmoil); tax system (different tax rates, including VAT); participation (or its lack) in common political and economic structures; Schengen Agreement, European Union, etc.; quality requirements in relation to products traded on a given market (e.g. requirement of obtaining a quality certificate); level of liberalizing legal regulations, applicable legal acts; competition on a given market: number of strong players (dominating companies in a given country), level of meeting potential demand, standard prices, resources for investments and marketing allocated by foreign competitors; 10 In the reference books, the notion of risk is differently defined. Theoreticians claim that there is only one risk, yet it takes different forms. Market practitioners use the plural form (risks) and claim that there are many risks. 11 Risk Taxonomy, Shannon Bayes Venture Comany, 2004, 2005, following P. Kulawczuk, Analiza ryzyk, kosztów i korzyści ochrony własności intelektualnej w rozwoju strategicznym przedsiębiorstwa, [in:] Przedsiębiorczość intelektualna i technologiczna XXI wieku, edited by M. Bąk, P. Kulawczuk, KIG, Warszawa 2009, p K. Białecki, T. Kaczmarek, op. cit., p. 173.

20 18 Andrzej Poszewiecki different currencies causing the foreign exchange risk (negatively or positively influencing an exporter). Other types of problems that should be accounted for in the course of planning or conducting export activity: logistics network facilitating or hindering regular or on-time deliveries; possibility of gaining cost advantage helping to adopt less or more aggressive price policy; possibility of creating the structure of permanent customers (final customers or intermediaries); sufficient financial resources for intensive promotion and marketing on a given market. Cultural factors play a significant role in conducting business activity. They influence the following aspects: anticipated partner credibility (making an evaluation is facilitated by e.g. credibility rating); perceiving a brand some company names or brands may be problematic for pronunciation, sound exotically, ridiculous or even discouraging; language barriers export activity requires a fluent command of at least one foreign language. Fortunately, in the case of most countries, speaking English is sufficient since it is the language commonly used in business. It is also appreciated to use a few basic expressions in the language of our partner. An important factor influencing business activity are random accidents and occurrences. In international trade, they may be classified in the following way 13 : natural catastrophes (earthquakes, floods), failures and technical damages, transport accidents, random accidents resulting from the actions of sovereign country authorities towards natural and legal persons operating in this country and towards their property (e.g. nationalization), random occurrences in the sphere of foreign financial operations (foreign exchange risk), accidents at work causing death or permanent disability. Typical risks in international trade also include 14 : transactional risk associated with the value of equity commitment. Apart from equity directly involved in a transaction, the risk also applies to equity indirectly involved (possibilities of incurring losses caused by non-performance or improper performance of a transaction by consecutive sales links and producers who further process a given product; quality risk unstable product quality may cause termination of a contract by a foreign partner and also compensation claims for the losses incurred, liquidated damages payment, etc.; price risk specifying the price which is too low or too high; the risk related to the date of performing an obligation (the passage of time between the date of making an agreement and its performance is typical of export). In negotiations, we may specify the constant price not considering the market price applicable at the time of a delivery or we may account for the market price at the time of a delivery in a contract. It is also possible to use an intermediary solution, that is provide a contract with the price review clause in the circumstances specified in this contract; foreign exchange risk related to an open and dangerous foreign currency position as a result of unfavourable changes in foreign exchanges rates. Exemplary groups of risks related to intellectual property include 15 : risks related to illegal copying and imitating, risks related to stealing or appropriating intellectual property, risks related to forestalling within the scope of intellectual property, 13 Ibidem, p Ibidem, p Przedsiębiorczość intelektualna i technologiczna XXI wieku, edited by M. Bąk, P. Kulawczuk, KIG, Warszawa 2009, p. 49.

21 Motives of initiating export activity in the Baltic Sea Region 19 risks related to infringing the value of assets, market and sales risks, direct losses and financial damages, information flow risks, risks related to an unauthorized access to intellectual property, risks related to improper intellectual property management, risks related to losing reputation, legal risks, unauthorized use of intellectual property. The number of exemplary risks indicates that an entrepreneur faces a significant challenge determining the start of export activity. How difficult it is to protect property outside one s own country Dyson uses fibreglass to produce the oval body of barrows, which are to be supported with a ball (a proper name ballbarrows, as opposed to standard wheelbarrows). A ball must be inflated like an ordinary ball, yet it must have an axis. Such circle was not created by anybody. Everything is a success. The prototype works perfectly. Phew! Ballbarrows are ready. What they need is promotion ( ). Press announcements and especially articles help in this regard. An editor of Sunday Times intrigued by the shapes of ballbarrows describes them in the gardening section. It is sufficient for ballbarrows to arouse interest among other magazines and their readers. Dyson discovers that one article generates hundreds of advertisements. Soon, 45 thousand ballbarrows are sold every year. Turnover exceeds 600 thousand pounds. Ballbarrows gain the half market share. However, 20%-something interests are burdensome for this company. It is necessary to sell the licence. Where? Certainly, in the USA. John Brennan, the sales director participates in business talks. He is supposed to visit 5 companies. He ends with 2 companies. I found a perfect one he reports. It is Glassco. They are great. Besides, they want me to work for them! he expresses his happiness and hands in his resignation. In the course of further negotiations in the USA, Dyson and Co. discover that ballbarrows have already been present there. Glassco stole not only ballbarrows, but also the advertising slogan The ballbarrow is here as well as their brochure. Brennan did not waste his time. Source: A business lesson by James Dyson, Cz I_.html [access: ]. Although it was impossible to predict the result of the above-mentioned types of risks, an entrepreneur is able to protect himself/herself against some results of the existing risk or at least reduce their effects. We may use different methods of minimizing or reducing risk (e.g. avoiding risk, preventing risk, incurring the risk costs, transferring risk, hedging). An enterprise should systematically assess the risks and make decisions about the methods of handling them. It may be helpful to specify the risks, the probability of their occurrence, possible losses, counteractive measures and costs of protecting against them. Based on this data, we may calculate the values of expected risks (calculated by multiplying the probability of a given risk occurrence and the value of possible losses we receive the so-called expected loss value). Then, we should sort the expected values from the highest to the lowest and specify the risks they refer to and protection costs. Having prepared such list, we may consider whether it would be possible to integrate all protection methods in order to reduce protection costs. The last element of this process is making a decision about safeguarding against the risks (which of them should be safeguarded against and which should not be safeguarded against, but, e.g. monitored).

22 20 Andrzej Poszewiecki 1.3. Decision process related to initiating export activity Initiating export activity creates significant chances for an enterprise. However, such enterprise is also exposed to different risks. Therefore, it is possible to present a decision process which will help an entrepreneur to make a choice about initiating export activity. 1. Do you have free production capacities or would you be able to increase them? C O U N T Y O U R A N S W E R S 2. Does increasing production make profits higher and unit costs lower? 3. Do you need the information about changes and tendencies on the global markets? 4. Are domestic demand fluctuations troublesome for your company? 5. Do you search for new niches and business contacts? 6. Does a company wish to improve the level of profitability and turnover? 7. Do you search for new methods of financing business activity? C O U N T Y O U R A N S W E R S 8. Do you wish to improve your competitiveness on the domestic market? 3, 4, 5 for NO Consider checking your competitive position. Under some conditions, export may be beneficial. 2, 3 for YES up to 2 for NO Check your competitive position. Export may be beneficial for you. > 4 for YES > 6 for NO Do not initiate export activity. 0, 1 for YES Fig. 4. Decision algorithm presenting the process of initiating export activity Source: Poradnik eksportera, p. 6.

23 Motives of initiating export activity in the Baltic Sea Region 21 Certainly, the algorithm presented is not the only possibility of assessing readiness for initiating export activity. It is also a simplified analytical tool, yet helps to evaluate the conditions which indicate potential export benefits and an entrepreneur s readiness to initiate this activity. Within the algorithm, an entrepreneur must specify whether he/she owns free production capacities (or is able to increase them), or whether increased production will lead to unit costs reductions (not always do we have to deal with such situation). Another question refers to an entrepreneur s need for the information about the global markets. On the one hand, it may seem that every entrepreneur needs such information. On the other hand, it is possible to imagine traditional management areas determined by permanent rules. This situation may happen when an entrepreneur ends business activity and when shareholders (owners) are not interested in new trends anymore and do not plan any changes in their activity. Another researched elements are domestic demand fluctuations and their impact on the enterprise performance. If an enterprise has a stable domestic demand, it may be a factor discouraging from foreign expansion. However, it is possible to imagine that a stable domestic market position may be a good starting point for export. An entrepreneur focused on searching for new niches and business contacts may considerably benefit from export activity. The activity will provide him/her with the information about customer needs on different markets, which helps to develop further. Question 6 refers to the willingness of improving turnover and profits. In the case when an entrepreneur is satisfied with the current course of business activity, he/she does not have to consider the need for export. For a company searching for new methods of financing its activity, export may help not only to increase profits, but also to improve solvency and access to banking finance. The last question refers to improving domestic market competitiveness, which is inextricably linked with conducting export activity. Export, as has been previously mentioned, brings many benefits related to, e.g. improving the quality of products/services, getting to know the needs of new customers and the solutions used on different markets. These factors contribute to improving the competitive position of an enterprise, also on the domestic market.

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25 Andrzej Poszewiecki 2. Searching for the sources of export information in the South Baltic Region 2.1. Export-related information needs Information is an extremely important factor influencing the development of an enterprise and an element determining its competitive advantage. In the case of enterprises wishing to operate on the foreign markets, emphasis is placed on the information about selected markets and the competitors operating on them. Companies possessing this information are able to plan their future export development and prepare themselves for the challenges existing on the foreign markets. Obtaining information about the factors influencing the enterprise performance is necessary to properly plan tangible and intangible assets of an enterprise, which are required for its market expansion. This information helps to make appropriate decisions about choosing a location and market. The experience proves that the most successful exporters are those who acquired knowledge of the market on which they were going to operate. They also remember that the so-called curiosity about the market must be constantly satisfied. Therefore, the knowledge of the external environment is supposed to be updated, e.g. by establishing contacts while conducting business activity. Such action helps to understand the market as well as its rules and, as a result, to establish a proper marketing and sales strategy. Successful foreign market operations depend exclusively on an active participation based on the credible research and market analyses 16. One of the first steps is to specify the potential foreign markets on which trade operations are possible and also to exclude those markets which make the cooperation impossible, e.g. for the political reasons. When specifying the information needs of an innovative enterprise, it is necessary to answer the following questions: What are our main aims of entering new markets? 2. What are the main problems which should be solved while entering new markets, in order to fulfil the aims? 3. What is significant from the perspective of innovative products and services? 4. What decisions are we supposed to make while entering new markets? 5. Which tangible and intangible assets will we need? 6. Which information will be necessary to bridge the information gaps? 7. What will be the sources of information? The export-related information needs may be exemplified by the Figure 5. Figure 6. presents a more detailed version of the algorithm. 16 Poradnik eksportera z IP dla MSP, (ed.) M. Bąk, P. Kulawczuk, KIG, Warszawa 2010, p Ibidem, p. 85

26 24 Andrzej Poszewiecki Stage 1 Specifying export directions Stage 2 Specifying the main decision problems within particular ranges Stage 3 Specifying innovative ways of establishing competitive advantage Stage 4 Specifying the necessary tangible and intangible assets Stage 5 Specifying the list of the necessary information Stage 6 Analyzing the information and specifying the information gaps Fig. 5. A decision algorithm specifying the export-related information needs Source: Based on self-study. It is possible to indicate the basic ranges of economic information necessary to be obtained by an enterprise wishing to enter the foreign markets. information about markets what is the economic and political environment of a given country, what is the potential of the market and what is the market structure, what are the characteristics of the labour market; information about competition which companies operate in a given country, what is their market share, what is their specificity; information about buyers preferences, ways of making market decisions; information about products and services what are the competing products and services, what are their prices and quality, legal issues related to launching particular products; information about prices price brackets in which particular products are offered on a given market; information about distribution channels what are the distribution channels of the competitors, what are the possible channels of launching the products on a given market (wholesale, retail, chains, etc.); information about promotion how do the competitors communicate with the recipients, what are the communication channels used; information about business culture business codes applicable in a given country knowing them may considerably streamline the penetration of the foreign markets.

27 Searching for the sources of export information in the South Baltic Region 25 Specifying the list of the necessary information Analyzing the information and specifying the information gaps Specifying the sources of searching the information within particular ranges (e-sources, public, institutional and commercial sources): Market Supplier Prices Promotion Intellectual property Competition Production and services Distribution channels Innovation Business culture YES Is the time and cost of obtaining information adequate to the needs and capabilities of a company? NO Gathering the necessary data Analyzing the information gathered, specifying the remaining information gaps Analyzing the information gathered, specifying the remaining information gaps YES Is the information complete? NO There are still information gaps Making managerial decisions Fig. 6. A decision algorithm specifying the export-related information needs a detailed version Source: Self-study work based on Poradnik eksportera z IP dla MSP, op. cit., p. 86.

28 26 Andrzej Poszewiecki An entrepreneur must account for a considerable amount of information, also the information related to various types of the risk. The risk covers the following aspects: lack of payment for a good or lack of its buyer, prices which are too high (low), destruction a good, etc. 18 An entrepreneur must acquire considerable knowledge of the final buyers and sales chains which may be included in the export process (intermediaries, banks, forwarders and insurers). In the case of export outside the EU countries, certain barriers may be encountered. It is necessary to recognize and adjust to them. In the case of the products powered by electricity or combustion engines, it is necessary to consider the standards (norms) applicable in a given country, e.g. in the USA ASA (American standards), in Russia GOST (Gosudarstwiennyje standardy). When a company fails to consider these norms, it is impossible to launch a product on a given market. However, on the other hand, meeting these requirements may lead to the situation in which export is unprofitable 19. PEST analysis One of the tools used to analyse a potential country with which we are going to cooperate is the PEST analysis. The PEST analysis is a tool which helps to concisely and comprehensively evaluate a country, e.g. in terms of its potential foreign investment or export. As a result, it is possible to compare a few potential countries. However, the analysis does not provide the algorithms automatically specifying a better country. In every case, the decision is made by an individual and, what is more, an individual and a specific situation determine the significance of particular criteria and finally, indicate the conclusions from this synthetic ranking. Table 5. PEST analysis Subject of the evaluation Political Environment Economic Environment Socio-cultural Environment Technological Environment Description acts and regulations on business activity (concession, labour law), social and economic ideology of the government, attitude of the politicians towards a specific industry (sphere of the economy), stability of the government basic trends (GDP, inflation rate, unemployment rate), access to the credits, level of disposable income, consumption rate, interest rates, taxation, exchange rate, trade balance and balance of payments, national income per capita, salary level, income distribution, budget balance values, lifestyle, religion, ethics, ethical code of employment, labour structure, demographic ratios, attitude of the society towards a given industry scientific discoveries, patents, technological progress in a given industry, technological progress in related industries Source: Based on self-study Market report and its structure A market report is a tool which helps to penetrate new export markets. Entrepreneurs can compile such market report themselves by using the Internet sources and their own research. However, it must be considered that it requires substantial work and financial resources. Currently, there are many possibilities of using general market reports on a given market, industry or product. Every entrepreneur may also contract individual and tailor-made research. However, this form is much more expensive than general market research. It is also worth remembering that the best solution 18 J. Bednarz, E. Gostomski, op. cit., p K. Białecki, T. Kaczmarek, op. cit., p. 44.

29 Searching for the sources of export information in the South Baltic Region 27 is to contract market research to the companies specializing in this field in a given country. They are knowledgeable about and experienced in a given market, which translates into the quality of the information provided and considerably reduces the cost of research/analyses. The market research process consists of four main elements 20 : making assumptions about market research, choosing the method of gathering information, gathering the necessary information, conducting an analysis and interpreting the information gathered. Market research means gathering information about a given market based on: primary sources gathering information and data based on a direct contact with the participants of a given market. The most commonly used method are individual conversations, telephone conversations, questionnaires, etc. It is a time-consuming and costly method. However, it provides an in-depth and very individual research and analysis. From the perspective of small companies, this form may be too expensive; secondary sources gathering data based on generally available materials magazines, research results, statistical data, etc. Currently, this analysis is based on the Internet sources. An exemplary structure of a market report is presented below. It contains information indicating the research aim, description of research methodology, summary of the most significant research results (executive summary), description of consumer behaviors and research results concerning the promotion of the project in question. Unquestionably, it is the structure which may undergo considerable changes (apart from the first and second part) resulting from the research aim and subject. Structure of a market report (based on the primary sources) Report from the qualitative research conducted among a representative group of individual clients 1. Description of the research conducted 1.1. Aim of the research 1.2. Description of the research group 1.3. Description of the research problems 1.4. Description of the methodology used 2. Executive summary 3. Presentation of the detailed results 3.1. Description of the market and its segmentation 3.2. Market size 3.3. Market share of the industry/product 4. Preferences of buyers consumer behaviour 4.1. Market structure description of buyers (age, gender, educational level, income, etc.) 4.2. Specific criteria of choosing products/services 4.3. Choice of a purchase place 4.4. Frequency of purchase 4.5. Requirements with reference to specific product features, additional benefits 4.6. Brand loyalty 5. Promotional and advertising communication 5.1. Knowledge of a brand and product 5.2. Image of a brand and product 5.3. Knowledge of promotional activities and their influence 5.4. Associations with a brand and product 5.5. Sources of information about a brand and product 6. Tables Source: Poradnik eksportera z IP dla MSP, op. cit., p Poradnik eksportera z IP dla MSP, op. cit., p

30 28 Andrzej Poszewiecki Those entrepreneurs wishing to buy a ready-made report on the situation of particular markets or on the situation of a given industry, may buy online the electronic versions of market reports (it is also possible to order a print version). Paid market reports are to be found on the following websites: marketpublishers.com A useful source of information may be also the website offering a selection of reports gathered in one place (www.reportlinker.com). Before buying a market report, it is worth reading its description, detailed information included and its scope as well as asking for a few pages as a sample of the report (it is a customary procedure). Apart from market reports, it is also possible to order a report on a specific business partner. Such services are performed by the credit information agencies, e.g. Dun & Bradstreet, Creditreform and Coface. These reports include: contact details, legal form, scope of business activity, ownership structure, structure of the governing bodies (management board, supervisory board), equity relationships, equity, real estate, suppliers and recipients, solvency, debt collection proceedings, banks performing their services, employment structure, history. Table 6. Basic information sources useful for the SME exporters Information sources Types of sources Information range E-sources Internet browsers, export-devoted portals, industry-specific portals, statistical databases, patent databases Information about the markets and industry development, economic data, market statistics, information about the innovations and the IP protection, etc. Public institutional sources Commercial sources Source: Poradnik eksportera z IP dla MSP, op. cit., p. 98. Government departments, embassies and their branches, Polish Agency for Enterprise Development (PARP), Polish Information and Foreign Investment Agency (PAIiIZ), local administration business-related organizations, consulting agencies, law firms Information about the markets, support programmes, potential export support, etc. Information about the markets, industry-specific events, fairs, missions, market reports, legal regulations, etc.

31 Searching for the sources of export information in the South Baltic Region Internet monitoring The Internet is a medium which meets all the information needs of enterprises. Its main advantages include an access to updated and credible data and a low financial cost (even close to zero). According to the research conducted by the Institute for Market, Consumption and Business Cycles Research (IBRKK) 21, the Internet is gradually gaining in importance as an source of information about the foreign markets. Internet sources are necessary for seeking information about using and protecting intellectual property on the international markets. An easy access to the scientific and technical information, to the patent databases and the R&D research is now commonly used by enterprises in their decision process and should constitute an information source of every innovative enterprise. The Internet is now regarded as a common medium, which has led to the situation in which access to the information about e.g. the foreign markets is considerably easy. The Internet allows enterprises to find statistical data about particular markets, industries and products easily and cheaply. Seeking information on the Internet is the cheapest way of obtaining the necessary data. However, this form requires much time and involvement. Internet sources are mine of information which, when used properly, helps to establish business objectives and take suitable actions on the international markets. When using the Internet sources, it is always necessary to remember that not all information is credible and updated. Therefore, the date of publication of reports or articles should be considered. Moreover, it is advisable to gather as much information about a given topic as possible in order to eliminate not plausible sources. The simplest tool to search Internet are the Internet search engines, such as Google.com, Yahoo. com, Onet.pl, Wp.pl and Interia.pl. Seeking information on the Internet resembles a domino game. The starting point is to set the key ranges and expressions by which the information is to be sought. Finding further data determines other reference points new searches, references to other websites, interviews or reports. While finding further information, it is advisable to organize it with reference to particular ranges of the searches and the nature of the information statistical data, general information, research results, interviews including the experiences of other enterprises, etc. 21 A. Wysocka, E.M. Jagiełło, K. Marczewski, Aktywność eksportowa polskich przedsiębiorstw przemysłowych. Questionnaire results, IBRKK, Warszawa 2007.

32 30 Andrzej Poszewiecki The information sources about Sweden available in the Internet Exchange rates FXHistory Historical Currency Exchange Rates Ministry of Finance Invest in Sweden Agency description of the industries, how to conduct business activity in Sweden General information Sweden/ (www.swedishtrade.se/sv/vara-kontor/europa/polen/in-english/) National Institute of Economic Research (Konjunkturinstitutet) National Board of Trade (Kommerskollegium) Kommerskollegium: Chambers of Commerce Polish-Swedish Chamber of Commerce: Swedish-Polish Chamber of Commerce: (only the Swedish version) American Chamber of Commerce in Sweden: An extremely useful source of information are the websites of industry-specific magazines from a given country. Apart from current industry-specific information, the websites include many interesting comments and opinions about the performance on a given market. Small and medium-sized exporters may use an attractive and useful Export Promotion Portal available on gov.pl, The aim of the portal is to present the economic information which is relevant for Polish export, to gather various Internet sources, to enable Polish exporters to access updated information about the foreign markets (free-of-charge service), to promote Polish export and to facilitate the establishment of trade relations. The portal offers a wide range of macroeconomic information for small and medium-sized exporters, e.g. information about the foreign markets, legal and economic regulations and forms of supporting export in a given country. Exporters may also place their offers and search the invitations to tender placed by the foreign companies. The information on the portal may be comfortably and quickly browsed using the advanced search options and specifying the market, category, industries and key words. The data available on the portal are a reliable source of information since they are based on the reports and foreign invitations to tender sent by the Trade and Investment Promotion Departments of the Polish embassies and consulates-general and the information transferred by the Polish Ministry of Economy and by other public institutions. Entrepreneurs wishing to broaden their general and specialized knowledge of the global market processes and of the specificity of a given country should visit the portal They will find there many interesting articles about the global markets and export updates. The portal offers valuable information for future exporters. An easy browser helps to quickly find the publications related to a given market and industry. Another website worth recommending is offering many forms of support for future exporters. The portal includes the Polish and foreign companies offers related to support-

33 Searching for the sources of export information in the South Baltic Region 31 ing the export process, e.g. logistics, legal advice, accounting offices, banks, translation agencies, forwarding companies, etc. The information about the Polish and foreign companies offers may be found by searching according to the industries, company names and key words. A considerable advantage of the portal is a large global database of business partners. The database offers the information about all associations, trade groups, portals devoted to a given country or industry and B2B global networks. The portal also includes contact details to the organizations helping to establish global relations within every industry. Entrepreneurs may also use the information included in the portals of international institutions and organizations (American and British) available in English. An overview of the most important portals is presented in the Table 7. Table 7. Free-of-charge export information available on the Internet in English Name of an institution or an organization Export Entreprises SA, France RBA (Rhodes-Blakeman Associates), United Kingdom Doing Business, United Kingdom International Finance Corporation, United States of America U.S. Commercial Service Internet source FIAS_Resources_Country_Reports cfm?search_type=int&loadnav=no Source: Poradnik eksportera z IP dla MSP, op. cit., p. 100 Range of available information and its usefulness The portal offers the possibility of searching reports and short information by specifying a key word and a given market. The website includes information about various sources useful for exporters, e.g information about the institutions conducting market research, links to the ready-made reports and publications within this scope, references to statistical data, etc. The portal includes a variety of useful information and reports based on self-study checking whether particular countries are conducive to business activity. It is possible to search to portal content by specifying selected topics and criteria, e.g. establishing a business, employing people, paying taxes and obtaining finance. Entrepreneurs are offered a variety of interesting information about the rules of conducting business in particular countries and regions. It is also possible to find detailed market reports grouped according a given country. The website includes market reports prepared by this department and offers a possibility of searching information by specifying the industries, products, countries and key words as well as the information about the current situation in various industries. An official website also gives access to useful guides which show how to solve various problems related to international export.

34 32 Andrzej Poszewiecki 2.4. Sources of business information The process of foreign market research is cheapest when the secondary sources gathered beforehand by other institutions (organizations) are analysed. The sources include: statistical yearbooks, results of the sectoral analyses, reports prepared by the industry-specific chambers of commerce, data from the censuses, results of researching the household budgets, publications of the consumer organizations, publications in industry-specific magazines, results of the public opinion research, rankings concerning a given market, catalogues, reports of the central bank, free-of-charge reports of the research institutions and think-thanks. Additional information is available on the websites of Trade and Investment Promotion Departments of the Polish embassies and consulates-general (http://polska.trade.gov.pl/pl 22 ). Trade and Investment Promotion Departments support Polish business entities. The activities of these departments cover the following areas: promotion of Polish export (direct contacts with enterprises, chambers of commerce, interventional actions), joint participation in preparing and launching the programmes of economic missions and study visits, preparing current information, analyses and forecasts for Polish enterprises about the possibility, conditions and perspectives of operating on a given market 23. However, such institutions are not willing to provide detailed information about particular industries and they are not willing to closely cooperate with SMEs 24. A valuable source of information are also reports prepared by the public institutions, focused on developing export in different countries, e.g. every year, the UK Trade and Investment issues the report Doing Business in (e.g. Sweden) available on The reports of this British institution provide the information about the aspects that should be considered by the entrepreneurs wishing to cooperate in Poland. These issues relate to the problems encountered in conducting business activity in Poland, that is bureaucracy, lack of transparent taxation rules, corruption and delayed actions of Polish courts. The reports on particular countries are available on Similar reports are also prepared by other countries, e.g. the USA (export.gov/worldwide_us/index.asp). The reports constitute a valuable source of information about the country of our business partner. Moreover, reading the opinion about our country may be an important signal concerning the factors that may worry our business partners who wish to cooperate with us 25. Public institutions provide a variety of statistical data and reports facilitating the activities of innovative companies. In the databases and statistical reports, entrepreneurs may find the information about the international markets, economic conditions, labour market, consumer behaviour, etc. In Poland, the main source of information of this kind is the Central Statistical Office which places infor- 22 This website includes e.g. guides on 44 markets, including Sweden, Denmark, Finland, Germany and Norway. 23 J. Bednarz, E. Gostomski, op. cit., p K. Białecki, T. Kaczmarek, op. cit., p An example of a detailed report on Poland is available on documents/webcontent/eg_pl_ pdf.

35 Searching for the sources of export information in the South Baltic Region 33 mation on including all published reports and statistical research concerning foreign markets. The information about international markets (mainly in English) is available on the website of the EUROSTAT and the World Trade Organization Other sources of business information. Data concerning the European Union enterprises: Coface Poland (Central and Eastern Europe) free-of-charge basic information about the companies from Central and Eastern Europe (the trade report including detailed information is paid); Global Information Network INFOVERTI paid information about Polish and foreign companies, e.g. financial statements, industry analysis, equity relations, press monitoring, payment defaults, scoring, rating, etc.; VAT (VIES) number validation of the European Commission verifying the validity of a VAT number of a foreign partner issued by any Member State.

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37 Przemysław Kulawczuk 3. Market entry strategies in the South Baltic Region and on third markets 3.1. Enterprise technological and market development and its impact on exploitation of export opportunities The level of market and technological development achieved by the enterprise considerably influences the choice of a market entry strategy. Foreign market entries are characterized by a certain degree of instability. A market entry should be organized in a way that makes it possible to achieve the scale benefits and production repeatability, which altogether results in eliminating an initial instability. On the other hand, more and more export enterprises focus on technological products and services, which are mostly based on worked-out technological solutions accounting for intellectual property. From the perspective of manufacturing productivity, one of the most important processes creating financial effectiveness is the standardization process. It is based on eliminating all marginal product features and focusing on elements which are the most important for the majority of customers. Frequently, standardization is made in order to reduce production costs. However, customers are distinct and they wish to be perceived and treated individually. Accounting for this attitudes increases production costs, which generally contradicts with the standardization and cost reduction idea. Mixing the concept of reducing costs and individual customer wishes is the customization concept. It is based on specifying 80 90% of standard features and 10 20% of the features that could be freely shaped by customers. If it is possible to make production massive, then such customization becomes massive as well. Massive customization mixes producer benefits, related to low production costs, and customer benefits, associated with product individualization. The concept of mass customization was created by Stan Davis 26 and then developed by Joseph Pine 27. Traditionally, a tailor-made product (service) and low production costs were contradictory. Mass customization makes cost reductions possible. However, product homogeneity must be accepted. A tailor-made product was created by designers and craftsmen and its costs made it available exclusively for wealthy customers. Currently, new interactive technologies such as the Internet facilitate communicating with a producer and expressing unique customer requirements, which are then met by means of automated systems. Although it may be seemingly complicated, it is possible to hide technical details of this operation and leave customers unaware of them 28. We may distinguish four models of enterprise development in the context of production development (production scale) and market development (degree of adjusting to the solutions): 1. Unit prototype production (LL), 2. Serial production (LH), 3. Mass production (HL), 4. Mass customization (HH). The Figure 7 presents the models. 26 S. Davis, Future Perfect,10th anniversary edition, Addison-Wesley Pub Co, Harlow, England, B.J. Pine II, Mass Customization The New Frontier in Business Competition, Harvard Business School Press, Boston A. Szcześniak, Dojrzałość rozwiązań technologicznych do komercjalizacji, [in:] Modele biznesowe budowy i rozwoju firm spin off na podbudowie szkoły wyższej, ed. by Mieczysław Bąk and Przemysław Kulawczuk, IBnDiPP, Warszawa 2010, p. 75

38 36 Przemysław Kulawczuk PRODUCTION SCALE high Mass production (HL) Mass customization (HH) low Unit production based on the prototype (LL) Batch production (LH) low NEED ADJUSTMENT high Fig. 7. Four models of innovative enterprise development Source: Based on A. Szcześniak, op. cit., p. 76, based on Pine II B.J., Mass Customization The New Frontier in Business Competition, Harvard Business School Press, Boston, Mass., The majority of small technology-oriented companies is at the first stage of development, within which unit production based on the prototype is initiated. The second stage of production and market development is serial production, then mass production and finally, mass customization 29. A typical modern production and technological development follow the pattern of the reversed Z letter. There arises the following question: at which development stage of producing technological goods is it worth exporting? The answer to this question is complex. So far, it has been believed that an enterprise should go into export when its position on the domestic market is stable. Progressing globalization and integration among some group of countries (e.g. within the European Union) or a decrease in temporal transportation distances cause radical changes, considerably facilitating contacts as well as limiting distance and concerns related to trusting partners. Referring these observations to Baltic trade, it is assumed that in some situations, even prototype production may be exported when a potential recipient knows an exporter technological entrepreneur or wishes to cooperate while solving problems Export as an innovative business model A domestic entrepreneur becomes an innovator when making an export decision. This innovation means that an exporter must discover new conditions of conducting business on a given export market, e.g. customer needs, market customs or cultural requirements. Even if an exporter s product 29 J. Pine and J. Gilmore distinguished four faces of customization: 1. Collaborative customization: a consumer and producer communicate and in this way, they specify the recipients requirements (e.g. computers, clothes, shoes, furniture, some services); 2. Adaptive customization: a product is designed and therefore, its users may modify it according to their unique requirements for different occasions (e.g. some electronic devices, modern office furniture, services of clubs related to a given subject, clothes, sports equipment); 3. Cosmetic customization, also referred to as personalized customization: a product is unique in terms of its appearance; customers choose an inscription or other sign (e.g. on clothes, mugs, caps, mouse pads, etc.); 4. Transparent customization: a producer sells a mass product, yet a customer considers it as individualized; this type of customization may be used when consumer needs are predictable or easily deducible and when consumers do not want to repeat their requirements (e.g. orders for non-standard clothes and other products/services), A. Szcześniak, op. cit., p

39 Market entry strategies in the South Baltic Region and on third markets 37 is known on other markets, innovation has a marketing and organizational aspect. Frequently, an exporter is forced to adjust products to more demanding markets, which finally results in a higher level of product technology. Generally, export means going beyond your own culture and facing the requirements of a new culture, which usually inspires developing industrial design, designing new customization models and other activities which considerably improve a product. Based on these premises, the concept of an export business model may be defined as follows: An export business model is a synthetic notion specifying the way in which an enterprise generates profits by exporting to other countries. Such model accounts for the following aspects: the main customer value (why a given product is worth buying), a general idea of entering the market, the concept of generating export profits (what is the source of an exporter s benefits and what is an exporter s income and profit potential), as well as fundamental success factors 30. An export business model must be light, short and clearly explain the ways of generating profits. However, such description must indicate a convincing argument, why buyers should purchase our export product. Since exporting technological or intellectual property-based products is currently gaining in importance, below you will see the presentation of adjusting innovative business models to export activity. Based on the observation of domestic and foreign establishment and performance of innovative companies which developed by means of export activity, it is possible to formulate the following list of typical business models related to export undertakings focusing on technological or intellectual property-based products 31 : 1. Niche exploitation model access to the existing practical, technological and product solutions on the domestic and global market and exploitation of the existing, yet not penetrated foreign market niches. This model may be used when there are unserviced market niches, frequently because of their distance or transportation problems. Then, finding a new distribution channel considerably helps to deliver innovative products to foreign recipients. For example, using Internet channels and different forms of product visualization for remote customers are possible. Particularly, peripheral areas or those located far from the economic centres of the Baltic Sea may be used. 2. Niche discovery model discovering niches that might be used (potential users foreign market segments) for finished or unfinished products and services based on technical patterns protected by patents and other protection measures. This model is different from the previous one since it is necessary to specify foreign segments which have not used similar products so far. It is quite difficult since discovering foreign market niches and launching a product may firstly take place on the foreign market. 3. Outsourcing model outsourcing the cost of some production and technological works performed by foreign units and concerns by an exporter, who is able to offer considerably lower production or service costs than performing these works by a foreign mother company. A foreign enterprise decides to use outsourcing and searches for a contractor or producer of a few elements (links) of the international value chain. In general, production, logistics, distribution and other elements of the value chain may be outsourced. A similar model is the contract 30 A thorough description of innovative concepts of business models are included in the following works: Gołębiowski T., Dudzik T., Lewandowska M., Witek-Hajduk M., Modele biznesu polskich przedsiębiorstw, Szkoła Główna Handlowa, Warszawa, 2008; Petrovic O., Kitel C., Teksten R.D., Developing Business models for e-business, Working paper, evolaris ebusiness Competence Center, 2001; Chesbrough H., Rosenbloom R. S., The role of the business model in capturing value from innovation: evidence from Xerox Corporation s technology spin-off companies, Industrial and Corporate Change, Volume 11, Number Compare e.g. P. Kulawczuk, Modele biznesowe spółki spin off, [in:] Modele biznesowe budowy i rozwoju firm spin off na podbudowie szkoły wyższej, ed. by M. Bąk and P. Kulawczuk, IBnDiPP, Warszawa 2010, p

40 38 Przemysław Kulawczuk model, in which an exporter delivers particular components without bothering about the management of a value chain link. 4. Model of technological market subordination using a solution, e.g. technology of a great utility or market potential, so that it is possible to reorganize the existing chains of the value network. This model may be used when technological advantage of an exporter brings such benefits to customer that they are willing to reorganize the existing value chains. A typical example is export expansion within the way of extracting gas shale or using wind turbines. Implementing these technologies may considerably change the former methods of generating electric power. 5. Model of exploitation of exporter s overcapacities managing production overcapacities, enterprise resources and assets in order to improve a general management effectiveness. It is a typical development model of an exporter s enterprise accounting for seeking possibilities of increasing the use of production capacities. Every profitable export activity makes it possible to reduce variable unit costs of production, leading to an increase in the gross profit generated. 6. Opening markets model discovering and opening big foreign markets and searching for the ways of complementing them with the enterprise production and technological solutions. This business model is one of the most promising ones, e.g. for the producers of consumer goods on one continent. On the other continents, a given product is not consumed or rarely consumed. This model is fostered by geographical distance, other cultures activity, customs or the ways of doing business. Sometimes such discovering of markets proves to be successful only for a single exporter considering the failures of other exporters in entering these frequently hermetic markets. Discovering markets is easier after finding the key according which customers, distributors or intermediaries from a given export market regard the potential of a foreign product or technology as interesting. This model may be used by Baltic enterprises while opening Asian or South American markets (e.g. Volvo privatization opens a huge Chinese market for this company). 7. Innovation discovery model discovering new processes, solutions of important problems and searching for their practical applications, niches and foreign markets. This model means that an enterprise works on new products or technologies considering their application on the foreign markets. It does not have to be a global application, yet with emphasis on the utility of inventions abroad (e.g. Polish Young Digital Planet, Norwegian Thermtech). 8. Key problem-solving model observing key problems of important decision-makers and economic players, as well as delivering ready-made solutions, processes or technologies abroad. This model considers solving the following problems: high costs of public services, environmental contamination, healthcare problems, etc. If a foreign enterprise is able to deliver modern technology of public services while considerably reducing the previous costs, then local public authorities may save a great amount of public resources. An example of such export entries is PESA from Poland. 9. Market and product creation model creating niches on foreign markets by providing innovative products meeting new needs. This model is generally used best by high-tech enterprises, e.g. producing electronic devices, software and fast moving consumer goods. It requires intensive research and development works and is considered as full of potential in its application (e.g. Finnish Nokia). 10. Prestige potential exploitation model exploiting great market identity of an exporter s enterprise by providing typical products, yet brand-underpinned. The model is frequently based on using positive stereotypes of images associated with other countries and products. Here are a few astonishing examples. The main bakery chain delivering the European-type bread in Japan is Andersen Bakery, a Japanese company which refers to a Danish bakery tradition from the 50s and 60s, while in contemporary Denmark this type of bread is rare. In the USA, good bread is sold under the French Bakery brand, while it is known that currently in France

41 Market entry strategies in the South Baltic Region and on third markets 39 bread does not play a significant role. However, positive stereotypes of these countries may be strong drivers of promotion and sales. 11. Model of arbitrage based on resource costs delivering typical technological products offering average prices of the foreign markets and expecting profits resulting from access to cheaper resources. This type of an export business model is associated with accessing cheaper resources. Having cheaper resources while offering similar market prices, an exporter is able to gain cost advantage which may be discounted by reducing prices and increasing the market share. Frequently, this model is associated with the outsourcing or key problem-solving model. The problem, in this case, are costs. It is a typical model of any contract export. 12. Model of exploiting technological or design advantage an offered export product has such a huge advantage in terms of technology or design on a given market, that it is easily accepted by customers. This situation may take place when an exporter offers e.g. devices of considerably higher effectiveness or consumer products nicer and more functional than the previous ones. The above-mentioned export business models are generally based on a few fundamental attitudes, that is the ways of creating a business model. Ways of creating a business model of export enterprises: 1. Market penetration approach starting from observing the market and searching for nonpenetrated niches providing a product to newly discovered niches (the niche market first, an idea later). 2. Utility use concept approach starting from an idea or solution and searching for niches until they are penetrated (an idea first, the niche market later). 3. Key problem solution approach designing solutions from the perspective of the existing big problems (the market of key customers first, a practical solution on a big scale later). 4. Optimal use of resources approach optimizing the use of an exporter s production resources (tangible, human, results of R&D works and prestige) and seeking to reduce unit costs in export. 5. Market creation approach creating niches or markets by product (creating new needs), organizational and technological innovations and providing useful products (simultaneously creating the idea, market and practical solution; it may have a niche or mass nature). 6. Effectiveness gaps exploitation approach searching for production niches unprofitable for producers of finished goods and offering outsourcing or contract products/services by an exporter for these producers. The above list of formulating business models of an export enterprise is not complete and comprehensive. However, it seems to present the most frequent ways of formulating an export business model in the Baltic region The main strategies of export entry modes on foreign markets and their practical application Criteria of choosing an entry strategy An exporter wishing to enter the foreign market in the Baltic region must be aware that these markets are heavily influenced by trade customs and specific mature distribution channels. For example, it means that if a producer from Central Europe wishes to enter the market of popular medium-quality

42 40 Przemysław Kulawczuk furniture in Scandinavia, it is necessary to use several chains offering this type of furniture. If such producer decides to enter the market with higher quality products, he/she may negotiate with regional wholesalers. If negotiations fail, the chances of entering the Scandinavian market by other distribution channels are small. However, when writing about strategies of export entries, it is not necessary to imagine that only Baltic countries are the export markets. It is possible to develop the export potential of the Baltic region and direct export towards third countries. It means that an overview of possible entry strategies is essential. Undoubtedly, a valuable action before deciding to enter a given market is finding an answer to the following question: How did other companies or our competitors enter a given market with similar products? An overview of previous solutions is generally the most reasonable for mature and stable markets. However, emerging markets offer more freedom in terms of making entry decisions. Frequently, the markets which are of an exporter s interest are not entered by other competitors with similar products, which requires further exploration and understanding the ways of selling on a given market. It is advisable to analyse optional strategies, their advantages and disadvantages on emerging markets. An analysis should assume that there are at least several available ways of entering a given market. From the perspective of minimizing risk, the key rule is the step-by-step rule. The step-by-step rule while entering the foreign market means that initially we differently test the market potential (using relatively little resources). To be precise, we mainly analyse the working time of our employees, establishment of commercial contacts, as well as samples and designs. Then, when we decide that these activities are favourable and arouse interest of local customers so that they would be able to bring considerable benefits for an exporter, we engage ourselves in the export entry. An important rule is to recognize optional markets. An exporter s enterprise does not have to follow other enterprises and seek to export into the Chinese market, which hosts competitors. This enterprise may check Vietnamese, Philippine and Indonesian markets which, for different reasons, have fewer competitors or even lack them. Assessing benefits from an export entry should be associated with the risk analysis. Some markets offer huge development possibilities, yet they are known from considerable infringements of intellectual property. An enterprise must assess whether it is beneficial to incur the costs of monitoring these infringements and whether the legal system of a given country is effective enough to ensure intellectual property safety. Deciding about an export entry, it is necessary to consider the entry organization and answer the following questions: Who will perform export-related tasks, which tasks will that be and which tangible resources are we going to allocate for organizational activities? Considering these activities may help to effectively organize an export entry. A market entry strategy is worth formulating so that it contains at least two optional solutions to key problems. It may translate into preparing two options of an export entry. Sometimes the second solution may take the form of a controlling counter-proposal and act as advocatus diaboli, which generally leads to even better formulation of the main export entry strategy Export entry strategies from the perspective of an accepted business model and the level of technological and market development Export entry strategies specify the way in which an exporter implements an export business model at the specific level of technological and market development of an enterprise. An export entry strategy considerably results from the way in which a potential exporter has developed production or services so far (from the perspective of production or technology advancement) and from the level at which an exporter has been able to develop business contacts and cooperation related to selling on other markets than the export market. On the other hand, an export entry strategy results from external factors which determine the choice of some distribution channels, possibilities of using distribution

43 Market entry strategies in the South Baltic Region and on third markets 41 niches (e.g. defects in a distribution offer which may affect our products) and from the existing interest of our product. An export entry strategy must also account for the stereotypes present on a given market and the existing trade customs. These stereotypes and customs are not always beneficial. It is typical to overcome them, yet they must be considered. The next part of this chapter presents synthetic descriptions of strategies related to entering the foreign markets. The issues of protecting intellectual property are also included 32. This part also presents the ways of connecting particular market entry strategies with the stages of technological and market development and standard export business models used by an enterprise. The presentation of market entry strategies, export business models and technological/market development stages is a suggestion which results from a logical juxtaposition and market observation. This presentation serves a potential exporter as the material helping to shape an export entry strategy. This chapter also includes the forms related to formulating an export entry strategy, to be filled in by an entrepreneur. 32 They refer to Poradnik Eksportera dla MSP z IP, ed. by M. Bąk and P. Kulawczuk, KIG, Warszawa The book served as a source of most definitions of entry strategies.

44 42 Przemysław Kulawczuk Table 8. Strategies of entering the foreign market (1) Stages of technological and market development Export business models Unit production Serial production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Resource costs arbitrage Technological or design advantage 1. Delivery of no-name final product directly to a sales channel, to a final customer, means delivering a product of clear utility values and with little or even without any emotional value, frequently without the producer labels, generally to a retail or wholesale store which sells this product as a no-name product. 2. Delivery of our final product under a foreign brand of low quality directly to a sales channel, to a final customer, means delivering a product of clear utility values and with little or even without any emotional value, identified with the shopping chain name or with a product name placed on the package or the chain brand specified on a product, with limited information about the place of real production (sometimes without this information).

45 Market entry strategies in the South Baltic Region and on third markets 43 Stages of technological and market development Export business models Unit production Serial production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Resource costs arbitrage Technological or design advantage 3. Delivery of our final product under a foreign brand of high quality directly to a sales channel, to a final customer, means delivering a product of clear utility values and with little or even without a high emotional value, identified with the shopping chain name or with an owner of a well-known brand, with a well-known brand belonging to the product owner placed on a product, with very limited information about the real place of production (sometimes without this information). 4. Direct export of our final products means delivering a product to an intermediary without sufficient knowledge of the product location. In extreme situations, it may be located on the markets on which our company has already been present, which may cause problems. This form is widely used, especially on less developed markets.

46 44 Przemysław Kulawczuk Table 9. Strategies of entering the foreign market (2) Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 5. Direct export to a final recipient means delivering a product to a final recipient by means of our sales network, without a representative or other people or commercial entities, in a way which unambiguously identifies an enterprise as a supplier of both utility and emotional values. 6. Subcontracting manufacturing using supplied or specified technology means producing semiproducts on our own, according to a contractor s specification; such features as shape, colour, utility and other are determined by a recipient. Moreover, a recipient delivers technology used for production or specifies the type of technology to be used. An intermediate product is not labelled and a final product is labelled as a contractor s product and distributed under his/her brand. It is a variation of contract manufacturing.

47 Market entry strategies in the South Baltic Region and on third markets 45 Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 7. Subcontracting manufacturing using our own technology means producing semiproducts on our own, used to produce final products according to a contractor s specification. A recipient accepts technologies owned by a producer. An intermediate product is not labelled and a final product is labelled as a contractor s product and distributed under his/her name. It is a variation of contract manufacturing. 8. Subcontracting and final production mixed strategies means simultaneously offering the same or similar products within the contract market and the final customer market. Contract products are not labelled and a final product is labelled as a contractor s product and distributed under his/her name. Some products targeted at final recipients are labelled with a producer s brand.

48 46 Przemysław Kulawczuk Table 10. Strategies of entering the foreign market (3) Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 9. Dominant subcontracting and a supplementary role of final production means simultaneous offering of the same or similar products within the contract market and entering the market of foreign customers. The aim of this strategy is to become more independent from recipients (producers of final goods) by entering the market of final goods for final customers. An exemplary market of this kind is the car parts market, on which it is possible to deliver products for car makers and by means of sales networks, directly to the market of final customers. Some products targeted at final recipients are labelled with a producer s brand.

49 Market entry strategies in the South Baltic Region and on third markets 47 Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 10. Subcontracting as a supplement of final production means simultaneous offering of the same or similar products within the final goods market and attempting to enter the contract market, especially when this market is able to ensure considerable economies of scale. An exemplary situation refers to a producer of car seats attempting to enter the car upholstering market by establishing relations directly with a car maker. In this situation, producers involved in contract production lose the brand identification of its product, yet benefit from the contract value. 11. Integration of an international business process at third party order means pursuing international management with reference to the entire value chain, based on a contract made with the value chain owner or the owner of intellectual property rights which are necessary for the management of this process.

50 48 Przemysław Kulawczuk Table 11. Strategies of entering the foreign market (4) Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 12. Integration of an international business process under our own brand means pursuing international management with reference to the entire value chain, based on the decision about an independent presence on the foreign markets under our general brand while using product, service or component deliveries from partners or contractors. It is also necessary to maintain full control over intellectual property of the entire business process and those chain links whose intellectual property rights belong to our enterprise. 13. Service specialization within the value chain or managing a separated value chain link means ensuring services within a single value chain link (e.g. logistics, sales, etc.) and managing the link. This relation ensures specialization and high or even very high-quality service performance inside the link and makes it possible for a manager of the link to handle intellectual property protection.

51 Market entry strategies in the South Baltic Region and on third markets 49 Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 14. Producing and offering independent services under our own brand inside the value chain is a modification of managing the value link without the possibility of using our own brand. In this case, an integrator of this process helps to use its own brand by a manager of a separated chain, which is generally associated with a high evaluation of this brand.

52 50 Przemysław Kulawczuk Table 12. Strategies of entering the foreign market (5) Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 15. Value chain integration inside the link of a wider value chain means using a specific type of link as specializing in and taking over the management of this link within a series of other value chains in order to gain a dominant position or strong competitive advantage over other competitors. 16. Strategy of creating and managing intellectual property rights means focusing the company activity on creating intellectual properties, providing them with legal and contractual protection in order to license the rights, so that they can be used on specific markets or within the scope of particular products or types of activity. The aim of this strategy is to benefit from intellectual property as a result of fully spreading it on different markets and value chains.

53 Market entry strategies in the South Baltic Region and on third markets 51 Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 17. Integration of the international intellectual property management means assuming the role of the creation process organizer, spreading and protecting intellectual property rights in a given business area while performing diversified functions within the scope of using intellectual property rights, from an independent use to a licensed use, and while performing activities aimed at stimulating the development of a given area. An integrator benefits both from intellectual property and intellectual property rights, yet without assuming a dominant position within all scopes, so that standard market performance is possible.

54 52 Przemysław Kulawczuk Table 13. Strategies of entering the foreign market (6) Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 18. Subcontracting strategy in the value chain related to managing intellectual property means delivering services, products or intellectual property generally within a single value chain link under competitive rules. An integrator of a business process competitively seeks suppliers. Generally, a contractor may benefit while taking over the service of the entire service or production process in a given subject. 19. Managing a separated link in the value chain related to intellectual property management means that an enterprise specializes in a single link in the value chain related to intellectual property. This specialization makes a given company a superior supplier and sets guidelines within the scope of intellectual property and, as a result, integrators of basic business processes entrust this company with important functions in managing a given link.

55 Market entry strategies in the South Baltic Region and on third markets 53 Stages of technological and market development Export business models Unit production Batch production Mass production Mass customization Niche penetration Niche discovery Outsourcing Technological market subordination Managing free potential Opening markets Discovering innovations Key problemsolving Market and product creation Prestige exploitation Arbitrage based on resource costs Technological or design advantage 20. Representative office means appointing an exporter s overseas commercial representative fulfilling the role of a contract agent, who negotiates delivery conditions and conducts market explorations. 21. Management contract means that an exporter provides management over the importer s enterprise. The management contract is generally made for the term of several years and leads to a huge transfer of technology and know-how related to conducting business from exporter to importer. Source: Based on self-study and Poradnik eksportera z IP dla MSP, edited by M. Bąk and P. Kulawczuk, KIG, Warszawa 2010.

56 54 Przemysław Kulawczuk 3.4. Creating a strategy of entering a new export market Below we present the outline of an export entry strategy description on the new market. This description is an advisory tool in decision making concerning the market entry for company management. At this initial decision stage we think that 3 4 pages of synthetic description is enough. The broader description of the strategy (or its elements) depends on information needs of company management, especially when final decision is to be made. 1. Technological and market development of an enterprise (describing the level of product standardization/customization and the scale of product ranges that may be subject to export) 2. Designed export business model (How does an enterprise generate profits by exporting to other countries? Such description includes: the main value for a buyer the reason for buying, a general idea of entering the market, a given concept of export profits a source of an exporter s benefit and the exporter s revenue and profit potential as well as fundamental success factors) 2.1. The key customers value 2.2. Concept of exporter s income (how money is to be earned)

57 Market entry strategies in the South Baltic Region and on third markets Income potential 2.4. Fundamental success factors 3. Overview of previous solutions related to choosing an entry strategy (competitors, suppliers of similar goods and our company experience) 4. Results of testing the market potential (how much does a given market absorb and is the entry possible) (by our employees, including preliminary talks with potential distributors) 5. Evaluation of a given market as compared with optional markets (to what extent the potential of this market is better than the potential of other markets) 6. Evaluation of benefits from entering the foreign market

58 56 Przemysław Kulawczuk 7. Analysis of the market entry risk 8. A choice of an entry strategy (a detailed strategy) (a choice among 17 strategies described in the Tables above or specifying another strategy) 9. Entry design 10. Alternatives for the entry strategy suggested

59 Eugeniusz Gostomski 4. Distribution channels on the foreign markets 4.1. Distribution as a marketing tool Distribution is a marketing tool connecting a producer of goods and the buyers of the goods offered. Distribution comprises all activities related to transferring particular goods form their place of production to the place where they are sold to the final customers. In the case of distribution on the international markets, a final recipient of goods is outside his/her mother country. The main aim of distribution is to overcome spatial, temporal and ownership barriers separating a producer or seller from a final recipient of the goods 33. Distribution comprises two basic elements: distribution channels and physical distribution 34. In the reference books, there exists the functional and subjective approach towards distribution channels. According to the subjective approach, a distribution channel is: the structure of organizational elements of a company (sales and distribution departments, warehouses of finished goods, transportation department) and the external intermediaries participating in selling the goods; a group of interrelated organizations participating in the process of delivering products and services to a user or consumer. According to the functional approach, a distribution channel is a chain composed of consecutive links (institutions and people) which act as intermediaries in the sales and marketing flows: information about potential recipients and competitors, promotional information which encourages customers to buy goods, information about the intention to buy a specific batch of products (orders), products (transport, storage, throughput), payments, that is settling payments by the customers, with banks acting as intermediaries, ownership rights from one link of the chain to another, risk accompanying the movement of goods by means of a distribution channel; risk related to settling the payment 35. The direction of these flows is diversified. Promotion, products and ownership rights flow from a producer to a final customer. Orders and payments, in turn, flow from a final customer to a producer. Apart from the above-mentioned flows, there are bi-directional flows comprising information, negotiations and risk. As far as physical distribution of products is concerned (also referred to as distribution logistics), it includes the transport of goods from a producer to a customer or user. This flow may be disrupted by storing goods in the warehouses. Goods may be transported by a producer, wholesaler, retailer, consumer or transportation company. The aim of physical distribution is to ensure a proper level of customer service accounting for the reduction of costs to the minimum. International distribution means that a final recipient is outside the mother country of a producer, which requires using foreign intermediaries. It must be emphasized that selling goods on the foreign markets does not always mean the goods crossing the border. This situation takes place, e.g. when production on the foreign market results from the foreign direct investment. 33 W. Grzegorczyk, Marketing na rynku międzynarodowym, Wolters Kluwer Business, Warszawa 2009, p A. Czubała, Dystrybucja produktów, PWE, Warszawa 1996, p Ibidem, p

60 58 Eugeniusz Gostomski 4.2. Types of distribution channels Domestic and international distribution channels differ from each other in terms of the following aspects: type of participants, number of indirect levels, number of intermediaries at the same level, type of flows, degree of integration and coordination of the channel participants and importance of a channel for a producer. Based on the criterion of the type of participants involved in the process of distributing goods, direct and indirect distribution channels are distinguished. Direct distribution means that a producer independently conducts distribution activity, without specialized domestic or foreign intermediaries. Producers maintaining their offices and chain stores abroad use their employees or sell goods online. Direct distribution channels are commonplace on the investment goods and raw materials markets. On the consumer goods markets, direct distribution channels are common in the case of retail stores, cars, furniture, shoes, clothes, etc. From the perspective of a producer, direct distribution channels have a number of advantages, since they: ensure a full control over the sales, prices and quality of servicing final recipients, help to shape a uniform image of a brand and to establish long-lasting relations with local recipients and strengthen their loyalty, provide an easy access to the market information, help to precisely recognize market needs and quickly adjust the offer to the changing demand, positively influence the reduction of time needed for the products to flow from producers to final recipients and also shorten a payment cycle, which translates into the profits generated for the producers of goods. The basic disadvantage of direct distribution are its high costs and the necessity for the producers to transfer entire sales risk. Another disadvantage is reducing market penetration to the throughput of the distribution network possessed, which means that some groups of recipients are not provided with an offer. As a result, a direct sales method is not advisable on highly diversified and remote foreign markets. While selling goods on the foreign markets, particularly consumer goods, direct distribution channels are used much more frequently, which means that producers use outsourced services in order to deliver goods to the final foreign recipients. Then, they do not have to search for customers themselves and to incur costs necessary for establishing and operating their own sales network. An effective intermediary within a distribution channel establishes positive relations with local customers. He/ she knows their needs and the cultural circumstances of their market behaviour, which determines a favourable offer prepared for them. The presence of intermediaries increases the chances of producers entering new culturally diversified markets and helps to penetrate the markets serviced so far. An active participation of intermediaries in distribution is particularly important for an enterprise wishing to expand its activity on the foreign markets. However, a disadvantage of this distribution method is a danger of losing control by a producer over choosing final customers and over such elements of distribution as prices and promotion. It is also impossible to exclude the situation when intermediaries do not perform their contractual obligations, which negatively influences the sales volume. Moreover, when using a direct sales method, a producer is separated from the market information about the changes in demand and what is more, the period of paying for the goods sold is extended 36. Apart from the length measured by the number of links from a producer to a final customer, distribution channels differ from each other in terms of their width related to the sales intensity (see Figure 8). 36 A. Limański, I. Drabik, Marketing międzynarodowy, Difin, Warszawa 2010, p

61 Distribution channels on the foreign markets 59 Long distribution channel Short distribution channel Producer Producer Producer Producer Producer Producer Intermediary exporter Intermediary exporter Intermediary importer Intermediary importer (agent) Wholesaler Wholesaler Wholesaler Wholesaler and (or) and (or) and (or) Retailer or wholesaler retailer Retailer or wholesaler retailer Retailer or wholesaler retailer Retailer Retailer or wholesaler retailer Final recipient Final recipient Final recipient Final recipient Final recipient Final recipient Indirect distribution Direct distribution Fig. 8. Distribution channels Source: W. Grzegorczyk, op. cit., p The width of a distribution channel is specified by the range of reaching final recipients, understood as the number of stores offering the products of a given enterprise on the domestic or foreign market. This width depends on the number of intermediaries and their involvement in selling those products. When the width is used as a criterion, the following distribution channels may be differentiated: intensive distribution, with a big number of stores offering products on a given foreign market, selective distribution, with selected stores offering products on a given market,

62 60 Eugeniusz Gostomski exclusive distribution, used when there is only one distribution link of a given enterprise on the foreign market 37. Distribution width is determined primarily by the specificity of products and demand. Intensive distribution means offering a product by all potential intermediaries in a given country. It is used with reference to everyday products (e.g. food and hygiene products), which are traditionally bought by consumers nearby their place of residence, not to waste their time. The buyers of the above-mentioned products are geographically dispersed and therefore, reaching them requires creating strong links at a given level of distribution, which is costly and difficult to organize in case of foreign sales. It also requires using considerable stocks and effectively coordinating the work performed by all entities involved in the distribution of products of a given producer. The problems encountered while arranging an intensive distribution on the foreign markets lead to the situation in which enterprises focus on the cooperation with selected intermediaries. In other words, they use selective distribution. The selection process aims at excluding those intermediaries characterized by poor sales capacities, incompetent, demanding considerable financial resources for their activity (in the form of credits) and not possessing the sales skills and conditions required by a producer. The aim of selective distribution is not only to maximize profits by producers, but also to establish conditions for an effective fulfilment of the marketing functions. Selective distribution is used in case of goods that may be chosen from different offers. Buyers evaluate the products offered by a given entity: furniture, white goods, computers, clothes, or compare other products in terms of their price, quality and functionality with those offered by other producers. Time devoted by a buyer to reach the place of the purchase does not play a deciding role. Thus, the sales network does not have to be extensive. Producers are not obliged to cooperate with a big number of intermediaries on a given foreign market, which facilitates controlling a distribution channel, reducing the cost of its performance and coordinating the activities on an international scale. Exclusive distribution means that a producer chooses one intermediary at an appropriate level of a distribution channel and gives him/her an exclusive right to sell specific products on a given area and, simultaneously, forbids him/her to sell the products offered by the competitors. Selective distribution is primarily used with reference to the luxury goods, unique and specialized goods as well as complex investment goods. Cooperation between a producer and an intermediary is here governed by the agreements specifying their rights and obligations. Frequently, these agreements take the form of franchise agreements. An advantage of selective distribution from the perspective of a producer is that it ensures a high degree of control over a distribution channel and guarantees a specific sales standard and a uniform brand image. The information about the market conditions (e.g. cultural circumstances) requiring a proper adjustment of a product are also of great importance 38. Distribution channels differ in terms of the level of integration between their participants. Considering the scope of cooperation between them, we differentiate conventional and vertically-integrated channels. Conventional channels are characterized by an autonomous action of every participant of the product distribution process. In vertically-integrated channels, in turn, the entities participating in a specific distribution channel cooperate to achieve common goals. Vertically-integrated channels include administrative, contractual and corporate channels. In administrative channels, one of the participants has an administrative or economic advantage over the rest, who have to consider his/ her requirements in terms of prices, delivery form or promotional activities. Contractual channels are based on the franchise agreements, commissioned sales agreements and joint venture agreements signed by the independent participants of the distribution process. The agreements specify the scope of cooperation and the rights and obligations of the parties to the contract. The essence of corporate channels is merging the enterprises from the consecutive levels of a distribution channel 37 E. Duliniec, Marketing międzynarodowy, PWE, Warszawa 2009, p A. Limański, I. Drabik, op. cit., p

63 Distribution channels on the foreign markets 61 into one organization. An integrating role in the distribution channel may be performed by a producer or a commercial enterprise. Integration and concentration processes in international trade have led to an increased share of huge commercial organizations in retail trade. These organizations are not supplied by wholesalers, but directly by producers Intermediaries in selling goods on the foreign markets Export intermediaries are most frequently divided into two groups according to the level of risk taken acting on their own behalf and acting on an exporter s behalf. Entrepreneurs acting on their own behalf take the entire sales risk and, most frequently, perform an integrating role in a distribution channel. This group includes distributors, wholesalers and dealers. Distributors independently act on their own behalf. They cooperate with an exporter and are bound by a long-term agreement ensuring an exclusive right to sell the products of an exporter on a specific market. Generally, the role of a distributor is performed by a wholesale enterprise or a retail enterprise having its own sales network and cooperating with other retail networks. Distributors sell goods under their own brand or the brand of an exporter and incur all costs related to delivering goods to a final recipient. Their services are most frequently used by small and medium-sized exporters, not experienced in the foreign market operations. Large producers use their services only on less attractive markets, which make it groundless to create their own sales network. Wholesalers also act independently on their own behalf. They own their retail chains (agents, subsidiaries) and cooperate with retail enterprises. Wholesalers can label goods with their own brand. When they make transactions with a producer, they have to enter into a separate agreement and, generally, they do not exercise an exclusive control over a given area or product. When it comes to domestic trade, their role is currently decreasing. In foreign trade, their role is considerably increasing. A retailer as an intermediary in a distribution channel sells goods directly to final recipients. Various stores are used for this purpose: specialized self-service stores, supermarkets, discount houses and department stores. In contemporary retail trade, large stores, discount houses and chain organizations are growing in importance. Dealers are also intermediaries acting independently. A dealer is both a retailer and a wholesaler. Usually, dealers cooperate with a single supplier. Apart from selling, they are also responsible for the before and after-sales service. Generally, they do not sell goods under their own brand. Commercial agents acting for other entities are intermediaries most frequently used by exporters. An agent is employed under a long-term agency agreement on behalf of and for the ordering party, who is a producer in most cases. Agents may also represent buyers (usually small retailers or wholesalers) and buy goods from producers on their own behalf. An agency agreement may include the competition clause specifying that an agent acts exclusively for the ordering party within a given area and within a given product range, and that an agent will not accept authorizations from other entities within the scope of the same or related goods. The main role of an agent is to establish commercial contacts and act as an intermediary in making transactions between producers and their final customers. Moreover, agents are obliged to research the market and promote the goods offered. The ordering party remunerates agents by giving them a commission proportionate to the sales value. A specific example of an agent is a CIF-agent who represents a bigger number of producers and maintains independence. CIF-agents receive orders from importers (e.g. foreign retailers) and make transactions, most frequently based of the CIF trade term W. Grzegorczyk, op. cit., J.W. Wiktor, R. Oczkowska, A. Żbikowska, Marketing międzynarodowy. Zarys problematyki, PWE, Warszawa 2008, p. 265.

64 62 Eugeniusz Gostomski Contrary to an agent, a broker acts with reference to a single order as an intermediary between many exporters and importers. Brokers participate in making commodity, freights, insurance and monetary transactions. On the formalized markets (commodity exchanges, auctions), they obligatory act as intermediaries between buyers and sellers. They are appropriately commissioned for their work. Consignees are intermediaries acting for another entity (exporter), yet on their own behalf. They cooperate with an exporter under a long-term consignment agreement, which is a variation of the commissioned sales agreement. They arrange the consignment stock, generally consisting of the brand-name products, from which they supply retailers and wholesalers immediately after they place an order. They may also arrange the spare part stock, which considerably streamlines the after-sales service of the foreign customers buying technical goods. Consignees are obliged to exploit buyers with reference to the goods from the stock. They are remunerated for their work with a commission based on the prices of goods Choosing distribution channels on the foreign markets Choosing an appropriate distribution channel on the foreign markets is crucial for the economic results of exporters. An improper strategy of entering the foreign market and a wrong selection of intermediaries may become the cause of the export failure. Creating by an exporter an optimal distribution channel requires specifying the aim of distribution, the length and width of a distribution channel and evaluating as well as selecting its intermediaries. The starting point for exporters creating distribution channels is the strategy of entering the foreign market, that is choosing the methods of delivering products on this market. If an entrepreneur chooses indirect export, then an intermediary is responsible for the method of delivering goods to a final recipient. An exporter is obliged to create distribution channels abroad from scratch, buy a foreign company possessing distribution channels, create a distribution joint venture, make the franchise agreement with a foreign partner or use the services of other intermediaries. The factors determining the choice of distribution channels on the foreign markets are divided into internal and external factors. The greater the number of countries towards which enterprises direct their export, the greater the number of factors analysed and the more intensive the need to adjust the sales strategy to the changeable market conditions. The main internal factors determining the choice of distribution channels on the foreign markets include: experience in servicing the foreign markets, size of an enterprise, its assets and the marketing objectives achieved, type and features of exported goods, need to exercise control over distribution channels. The size of an enterprise and its assets considerably influence the creation of the sales network or determine the use of the services performed by intermediaries. The first solution is generally selected by big companies; the second one is more typical of smaller exporters. Creating independent distribution channels and maintaining them as efficient as possible is costly, which means that only enterprises with considerable financial resources can afford them. It is also important to consider international experience of an enterprise while choosing a distribution channel on the foreign market. International experience helps to choose an optimal distribution channel and the best intermediaries necessary in the process of delivering exported goods to final recipients. 41 W. Grzegorczyk, op. cit., p. 164.

65 Distribution channels on the foreign markets 63 Choosing optimal distribution channels must be preceded by specifying the marketing objectives of a company. These objectives are reflected in the planned sales volume and foreseeable profits. Enterprises intending to export on a large scale choose the channels enabling them to achieve considerable turnover on a given market. Most frequently, they choose big wholesalers and retailers having an extended sales network. The pace of entering a given market is also considered. If an enterprise intends to enter a specific market quickly, the choice of a distribution channel is limited to the channels available in a shorter period. An important factor influencing the choice of a distribution channel is the type of a product being launched on the foreign market. Frequently, low-priced goods for an everyday use require long and wide distribution channels. However, specialized goods bought less frequently and requiring the after-sales customer service, need relatively short distribution channels (see Figure 1). The features of a product may, simultaneously, reduce the number and type of available intermediaries (e.g. only the stores having refrigerators can sell frozen food products) 42. When choosing distribution channels, the issues of their control by exporters operating on the foreign markets are considered. The longer a distribution channel as well as the greater the number of intermediaries and geographical remoteness, the lower the control span. If exporters having a good reputation and recognizable product brands are interested in the current distribution control, they must focus on a direct sales method used while offering products on the foreign markets. In other words, they must use the shortest distribution channel. Among the internal factors influencing the choice of a distribution channel, exporters should particularly consider the following aspects: general level of economic development of the country towards which exported goods are directed, purchase behaviour and requirements of foreign consumers, legal framework, specificity of foreign distribution channels 43. The level of economic development of a given country determines the choice of specific solution with reference to the distribution of goods in this country. The more economically developed the country, the more commercial intermediaries of diversified profiles. A higher level of economic development of a given country translates into higher margins charged by intermediaries for their services. Simultaneously, independent importers play a less significant role in developed countries. An exporter must persistently attempt to meet the needs and requirements of the foreign market customers. However, it is impossible without a thorough knowledge of the purchase behaviour and requirements of these customers. In other words, an exporter must know what, where, when and how customers in a given country buy. When choosing a specific distribution channel, it is necessary to provide the product information, to enable customers to buy a product of suitable quality and in a convenient place and time, as well as to ensure the necessary after-sales service. Direct channels and short indirect channels having a small number of distribution links are better in meeting the consumer requirements than long distribution channels. Such solution is necessary particularly while selling specialized investment goods. However, as far as offering mass goods and reaching geographically dispersed consumers are concerned, exporters generally sell goods by those intermediaries who perform export-related services. Operating on various foreign markets requires considering applicable legal regulations (e.g. restrictions on selling alcohol in Sweden, anti-monopolistic regulations, etc.). It is necessary to comply with the regulations on the rights of the employees involved in trade, opening hours of stores, promotional methods allowed in a given store and other legal regulations of the country towards which exported goods are directed. 42 J. Wiktor, R. Oczkowska, A. Żbikowska, op. cit., p Ibidem, p

66 64 Eugeniusz Gostomski Particular countries differ in terms of the existing distribution channels, which must be considered while entering the foreign markets. When it is impossible to find intermediaries ready to cooperate and able to meet the requirements specified by an exporter, enterprises must establish their own direct distribution channels Using the Internet to distribute goods on the foreign markets For several years, the role of online distribution in performing marketing activities on the foreign markets has been growing in importance. The Internet helps to increase sales on the foreign markets and expand the sales markets by entering new ones. It is a very convenient medium used to transfer the information about the goods and to present it on the websites. Moreover, the Internet is much more frequently used in selling goods directly to the foreign customers, which eliminates some indirect links in the foreign market distribution. Thus, a distribution channel is shortened and the sales costs are reduced. Not all goods can be sold on the Internet. The most suitable goods for online selling are those that can be recorded electronically, that is books, songs, software, computer games, etc. For several years, electronic banks have been successfully performing their services. They primarily offer personal accounts and deposits serviced electronically. However, the goods sold in reality and those that cannot be recorded electronically, such as cars or white goods, can be only promoted or ordered on the Internet and their delivery takes a traditional form. Enterprises using the Internet in distribution are divided into two groups: enterprises selling goods only on the Internet, enterprises both selling goods on the Internet and using traditional distribution channels. The first group comprises mainly those enterprises offering the products that can be electronically recorded. These enterprises do not have to incur costs of distributing their products. The second group of enterprises using the Internet together with traditional sales methods is very diversified and comprises the exporters of clothes, cosmetics, electronic equipment, etc. These enterprises are exposed to the phenomenon of cannibalism, which means that customers using traditional distribution channels switch to the Internet 44. Those producers interested in exporting may use the following Internet distribution links: online retail stores, electronic agents, that is intermediaries not involved in direct distribution and only helping to find appropriate goods and make transactions (e.g. online auction and shopping portals, such as ebay and Allegro, or the portals comparing the prices of products, such as Skąpiec or Ceneo). electronic retailers, that is online stores offering the goods of many producers and allowing consumers to place an online order for a specific good, which is delivered to a buyer (e.g. Amazon or Merlin) 45. An exporter using the Internet to contact foreign customers must have a visually attractive website in the mother language of the foreign recipients or at least in English. 44 A. Limański, I. Drabik, op. cit., p J.W. Wiktor, R. Oczkowska, A. Żbikowska, op. cit., p

67 Bohdan Jeliński 5. Organizing export activity in an enterprise An enterprise is an independent organizational entity with legal personality conducting business activity purposefully and rationally. It is a separated economic system which requires an effective and successful management. Managing an enterprise means shaping it constantly and consciously by coordinated processes of planning, programming, transferring and controlling its operations. Moreover, this management accounts for using all available resources in order to achieve the assumed aims 46. An important element of managing a company is its organization understood as the process of leading a consciously separated group to a coordinated cooperation using particular resources and decision rights within specific internal and external relations, in order to achieve an assumed aim or a group of aims Forms of conducting business activity on the foreign markets According to the functional approach, organizing company performance means specifying an organizational structure which is the most suitable for a given strategy, human, production and financial resources as well as technologies and tasks. Every standard element of company performance includes specific factors and detailed relations determining this performance, understood as a network of many simultaneous and interdependent relations, within which the employees seek to achieve common aims under specific management. This network of relations is constantly developed and becomes more and more complex when an enterprise makes a strategic decision to internalize its activity, that is expanding its spatial coverage into the foreign markets. In this way, selling and purchasing goods or services may be conducted on the domestic market of a producer or on other markets. Entering the foreign markets means that a producer of goods is more and more separated from the market of expanding sales and supply. Then, a transaction cycle is prolonged and the amount of capital invested in production and commercial activity increases. Moreover, there exists a stronger tendency to divide business activity into production and commercial activity. In the case of direct export, instead of using intermediaries, a company takes control over the product sales, its transportation, customs clearance, distribution channels, advertising and price setting. These duties may be contracted to an export department created, or a subsidiary in the country where a company sends its goods. The second possibility gives a foreign customer a chance for an easy contact with a company and quickly strengthens its positive image. For novice exporters, the help of intermediaries may prove invaluable. When exporters become experienced enough, they decide whether further cooperation with intermediaries is still beneficial. Using an independent export department is probably the most appropriate in the case of a company doing business with a limited number of foreign recipients, while easily controlling the export costs at the same time and ensuring the after-sales service to a limited extent. Certainly, employees of an independent export department must know all about the activity of a company and its structure and know how to search for information. Employees should take full responsibility for the steps taken and their career development should depend of the quality of economic labour effects. However, conducting export activity by a company itself is exposed to certain dangers: 46 J. Stoner, R. Freeman, D. Gibert, Kierowanie, PWE, Warszawa 1998, p. 20.

68 66 Bohdan Jeliński exclusive aim of an export department is to continue export activity regardless of real profitability of foreign sales, the mistakes made because of the lack of skills or knowledge may never be revealed, employees related to a single company do not have a more extensive knowledge of other industries and companies, employees related to a single company may lose the ability of pioneering thinking, which is essential to fulfil non-standard or exceptionally difficult orders, External intermediaries may present a more objective assessment of success possibilities of products which a company wishes to export. An extensive knowledge of export issues and experience gained while cooperating with many companies help to quickly find proper solutions for a burdensome problem and consider all emerging possibilities together with probable dangers. Moreover, cooperating with intermediaries may bring the following benefits: no need to train employees in order for them to handle new duties, economizing on day-to-day expenses, every intermediary knows the newest export techniques and methods, not to mention a constantly supplemented knowledge of the current situation on the foreign markets, intermediaries usually have greater motivation, since they wish to generate higher profits if their services prove to be at the highest level (full-time employees will be anyway remunerated); moreover, intermediaries have an extended network of contacts with other exporters and export specialists in a given subject. If a company decides to use the help of intermediaries, it should prepare their list (as far as the choice is possible), and then thoroughly analyse the details of every candidate. It is required to check whether and to what extent a given candidate knows a product and potential export markets, what is his/her experience, how much commission he/she expects, whether there is a possibility of granting credits and whether he/she owns resources to ensure proper customer service and effective product promotion. A good intermediary should have the following features: solid financial standing, reputation, positive market image, documented experience in conducting similar transactions, a wide network of subsidiaries worldwide, sufficient number of employees, possibilities for storing products and readiness to finance considerably big stock levels, possibility of quickly performing contractual obligations and pre-financing deliveries. The basic criteria used to select an appropriate representative are the following: proven knowledge of local customs and conditions of doing business, ability to conduct market research, contacts with local companies, which may ensure specialised services such as the repair service, availability of a flexible representative, with a telephone, fax and a suitable office, if a representative is associated with competitive companies, is it possible to engage him/her into our company and its products, sufficient information about the benefits of a product, quality of former order fulfilments, quality of translating promotional materials and an active attitude in this regard, easiness of assessing the level and results of a representative at work, professional experience of a representative, documented orders, company history, reputation, the existence of a subsidiary and its location, is it possible for a representative to serve customers within the country area, appropriate measures essential to meet the conditions: staff, location, technical competence, storage possibility, etc.,

69 Organizing export activity in an enterprise 67 easiness of supervising and motivating a representative by a contractor; which control and motivation system may be used (e.g. submitting reports, conducting checks, commission system and other financial incentives); a representative is usually required to prepare a quarterly sales forecast and explain distinctions between forecasts and real results; a representative should keep the copies of the enquiry letters received, confirm the calls made, offers submitted and complaints handled as well as transfer information about all the issues at the end of a month, knowledge of a product and sales techniques and whether a representative requires a thorough training in this regard. Every potential respected representative of a foreign company should not perform his/her duties before assessing the situation of a customer and the involvement in acting on the local market. Therefore, a representative should be provided with the information not only about a product, but also about the performance of a company, its advantages and technical as well as technological possibilities. Since a representative acts within a certain distance from the company location, undoubtedly, sooner or later, he/she will have to make decisions on behalf of the company and without the possibility of consulting these decisions. Therefore, a representative should have a thorough knowledge about the price and credit policy, delivery conditions and discounts resulting from cash payments or orders in bulk. A company should maintain a constant contact with its foreign representative, meet and call him/ her as well as receive regular reports on sales, potential customers, market tendencies, etc. A representative should be also informed about new actions, intentions, staff turnover, new products and marketing plans. Some companies provide trainings for their foreign representatives and the company management should visit them during local fairs or local stays in a given country. Companies sponsor awards or interesting holidays for a representative achieving the highest sales results. Motivation of foreign representatives limited to essential commissions does not provide the framework for long-term cooperation, especially during the market downturn and temporary company problems Creating an organizational structure for conducting export activity Regardless whether a company decides to conduct direct or indirect activity on the foreign markets or works out an original form of doing business, it always means the necessity of extending the scope of spatial activity, yet primarily, expanding in terms of substantive and organizational aspects and, as a result, incurring specific costs anticipated. Thus, the decision about creating an organizational structure for conducting export activity should be preceded by a thorough analysis of possibilities and dangers of this strategic decision for an internal and financial balance of an enterprise. Then, the following questions should be constructively answered: May the products manufactured by means of the existing and future production capacities be sold on the foreign markets and is it possible to increase sales? Do employees accept an export unit and are they convinced about professional skills that would be used to manage an enterprise? Is the administrative system strong enough to sustain additional burdens and is the company management ready to accept additional duties? Will the financial situation of an enterprise be shaken by payment delays or foreign partner bankruptcy and to what extent? Does a company have additional financing sources related to export usually stimulating an increased demand for working capital? 47 See: K. Bielecki, Operacje handlu zagranicznego, PWE, Warszawa 1996, p

70 68 Bohdan Jeliński Positive answers to the above-mentioned questions justify an aware expansion of enterprise activities into the foreign markets. It means being fully involved in a new business area and subordinating export to the main company aims as well as attaching the same importance to all orders coming both from domestic and foreign recipients. Working on new products, choosing transportation modes and distribution systems, establishing relations with banks and advertising companies and even devising a general company strategy requires accounting for the export-related requirements. Products may require adjustment to the foreign customer needs which, in turn, must be checked and all these activities must be appropriately financed. A company is required to face foreign exchange fluctuations. It cannot forget that the necessity of preparing promotional materials in a foreign language increases the costs. The basic marketing tools used on the domestic market may be effective in foreign trade even though the problems encountered there differ from each other. It will be necessary to change the former thinking pattern related to marketing, which domestically may be considerably easy, since there are well-known conditions, an easy access to information and media as well as recognized market research companies and other marketing services. Moreover, the conditions of conducting business activity may be distinct in different countries, since they depend on a specific political, economic, legal and cultural situation. Considering the above-mentioned factors, the decision about internationalizing the company activity and locating export activity within an organizational structure seems problematic. An organizational structure of foreign trade offices is not identical in all enterprises. It depends on the product specificity, trade volumes and the organizational concept used by the management. The earliest form of company internationalization is traditional foreign trade. Among the external factors influencing foreign trade organization in an enterprise is its international environment. International environment is primarily understood as the trade policy of the countries towards which an enterprise directs its export. Tariff and non-tariff barriers, including transaction-related formalities, result in a greater complexity of foreign trade organization. Moreover, a restrictive trade policy of these countries may force an enterprise to replace export with domestic production and sales, which will influence the change of its activities and organization of a foreign trade department domestically and abroad. Thus, an effective operation of the legal and administrative system (the level of bureaucracy involved) is of great importance. It also refers to the banking system, telecommunication infrastructure development and wholesale and retail trade network in a given country. Foreign trade organization, its scope and structure will be also determined by an enterprise position occupied on the foreign markets as well as competition intensity. These factors will determine the choice of an action strategy. An offensive or defensive type of a strategy will be associated with differentiated allocation of financial, human and organizational resources. The basic variations of organizational structures related to foreign trade flows of a company are presented in the Figure 9. A certain level of importance should be attached to the structure and pace of the coming orders or the type of customers. High frequency of even small orders of a short period of fulfilment requires expanding some units in the foreign trade department in order to ensure an effective course of a transaction. If some distinct groups of customers or even a few single customers are important for the export structure of an enterprise, this specificity should be reflected in organizing foreign trade. The differences among countries and regions will, to a greater extent, yet similarly influence foreign trade organization. The basic internal factors determining the organization of foreign trade are its volumes. If commercial transactions are of lesser value and rare, they do not require a separate organization. They may be conducted by the domestic sales or marketing department as well as by a task-based team arranged spontaneously. An increasing share of foreign trade in the overall enterprise activity makes it necessary to gradually develop essential domestic and foreign structures. Another factor are differentiated products. Depending whether an enterprise produces a single good, a small amount of different products or a wide array of similar goods or considerably distinct ones, foreign trade organization will take different forms.

71 Organizing export activity in an enterprise 69 Structure type Non-specific organizational structures Independent foreign trade department Diversified structures (international section/unit) Integrated organizational structures Independent position Section One-dimensional: functional structure product structure geographical structure customer structure Multi-dimensional: matrix structure tensor structure hybrid structure Fig. 9. Basic organizational structures of an international enterprise Source: Based on M. Kutschker, S. Schmid, International Management, Oldenbourg Verlag, München 2005, p The types of products are also important, that is whether they are raw materials, consumer goods (food or durable products) or investment goods. The level of their standardization is crucial as well. Homogeneous and standard products of a low unit value do not require complicated sales service, participation of experts in negotiations and help in installing and activating and service-related activities, which altogether plays a significant role in exporting investment and consumer durable goods. Thus, they do not require an extensive foreign trade organization. An appropriate sales strategy heavily influences foreign trade organization. If goods are sold directly to a foreign recipient, then the task and organization of the foreign trade department will be different than conducted by means of a commercial enterprise abroad or by an overseas representation network. Finally, foreign trade organization is determined by financial and human resources possessed by an enterprise. Appropriate resources may help to expand and extend the scope of activities, e.g. by including in their structure a market research institute or an advertising agency. In this context, marketing aims, which an enterprise wishes to achieve, and the type and intensity of using marketing tools are important. The above-mentioned external and internal factors determine the way of implementing foreign trade in the enterprise organization, the position of foreign trade in relation to the overall activities and the internal structure of foreign trade. As far as the ways of integrating foreign trade into the overall organizational structure of an enterprise is concerned, the structure may take different forms, from the above-mentioned non-specific ones to an independent foreign trade department or a unit/office. When an enterprise is less or rarely involved in foreign transactions, it is possible to use many non-specific forms of foreign trade organization. It may be handled by the purchasing department if import plays a significant role, by the financial or administrative department as well as by an export specialist usually answerable to the company management. It is also possible that a few departments will be simultaneously involved in foreign trade. These departments will be supervised by the management or an independent export specialist. However, it seems that foreign trade issues may be handled by the employees of the marketing and domestic sales department because of their knowledge and professional experience.

72 70 Bohdan Jeliński Company management Production Planning Administration Marketing* Finance * Includes domestic and abroad sale. Fig. 10. Foreign trade issues handled by the domestic sales department Source: Based on self-study. In the last case, it is possible to appoint a team within a department. This team will specialize in the foreign trade intricacies. If foreign trade activities of an enterprise become intensified, this team will underlie a new department foreign trade department. Another possible organizational solution, considering a little share of foreign trade in the overall enterprise turnover, is dividing the marketing and domestic sales department into two sections domestic and foreign. Considering a relatively low importance of the foreign section, it does not always have a manager. In some enterprises, it is managed by the sales department manager; in others, there is the section manager responsible for coordinating export and contacting customers. He/she is not entitled to give orders to other enterprise departments. Company management Production Planning Administration Marketing Finance Domestic section Foreign section Fig. 11. Separated foreign trade section Source: Based on self-study. Foreign trade organization in the form of a section is not sufficient if an enterprise is focused on performing operative foreign trade activities. However, if it decides to increase the level of internationalization, enter new markets, gain new clients and launch new products, then it is necessary to extend the section. The best solution is to transform it into an independent foreign trade department. A temporary solution between the section and an independent foreign trade department may be delegating export management to a specialized external company (the system of contract export management). Its services may supplement the activity of the foreign section within the scope of searching for new markets and customers, formulating proper marketing strategies and even conducting trade negotiations. Such company may help the section to gain essential experience needed for the future transformation into an independent department, whose creation may be supported by this external company.

73 Organizing export activity in an enterprise 71 When an enterprise exports intensively or the share of export in the overall sales is big, it is essential to make foreign trade organizationally independent. In this case, managers of the marketing and foreign sales department occupy the same positions in the hierarchy as the leaders of other departments. The foreign trade department should cover the entire foreign trade activity. It is important to realize this fact since, in practice, after creating the foreign trade department, some functions are still traditionally performed by other departments. It poses a danger of decreasing effectiveness and not fully performing the tasks ascribed to foreign trade. Company management Production Planning Administration Marketing domestic sales Marketing foreign sales Finance Fig. 12. Independent foreign trade department Source: Based on self-study. An independent foreign trade department should not only perform operating tasks related to servicing foreign orders, but also constantly search the foreign markets, devise and pursue and integrated market strategy as well as plan new market entries and sales development of former and new products. In some cases, competencies of this department are expanded by some financial functions. The department is organized as a foreign trade office of an internal character. Its creation helps to capture the foreign trade effects more carefully. Office organization differs from the organization of the foreign trade department, since the office is equipped with a unit responsible for foreign trade settlements. Such office is also called a section, with its extended promotional, marketing, forwarding, after-sales service, business cycle research and price teams. If an enterprise is heavily involved in trade activities, it is necessary to divide the foreign trade department or office/section into smaller organizational units. The division may by made according to six different organizational rules: functionally, according to products, geographical regions, customers, projects and in a matrix way. The considerations that have been made so far refer to foreign trade organization in an enterprise as an element of its internal structure. However, it is necessary to consider that an enterprise also creates an external foreign trade organization in the countries regarded as trading partners. Initially, different types of intermediaries are accounted for. However, the greater the involvement of an enterprise in foreign operations, the more subsidiaries, joint ventures and daughter companies created. In other words, such enterprise becomes an international company. Subsidiaries, joint ventures or daughter companies may be exclusively trade-related. However, in practice, foreign trade (export) is only the first step in the internationalization process. An enterprise expanding internationally becomes engaged in other foreign activities increasing its foreign involvement until it creates production daughter companies. Next, an enterprise may create self-controlled external integrated organizational structures, such as holdings 48. It is obvious, that the level and form of enterprise internationalization will heavily influence its organization. An enterprise fully focused on the domestic market or only slightly interested in exporting its products, requires a different organization than an enterprise sending more products abroad or producing in different countries. It may be stated, that an increasing level of internationalization requires creating globally-oriented organizational structures. 48 See: J. Rymarczyk, Biznes międzynarodowy, PWE, Warszawa 2012, p

74 72 Bohdan Jeliński Direct export is frequently associated with companies which mix sales of goods with other forms of foreign trade. Huge companies producing cars frequently export their licences for finished goods or their components, for assembling cars, etc. Then, it is necessary to create in a mother company a unit specializing in license agreement issues, coordinating regular payments made by the companies buying licences, the so-called royalties, etc. Companies exporting machines used for fitting technological lines frequently do not only sell these machines abroad, but also rent them. In order to conduct this type of activity, lease offices are established. Apart from activities conducted to search customers, draft, negotiate and make lease agreements, these offices also provide training for the engineering and technical staff Task ranges of export units in an enterprise Export activities may be conducted actively and passively. Passive export means fulfilling orders placed by foreign partners who find an interesting overseas producer on their own initiative. Active export results from a conscious company policy, according to which there is a specialised internal organizational structure created and proper service of this activity ensured. In both cases, there must be a properly developed (to a lesser or greater extent) organizational form of servicing foreign orders. Passive export activities are conducted directly by an enterprise while active export activities are conducted directly or indirectly. Regardless whether an enterprise chooses a direct or indirect form of export, and no matter which internal organizational structure it chooses for conducting this specific activity, there must created at least an organizational unit or employed a person coordinating this activity. Coordination is particularly important when intermediaries are involved. It is not only coordination of day-to-day operations, but also, more importantly, prior coordination, which requires choosing: foreign sales markets, number and type of intermediaries, form and content of the agency agreement and mutual obligations of the contracting parties, the most important day-to-day activities and their modifications. It is also important to conduct a regular appraisal of intermediaries and settle their due commissions as well as analyse and asses the volume and significance of export in the overall enterprise performance. In this regard, nobody will take over the enterprise responsibility of coordinating this range of activity. Choosing the foreign markets may be only supported by contracting a market research company to prepare a suitable report. There must be a person who will specify the range of such external order, assess and accept it. It is usually a one-person position called an export specialist. Such employee is generally responsible for overall cooperation with foreign partners. He/she must have the following professional and personal competencies: higher education, preferably in international trade, export experience (several years) related to a given industry, knowledge of negotiation techniques, basic knowledge of marketing and international finance, knowledge of trade as well as customs and tax policy; experience in cooperating with public administration in this regard, good command of foreign languages, computer skills. In micro and small enterprises (up to 50 employees), duties associated with this position are performed by a president or managing director. In this case, the position is not organizationally separated and a small amount of foreign orders is serviced by the domestic sales department. Orders usually refer to simple and standard goods or services, not requiring the after-sale service.

75 Organizing export activity in an enterprise 73 As has been mentioned, if the value of export and its geographical coverage are more extended and are not occasional, it is justified to separate the position of an expert specialist, usually accountable directly to the company management. It may be a full-time or contracted employee. He/she must be educated in this subject and experienced in contacting foreign companies. A reasonable solution is to place such person in the organizational structure of the trade department, also referred to as the sales department, which considerably improves cooperation while servicing day-to-day foreign orders. The organizational pattern of both solutions may be graphically presented in the following way. Director/owner Direct subordination Organizational and financial section Production Supply and sales section Indirect influence Domestic Export (1 2 people) Fig. 13. Foreign trade relations in the organizational structure of a small company Source: Based on self-study. An organizationally independent export specialist has generally the following duties: preparing offer materials, arranging contract negotiations and formulating the contract content, as well as potential participation in negotiations, keeping documentation of export contracts and coordinating their implementation, coordinating contractual payments, gathering basic information about the foreign markets and competitors, formulating premises of an export offer, prices as well as promotion and distribution programmes. An export specialist should be also entitled do shape and use the support of the production section as well as administrative and financial units. If the export sales develop systematically and exceed around 30% of the company sales in total, it is difficult to balance foreign sales simultaneously with the sales service on the domestic market. If employees responsible for constantly dominating domestic sales are forced to handle more difficult foreign sales within a greater scope, the quality of foreign sales is usually lower. The tasks, issues, documents and procedures related to foreign trade are so distinct, that it is intentional to create a separated export department with its manager. Such department is responsible for all exportrelated issues and accountable to a vice-marketing manger or to any vice-manager handling these issues directly. It is very important to select an appropriate person for the position of an export department manager. He/she must know the specificity of foreign trade procedures, negotiations, contracting, settling transactions, filling in the documents related to transporting and insuring goods as well as handling legal issues of making and performing contracts 49. Such person should be oriented in the specificity of different foreign markets and speak several foreign languages. Every employee is supposed to seriously treat the work of the export department and its role in the company performance. An export manager is expected to coordinate and actively perform such activities as market research, negotiations, agency and distribution agreements, new product ideas and product modifications, with foreign demand considered. Such manager should influence the 49 See: Transakcje handlu zagranicznego, ed. by B. Stępień, PWE, Warszawa 2004.

76 74 Bohdan Jeliński choice of foreign advertising agencies, transport organization, payment methods, product packaging and the post-sales service in a target country. Moreover, he/she is supposed to equally participate in the following enterprise activities: enterprise planning and development, research and development works, relations with banks and promotion agencies, sales forecasting, recruitment and training of employees handling foreign cooperation, control of foreign representatives and coordination of foreign visits made by the company employees in order to sort out export-related issues. Export department employees are responsible for conducting direct export activities and the scope of individual duties is determined by the following criteria: geographical criterion an employee is responsible for trade with a given country or a group of countries with all products offered by an enterprise, product criterion an employee is responsible for trade in a given product or a group of functionally similar products with all foreign partners. A division of duties according to the geographical criterion is generally used by the companies which: have a wide product ranges, sell considerable number of products to final customers, sell different products by means of the same distribution channels, have the possibility of adjusting products to real needs, considerably use economic and technical market information. A division of duties according to the product criterion is used by a company which: offers very distinct, especially technical and utility products for different final consumers, considering high transportation costs and local customs, produces or assembles its products on the local market, is influenced by fast technological progress (the resulting knowledge of foreign demand changes heavily determines an increase in export). An employee of the export department is primarily responsible for professional handling of the entire transaction cycle in foreign trade. However, such export specialist is not a standard enterprise employee. When hiring export department employees, it is necessary to know their exact duties and the ways and extent of their motivation. Company representatives, especially those export-related, should visit foreign customers. Such visits are extremely important, since they help to create relations between a recipient and producer. Moreover, it is possible to test a product on a small scale. Representatives are also responsible for a friendly manner of settling disputes and solving problems with agents and distributors as well as handling complaints. Sending representatives abroad is costly, yet still cheaper that establishing agencies and subsidiaries, especially when the expected value of all new orders in total is not too high. Therefore, the department staff should be carefully selected and regularly supervised. Export employees should have appropriate personal features. They are supposed to be presentable, convincing, as well as able to quickly recognize and understand customer needs. Moreover, they are primarily expected to conduct market research abroad, including competition research. Therefore, they should be very responsible. Representatives conduct negotiations with customers and make important decisions, represent the company management and cannot expect regular instructions from their superordinate. When communicating with a customer, a representative is expected to provide sufficient information about technical details, servicing, transportation, applicable penalties for not fulfilling delivery or payment obligations, contract details and possibilities of financing a transaction. Export department employees travelling abroad for business purposes usually deal with the management representatives of a company which is a future buyer. Therefore, they should be able to assess a given situation, the risk involved, prepare a few action variations, even based on scarce information, and independently make important decisions. Apart from the command of foreign languages, a representative is supposed to adapt to the foreign environment, accept different customs (also those related to doing business), since an attitude towards doing business in particular countries is distinct.

77 Organizing export activity in an enterprise 75 When selecting people for this position, it is necessary to search for individuals who are impartial, emotionally strong and diplomatically tactful. Such people should be able to easily feel which statements are appropriate in a given culture. They are also expected to view issues from an international perspective and go beyond narrow-mindedness and individual opinions 50. The ways of doing business in different countries considerably differ. If an exporter knows local customs, it is frequently easier to establish deep professional and personal relations with foreign recipient. The nature of export activity makes the export department more independent than other departments. Sometimes, it may cause problems since the department starts pursuing its own interests and place them above the company general interest. A common problem of enterprises whose foreign sales are constantly increasing is the inflow of orders while the export department is not adjusted to this new situation. It has not been expanded or reorganized. As a result, such situation leads to facing obligations which are beyond the staff competencies. In order to solve these problems, it is required to transform the export department into the export section/office, which is managed by a person directly accountable to a president or managing director of an enterprise. This person is equal to a vice-manager responsible for a given department. The range of the export section s tasks is equivalent to the export department s duties. The tasks of employees directly conducting export transactions are parallel, yet the number of employees considerably increases. A section manager s duties change fundamentally when compared with a department manager. An export section manager is substantively responsible for the entire work of the section by directly performing an inspiring, coordinating and controlling function in this regard. Direct representatives are supported in performing their tasks by special departments researching the market and handling its promotion, transportation and logistics as well as the price policy and planning. Employees directly conducting export transactions are then organized in trade departments established according to the geographical or product group criteria. Sometimes several export-related activities, such as market research and especially, an active and effective promotion, require financial resources exceeding financial possibilities of particular companies. In order to perform such tasks, they may make aim-based agreements referred to in this case as export consortia, frequently under the patronage of trade associations or the associations both production and trade-related 51. In this way, costs are shared by a few companies. As a result, there emerges the possibility of commonly using the services of well-known consulting companies, which would be too expensive for a single enterprise. A consortium may export jointly and display the names of its constituent companies. Moreover, it may coordinate negotiations of prices for common packages, conduct business cycle and foreign market prices research, work out unified sales conditions and support each other in collecting outstanding payments See: Savoir-vivre. Poradnik dobrego wychowania, Wydawnictwo Buchmann Sp. z o.o., Warszawa See: Formy wspierania eksportu. Konsorcja eksportowe, Ministerstwo Gospodarki, Warszawa See: European maritime clusters, Agder Maritime Research Fundation, Kristiansand 2003.

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79 Bohdan Jeliński, Przemysław Kulawczuk 6. Creating and implementing an export business plan 6.1. Business plans and an export development plan A business plan is an official document including the aims of a given undertaking, a description of goods/services of a specific company, the market analysis and forecasts of the financial effects related to this undertaking, as well as a description of management strategies of a company pursuing the aims established. It is also called an intention plan. Thus, a business plan is a basic set of documents describing in detail how an enterprise performs, develops and operates. The document specifies an enterprise, its place in a given economic environment, the aims as well as the methods and measures used to achieve these aims within a certain period. It also presents the advantages of a company, its strengths, weaknesses, opportunities and threats. Therefore, it is an invaluable planning tool used in the case of short and long-term strategic plans. When creating a business plan, an entrepreneur enters a preliminary stage of managing a real enterprise. A business plan provides an entrepreneur with information about the requirements which have to be met in order to achieve success. The document should give answers to the following four questions: 1. What is the aim of an entrepreneur? 2. What are the strengths of an entrepreneur? 3. What are, according to an entrepreneur, the best methods to achieve the aim? 4. What are the expectations of an entrepreneur in the future? Thus, a business plan preliminary verifies the idea of an undertaking as well as short and long-term intentions as to the company development and specifies financing methods and operation strategies adopted to achieve the aims established. Figure 15 illustrates the activities and events which are the basic elements of preparing a business plan in a big corporation. Consecutive actions: 1. Deciding about establishing an enterprise 2. Analysing opportunities and intentions 3. Choosing products/services 4. Researching the market 5. Forecasting sales profits 6. Choosing a location 7. Preparing the production plan 8. Preparing the marketing plan 9. Preparing the organizational plan 10. Preparing the plan of legal actions 11. Preparing the insurance plan 12. Preparing the accounting plan 13. Preparing the financial plan 14. Writing a company description

80 78 Bohdan Jeliński, Przemysław Kulawczuk weeks Fig. 14. Consecutive decisions while preparing a business plan in a corporation Source: See: R.W. Griffin, Podstawy zarządzania organizacjami, PWN, Warszawa The basic aim of creating a business plan is to seek partners for cooperation and co-financing of a planned undertaking, as well as to gather information about the feasibility of a given investment project. It frequently happens that preparing this document makes an entrepreneur realize the costs of establishing a company or its promotion. A business plan is a necessary document required while applying for a credit or financing from the EU or Employment Office funds. The aim of this document determines its accuracy and length, which is presented in the Table 14. Table 14. The aim of preparing a business plan Internal needs Schedule of company activities Development direction Motivation for actions Profit realization Profit realization Aim achievement Long-term strategy Strategy control External needs Credits Investor Governmental funds Local funds EU funds Source: Based on self-study. Every business plan is characterized by the features which make it well-prepared. The features include: objectivity the addressees of a business plan assess its assumptions, purposefulness clearly specified and realistic aim, specificity specific assumptions and aims expressed in figures,

81 Creating and implementing an export business plan 79 flexibility the structure enabling an entrepreneur to implement changes when new data appear, usefulness used to manage a company, conciseness and clarity precisely and logically formulated, comprehensiveness particular parts interrelated and complementary as well as containing information necessary to assess a planned project. Apart from its specific features, a business plan has its own standard structure comprising the following elements: 1. Summary 2. General information about an entrepreneur 3. Investment planned 4. Marketing plan 5. Staff 6. Economic and financial situation 7. Conclusions 8. Appendices Business plans are prepared according to a specific template. However, their structure depends on the aim they serve. An addressee of this document (an investor or lender) may specify additional requirements about the information required in this document. A bank will pay greater attention to profits and losses and to financial flows since this institution is much more interested in an entrepreneur s creditworthiness. An investor (business angel or venture capitalist), in turn, will consider the innovativeness of an undertaking and returns on investment in a given project. Selected institutions and portals, including the Polish Agency for Enterprise Development (PARP), Polish state-owned bank (BGK), publish business plan templates which differ from each other in some respects, yet the majority of elements are common. Despite such obvious benefits, many entrepreneurs attempt to start their business activity without a business plan. Those entrepreneurs fall into two groups. The former group includes individuals who do not need much capital for their business activity. The latter group includes those who have considerable financial resources and claim that there is no need to prepare a precise financial assessment of a project. Entrepreneurs from the first group believe that buyers will pay for the products in cash and that suppliers of raw and other materials will wait months for the payment. Such buyers and suppliers are rare. In this case, we may observe one of two typical market reactions. Either a product is poorly sold and the warehouses are full of stock, or a product is sold in big amounts, which immediately encourages the competition equipped with much more financial resources to start the same kind of activity. Thus, a company with a smaller amount of financial resources will be locked out of the market by a more powerful competitor. Entrepreneurs having their own or, even worse, lent capital resources claim that time for preparing a business plan would be better devoted to search for an appropriate location, buy a delivery truck or install a microcomputer. They regard all issues which distract them from immediate actions as a waste of time. When an initial idea of a project has, in most people s opinion, many weaknesses, the entire undertaking becomes very risky. This situation may be avoided by drafting an accurate business plan. All mistakes will become noticeable when market operations result in very high real costs and negative effects. If a company sells abroad, then the specificity of this activity and a considerably increased risk make it necessary to include it in a business plan. More frequently, this issue translates into a separate export development plan or an appendix to a company business plan.

82 80 Bohdan Jeliński, Przemysław Kulawczuk 6.2. Structure and creation of an export development plan for processed goods and services A typical structure of an export development plan includes the following elements 53 : 1. Market objectives 2. Product strategy 3. Price strategy 4. Distribution strategy 5. Promotion strategy 6. Strategy of protecting intellectual property A general structure of an export development plan for Baltic trade does not have to differ from a typical one (referring to the elements of the marketing mix). The sequence of preparing this plan for mature markets may be slightly different. These markets are greatly saturated and have an easy transportation access, yet they are not big (e.g. Scandinavian markets) or lack considerable financial resources (the market of Poland and Baltic countries), which causes a different justification of particular plans. In this regard, we may consider a slightly changed structure of an export development plan for Baltic trade: 1. Product strategy 2. Price strategy 3. Distribution strategy 4. Communication and promotion strategy 5. Safeguarding the interests, including the strategy of protecting intellectual property rights 6. Market aims (final) In the suggested structure for Baltic trade, market objectives are, on the one hand, an indicative value at the stage of initial planning. On the other hand, they derive from prior planning activities related to adjusting a product to a given market and positioning this product while considering reasonable undertakings and costs. Traditionally, the aims determine other activities leading to their achievement. This traditional attitude accounts for specifying the aims twice: first, indicative aims and, after researching the export market, final aims. Such way of thinking gives more freedom in creating subject-related entry strategies and offers more possibilities of juxtaposing intentions with real capacities. The attitude refers to the conviction that first, it is necessary to specify positive aspects within developing export activity on a given target market, and then to establish real aims. Before specifying particular subject-related strategies (included in the marketing mix), it is possible to set indicative aims of an export market entry. These aims may refer to: planned sales volume (within a particular range) to be achieved within, e.g. 3 years value of a planned export margin (also within a particular range, e.g. 3 years) scenario of the relations with distribution channels (e.g. entering and strengthening the relations with key regional distributors on particular areas) Relatively several indicative aims will be made precise while formulating final aims, which will result from the export planning procedure Product strategy Products have specific features necessary to meet the needs, which in economics is called the product utility value. The more utility of a product, the more needs it can meet and to a greater extent. Apart from a typical utility value, products have an emotional value, which is generally associated 53 This division refers to the structure suggested in Poradnik eksportera z IP dla MSP, ed. by M. Bąk and P. Kulawczuk, KIG, Warszawa 2010, p

83 Creating and implementing an export business plan 81 with the customer willingness to pay higher prices for a better design, appreciated brand, special colours or other product features, which do not necessarily translate into utility features. A special example of applying the concept of an emotional value is setting relatively high prices for Volvo cars as a symbol of safety, even though it is clear that this producer mostly uses the Ford technology and the technology of other, even more famous car makers. However, customers appreciate the Volvo brand and although these cars offer a comparable level of safety as other brands, producers can use an emotional value setting higher prices for these cars. Realistically, a novice exporter on a given market can use both values only when possessing proper evidence confirming that an emotional value is appreciated on other export markets, whose customers regard it as important and exemplary. The first stage of the product strategy may consist in specifying competitive advantages of a product over other products available on a given market, excluding cost and price advantages. In order to specify these advantages, the following Table may be used. Stage 1. Preliminary specification of competitive advantages of a product offered Assessment criteria Yes or another positive answer ( No but ) No or another negative answer ( No but ) Does a product offer utility values that could be used on a given target market? Is the number of utility values (needs met) included in a product greater than the number of these values in a competitive product? Which utility values included in our products are unavailable in competitive products? Which utility values included in competitive products are unavailable in our products? Does our product include important emotional values (and which) that may be crucial for a customer from a given target market? Is our product more technologically advanced? Does our product offer a higher quality and quality parameters than competitive products and how is it possible to prove these parameters? Is our product more expert knowledge and intellectual work intensive? Are technical solutions of our product protected by patents and is design subject to industrial property protection? What makes our product unique? To what extent is our product based on original solutions and why is it worth our trust? Who has trusted them so far? What other competitive advantages are offered by our product bought in the quantity bigger than competitive products? Source: Based on self-study. If a preliminary assessment of our product competitiveness is positive, then the next stage accounts analysing a better adjustment of a product to the target market needs.

84 82 Bohdan Jeliński, Przemysław Kulawczuk Stage 2. Adjusting a product to the target market needs (An analysis should be conducted for all products considered for export purposes) Strengths of a product how to display them? Weaknesses of a product how to improve or REQUIRED ACTIONS complement them? REQUIRED ACTIONS n n Creating needs how to make people aware of the possibility of meeting needs by our product, even though they do not feel these needs now? REQUIRED ARGUMENTS n n Source: Based on self-study. Disregarding defects how to disregard defects when a customer notices them? REQUIRED ARGUMENTS The Table presented above may have any number of rows if needed. Its aim is to specify the actions or arguments increasing the sales capacity of our product, regardless of its final price. It is worth emphasizing, that setting arguments is much easier than adjusting a product to the market, since it does not require any changes in a product. Product modification, yet sometimes necessary, greatly prolongs the process of preparing a product for export. It is possible to specify the benefits offered by a product at the third stage (specifying utility and emotional values). Benefits may be divided into primary benefits, which directly influence the purchase decision, and secondary benefits, fostering this decision. Primary benefits generally comprise the utility values which are important for a customer. They are usually associated with a product s key features. Secondary benefits, in turn, may be associated with an interesting design and purchase products supporting social initiatives or companies focused on corporate social responsibility. Benefits are determined for all export products. Stage 3. An overview of customer benefits Primary benefits: Secondary benefits: At the fourth stage, it is possible to conduct a preliminary analysis of a product offer for a given market if we have a greater number of goods.

85 Creating and implementing an export business plan 83 Stage 4. A preliminary choice of products that would be included in an export offer Criteria considered while choosing products that would be included in an export offer A product is a success on the domestic and/or foreign market A product has all required tests and certificates A product has valid technical checks conducted by a proper office with reference to the quality and technical requirements A product received prizes and awards at the fairs and exhibitions in the country towards which export is directed A product was accepted by a potential receiver intermediary A product was accepted by a potential final customer A product is comparable in terms of quality with the products available on the foreign market (this product might be even better) A product is based on a new technology, advanced technological solutions or patents A product meets all technical requirements, safety norms, etc. typical of a given market Source: Based on self-study and Poradnik eksportera z IP, op. cit. Do the products offered meet the criteria? YES NO After conducting an analysis of the export potential of a given product or products, a final export offer may be prepared. Stage 5. Final specification of an export offer 1. Description of a product or products, including their utility and emotional values: 2. Names/brands: 3. Number of features/options of every product or service: 4. Prices:

86 84 Bohdan Jeliński, Przemysław Kulawczuk 5. Target markets (countries): 6. Quality requirements: 7. Packaging: 8. Additional services (installation, technical assistance, etc.): As the result of applying of the above procedure, the offer for Baltic markets is prepared, what allows for right structuring of activities related to export preparation. However, it is just one issue associated with strategic planning. The remaining issues cover the price, distribution and promotion strategy. In the reference literature, there are several product strategies based on the product life cycle mentioned. As claimed by Kotler, there exist characteristic product strategies at different stages of the product life cycle. According to many publications, at the beginning of this cycle, only basic versions of a product are offered. From the perspective of initiating export activities, such simplifications are not justified. Generally, export is initiated when an enterprise is, for some time, present on the domestic market. Then, the preliminary stage of launching a product becomes usually completed. A product may be simultaneously launched on many markets and may also be technologically advanced or innovative. Product strategy in export is the concept of offering product values comprising a set of sales arguments related to a product, the leading motive of buying it and other elements associated with creating the product value among customers who are encouraged to purchase this product after considering its benefits. Below, there is a specification of product strategies in export, based on the way of formulating a product offer for a customer. Technological leader strategy may be used when a product has unique features and technological capacities which do not appear in competitive products. The technological leader strategy ensures pioneering advantage, yet requires time to be implemented and accepted by customers. It is a unique strategy resulting from creating and using innovative technologies and available not only for technological leaders. Examples: Volvo, Ford cars, etc. Design leader strategy is based on offering extraordinary design values, maintaining a similar technological level as the competition. This strategy may be successfully used when a company does not have great technological advantages, but is able to offer shapes, colours and other product

87 Creating and implementing an export business plan 85 features which will make it nicer than competitive products. Then, when maintaining a similar technical level, it is possible to create additional benefits resulting from an appealing design. The examples of such leaders include: Mini, Fiat 500, etc. Clan strategy (for the customers with extraordinary needs) may suggest production for a small group of customers. It does not have to be like that. Particularly, if a clan is determined by wealth, this strategy may become popular on various global markets, frequently poorer that the domestic market of a product. Buying a clan product on a poorer market that the domestic one may indicate a higher social status of a buyer. A typical example of clan products are those created by Apple. Clan products offer a high emotional value. In many cases, they are worse than products offered by technological leaders. Best value for money strategy refers to a customer s common sense and encourages him/her to compare the cost of a product with its benefits. This comparison is more beneficial if a customer discovers more values while buying a given product. The role of an exporter is to present various product utilities and its purchase conditions so that this comparison is more beneficial. An emotional value is not as important in this strategy as specific utility values. A typical example are the IKEA products. Strategy of a product decreasing costs may be used by the suppliers of semiproducts, services or other components of a final product and is based on offering lower prices, which allow a producer of a final product to economize on costs. In fact, a producer of a final product is subject to a serious risk (lower costs of semiproducts or services may lead to lower quality). However, if these semiproducts or services do not decrease the final quality of a product, yet decrease the costs, then, assuming a given price level of a final product, its producer may generate considerable profits. An example of this strategy is an offer of delivery companies from Eastern Europe servicing the producers of final goods from Western Europe. Simple and standard product strategy is based on offering a product of well-known quality while simplifying its features to the required minimum expected by most customers. This strategy corresponds to the maximum functionality and minimum form. It refers to the Scandinavian minimalism in art. Tailor-made product strategy is generally based on delivering good quality products or services tailor-made to a customer and may be useful in unit or short-run production. The strategy may also be applied while offering all types of services. The products or services of an average or higher unit value are well suited in this case. Mass customization strategy is based on delivering a very standardized product. However, it is possible to account for individual requirements in terms of colours, additional fittings and other features which may be customized. Mass customization means that a certain set of features, e.g % of features are standard and within the range of 10 20% of features we assume in advance that a customer would be able to make a choice according to particular needs or preferences. This type of strategy is generally applied in the case of automotive products, interior design, construction, etc. 54 Strategy of the least expensive product of a given quality level is based on offering a product meeting specific requirements (e.g. technical) while maintaining the price level very beneficial for a customer. This strategy refers to the strategy of a product decreasing costs. However, it does not result from an exporter s initiative, yet it is an answer to a specific question or an importer s tender. It is obvious that in order to offer a product of the lowest price, a producer must have cheaper resources, cheaper technology or both conditions must be met. The strategy is primarily used in the case of delivery production or tolling. 54 A. Szcześniak, Dojrzałość rozwiązań technologicznych do komercjalizacji, [in:] Modele biznesowe budowy i rozwoju firm spin off na podbudowie szkoły wyższej, ed. by M. Bąk and P. Kulawczuk, IBnDiPP, Warszawa 2010, p

88 86 Bohdan Jeliński, Przemysław Kulawczuk Adopting an appropriate product strategy should result in a customer s conviction that a product is good Price strategy Basically, the price strategy determines the effectiveness of entering new foreign markets. The first price specification, especially for a new product on a given market, causes an anchoring effect, well-known in behavioural economics. It means creating the reference point for all price and product changes as well as the product quality 55. Frequently, price strategies in export are presented as an analogy to price strategies for launching a new product. We may distinguish the strategy of penetration price (considerably lower than the price of competitive products), skimming strategy (a reversion of the previous strategy) and average price strategy (used by most competitors). This distinction based on a mechanistic attitude towards the relation of our price/competitive price does not fully correspond to starting export activity on new markets. It happens since enterprises enter a new foreign market with a product which has not yet been sold on the domestic market. Thus, the vast majority of products or services launched for export has already been offered. Products are rarely new. Secondly, over the last twenty years, the purchasing power of customers has considerably increased when it comes to comparing prices of similar products. Thus, it is rather unlikely that a customer will not recognize the prices of comparable products, including those offered on the domestic market. To sum up, believing that for some segments of customers the price does not play a significant role is not justified in export. The price is always important in export. It considerably modifies the perspective of using simple price-related marketing strategies in relation to the price strategy in export. Price strategy in export for processed goods and services It is intentional to skip here price strategies for highly standardized or mass products/commodities and focus exclusively on price strategies for processed goods and services. An analysis also skips the conclusions from e.g. product leaders strategies (technological and design leaders), which account for setting the prices higher than the competition. The strategy in export presented below refers to the experiences of psychological economy and to the practice of export sales. Stages of creating the price strategy for a processed good Stage 1. Specifying the guidelines for setting the price (guidelines based on the features of a product and sales conditions) Feature of a product Target segment of a product Utility values as compared with competitive products Emotional values of a product in relation to competitive products Product design Product patents and innovations Production capacity Delivery speed Easiness of servicing and clear operating Presence on other markets Tests and quality certificates Other features influencing the price Source: Based on self-study. Conclusions for the price strategy 55 For a comparison see: A. Tversky, D. Kahnemenn, Judgment under Uncertainty: Heuristics and Biases, Science, New Series, Vol. 185, No (Sep. 27, 1974), p

89 Creating and implementing an export business plan 87 Stage 2. Specifying the prices of competitive products or similar products on a given market Names and producers of competitive products Product X 1 of the companyy 1 Product X 2 of the companyy 2 Product X 3 of the companyy 3 Product X 4 of the companyy 4 Product X 5 of the companyy 5 Product X 6 of the companyy 6 Product X 7 of the companyy 7 Source: Based on self-study. Price level, including the way of its specification Conclusions for our price policy Stage 3. Specifying a preliminary price benefit for a customer 1. Specifying the price difference level A customer does not only expect a higher product quality, but also a better price, which may be set by specifying the level of a noticeable difference. The level of a noticeable price difference is the minimum value of the price difference of our and competitive goods, which makes a customer consider this difference as significant. In order to specify the price difference level, it is possible to make a differentiation analysis of competitive products prices by researching a customer and observing sales transactions of similar goods or other activities. Methods of specifying the price difference level The price difference between X and Y on the export market The price difference between Y and Z on the export market Public announcement concerning the choice of a public procurement offerror (revealing the price) Differences between the price lists issued on a given market and the prices available online (even with the overseas transport) Experiences from previous contracts made with customers on a given export market Preliminary negotiations with a potential customer Other methods Conclusions for our estimation 2. Specifying a preliminary price benefit for a customer as the product of the price difference level and a multiplier. It may be specified in other ways. In most cases, a customer is satisfied with the price benefit as a single price difference level. Sometimes, it is worth multiplying this benefit (e.g. while negotiating) in order for a customer to feel its scale. However, every multiplication reduces the influence of an exporter. The prices benefit, which is important for the majority of customers (in indirect export, together with the product strategy, it is important for all exporters), in the vast majority of cases helps in making a successful transaction. It is necessary to emphasize that price benefits are also important in such product strategies as the clan, design leader and technological leader strategy. Importers are considerably inclined to prove that their actions are effective and very reasonable. Sometimes a linear multiplication of benefits does not make sense when the level of a noticeable price difference is high in relation to 100% of the competitive price. It means that success may be achieved preliminary by reducing the price, e.g. by 10% and then by 5%. However, if the price difference level is 1,2% (e.g. real estate prices based on expert estimations), then sometimes, in order to sell a good, it is necessary to reduce its price six or even ten times than the level of a noticeable price difference (e.g. 7,2% or 12%).

90 88 Bohdan Jeliński, Przemysław Kulawczuk Specifying a preliminary price benefit: 1. Level of a noticeable price difference = 2. Suggestion of a preliminary price benefit = 3. Justification of this suggestion Stage 4. Specifying the range of price and volume discounts In export, the price level may depend on the quantity of goods sold. Therefore, it is worth providing a customer with the information about discounts resulting from a greater value of a transaction. In this regard, it is necessary to check the level of standard discounts given by the competition on a given market and the level of our discounts on other markets. Sales volume Up to 100 units 0% % % % Above % Discount Stage 5. Specifying the range of final price concessions At the final stage, it is possible to specify the minimum price which cannot be reduced any further considering different sales volumes. It is obvious that the price should cover at least production costs and an assumed profit margin. If the price does not cover these costs, it is necessary to analyse the price strategy once more 56. Adopting an appropriate price strategy should result in a customer s conviction that the price is good Distribution strategy The distribution strategy is one of the most important planning activities related to entering the foreign market with an export product. The notion of distribution is associated with arranging a physical flow of goods to the recipients, considering that this strategy may determine whether this flow is successful or compatible with particular aims. The process of delivering products from a producer to a customer is referred to as distribution. Kotler defines distribution as a profit-oriented activity covering planning, implementing and controlling a physical flow of materials and final products from the place of their origin to the place of their collection 57. The notion of distribution strategy suggests that exporters face many strategic decisions within which they may arrange a physical movement of a good to a customer. However, it does not have to be like that. Exporters choices may be seriously restricted by the existing customs of distributing products on a given market (most frequently on the mature market) and they may not have many options at their disposal. This type of the distribution strategy is referred to as the determined strategy. When there is not a dominant distribution pattern for particular goods, we may consider free strategies. 56 The lowest price level is determined by costs. Determining production costs, it is necessary to consider fixed costs (they do not change with the sale volumes, e.g. rents, accounting costs, heating costs, etc.) and variable costs (they change with an increase or decrease in production, e.g. costs of materials used to produce a good). Unit costs = variable costs of producing a unit of a good + fixed costs/sales. Apart from production costs, margins charged by distributors, transportation costs, certification costs on a given market and other costs related to legal regulations restricting access to a given market should be considered in export. 57 P. Kotler, Marketing. Analiza, planowanie, wdrażanie i kontrola, Felberg SJA, Warszawa 1999, p. 512.

91 Creating and implementing an export business plan 89 Determined strategies dominate Baltic trade on the mature markets (Scandinavian countries, Germany, Finland) and free strategies are more commonly applied in emerging countries (Baltic countries, Russia, Poland). Following the determined strategy means adjusting to the existing distribution channels or finding a gap in them. It may comprise the following activities: 1. Specifying which competitive products are offered on the market we wish to enter 2. Getting to know how a given type of products is distributed on a given market 3. Specifying the main distribution channels used by the competition 4. Preparing a detailed specification of distributors and their products 5. Specifying the main competitors and the gaps in the offer of some distributors 6. Preparing an offer for those distributors who, in our opinion, have offer gaps and, simultaneously, have the market development potential 7. Creating a distribution network based on a previously established model 8. Cooperating with a distributor or distributors who made a contract with our company Exemplary models of distribution include: Exclusive domestic distribution Exclusive regional distribution Competitive domestic distribution Competitive regional distribution Selected distribution channels: Commercial agents Warehouses (including bonded warehouses) Our own agency Local sales representatives Regional representatives Independent warehouses Wholesale networks Commission houses and consignment warehouses Direct sales by our own local warehouse We may distinguish some basic planning activities related to arranging distribution on the export market. Consecutive stages include: 1. Identifying distributors on the export market 2. Specifying the range of distributors tasks 3. Specifying a given distribution strategy (in the free distribution model) or the way of imitating the competition (in the determined distribution model) 4. Checking the potential of distributors 5. Preparing an offer for distributors 6. Planning the activities which are supposed to monitor the process of distribution Stage 1. Identifying and selecting a distributor on the export market Existing distributors of a similar product range D.1 D.2 D.3 D.n. Area of operations Customers serviced Experience in the product range similar to ours and product gaps References Source: Poradnik Eksportera dla MSP z IP, op. cit. and self-study work.

92 90 Bohdan Jeliński, Przemysław Kulawczuk Stage 2. Specifying the range of distributors tasks Apart from sales and logistics activities related to export products, foreign distributors may perform the following activities: Gathering orders, conducting negotiations with final customers, participating in delivery tenders Participating in fairs, exhibitions, presentations and other undertakings devoted to displaying our products Handling the post-sales and guarantee service Handling complaint procedures, using the guidelines we establish Gathering information about the market segments serviced and about new segments that we could service Gathering information about competitors, their reactions to our marketing activities, including the signs of unfair competition Gathering information about market trends, changes in customer preferences, etc. Negotiating the prices with the stores Performing other activities necessary to operate on a given market Stage 3. Specifying the distribution strategy within the scope of free distribution model The following exemplary strategies may be used: Type distribution Unrestricted multichannel distribution Restricted distribution using several channels Restricted regional distribution Exclusive domestic distribution Exclusive regional distribution using a single channel Non-exclusive distribution using a single channel competitive distribution Source: Based on self-study. Description It is based on offering a product by multiple distribution channels. This distribution may be controlled by suggested prices and discount levels. It requires specifying the rules for particular distribution levels (wholesale and retail). This type of distribution takes place in the case of popular and quickly sold products such as sweets, drinks or computer equipment. Distributors are interested in selling products quickly. An exporter chooses a few channels for every distribution (department stores, the Internet, franchises), specifies leaders and ensures exclusivity. This distribution generally refers to more expensive products such as cars, white goods, etc. An exporter chooses regional distributors and ensures them the possibility of exclusive sales by means of any distribution channels. This solution is used in bigger and middle-sized countries in which distributors are regionally organized. In general, it is required to resign from offering competitive brands. Sometimes despite regional exclusivity, there arises the price competition between distributors form neighbouring regions. An exporter chooses a domestic distributor, ensures sales exclusivity and demands, in return, not offering any competitive products. In this case, a distributor must operate on the entire domestic area. Most frequently, it is based on making an agreement with wholesalers who are supposed to transfer products to a retailer under the exclusivity rules. It means that they must resign from offering competitive products and an exporter resigns from transferring a product to other wholesalers. It is based of making an agreement with just one type of intermediaries, e.g. wholesalers who also offer competitive products. In turn, an exporter may transfer a product to any number of the wholesaler s competitors. Sometimes it is advisable to test a new distribution channel on the mature markets and in a determined distribution system. However, it most frequently applies to innovative products or fashionconditioned products (e.g. electronic goods).

93 Creating and implementing an export business plan 91 Stage 4. Checking the potential of distributors An exporter who is a producer at the same time has an appropriate potential and generally searches for distributors who could exploit this potential. Therefore, it is possible to draft a list of elements that should be checked among distributors: sales value in the previous years and in particular product ranges sale growth in particular product ranges over the last several years sales market share in particular product ranges number of retail stores or retail recipients serviced by a distributor sales value per single retail store availability of warehouses and the ways of storing goods distance from warehouses and retailers volumes and values of single deliveries preferred payment methods number of staff assets and technical measures transportation equipment certificates and awards experience in launching foreign products other issues relevant for an exporter distributor profile compatible with an exporter s distribution strategy. Representatives of an exporter, while recognizing distributors and specifying their export potential, should make it possible to indicate distributors suiting the needs of an exporter. Stage 5. Preparing an offer for distributors The offer should include: 1. Information about the producer and his/her competencies emphasizing intellectual property rights 2. Product description emphasizing a product s advantages in relation to competitive products, specification of benefits for final customers, expert opinions and research results confirming the product quality 3. Our expectations towards a distributor based on the range of duties 4. Information about cooperation conditions suggested by an exporter (e.g. remuneration, payment system, transportation to retail stores, expected sales, etc.). The offer should end with an invitation for negotiations. Generally, making an offer is preceded by one or several meetings and is the result, not the beginning, of specifying distribution strategies. Stage 6. Final selection of a distributor on the foreign market Distribution company Size of the market serviced Distribution services performed D.1 D.2 D.n Cooperation expectations At the final stage, it is possible to summarize all planning activities with reference to the distribution policy and make a final selection of a distributor or distributors on a given market. In practice, the possibilities of using free distribution on Baltic markets are considerably restricted by huge sizes of Scandinavian markets and a determined nature of relatively few distribution channels. On the other hand, it is possible to use many distribution possibilities on the German market. In Baltic countries distribution may be easier, since markets grow dynamically and there exist local partners who are ambitious and entrepreneurial enough to perform new tasks. Some markets are weak because of their small regional size. Russia (not only its part located at the Baltic Sea) is a very

94 92 Bohdan Jeliński, Przemysław Kulawczuk big market which is constantly open to new products and has its habits and preferences. It is not always possible to choose Russian partners freely Communication and promotion strategy When preparing an export development plan on Baltic markets, an enterprise should decide whether promotion methods used on the domestic market may be applied on a new market. Sometimes it is sufficient to translate the marketing message and forms of sales promotion. In other case, it is necessary to adjust a given message to cultural differences described in other chapters of this book. However, such easy methods are not always sufficient. The promotion and communication strategy gives answers to the question about the ways of providing a customer with information about utility and emotional values of a product. The situation is much easier as far as selling industrial goods of greater unit values is concerned. Then, we generally reach a final consumer whom we are able to present the benefits of our product. In Baltic countries it is much more difficult to reach this type of customers from nowhere, since they expect a well-known contractor or the contractors with references. Reaching a production buyer by an exporter generally requires performing a set of activities which help to earn trust of a potential buyer. This natural series of activities fostering an export-related selection in the environment of partners not knowing each other requires to: 1. Gain a foothold specifying fairs, exhibitions and undertakings in which an exporter and a potential buyer participated in order to build the underpinnings of common identity, 2. Specify similarities finding common business and personal interests, known companies, common partners, business activities, social relations, etc. in order to strengthen common identity and show that both parties are similar and the cooperation risk is reduced, 3. Show a complementary role of business partners as similarities reduce the risk, complementarity emphasizes the difference. However, this difference means that the capabilities of one party may be increased as a result of those features and competencies which another part lacks. Complementarity makes a partner and mutual cooperation attractive, 4. Build the platform of benefits a set of arguments; the conviction about complementarity, which makes, to a great extent, cooperation with a partner attractive, is not sufficient. It is necessary to show for a partner which specific benefits could be possibly gained as a result of export cooperation. In other words, it is necessary to properly present utility and emotional values of a product while using the price level regarded as attractive by a partner, 5. Plan the participation in competitive procedures an exporter must frequently participate in the procedures of formalizing a given purchase, e.g. in the offer contest, tender, etc., within which it is required to offer beneficial prices and sales conditions with reference to an exporter s products.

95 Creating and implementing an export business plan Gaining a foothold Communication methods between and exporter and a potential buyer of industrial goods an executive plan 2. Specifying similarities 3. Showing the complementary role 4. Building the platform of benefits 5. Planning the participation in competitive procedures The above-mentioned natural series of activities fostering the selection of an exporter and institutional buyer or corporate buyer (e.g. delivering turbines or equipment to a factory) is not required in simple transactions. However, in order to achieve success in creating this specific form of communication, it is necessary to have good products meetings requirements, that is to have export assets. It should be emphasized, that trade between enterprises from emerging and mature economises entails some natural prejudices resulting from the conviction that entrepreneurs from emerging economies are less experienced in doing business. In turn, frequently entrepreneurs from emerging economies know about these prejudices and choose cooperation with other emerging countries. The process of getting to know each other and establishing trust between an exporter and buyer covers business communication activities. Standard promotional activities may include the following stages: Specifying the content and addresses of a promotional message 1. Specifying the media used in promotion 2. Specifying the promotion budget 3. Preparing the plan of PR activities The promotion strategy should primarily account for the domestic specificity of the export location. The strategy does not require the promotion methods to be considerably different from the domestic ones. With reference to export activity, it is worth noticing the difference in domestic and foreign PR activities. When trading with Baltic countries, it is necessary to consider the following aspects: 1. Gifts cannot create an impression of bribery (countries are differently sensitive to corruption). 2. The message should be focused on presenting real company achievements, not apparent activities. In other words, important and less important issues must be balanced. 3. In PR activities, it is possible to use many forms of involvement in and contribution to economic and social life of local communities while respecting their autonomy. When financing social purposes, it is better to cooperate with local foundations and organizations than act independently.

96 94 Bohdan Jeliński, Przemysław Kulawczuk It is obvious that emerging markets form the Baltic Sea region attach greater importance to proving honesty and transparency of business activities than mature economies, such as Germany or Scandinavian countries. It results from the fact that in mature economies business ethics is deeply rooted, while in emerging economic corruption is still a problem. Therefore, they focus on fighting corruption. In this regard, mature economies business should strongly avoid PR activities which might be perceived as a form of bribery in emerging countries. We may distinguish the following accepted PR activities in the Baltic Sea region which may be performed by exporters without considerable risk: Participation in scientific conferences Participation in business meetings Gifts of a symbolic value (e.g. up to EUR 50) Sponsorship of social and scientific events by local organizations Organization of press conferences Participation in technical meetings and commercial presentations Publications devoted to corporate social responsibility, technical and commercial activities of an enterprise Participation in the meetings devoted to cooperation between business and social sector Website used for the PR purposes Participation in the works of a local chamber of commerce or an association of entrepreneurs Participation in the works of international associations Moderate and justified sponsorship of business meetings Safeguarding the interests, including the strategy of protecting intellectual property Recently, the role of export products based on intellectual property has increased. This export is more competitive that the export of simple goods accounting for the advantages from e.g. lower labour costs or other resources. Although business culture in the Baltic Sea region is more and more developed, the danger of losing intellectual property is still present. Business in this region is also subject to observation. An entrepreneur may generally follow two ways of protecting intellectual property: either keeping it confidential or making it public by means of the patent procedure, that is reserving an industrial design or trademark. In 2012, attempts were made to create the Single European Patent, which is a solution helping to register an invention in a European country and make it applicable throughout Europe. It is not the same as the so-called European Patent, which is actually a set of any national patents granted by the European Patent Office in Munich. It is rather a solution similar to European reservations of trademarks and industrial designs, which are applicable in the European Union through the OHIM (Office for Harmonization in the Internal Market located in Alicante in Spain). Thus, every entrepreneur from the Baltic Sea regions should primarily start from an analysis of domestic legal regulations. If an entrepreneur decided that a given invention should be protected on the export markets, then it is required to submit an application for the protection on all markets where the entrepreneurs interests might be endangered by fake goods, copies and other infringements of intellectual property. In particular, it is worth evaluating the sales value or profits endangered by illegal infringements of intellectual property. This issue is frequently overwhelming for a single entrepreneur and it is advisable to seek help of professional patent experts or legal firms. These services are not so costly for the majority of entrepreneurs. However, they might be too expensive for micro and small companies. Before deciding whether it is worth using these services or not, an enterprise should calculate the losses incurred as a result of illegal infringements of intellectual property. If an enterprise estimates that there exists the possibility of reaping economic benefits, then it may apply for receiving a patent. Apart from an individual application for the protection of intellectual property, it is possible to apply for exclusive rights using the European procedure (EPC) or international procedure within the Patent Cooperation Treaty (PCT). It is usually more beneficial than

97 Creating and implementing an export business plan 95 receiving the protection in selected countries, excluding those inventions requiring the protection in 4 5 countries. Currently, the PCT covers 139 countries, including all European countries. The European Patent Convention (EPC) was signed by 34 countries. Both the European and international patent registration is possible in the Polish Patent Office 58. An important method of protecting intellectual property is maintaining confidentiality of trade secrets (know-how), that is the information about the production methods of organizational solutions unknown to other entities. Know-how may be based on transferring technical parameters or using a given technology. Applying know-how which is not subject to patent protection requires maintaining confidentiality. However, know-how may be traded and in such cases legal protection consists in drafting an agreement. The agreement should precisely specify the rules of a potential further transfer of rights. It must be remembered that the lack of a patent means that intellectual property rights are only protected by the provisions of a given agreement. Such solution is advisable in the cases when know-how contributions are strongly conditioned by time factors (we expect that a solution we worked out may be relatively quickly replaced with a competitive solution/technology). The costs of protecting intellectual property are not only associated with legal costs. After granting rights to a patent, industrial design, utility design or trademark, it is necessary to monitor the infringements of rights and enforcing the infringement-related obligations. Infringement monitoring may be left to distributors of our products, which must be accounted for in our distribution agreements containing appropriate provisions. It is also possible to cooperate with a law firm which will ensure a more professional monitoring of our rights. However, it is associated with higher costs. Claims resulting from infringing intellectual property rights are subject to civil proceedings. An exporter s intellectual property is not limited to industrial property. Producers of innovative products can hire research staff publishing the results of their work. Although the knowledge published becomes the property of all interested entities, it is protected by property rights. Property rights apply to software, pieces of music, literary works and other cultural artefacts. Interest protection, including intellectual property protection an action plan 1. Evaluation of a danger related to infringing intellectual property rights, including the value of potential losses 2. Potential methods of protecting intellectual property rights 3. Required scope of cooperation with a patent expert or lawyer specializing in intellectual property 4. Agreed protection activities 5. Monitoring of potential intellectual property infringements 58 Urząd Patentowy RP (Polish Patent Office), Poradnik wynalazcy, Warszawa 2009, p. 159.

98 96 Bohdan Jeliński, Przemysław Kulawczuk 6.3. Formulating market targets After specifying only a few indicative aims at the beginning of the planning process and after determining the basic export strategies (product, price, distribution, communication and promotion strategy), it is possible to focus on the market entry or export expansion targets. Export-related aims may be both expressed quantitatively (e.g. market share, sales value) or qualitatively (e.g. image revamp, more effective promotion, improvement in perceiving a product). These aims should be clear, measurable and achievable in a specified time frame. Specifying the aims may be preceded by determining an initial position of an enterprise and an expected position after 3 years, resulting, for example, from the export activity. Table 15. Specifying a current market position and expected market position after 3 years Ratio Measurement method Sales in total Currency Export sales Currency Export share in total sales % Market share in the export and domestic % market Net profits Currency Export profits Currency Sales profitability Currency Sales profitability Currency Unit costs Currency Free production capacities % Financial ratios (ROI*) % for ROI Number of the foreign markets serviced Unit Number of agreements made with Unit distributors Number of patents, industrial and utility Unit designs Fixed assets: technologies, buildings, Specification etc. Key staff competencies Specification Product skills Specification Brand recognition** on the foreign % markets Current situation (Year 201X) Target situation Year 201X+3 * The return rate of the capital invested measured by the relation of income generated and capital outlays. ** An ability of a customer to recognize a brand and consider it as well-known, heard about or seen as well as related to a given product. Source: Based on self-study. The table above may be enlarged by adding new variables. However, it should always present a current and target position of an enterprise, e.g. after 3 years from a given year. A comparative table showing the future aims of an enterprise in relation to the current situation helps to directly formulate export aims. A number of export aims should be reduced to those which are directly associated with export.

99 Creating and implementing an export business plan 97 Table 16a. Specifying the quantitative targets for export activity Quantitative aims Ratios Year 1 Year 2 Year 3 Increasing export sales Currency Increasing export profits Currency Increasing an export margin % Increasing the scope of using production % of capacity capacity Decreasing unit costs % of costs Improving liquidity (current ratio) CR= (e.g. 0,5 2,5) ROI % Sales of new product ranges Currency Decreasing logistics costs % Export share in total sales % Source: Based on self-study. Table 16b. Specifying the qualitative targets for export activity Qualitative aims Ratios Year 1 Year 2 Year 3 Number of the foreign markets serviced Unit and description Number of agreements made with Unit and description distributors Number of new products launched for Unit and description export Increasing the number of key customers Unit and description Introducing new technologies Unit and description Using new forms of promotion and sales Unit and description New market segments reached Unit and description New industrial design used Unit and description Source: Based on self-study. The targets of export activity should not occupy a lot of space in the planning document. They are quantified and synthetically described results of enterprise activity based on implementing the plan Financing a business plan of export development When a company is involved in export sales, it requires more financial resources since credit payment conditions are a significant element of price competitiveness of an export offer. Moreover, in international trade, it is customary to accept cash payment methods up to 30 days after delivery. Frequently, different currencies are used in these transactions, which translates into the exchange risk influencing a smaller or bigger cash flow than it has been assumed. Considering the abovementioned factors, the remaining rules of accessing finance by a company are similar. There are many sources of financing used to start business activity, cover the costs of day-to-day operations and implement development undertakings planned beforehand. Selecting appropriate sources is a crucial element of enterprise development since disposable resources are a part of the mechanism stimulating company operations. Capital enables enterprises to develop and expand into the foreign markets. A general division of financial resources available for a company are presented in the Table 17.

100 98 Bohdan Jeliński, Przemysław Kulawczuk Table 17. Sources of company financial resources Foreign Own Investors capital contributions Credits Leasing Factoring Franchising Loans and resources from aid funds Non-banking loans Retained earnings Depreciation write-offs, transformations in assets and equity Additional partners contributions, seeking new partners Venture capital funds Share issue Grants and subsidies Source: Based on self-study. Foreign financial resources include those resources which are exclusively external to an enterprise and left to be used for a specific time by creditors entitled to collect the interest. They take the forms of loans, credits and other similar liabilities. A credit creates legal and financial relations between a bank and a borrower (legal or natural person). This relation is reflected in making a bilateral agreement and transferring a specific amount of money by a bank to a borrower. The agreement is made in writing and should include the following elements: parties to the agreement, amount of money and credit currency, credit aim, repayment period terms, credit interest and the terms of possible changes in this regard, commission value, if specified in the agreement, collateral, bank powers related to the control of using the credit and ensuring the collateral. The credit amount is a debt of a customer towards the bank and it is regarded as an obligation recorded in his/her account as a liability. The choice of a particular credit type depends on the aim of allocating it by an entrepreneur. The most common credit forms include: operating loans, current account loans, credit account loans, investment credits, merchant credits. Operating loans are used for financing day-to-day enterprise needs related to buying materials, fixtures and fittings, financing current transactions as well as sales and production. Operating loans are tantamount with short-term loans. Current account loans enable a company to incur debt up to the limit specified in an agreement. They are granted as short-term loans, renewable for the period not longer than 2 years. Such loans are used when the payment is made into the current account and its repayment is covered by the current inflows into a borrower s current account. A current account credit is usually granted to business entities whose solvency is very high. The condition of receiving this kind of credit is being a bank account holder for at least 3 months. Credit account loans may be granted as credits for financing a particular transaction. Credit account loans are different than current account loans in terms of making the resources available for a customer. For a specific borrower, a bank opens a credit account for recording all payments decreasing the borrower s debt. Depending on enterprise needs, this loan may take the form of a renewable or non-renewable credit which is repaid gradually until the credit agreement is terminated. Investment credits are generally granted for the period longer than 1 year and refer to investment undertakings related to increasing or modernizing fixed assets. Thus, they are used to buy real estate, machines, equipment, etc. The procedure of obtaining such credits is associated with a prior bank analysis of the enterprise solvency for incurring debt in the future. The procedure requires gath-

101 Creating and implementing an export business plan 99 ering many documents and drafting a business plan. Moreover, a bank is always entitled to control the way of using credits and their consecutive tranches. Besides, it is important to present the forms of collateral that a company can offer, e.g. in the form of real estate, provided that a business plan is unsuccessful. Merchant credits, also referred to as commercial or commodity credits, are a non-banking form of financing business activity. This credit is the most important one in trading. In practice, it can take the form of a supplier or recipient credit. Supplier credit results from deferring payments for the delivery of goods or services by a supplier. A lender is a producer or supplier of goods/services while their recipient is a borrower. The payment date is deferred up to several or even more days. The second form of the merchant credit is the recipient credit. In this case, a recipient (customer) is a lender. The credit is made when paying an advance. A customer (buyer) makes a payment for a given good before a producer manufactures it. Lease is the form of long-term financing of investment undertakings and new enterprise assets. The lease agreement assumes that a financing entity is obliged to purchase a good (within the scope of the enterprise activity) from a specific seller under the contractual terms and then return these goods to an entity, using them or reaping their benefits for a specific time. A user is obliged to pay a financing entity the monetary amount in agreed instalments, which is equivalent to at least the price or money from the financing entity s purchase. There are many types and forms of lease depending on certain parameters. The most important distinction accounting for tax effects includes the operational and financial (capital) lease. Operational lease a lessee receives the subject of lease assuming that within the agreement term, it is recorded in the fixed assets of a lessor. Therefore, a lessor regards lease payments in total as its revenue and depreciates the subject of lease including depreciation write-offs into the tax deductible expenses. For a lessee, in turn, total lease payments constitute tax deductible expenses. The subject of lease is transferred to a lessee for the period shorter than the economic life of a good (usually up to 3 years). Therefore, a lessor, within a single transaction/lease agreement, does not get back total outlays allocated to purchase a fixed asset. Frequently, the sales agreement with the same or another lessee for this asset at the agreed price is made. Financial lease (capital or investment lease) is usually of a medium or long-term nature and made for the period similar to the economic life of the subject of lease. The subject of lease is an asset item of a lessee which depreciates it. A lessee makes depreciation write-offs in the basic agreement term and includes the so-called lease payment interests and depreciation write-offs in tax deductible expenses. When the lease agreement expires, usually the assets of a lessee are purchased. In other words, the purchase option is used. Factoring is a modern financial service improving the current liquidity of a company and shortterm financing of business activity. In relation to a credit, it is a competitive form of providing an enterprise with operating financial resources, and then safeguarding against defaulting on payments. The core of factoring services is an intermediary role in collecting payments granted to entrepreneurs by specialized economic units (banks, factoring companies). The parties to the factoring agreement are a debtor (an entity selling a receivable) and a factor (an entity purchasing this receivable). The recipient of goods/services (factoring debtor) participates in the transaction, yet not as the party to an agreement. Franchising is a modern source of financing business activity. It is referred to as a non-capital method or market development. It is a system of selling goods, services or technologies based on a close and constant cooperation between legally and financially separate and independent enterprises (called a franchisor) and its individual franchisees. In the case of an enterprise wishing to be a member of this network, it is necessary to consider all advantages and disadvantages associated with the operations of a given network. Equity capital comprises resources left at an enterprise s disposal, its owners or shareholders and allocated for covering the future risk and strengthening the company general financial perfor-

102 100 Bohdan Jeliński, Przemysław Kulawczuk mance. The entity contributing equity becomes a co-owner and influences the company financial decisions. Equity capital is limitlessly used by an enterprise and constitutes its main financing source. Financing business activity from equity capital is typical for small and medium-size enterprises. However, it limits their development and investment possibilities since the resources may not be sufficient to finance new undertakings, yet they allow enterprises to gain foreign capital by strengthening their market credibility. Retained earnings an excess of total income from selling goods/services and from other sources over expenses incurred in order to generate this income (net income). In an enterprise of a good standing, it should be the main source of internal finance. Covering current expenses from net incomes causes a considerable dispersion of resources, which makes the company structures more rigid. Retaining earnings lead to the emergence of a new balance sheet item, that is reserve capital or retained profit (loss). In some enterprises, reserve capital is required by law, yet not in all countries. Depreciation is the process of fixed assets losing their value, which is caused by physical wear and tear resulting from their use or caused by economic wear and tear resulting from technical progress. Depreciation write-offs next to retained earnings are the sources of company self-financing. In an enterprise, depreciation fulfils four roles: redemption, cost, finance and stimulus-related role. Depreciation starts not earlier than after the acceptance following a month from entering into the register (according to the tax law) and ends when depreciation write-offs are equivalent to the initial value, liquidating, selling or assuming a shortage. Transformations in assets and equity obtaining financial resources from transformations in the asset structure is primarily based on selling superficial and ineffectively used items. The source of increasing the equity is the owner or share contributions. Owner contributions do not require returning the interest in the invested capital, which positively influencers financial liquidity. Venture capital is a medium and long-term investment fund burdened with a high risk, used by enterprises from the sectors of new environmental protection technologies and alternative energy. These sectors are exposed to the risk which is too high in order for a company to obtain a credit for starting or developing business activity and, precisely, for innovative investment projects. A typical solution is to make venture capital available by means of specialized institutions with legal personality. An investor provides the export knowledge apart from capital. Taking up shares means becoming a partner who monitors company activities and takes partial investment risks. It is beneficial for an entrepreneur since together with an investor they have a common aim: achieving success and increasing goodwill. Venture capital is associated with introducing interest-free capital into a company for a specified investment programme for a period of 3 7 years. An expected rate of return fluctuates usually within the range of 30 60%. Business angels the market of business angels constitutes the part of an informal venture capital market. They are specific private investors who invest their own financial surpluses in new promising companies, provide them with particular knowledge, experience and technologies. The main source of individual investors profits is an increase in the share value. Business angels fill the gap between equity capital and venture capital investment. Before making a decision, they conduct a thorough analysis of a project. The analysis covers a few areas and refers to both an undertaking and the people involved in it. Investments of business angels are long-term and usually end with their withdrawal after achieving the aim. Public share issue means obtaining finance on the public market. It takes place by means of issuing shares and bonds. For small and medium-sized companies, this form of obtaining capital may be problematic since these companies would earlier have to change their legal form of business and obtain the right to issue shares on the public market. Subsidy is a free-of-charge and non-repayable financial help, most frequently transferred by the government from the budget to institutions, social organizations and natural persons to support their business activity. It takes the form of a legal claim.

103 Creating and implementing an export business plan 101 Grant is a direct payment of a non-commercial character transferred to a recipient (an enterprise) by a contracting unit (the European Union or government) in order to pursue a specific activity. This activity is precisely specified in an agreement or by law. Under the law, it is impossible to change the allocation of resources and use a given grant for a different aim. Grants are allocated for implementing development investments improving enterprise competitiveness, associated with modernizing an enterprise and its offer (especially by means of modernizing production resources), implementing innovative solutions or buying modern equipment or assembly lines. Resources left or not used according to an agreement must be returned. Grants help a recipient to perform priority tasks form the perspective of an entity awarding them. Not all above-mentioned financing sources are equally available for every company. The availability of external sources of financing particular groups of companies in Poland and at different level of development is presented in Table 18. Table 18. Availability of external financing sources for companies at different stages of development Stage of development/ availability Credit Leasing Factoring Venture capital Share issue The concept of an + undertaking Start-up stage of business activity Small company Medium-sized company unavailable source, + hardly accessed source, ++ medium accessed source, +++ easily available source Source: M. Molo, M. Bielówka, Przegląd dostępnych źródeł finansowania działalności gospodarczej oraz ocena ich atrakcyjności, [in:] Finansowanie rozwoju Małych i Średnich Przedsiębiorstw, Polska Fundacja Promocji i Rozwoju Małych i Średnich Przedsiębiorstw, Warszawa 2009, p. 39. There exist many possibilities of financing. However, not all of them foster a direct cash flow in a company, yet they indirectly influence cash flows and prolong payment terms. Franchising, for example, increases the amount of financial resources which are then used for day-to-day activities. As has been mentioned, every enterprise s aim is associated with searching for external financing sources which should be carefully divided into long-term (strategic) and short-term (current). The latter sources ensure constant business activity, that is maintaining liquidity, which strongly influences the enterprise performance and development. One may distinguish among many forms of obtaining capital. However, every financing method somehow imposes restrictions on enterprises. It also brings negative effects and requires other rules of using financial resources. Company performance and development is determined by all these factors. Therefore, it is necessary to devise the most effective plan of financing an enterprise considering all pros and cons of a given solution and specifying the measures helping to achieve the company aims Exporters action when facing tensions and difficulties in the course of implementing the export development plan Implementing the export development plan may be associated with a series of difficult situations (problems) which require appropriate preventive measures. The specificity of Scandinavian and South Baltic countries should be considered in this regard. The most difficult or critical situations in implementing export plans an entrepreneur may face are the following:

104 102 Bohdan Jeliński, Przemysław Kulawczuk a) Sudden decrease of the foreign demand for a given product b) Increasing price pressure associated with fiercer competition c) Defaulting on payments by an importer d) Suddenly losing contact while conducting trade negotiations e) Delaying the purchase or contract-related decision by a business partner f) Delaying the contract and collection procedures g) Filing a claim by a producer related to infringing intellectual property (e.g. prohibited copying) h) Losing price competitiveness of contract manufacturing or a low export profitability i) Withdrawing from production cooperation a) Sudden decrease of the foreign demand for a given product This situation may be associated with the specificity of the internal market or with business cycles. If, for example, we export into South Baltic markets an investment product or cooperative semiproduct for the production of a final good in another country, then a significant decrease in our partners (distributors ) demand generally result from their serious sales-related problems. In every case, it is necessary to specify the cause of such dramatic decrease of orders and if the problems with business cycles come true, then the only solution is to search for new sales markets and other partners. After all, when the problems with business cycles occur, there is no regression of total trade and export. It is the other way round. Producers of final goods suddenly start searching for cheaper suppliers of semiproducts or complementary goods and fighting for effectiveness. Being effective in terms of costs, a supplier from South Baltic countries, e.g. a Polish or Lithuanian supplier, may expect selling goods to other producers of final goods since they search for effectiveness and appreciate price competitiveness, which altogether influences manoeuvring towards new sales markets. Certainly, it heavily depends on the product specificity, earlier price conditions or entrepreneurial activity. b) Increasing price pressure associated with fiercer competition An increasing price pressure is associated with stronger competition on a given foreign market and generally leads to mounting claims of buyers seeking price reductions. Buyers observe decreasing prices of competitive products and expect that an exporter will follow this trend as well. Generally, buyers are not interested in the causes of significant price reductions of competitive products. Dramatic decreases of competitive product prices may be caused by different factors. However, when being subject to such pressure, it is required to specify the causes. Frequently, the causes may be associated with access to cheaper resources or new technology implementation. Generally, lower prices result from lower costs. In this situation, it is necessary to imitate a competitive action (e.g. use the most modern technology) or attempt to withdraw from a segment serviced, e.g. by improving the quality or positioning a product among the segments accepting a higher price level. The most common mistake made by exporters is following market trends and decreasing the prices without taking concrete steps in order to reduce costs. As a result, the export margin disappears and the profit turns into loss. Then, export becomes unprofitable. c) Defaulting on payments by an importer Defaulting on payments may cause problems for an exporter. Generally, defaults result from insufficient recognition of payment possibilities and inabilities to sell a product or process it so that there exists a chance for profitable activity. Rarely, irregular payments are intentional when an importer without any agreement attempts to use the resources of a buyer. Fraud is the least common cause of defaults. It turns out that in export, the rule of limited trust should be used more frequently. Not every buyer wishing to purchase export goods is a desired customer. In order to minimize negative effects of defaults, it is necessary to monitor the inflow of foreign payments, specify the causes of delays

105 Creating and implementing an export business plan 103 and new payments dates with potential sanctions accounted for, as well as agree with a debtor on feasible plans of instalment payments in the case of more serious problems. It is also necessary to check the credibility of partners beforehand. d) Suddenly losing contact while conducting trade negotiations Entrepreneurs conducting export activity inform about the events resulting from a sudden loss of trade negotiation interest by a potential buyer. An enterprise which made great attempts to sell goods may face reluctance to maintain further contact. It frequently results from receiving negative information about our enterprise, product or country by a potential partner. Most frequently, this type of information is wrong or fake. Although every entrepreneur is freely entitled to maintain contacts with other entrepreneurs, time devoted for cooperation involvement is a warranty of demanding information about the causes of terminating a contract. In practice, these arguments are valid and a potential partner, after some time, gives an answer which corresponds to the above-mentioned causes or results from an internal situation of a partner (e.g. changes of plans). Sometimes, a buyer stops being interested in a contract as a result of financial problems. Therefore, devoting a lot of time for preparing cooperation with our partner, we should request an explanation of such loss of interest. e) Delaying the purchase or contract-related decision by a business partner When negotiations come to an end and all significant contractual terms are agreed on, a buyer must make a final decision by signing a contract. However, many buyers may delay decision-making. Frequently, they justify it by the necessity to obtain a final decision of their superior authorities. In such situation, it is not advisable to strongly force a buyer since the date of a final purchase is unknown. Such situations may occur when a buyer is related to public authorities, big financial institutions or public agencies which in South Baltic countries are not financially liquid, despite a specific budget. Then, an exporter can only wait for the final result. Making this type of contracts is supposed to be regarded as highly uncertain. In every situation, attempts should be made to determine why a buyer delays the final decision. Sometimes such behaviour results from a negotiation strategy within which a buyer refers back to finished parts of negotiations, demanding additional concessions. In this situation, it is not allowed to follow the temptation and withdraw because of unethical behaviour, but carefully assess whether making concessions is beneficial. The decision about making concessions must be associated with signing a contract. f) Delaying the contract and collection procedures Delaying the contract, e.g. for construction works, is possible when a recipient is not able to perform financial, documentation-related or other obligations. Therefore, a recipient may make it more difficult for an exporter (contractor) to make a contract so that the moment of issuing an invoice is delayed. Such actions are taken by road management companies in some Baltic countries and should be accounted for. Otherwise, it becomes a serious defect of contract management. Excessive formalism delaying the obligations of a buyer may be considerably minimized by attaching great importance to formal issues, which sometimes requires additional employees for preparing and controlling contract documents. A variation of such action is delaying collection procedures by spotting tiny defects (sometimes disputable or apparent) and making the collection decision later. In such situation, some works may not be finally accepted. Only those works whose acceptance is agreed on may be financially settled. Unfortunately, the parties may frequently bring a given case before the court.

106 104 Bohdan Jeliński, Przemysław Kulawczuk g) Filing a claim by a producer related to infringing intellectual property In export activity, it may happen that an industrial design or trademark are similar to other brand well-known worldwide. A brand owner may file a claim against an exporter and demand removing a trademark or industrial design so that it does not refer to the original one. In such situation, it is necessary to check whether an infringement of intellectual property endangers the existing products. It is required to check whether the type of an exporter s product corresponds to a product of a brand owner since not every similarity infringes intellectual property. Most frequently, a brand owner must be provided with explanations and if they are not sufficient, this owner may file a claim against an exporter. The court located in the country of an exporter is applicable in this regard. Proceedings in the cases related to intellectual property infringements are not easy and an exporter should always seek help of specialized lawyers. h) Losing price competitiveness of contract manufacturing or a low export profitability Contract manufacturing is generally taken when the country of an exporter has a cost advantage in terms of resources used for producing specific labour-intensive goods. However, the relations of resource costs may change with time and importers expect reductions of industrial production cost. When effectiveness is at the minimum level, such pressures may expose an exporter to bankruptcy. In such situation, it is better to gradually withdraw from contract production and switch into the production of final goods or more effective ones than manufactured in simple production processes. i) Withdrawing from production cooperation Production cooperation accounts for the membership of two parties in the production of a specific good. However, this cooperation is complementary, not contract by nature. A typical example of complementary cooperation are the activities of Nokia and Microsoft in producing mobile phones. Nokia supplies mobile devices and Microsoft is responsible for proper software. Most frequently, this type of complementary cooperation brings mutual benefits since they are proportionate to labour inputs of both partners. However, one partner may frequently withdraw from cooperation. This process usually takes some time. As a producer of a specific type of goods, an exporter should devise an emergency plan which would be used if the main partner withdrew from cooperation and also should analyse the risk of withdrawing from such cooperation. A summary of the above-mentioned issues is the Table presenting an overview of potential decisions that may be taken in order to handle difficult situations or minimize their negative effects.

107 Creating and implementing an export business plan 105 Table 19. Critical situations in foreign trade and their preventive measures Critical or difficult situations in foreign trade Sudden decrease of the foreign demand for a given product Increasing price pressure associated with fiercer competition Defaulting on payments by an importer Suddenly losing contact while conducting trade negotiations Delaying the purchase or contract-related decision by a business partner Delaying the contract and collection procedures Filing a claim by a producer related to infringing intellectual property Losing price competitiveness of contract manufacturing or a low export profitability Withdrawing from production cooperation Source: Based on self-study. Exemplary preventive measures ways of counteracting Specifying optional sales markets (fairs, exhibitions, personal contacts or intermediaries), specifying hard competitive advantages (e.g. cost advantages), searching for effectiveness hunters in other countries, establishing cooperation ensuring common market advantages Specifying a potential entry of a cost competitor into our market, analysing potential quality differentiation of our product and a competitive one, researching (testing) to what extent our partners are willing to accept a higher quality for the current price and finally, searching for the markets of higher price levels or new market niches Monitoring the flow of foreign receivables, specifying the causes of delays, specifying new payment dates with possible sanctions accounted for, specifying repayment plans in the case of more serious difficulties, checking a buyers credibility beforehand Demanding explanations of the causes of such behaviour referring to a considerable amount of time needed to prepare cooperation Being patient and able to wait, making a contract regarded as highly uncertain, making an attempt to determine why a buyer delays the final decision, not withdrawing and thoroughly analysing whether making concessions is beneficial, associating the decision about making concessions with signing a contract Careful handling of formal issues, which sometimes requires new employees who prepare and control contract documents, excluding some works from acceptance and financially settling only those works whose acceptance may be agreed on, considering the possibility of bringing a case before the court Explaining the difference between the nature of an exporter s products and the products of a trademark owner, employing specialized lawyers and participating in defence procedures before the court Withdrawing from export production or initiating production of more profitable goods, including final products Devising an emergency plan, preparing optional solutions and recognizing possibilities of implementing these solutions

108

109 Hanna Treder 7. Organizing an export transaction 7.1. Preparing a transaction in the course of a transaction cycle All activities an entrepreneur must perform in order to deliver goods to a foreign recipient constitute the so-called transaction cycle. The transaction cycle comprises the following stages: preparing an export transaction, conducting trade negotiations and, as a result, signing the contract, then implementing particular transaction activities, usually in the presence of a forwarder, carrier, insurer and bank. Exporter Exporter I. Preparing an export transaction II. Trade negotiations III. Performing a transaction within the scope the exporter s transport responsibility Importer Forwarder Importer Carrier Insurer Bank Fig. 15. Entities participating in an export transaction Source: Based on self-study. The primary role of a forwarder in the course of an export transaction is to arrange the shipment (or the collection) of goods and to perform various activities involved in the transaction process. The activities mentioned above include: advising and instructing on the choice of a forwarder and transportation route, preparing goods for shipment, making contracts with carriers, submitting goods for insurance, issuing shipment documents and supervising the movement of goods 59. Depending on the negotiated transport responsibility, an exporter s obligation is to deliver goods to the place specified in a contract. This place can be the recipient s warehouse, a specific sea port in the recipient country, a loading port or a specified handling base. If an exporter does not possess his/her own means of transport, it is necessary to account for a carrier to complete the transaction 59 See: B. Janicka, Podstawy prawne spedycji, [in:] Podręcznik spedytora. Transport, spedycja, logistyka, ed. by D. Marciniak-Neider, J. Neider, PISL, Gdynia 2011, roz. 1.

110 108 Hanna Treder procedures. A transportation company performs a service of moving goods based on the contract made with an ordering party for the shipment by a specific means of transport. The role of an insurer is to safeguard against the results of the risk which is inextricably linked with performing particular activities in the course of a commercial transaction. In some cases, an obligation of an exporter to make the insurance contract results from the contractual clause, the so-called delivery clause. It happens when the contract is based on CIF or CIP according to the interpretation of the INCOTERMS INCOTERMS 2010 specify that a seller must arrange the insurance at his/ her own expense and deliver the policy or another proof of insurance to a buyer 60. In other cases, when an obligation to arrange the insurance is not clearly specified, an initiative to take the transport risk requires a decision about the way of its management. Accounting for an insurer in the course of a commercial transaction means that an exporter must incur the cost of the insurance premium. This cost should be incurred rationally so that all possibilities of managing the identified risks are considered. There arise doubts concerning the validity of making insurance contracts, particularly with reference to the transportation risks for which a carrier is hold accountable under the carriage contract. However, even in such situation, it is necessary to consider whether making the insurance contract is valid or not. In this way, a range of safety can be properly adjusted to the insurer s requirements. Moreover, the insurance contract is more favourable than the carriage contract in the way that it is possible to receive compensation for the losses incurred. In the course of an export transaction, the role of banks is also noticeable. Their primary role is to act as an intermediary in transferring financial receivables (advances, prepayments, delivery payments or complaints receivable). However, even in these primary activities, the involvement of banks can be more evident. Depending on the specified payment method, bank activities may, for example, consist in making payment orders. When using other payment methods such as a documentary letter of credit, banks assume the role of a payer in relation to an exporter and take the risk involved. The documentary letter of credit means that an importer s bank (opening the letter of credit) assumes an obligation to pay a specified amount to an exporter after meeting the requirements specified in the letter of credit. Apart from acting as an intermediary in settling transactions, the role of banks in the course of a commercial transaction may comprise a wide range of activities, such as delivering resources for financing the export production, issuing various types of guarantees, performing consulting/factoring/fortfaiting services 61. In the course of a transaction cycle, special attention should be paid to the first stage, that is preparing a transaction. Proper decisions made at this stage affect the efficiency of performing particular activities and a degree of achieving the assumed business objectives. One of the primary decisions of an exporter is the choice of a delivery method and a proper transaction technique. During this decision-making process, the following factors should be considered: legal framework within which a transaction will be performed applicable legal regulations of the seller s and buyer s country; economic environment the relations between supply and demand on the foreign market, a degree of market concentration, a degree of market formalization and applied trade customs; internal conditions specifying the marketing potential of an exporter s company; specific features of a good which is the subject of an export transaction. An analysis of the legal framework indicates that, in the case of the EU countries, exporters must consider the regulations enacted by the EU institutions and the national law. Trade among the EU Member States is governed by the free movement of goods and, only when the rules of fair competition are not complied with, the EU institutions can intervene. Exporting goods outside the Community requires a prior specification of potential barriers on the part of importer country. These barriers may take the form of import quotas, technical or sanitary requirements, and even an embargo placed on the imports of specific goods. 60 Por. INCOTERMS 2010 by the International Chamber of Commerce, ICC Publication No See: Rozliczenia międzynarodowe, ed. by D. Marciniak-Neider, PWE, Warszawa 2011.

111 Organizing an export transaction 109 Legal framework Economic environment EXPORTER Specific features of a good which is the subject of an export transaction Marketing potential of an exporter s company DECISION ABOUT THE TRADE FORM Fig. 16. Factors influencing the decision about choosing a delivery method in the course of an export transaction Source: Based on self-study. While recognizing the economic environment in the course of preparing an export transaction, it should be noted whether the market is dominated by the supply or demand side. An analysis of the situation from this perspective underlies the choice of a specific market entry strategy. In the case of the seller s market, when demand exceeds supply, an exporter s offer may include more elements favourable for a seller, e.g. a higher price or beneficial payment methods by demanding a prepayment or a documentary letter of credit. As far as the buyer s market is concerned, when supply exceeds demand, an exporter s offer may include more elements favourable for a buyer, e.g. a lower price, attractive after-sales service or payment deferment. Careless recognition of the economic market conditions carries a high risk of failing to perform a commercial undertaking. Careful recognition of other market conditions such as a degree of concentration or a degree of market organization, increases the exporter s chances to complete a foreign transaction successfully. High market concentration of the supply side results in activating monopolistic mechanisms which hinder the market entry of new entities. To ensure that the exporter s actions are effective, it is necessary, in this situation, to adopt appropriate marketing instruments which considerably enhance the sales offer. A high degree of market organization requires the sellers and buyers to comply with the exactly specified rules included in the statute or regulations of an institution responsible for the market performance. Such a high degree of market institutionalization is specific to the commodity exchanges, auctions, international fairs and tenders. Trading on such a highly concentrated market means lesser freedom of market participants in terms of specifying the conditions of a commercial contract. Moreover, performing a transaction in such conditions carries less risk. Evaluating the marketing potential of an exporter s company underlies a decision between a direct and indirect sales method. When an exporter starts his/her activity on a new market or when his/her prior experience is not sufficient, it is advisable to account for an intermediary and choose an appropriate legal form of the agency contract (commercial activity may be conducted by an intermediary on his/her own behalf and for himself/herself or for an ordering party as well as on behalf of and for this ordering party). A choice between conducting a direct or indirect activity on the foreign market is associated with specific dangers and, simultaneously, can result in additional potential benefits. If an intermediary is entrusted with organizing the distribution, an exporter may expect more effective sales results since an intermediary is much more aware of the local market conditions, especially the culture-specific aspects. Preliminary attempts made by the Polish entrepreneurs to locate their goods on the Scan-

112 110 Hanna Treder dinavian market frequently end with a failure since they are not aware of specific cultural aspects, different patterns of business conduct, which makes it difficult to establish a bond of trust between the partners. As far as Scandinavian markets are concerned, establishing business contacts with the participation of Swedish and Norwegian intermediaries increases the chances for more effective actions. Table 20. Examples of exporter s benefits and dangers resulting from choosing between a direct and indirect sales method Form of a commercial activity Benefits Dangers Direct commercial activity direct presence on the market, possibility of establishing an exporter s brand position, possibility of shaping an exporter s long-term marketing strategy, possibility of reacting quickly to the market signals within the scope of shaping the product and pricing policy, lack of commission charged by an intermediary. necessity of establishing and maintaining an exporter s distribution channels, necessity of fully assuming the commercial risk, lower sales effectiveness resulting from the lack of understanding of the local circumstances, lack of a predisposition for undertaking commercial activities on the foreign market, necessity of putting much more effort in terms of organization. Indirect commercial activity possibility of shifting selected commercial risks associated with performing a transaction to an intermediary, more effective sales activity on the foreign market, access to an intermediary s distribution channels, possibility of concentrating efforts and resources on the production activity. necessity of incurring the commission costs charged by an intermediary and, hence, increasing the price of a good, limited influence on an intermediary s marketing activities on the foreign market, hindered and/or delayed market information flow, improper cooperation with an intermediary, lack of maintaining positive reputation among the customers when goods are sold by an intermediary. Source: Based on self-study. The product features influence the choice of a sales method so that in the case of certain goods with specific features, it is possible to launch them on highly-organized institutional markets. As far as a mass good susceptible to standardization and characterized by homogeneity is concerned (identical features are also specific to different batches of the same good), it can be launched on a commodity exchange for sale. If an exporter owns a good characterized by such features, then when choosing the method of performing a commercial transaction, the possibility of selling on the trading floor should be considered. However, if a good is highly individualized, it can alternatively be sold on an auction according to the regulations specific to a given market. Preparing an export transaction requires obtaining substantial information about the sales market, potential partners, legal regulations, trade customs and trade techniques. In order to decide properly about the method of performing a transaction on the foreign market, it should be borne in mind that the market is dynamic and its parameters frequently change. Thus, in order to rely business decisions on the information obtained, it must be continuously updated.

113 Organizing an export transaction Creating the concept of an export transaction Before launching trade negotiations, an exporter should devise his/her own concept of a contract which will then be presented to a potential partner in order to find flexible solutions underlying the delivery completion. A general concept of a contract must comply with the strategic assumptions of an exporter s expansion on the selected foreign market. An exporter must clearly specify his/her own vision and ask which aims are of crucial importance: whether a single sale of goods after ensuring a maximum level of the selling prices or establishing permanent positive reputation in a given market environment in order to position himself/herself among other market participants. The accepted concept of an export contract should be based on detailed provisions concerning not only the price level, delivery and payment date, but also it must comprise other aspects such as a detailed description of a good, the possibility of partial deliveries, a specification of the transport responsibility, a division of risks related to the delivery completion, the payment method, different ways of securing the interest of the parties, dispute settlement, the complaint procedure, etc. When formulating the concept of a contract, an exporter must primarily consider a range of responsibility he/she is able to bear in relation to the delivery completion. He/she should identify the risk to be safeguarded against by supplementing the contract with proper provisions. Sharing responsibility for the delivery depends on the choice of a specific trade term. In international trade, it is customary to use the interpretation of the INCOTERMS prepared by the International Chamber of Commerce. This interpretation clearly specifies the regulations of the most important aspects related to the delivery, e.g. a range of obligations of a seller with reference to the delivery completion, an obligation of a buyer to collect the delivery, shared responsibilities in terms of arranging formalities, an allocation of transportation costs and the transportation risk, an obligation to label a good properly and an obligation to issue documents and notify a partner of the actions related to a commercial transaction. Applying the interpretation of the INCOTERMS, to a great extent, facilitates trade negotiations. However, it does not comprise all relevant aspects which must be included in the contractual provisions. Before choosing a trade term, the parties to a contract must additionally specify, e.g. the payment and dispute settlement method and indicate the legal system which the contract will be subject to. Choosing a trade term as a delivery base which accounts for a wider range of the seller s responsibility, e.g. the delivery of a good to a discharge point or the recipient s warehouse, an exporter may additionally benefit from, e.g. using his/her own means of transport or choosing the way of moving a good while relying on his/her own relations with carriers who offer more attractive price discounts. However, it must be noted that a wider range of the transport responsibility frequently (yet not always) means the necessity to take the transportation risk, which may not be a beneficial solution for an exporter. In the course of preparing a transaction, an exporter should also devote his/her attention to the problem of risk and attempt to reduce its potential negative implications. Proper actions in this regard should be reflected in the contractual provisions, e.g. by transferring the risk to a partner (choosing an appropriate trade term gives such possibility), by including the contractual provisions on using a documentary letter of credit confirmed as a payment method, by demanding from a partner to issue a guarantee safeguarding against a refusal to collect a good or a delay in settling the payment by an importer. Finally, the content of a commercial contract results from the seller/buyer negotiations. Formulating his/her own concept of a contract, an exporter must also account for the necessity to make concessions towards a partner and these circumstances should be considered as well. Another aspect is the choice of a negotiation strategy which may considerably influence the final result of trade negotiations.

114 112 Hanna Treder Table 21. Basic contract clauses Type of clause Negotiation clauses Name of a clause Description of a good Quality of a good Condition of a good Quantity of a good Price Delivery terms Delivery date Payment terms Payment date Complaints Force majeure Price review Dispute settlement Applicable law Significance of clause in a contract Specifying a commercial name (brand) which helps to identify a good without any doubts Specifying the features which considerably influence the possibility of using a good for specific purposes A condition of a good when the delivery is completed Specified in proper units of weight (gross/net), volume, length or in pieces; it is necessary to pay attention to the measurement of the units and, in some cases, a range of tolerance in relation to a given amount should be specified The price clause should include the description whether it is a unit price and whether the price covers and entire delivery. The currency should be specified as well. The contract may account for the discounts, rebates and bonuses Choosing the so-called delivery base in the form of a trade term; not only the name of the term, but also its interpretation accompanied by the publication date, e.g. the INCOTERMS 2010 The clause specifies the delivery date (according to the INCOTERMS interpretation) and potentially the dates of partial deliveries. If there is no possibility of writing a specific delivery date, the following notions can be used: the beginning of the month, the first half of the month, etc. However, the interpretation of these notions should be agreed on beforehand (the interpretation recommended by the International Chamber of Commerce may be referred to) Specifying the settlement of the delivery payment; when choosing among various payment techniques, special attention should be paid to the risk involved in each of the techniques and to the application of appropriate security measures to safeguard against negative implications When using a merchant credit, the payment date is deferred in relation to the delivery completion date, which means an additional risk on the part of an exporter Specifying the procedures of filing and examining the good-related and commercial complaints (concerning the course of a delivery, e.g. not complying with the delivery date, wrong or unpunctual delivery of documents, etc.) Force majeure accounts for waiving the liability of the parties who fail to perform contractual obligations in extraordinary circumstances which are not under the partners influence and which hinder or make it impossible to perform the obligations on time. Since there is no unified interpretation of force majeure, the parties should specify in a contract the meaning of this notion The price review clause accounts for the possibility of changing the price specified in the contract, which may result from the changes in the prices of the factors of production (the changes may happen after accepting the contract and before the delivery completion). The clause should precisely specify the procedure of the potential price changes It is a contractual clause indicating the method of settling potential disputes; it is advisory to use an arbitration procedure in the form of including a proper contract clause or making a separate written agreement Applicable law indicates the legal system which the contract is subject to. It is in the interest of an exporter that the applicable law is the law of his/her country of origin

115 Organizing an export transaction 113 Type of clause Non-negotiable clauses Name of a clause Name of the parties to a contract Place of signing a contract Date of signing a contract Signatures of the parties Significance of clause in a contract The company names specified in a contract as the contracting parties should be very carefully included in other transactional documents. Otherwise, when even slight ambiguities arise, the documents may be questioned by a bank arranging a documentary letter of credit The place of signing the contract is not/does not have to be the place of the delivery completion or the place of the payment settlement When a contract includes the provisions which make the effective date dependent on, e.g. obtaining an export/import licence, the date of signing the contract does not create an automatic obligation to initiate the delivery A contract may be signed only by the entities authorized to perform this activity Source: Based on self-study Trade customs and terms Trade customs are a common practice on the international market. They are established independently, in the long run, as a result of maintaining specific rules in the relations between the participants of commercial transactions. Applying customary standards of behaviour considerably facilitates and accelerates trade negotiations and makes the course of a transaction more predicable, which reduces the transactional risk. Lacking knowledge of the trade customs hinders and, sometimes, even makes it impossible to establish contacts with the foreign partners. Trade customs refer to various stages of a transaction and influence shaping the relations between the entities participating in the delivery. Exporter INCOTERMS Importer Exporter Institute Cargo Clauses Insurer Exporter UCP 600 Bank Exporter York-Antwerp rules Carrier Fig. 17. An exemplary application of trade customs in the relations between the participants of a commercial transaction Source: Based on self-study. The trade terms, INCOTERMS with their interpretation prepared by the International Chamber of Commerce (ICC), are the most commonly used basis for shaping commercial relations between exporters and importers on the international market. Including one of the INCOTERMS 2010 in

116 114 Hanna Treder a contract means that the parties accept a division of obligations related to the delivery according to the ICC interpretation. The scope of regulating the concepts included in the interpretation of the INCOTERMS 2010 is presented in Table Table 22. Aspects of a commercial transaction included in the interpretation of the INCOTERMS 2010 INCOTERMS 2010 A1 General obligations of a seller B1 General obligations of a buyer A2 Licences, authorizations, clearances related to security and other formalities B2 Licences, authorizations, clearances related to security and other formalities A3 Shipment and insurance contracts B3 Shipment and insurance contracts A4 Delivery B4 Delivery collection A5 Risk taking B5 Risk taking A6 Cost allocation B6 Cost allocation A7 Notification of a buyer B7 Notification of a buyer A8 Delivery collection B8 Delivery proof A9 Checking packaging labelling B9 Control of a good A10 Help with obtaining information and the costs involved in this activity B10 Help with obtaining information and the costs involved in this activity A1 10 seller s obligations A1 10 buyer s obligations Source: Based on self-study. INCOTERMS 2010 by the International Chamber of Commerce (ICC). The rules of the ICC to be applied under the national and international trade conditions, ICC Poland, Związek Banków Polskich, Warszawa INCOTERMS 2010 comprise eleven trade terms divided into two groups: the terms applied to the sea and inland waterway transport as well as the terms applied to other modes of transport. Table 23. INCOTERMS 2010 Terms applied to the sea and inland waterway transport FAS FOB CFR CIF Free Alongside Ship ( named port of shipment) Free on Board ( named port of shipment) Cost and Freight ( named port of destination) Cost, Insurance and Freight ( named port of destination) INCOTERMS 2010 A buyer takes the risk when a seller places the goods alongside the ship of the named port of shipment. The buyer covers transportation costs and the seller clears the goods for export. A buyer takes the risk when a seller loads the goods on the board in the named port of shipment. Transportation costs are covered by the buyer. A seller is responsible for the transport and covers the costs until the goods reach the named port of destination. The risk is taken by a buyer when the goods are delivered on the board in the named port of shipment. A seller is responsible for the transport and covers the costs until the goods reach the named port of destination. The risk is taken by a buyer when the goods are delivered on the board in the named port of shipment. Insurance costs are covered by the seller. 62 INCOTERMS 2010 by the International Chamber of Commerce (ICC). Reguły MIH do stosowania w krajowych i międzynarodowych warunkach handlowych, ICC Polska, Związek Banków Polskich, Warszawa 2010.

117 Organizing an export transaction 115 Terms applied to other modes of transport EXW FCA CPT CIP DAT DAP DDP Ex Works ( named place of delivery) Free Carrier ( named place of delivery) Carriage Paid to ( named place of destination) Carriage and Insurance Paid to ( named place of destination) Delivered at Terminal ( named terminal at port or place of destination) Delivered at Place ( named place of destination) Delivered Duty Paid ( named place of destination) INCOTERMS 2010 A seller makes the goods available at the named place of delivery. A buyer brings the goods to their final destination and fulfils the obligations related to the delivery. A seller delivers the goods to a carrier at the named place and, until this moment, a buyer covers the costs related to the delivery and takes the risk involved; later, the costs and risk is taken by the buyer. A seller covers the delivery costs until the goods reach the named place of destination; the risk is taken by a buyer when the goods are handed over to the first carrier. A seller covers the delivery costs until the goods reach the named place of destination and pays for the insurance; a buyer takes the risk when the goods are handed over to the first carrier. A seller covers the costs and risk until the goods are unloaded on the coast, in the warehouse, on the storage yard or at the terminal. The seller is responsible for clearing the goods for import. A seller covers the delivery costs and risk until the goods reach the named place of destination; a buyer is responsible for unloading the goods and clearing them for import. A seller covers the delivery costs and risk until the goods reach the named place of destination and takes responsibility for clearing the goods for import; a buyer is obliged to unload the goods. Source: Based on self-study. INCOTERMS 2010 by the International Chamber of Commerce (ICC). The rules of the ICC to be applied under the national and international trade conditions, ICC Poland, Związek Banków Polskich, Warszawa Another example of applying trade terms are the so-called English insurance terms, accepted when making insurance contracts for the goods in international trade. This term is also referred to in the INCOTERMS 2010 within the scope of CIF and CIP. A seller must, at his/her own expense, obtain the insurance of goods covering at least the minimum specified in the C clause of the Institute Cargo Clauses ( ) 63. Applying English insurance terms means that the basis for making the insurance contract is the standard marine insurance policy and a proper set of the Institute Cargo Clauses attached. International trade participants have at their disposal three standard sets of the cargo clauses which differ in terms of the risk coverage. Choosing the set of A clauses ensures the broadest range of the insurance coverage for the shipment specified by a contract. Under the contract, goods are insured against the risks, without those excluded in the Exclusions clause. Under the set of B clauses, an insurer offers an extended coverage (not smaller than in the A set), including such risks as fire, explosion, sinking, earthquake and the loss of a good while loaded or unloaded. The coverage excludes such risks as war or strike. The set of C clauses provides the basic (the smallest) risk coverage, excluding such risks as the volcano eruption or the losses made by the sea water which may pour into the container INCOTERMS 2010 by the International Chamber of Commerce (ICC). Reguły MIH do stosowania w krajowych i międzynarodowych warunkach handlowych, ICC Polska, Związek Banków Polskich, Warszawa See: Z. Kamiński, Ubezpieczenia ładunków w przewozach międzynarodowych, [in:] Podstawy handlu zagranicznego, ed. by H. Treder, Wydawnictwo Uniwersytetu Gdańskiego, Gdańsk 2005.

118 116 Hanna Treder Table 24. The scope of regulations in the Institute Cargo Clauses Institute Cargo Clauses A, B, C 1. Risk Clause 2. General Average Clause 3. Both to Blame Collision Clause 4. General Exclusion Clause 5. Unseaworthiness and Unfitness Clause 6. War Exclusion Clause 7. Strikes Exclusion Clause 8. Transit Clause 9. Termination of Contract of Carriage Clause 10. Change of Voyage Clause 11. Insurable Interest Clause 12. Forwarding Charges Clause 13. Constructive Total Loss Clause 14. Increased Value Clause 15. Not to Insure Clause 16. Duty of Assured Clause 17. Waiver Clause 18. Reasonable Despatch Clause 19. English Law and Practice Clause Source: Based on self-study. A common practice related to the bank role in conducting commercial transactions is applying the rules while using a documentary letter of credit as the payment method. These rules are included in the publication issued by the International Chamber of Commerce, Uniform customs and practice for documentary letters of credits 65. A documentary letter of credit as the settlement method used in international trade works in the following way: a bank, at the request of an importer, issues the payment obligation for an exporter; the obligation payment is fulfilled when an exporter meets the requirements of the letter of credit by submitting to the bank, within a specified date, the documents confirming that specific transaction activities are performed. The rules that should be complied with while using a documentary letter of credit prepared by the International Chamber of Commerce include the requirements on the documents confirming that an exporter performs specific activities and a uniform interpretation of ambiguous notions used in the contracts, such as allowable deviations in the quantity of goods, the possibility of partial deliveries or the fulfilment of an exporter s obligation to submit trade documents on time. In the course of a commercial transaction in which goods are shipped by sea, there exists another important example of applying trade terms in light of random occurrences referred to as the general average. This term is reflected in applying the York-Antwerp rules while specifying and settling the general average. An occurrence subject to the general average is interpreted in the following way: if it happens that while transporting goods by sea, there emerge random circumstances posing a danger to the cargo and/or ship, then, in light of this danger, intentional sacrifices of property are made in order to save the entire undertaking. The losses incurred in such circumstances are then proportionally shared by all participants of the trip (cargo and ship owners). The York-Antwerp rules include detailed provisions which help to determine whether a given occurrence may be called a general average and which include the rules of general average settlement. For those exporters who dispatch their goods to the recipients by sea and who bear responsibility for the transportation risk, the general average is another risk which should be subject to the insurance coverage. If the insurance contract is made under the Institute Cargo Clauses, the risk of the general average is subject to the insurance coverage. 65 ICC Uniform Customs and Practice for Documentary Credits UCP, International Chamber of Commerce Publication No. 600.

119 Organizing an export transaction Risk management in an export transaction The exporter s actions while preparing a transaction and then while delivering goods bear a certain level risk. An ability to identify this risk, assess it and select proper methods of its management helps to reduce the losses resulting from random occurrences. The source of this risk is usually the lack of current and complete information about the conditions in which a commercial transaction will be performed in the future. Choosing transaction techniques and devising the concept of an export contract happens in the course of the decision-making process (Figure 18). The information gathered at the first stage of the process underlies the choice of a proper behaviour. The information, sometimes, becomes outdated when it turns out that an action must be taken in different circumstances, as a result of, e.g. changes of legal regulations, economic downturn in the importer s country and dramatic changes in the production factors prices, exchange rate fluctuation, catastrophes or social tensions. I. Gathering information about the conditions in which a given undertaking is performed II. Preparing potential versions of an action III. Choosing a potential version of an action IV. Initiating an action V. Observing the results of the performed action Fig. 18. The course of a decision-making process Source: Based on self-study. Making decisions in uncertain circumstances, when the final result of the actions is unknown, means the necessity to manage the risks related to these action. A specific source of risk in international trade are the differences of the legal, economic and cultural systems between the countries from which the parties to a contract come. Business activity risk should be regarded as not only an objective danger, but primarily as a challenge which necessitates taking rational actions. Particular transaction risks should be managed not by immediate searching for the ways to reduce the losses, but by implementing a comprehensive framework of the risk management process. Implementing the concept of risk management frequently necessitates changing the organization of the enterprise performance. However, it brings real economic benefits by reducing potential losses resulting from random occurrences. In an enterprise which manages the risk, decisions are based on a verified standard of behaviour which fosters courageous and innovative actions.

120 118 Hanna Treder I. Risk identification II. Risk assessment III. Specifying different versions of an action IV. Decision implementation V. Observation of the action results Fig. 19. Risk management Source: Based on self-study. In the risk management process, it is incredibly important to identify the risks related to a particular decision situation. When one or more potential dangers are disregarded at this stage, then the risk may come true, yet without the possibility of reducing its negative effects. Identified risks should then be assessed in terms of their size by estimating the probability of a random occurrence and of potential severe losses which may result from the random occurrence (Figure 20). High risk small loss High risk big loss Low risk small loss Low risk big loss Fig. 20. Risk assessment in the course of risk management Source: Based on self-study. The assessment of particular risks (at the further stage of risk management) determines the choice of a proper instrument for reducing potential losses. Contrary to a common practice, not every risk related to an export transaction must be subject to the insurance coverage. It is always necessary to consider the possibility of taking preventive measures making the losses less probable, e.g. with reference to the risk of destroying the transported goods, the choice of a proper type of packaging is regarded a form of a preventive measure. Preventive measures reduce the risk. However, they do not fully eliminate a real danger. There exist other standards of behaviour with reference to the

121 Organizing an export transaction 119 remaining dangers, e.g. transferring the part of the risk to a business partner or an intermediary as well as safeguarding against the losses by making the insurance contract. III. Stage of the risk management: Specifying different versions of an action reducing the risk preventive measures stopping the risk stopping an action transferring the risk to a partner or an intermediary transferring the risk to an insurer Fig. 21. Different versions of handling the risk, according to the theory of risk management Source: Based on self-study. A choice of a particular action with reference to the identified risk depends on the assessment of its size and severity of potential losses. If a risk is assessed as high (the probability coefficient is close to 1) and potential losses are very severe for an exporter, it is rational, in this situation, to abandon the planned action. This situation may happen when, for example, an exporter considers the possibility of delivering goods of considerable value and the information gathered indicate the poor solvency of a business partner refusing to use the protection such as a documentary letters of credit or the bank guarantees. In the case of low and considerably less severe risks, it is justified to bear the consequences without incurring additional protection costs such as the insurance. However, in practice, in the case of most transaction risks, it is justified to use the insurance coverage within the scope of the responsibility for the risk specified in a contract. An exporter using such protection, even in the case of random occurrences influencing him/her in a negative way, is able to keep operating on the market by compensating the losses by the insurers.

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123 Bohdan Jeliński 8. Negotiating and making contracts In fact, international trade is a sum of sales contracts between partners from different countries. Thus, sales transactions underlie international trade. Agreements for buying and selling goods/services made in international trade are specific and therefore, they are customarily referred to as contracts. Thus, a sales contract is an agreement for buying and selling goods in which a foreign partner is one of the parties. As a result, making such contract is much more difficult and complex than making sales contracts between domestic partners Negotiations as the basis for making contracts and negotiation strategies Every contract is a joint statement of at least two parties and causes legal effects. Therefore, the form, content and way of making a contract must be carefully thought through and then mutually agreed on, so that its further performance does not generate unnecessary problems and costs for the parties. Common freedom of making contracts means that each party can choose a partner and make a contract of different formality level. This superficial freedom in shaping contractual relations is not unlimited. It is restricted by: unconditionally applicable legal regulations, exchange control, tax and customs regulations as well as other laws which must be complied with in foreign trade, general clauses, necessity to specify rights and obligations of the parties to a contract under a given legal relation. These restrictions become particularly important when the parties to a contract are subject to legal regulations of a given country. An unambiguous specification of the legal system, which a given contract is subject to, helps to make a non-conflicting and effective contract. It is particularly important to consider the objective and subjective premises of the contract validity. Subjective premises primarily include: capability of both parties to perform legal actions, statement of will without legal defects. Objective premises, in turn, include: compatibility of a contract with unconditionally applicable legal regulations and general clauses, prior and real possibility of performing contractual obligations. In international trade, every form of making a contract is accepted (in writing, verbally, by phone and electronically). However, when it is necessary to prove the validity of a contract, written evidence, witness statements, sound or image records are supposed to be submitted. It must be remembered that some contracts must be written or take the form of a notarial deed to be effective. The way of making a contract heavily influences its form and legal effects. The following ways are possible: on the formal markets a contract is made in a specified place, time, way and form, by means of a tender the process of presenting offers, negotiating and making a contract is determined by a buyer who is subject to international and domestic regulations in this regard,

124 122 Bohdan Jeliński by means of an offer and its acceptance one of the parties accepts an offer of another party, through negotiations the parties decide on particular conditions of a future agreement made as a result of direct contacts. The first two ways of making a contract require the knowledge of the formal market performance or tender-related procedures 66. There exist two most frequently used ways of making contracts by making an offer and its acceptance and through negotiations. These ways require a thorough knowledge and long trade experience from the parties to a contract. Therefore, international initiatives are taken in order to implement international standards of making sales contracts 67. These regulations provide a general framework for direct trade talks. An offer is a precise and binding proposal of making the sales contract directed towards specific trade partners. Typically, when making a contract by means of an offer and its acceptance, the parties to the contract do not meet directly. This way of making contracts usually refers to the goods which are not complex in their construction, similar in terms of physical and chemical features, bought in a big quantity and easily and unambiguously specified. Negotiations as a way of making the sales contract are usually initiated when the parties intend to make valuable, long-term as well as economically and legally complex contracts. Frequently, these contracts are atypical and also original. This way is referred to making contracts for valuable goods, comprehensive construction of facilities and factories, delivery of valuable equipment and machines, delivery of new technology lines, acquisition of companies or the controlling interest and establishment of joint venture. Negotiations also accompany the process of making lease and license agreements. Generally speaking, negotiations mean the process of searching for the conditions of obtaining what we wish to gain from our partner or what our partner wishes to gain from us 68. Negotiations are a bi-directional communication process aimed at reaching an agreement, with the parties sharing partially common and partially conflicting interests 69. Thus, it is necessary to notice that this is the process in which two parties of different opinions, needs and motives attempt to reach an agreement concerning a mutually important issue 70. An agreement as part of negotiations leading to make a contract may take different forms: mutual business meetings and conferences, telephone exchanges, letters, fax and electronic messages. The moment of starting negotiations marks the beginning of talks between the parties of a future agreement. In practice, it is the date of accepting the invitation to negotiate by one of the parties. These negotiations are supposed to decide on consecutive terms and conditions of a future agreement. Such talks may result in preparing the concept of a future contract. A considerable problem is to specify the moment of making a contract through negotiations. Most legal systems, including the Polish law, assume that a contract is made when the parties reach a consensus as to all proposals subject to negotiations. In practice, it frequently happens that the parties consider a contract as final even though not all proposals from negotiations are agreed on. These proposals, frequently not fully agreed on, include less important provisions of a future contract. If a party doubts whether a contract is made, the issue is resolved by a proper court. In some legal systems, making a contract through negotiations occurs when the parties agree on the essential contractual conditions. If a contract is made through negotiations, it is necessary to adopt proper strategies beforehand. A negotiation strategy is a comprehensive concept of behaviour related to the way of argumenta- 66 See: J. Rymarczyk, Handel zagraniczny. Organizacja i technika, PWE, Warszawa 2012, p and Z. Wojciechowski, Międzynarodowe rynki towarowe, PWE, Warszawa See: Konwencja wiedeńska o umowach międzynarodowej sprzedaży towarów (Vienna Convention on Contracts for the International Sale of Goods), Kantor Wydawniczy Zakamycze, Kraków G. Kennedy, Negocjacje. Jak osiągnąć przewagę negocjacyjną, Business Press, Warszawa 1999, p R. Fisher, W Unii. Dochodząc do TAK. Negocjowanie bez poddawania się, PWE, Warszawa 1990, p P. Casse, Jak negocjować, Wydawnictwo Zysk i S-ka, Poznań 1996, p. 15.

125 Negotiating and making contracts 123 tion and mutual influence of the negotiating partners. The concept of conflict underlies negotiations understood in terms of their strategic nature. A party starting negotiations must be aware that it participates in an attempt to solve the conflict of interests. Regardless of the culture of the negotiating partners, the parties are the opponents representing incompatible interests. Negotiations may divide the parties into winners and losers and the negotiation subject may be settled so that neither party is fully or partially satisfied. Negotiations may be also cancelled and fail to solve the conflict of interests. A starting point of every negotiation process is the conflict of interests and the final stage is a mutual agreement. As a result, this basic assumption leads to another premise that willingness of the parties to reach an agreement does not necessarily mean cooperation. Moreover, an intent to cooperate makes the parters willing to use cooperation for their own benefit. These regularities correspond to three strategic attitudes towards negotiations: mild attitude, aggressive attitude, flexible attitude. An overview of the above-mentioned attitudes is presented in the Table 25. Table 25. Strategic attitudes towards negotiations Mild attitude Aggressive attitude Flexible attitude Participants are friends Participants are opponents Participants are supposed to solve a problem Consensus is the aim Victory is the aim The result achieved in an effective and friendly way is the aim It is necessary to make concessions to maintain positive relations It is necessary to be mild towards people and problems It is necessary to adopt a flexible attitude It is necessary to make offers It is necessary to openly specify the border of making concessions It is necessary to accept some losses for the sake of the entire agreement It is necessary to seek a clear solution which would be acceptable for both parties It is necessary to insist on crowning negotiations with an agreement It is necessary to avoid an emotional conflict It is necessary to surrender under pressure It is necessary to demand concessions to maintain positive relations It is necessary to be aggressive towards people and problems It is necessary to be consistent and follow the adopted attitude It is necessary to warn with breaking negotiations It is necessary to state an incorrect border of making concessions It is necessary to demand unilateral concessions as the price for agreement It is necessary to seek a clear solution which would be acceptable for us It is necessary to insist on crowing negotiations according to our demands It is necessary to win an emotional conflict It is necessary to exert pressure It is necessary to separate people from a given problem It is necessary to be mild towards people and firm as far as problems are concerned It is necessary to focus on the interests, not on the adopted attitudes It is necessary to analyse which interests are in question It is necessary to avoid answering the question about the border of making concessions It is necessary to consider various possibilities of reaping mutual benefits It is necessary to present alternative solutions; the choice should be made later It is necessary to insist on discussing objective criteria of both parties decisions It is necessary to achieve the result based on objective premises and not on emotions It is necessary to give reasonable arguments and remain open to similar arguments; making concessions for the sake of the rules, not pressure. Source: Regulacje handlu i biznesu międzynarodowego, ed. by R.R. Ludwikowski, Dom Wydawniczy ABC, Warszawa 1998, p. 46.

126 124 Bohdan Jeliński Conflicting interests as the essence of negotiations happen both during the negotiation process and while performing contractual obligations. It is assumed that a conflict is a complex phenomenon consisting of a few elements: conflict of interests, contradiction of aims, mutual negative influence of the parties on each other. In business, a conflict may arise as a result of not performing contractual obligations because of negligence, the lack of due care or a set of random occurrences. The parties should safeguard against random occurrences in a contract by including specific clauses reducing the scope of negative risk effects. The situation becomes complicated when one of the parties does not perform contractual obligations: an importer defaults on payments or makes them partially and an exporter does not deliver goods on time, delivers a smaller quantity of goods and/or delivers goods of lower quality, etc. An inability to solve the conflict of interests may direct negotiation parties towards unwanted scenarios: loser-loser or loser-winner. In order to avoid such situations, both parties should conduct negotiations according to the assumed strategy. Well-know negotiation strategies include: avoidance, concessions, rivalry, compromise, cooperation 71. Avoidance means withdrawing from cooperation with a conflicting person, resigning from personal contacts, terminating employment or a contract, etc. It is typical of a partner who, directed by emotional tensions and frustration, is in favour of withdrawing from negotiations rather than attempting to solve the conflict of interests. The strategy of concessions is characterized by the following features: behaviour of one party is compatible with the wishes and interests of another party, based on the conviction that conflict plays a negative role, a frequently used way of solving a conflict when a much more powerful party abuses its position, a weaker party causes another conflict when it is only possible. Rivalry in negotiations is characterized by the following features: one party is forced to make concessions, engages impartial people on its part, uses manipulations, treats other people instrumentally. Compromise is a solution which partially serves the interests of both parties. However, the parties must make a concession to reap benefits. It is a style frequently used in the situation when the aims and interests are less important than positive relations. This style brings benefits when both parties are similarly powerful. Cooperation refers to the actions performed to search a solution which would satisfy both parties in a long perspective. It is believed that this style is the most effective one and used when there is no communication between the parties or when the communication process is disrupted. Both parties are generally involved in eliminating the causes of a conflict. When using the above-mentioned negotiation strategies in business, especially in conflicts resulting from an improper way of executing the negotiated contract, one may infer that cooperation is the only effective solution for the parties who decide to avoid arbitrage or court proceedings. In practice, it may turn out that it is necessary to negotiate the contractual conditions agreed on beforehand. The stage of performing contractual obligations (especially in the case of the first contract) is equally important and even much more important than the negotiation process. This stage greatly affects the 71 R. Błaut, Skuteczne negocjacje, CIM, Warszawa 1994, p. 7.

127 Negotiating and making contracts 125 possibility of establishing long-term cooperation. Therefore, great effort should be made in order to perform the obligations and not to exert pressure on another party to enforce them formally The essence of export negotiations and negotiation tactics Negotiations are the art of reaching an agreement satisfactory for the parties who are, initially, of different opinions on a given issue. However, this difference is so significant that an immediate agreement between the parties is impossible. Learning the art of negotiations determines not only a mutual agreement itself, but also the costs incurred and time devoted to reach this agreement as well as the atmosphere during negotiations and the partner relations after finishing them. Thus, it is the art requiring a thorough knowledge, different skills and personal talent. It is necessary to know the subject of negotiations as well as the partners involved in them. It is impossible to improvise during negotiations. It is a branch of science which requires constant development from the parties interested. The course of negotiations primarily depends on the answers for the following questions: are negotiations conducted directly between the parties meeting personally or are they conducted by means of exchanging offers/counteroffers and their acceptance? is a potential partner known to us and are we interested in a long or short-term cooperation perspective? are we competitive on the market and what is our bargaining power? what is the subject of negotiations? The answers for the above questions underlie the choice of a negotiation strategy which covers an aware verbal manipulation and attitude adopted to achieve the assumed aim. Negotiation tactics are based on the knowledge of human psychology. However, an evaluation of their use is controversial. It is worth knowing the basic negotiation tactics in order to apply them consciously and effectively as well as to recognize and skilfully safeguard against those tactics used by a partner 73. The most common negotiation tactics include: Budgetary bluff I only have such budget and this is the only amount I can spend Why does it work? It is easy and painless in use. It is difficult to question it and to check whether it is true. Other people are guilty (e.g. a financial director). It enforces empathy (and compassion). A buyer seems to ask for help. How should you react? You should get to know the budget amount and check whether you were told the truth. You should suggest later payments, payments in instalments. You should suggest another solution, e.g. smaller quantity or the contract within the budgetary capabilities. You should help in persuading third parties into increasing the budget. 72 See: R Fisher, W. Ury, B. Patron, Dochodząc do TAK. Negocjowanie bez poddawania się, PWE, Warszawa See: H. Stelmaszczyk, Negocjowanie kontraktów handlowych. Poradnik dla eksporterów i importerów, CDKHZ, Warszawa 1992.

128 126 Bohdan Jeliński You should emphasize the beneficial side of the costs incurred and show how the value of purchase will justify increasing the budget. You should suggest contractual changes (e.g. transport free-of-charge) You should use an isolation technique or maybe technique (e.g. if we reduced costs somehow or decided to place an order? or not to mention price, is it a product you search for? ). As a last resort, you may say that the company rules and policy do not account for lower prices. Pressing A buyer exerts pressure to reduce the price referring to the competition Why does it work? It is easy and painless in use (it does not have to be true). It may be credible. Many sellers have the impression that their prices are always high and therefore, they show understanding. A seller must feel encouraged to talk with his/her management about reducing prices. It encourages a seller to immediately reduce the price to the minimum. How should you react? Before negotiations, make an attempt to handle this popular technique. Check whether competitive prices are real (e.g. asking politely for the price list in order to see how they make it possible ). Check whether a buyer compares the prices of the same products and services; ask many questions. If competitors offer lower prices, compensate it with presenting benefits from buying your goods. Offer a cheaper solution. If you have to reduce the price: Surrender slowly and unwillingly, When possible, justify your concession, While making a concession, attempt to get something in return. Triangle auction It is a variation of the pressing technique. This technique is based on an open comparison of two or more competitive offers during negotiations. Why does it work? For a buyer, it is natural to hear a low price as soon as possible. A buyer controls a situation psychologically and carefully observes negotiators representing a partner. Sellers are in a more stressful situation. No seller likes when competitors receive an order in front of him/her. How should you react? Be calm and, if possible, try to ignore others. Clearly specify your lowest price and do not go down with it. Show that your offer is superior. However, do not make direct references to your competitors explaining a buyer that he/she does not compare equal products or services even if it is true. It should be done politely and tactfully. If possible, delay actions: call for advisers, use your telephone. Be firm, search for the variable distinguishing your offer. If you fail to receive an order, do not treat your competitor and buyer as your opponents.

129 Negotiating and making contracts 127 Gentle touch A buyer is gentle, prudent and does not seem to be a negotiator. For example, during lunch, in a friendly atmosphere, a buyer transfers unofficial information, if I could decide I received this order and I must be honest with you. A general signal here is disarming honesty. Why does it work? Psychologically, you want to offer a good deal. It gives a false sense of security and may cause excessive relax. You may disclose relevant and confidential information. A buyer who is an excellent interlocutor may oblige a partner to make concessions while initially, it was supposed to be a casual talk. How should you react? You should be polite and natural, yet ask most questions and talk about the company of a buyer, not yours. Try to make a situation work for you. Say honestly privately, I would like to help, but and then refer to the company rules and policy hindering, e.g. price reductions. Try not to say more than you have to. Be watchful and remember that a buyer has a particular aim. Casting a net This techniques may be based on casting a big net at a long distance (e.g. by declaring that when I negotiate good conditions at the first order, the order will be bigger in the future ) or on casting a small net at a short distance (e.g. a buyer promises to place a bigger order, but after receiving a lower price, actually buys less). Such situation may lead to limiting cooperation to the first contact. How does it work? People believe in what they want to believe every seller likes thinking about the future turnover and both versions of this technique may have a strong influence. It seems logical that a seller offers the lowest price both with reference to small and big orders. Both attitudes of a buyer may be fully credible and logical. If a buyer does not place an order agreed on beforehand, in practice, there is no way to enforce further obligations, unless they are specified in a contract. How should you react? Behave in such a way that there are no reasons to mistrust the buyer s declaration. However, for your own sake, assume that the purchases declared may not be made. Give discounts for prior orders depending on their quantity and fulfilment of orders, not on the declaration given. Blame the company rules and policy for your non-cooperative actions. Remember that if the buyer s declarations referring to a big order are honest, discounts for prior orders depending on the quantity of the current orders will fully satisfy this buyer. Prolonging This technique is used by people who unnecessarily prolong every negotiation stage. However, it may or may not be an intentional action. It may be the lack of competence to make a decision or unwillingness to make a purchase. Why does it work? A seller is forced to invest a considerable amount of time and money in negotiations and insists on making any agreement.

130 128 Bohdan Jeliński A seller may lose patience and be thrown off-balance. How should you react? Use a warning in order to test a buyer (e.g. soon, we expect an increase in prices, so let s make an agreement earlier, I can guarantee the delivery only when I receive the order until ). When you suspect that a buyer does not intend to make a purchase, be honest and say that you cannot devote much more time, but if a buyer makes a decision, you will be eager to arrange a meeting. Show that you are against a slow pace of negotiations. Do not accept a few meeting dates. Make contacts as rare as possible and observe the buyer s reactions. Suggest a few unreal dates and a few concessions in order to hasten a buyer with a decision. Buy now bargain later Before making a contract, a buyer persuades a seller into fulfilling an order or performing obligations (e.g. in terms of the sales service). It is frequently associated with persuading a seller into other tiny concessions. Why does it work? Breaking negotiations may be much more expensive for you than conducting them further. Every tiny concession is separately of lesser importance for a seller and the entire cost of making concessions may be easily overlooked. When you decide to fulfil an order, you signal psychologically that you are not able to negotiate firmly any more in order not to risk a future contract. You also feel that the most important part of negotiations is behind you. How should you react? Before you perform even a tiny activity, do not make yourself obliged to anything. If you are not able to perform these tiny actions, specify the minimum and maximum number of contractual parameters and specify the negotiation conditions. Remember that every concession for a buyer decreases the profit of a seller. Do not give anything easily. Refer to the company rules and policy ( I am not authorized to ). Good bad This technique is recommended when a negotiation group includes two or more buyers: one is aggressive and imprudent, another one understands you and seems to be prudent. Why does it work? A nervous atmosphere is present and, as a result, buyers are more willing to give a quick consent. Changing the pace and pressure hinders reasonable thinking and makes it impossible to force the initial plan. A bad individual does not necessarily have to be present. However, it may be said that the employer of a given buyer refuses to pay more than and as all know it is unreal, but. Bad individuals are frequently very credible. How should you react? Remember that both bad and good people are on the same side and it is not the side of a seller. Remind yourself that you are the last person to benefit from this technique; do not try to react as others expect from you.

131 Negotiating and making contracts 129 Do not allow yourself to be thrown off-balance. Allow a bad individual to talk and even encourage him/her to do so. Use such conversation techniques so that a bad individual does not exist. In an extreme case, you may politely reject cooperation with people who are exceptionally impolite and try to avoid them. However, it means accepting your defeat. Use the bad technique on your own. In order to feel safe, take with you another person, not an equivalent of a bad individual. Remember that a bad individual does not necessarily have to be so firm. A given negotiation technique is used by specific people of individualized personalities and behaviours. In this way, they should be selected into a negotiating team 74. According to psychological research on the behaviours of partners during negotiations, the following attitudes typical of negotiators contacting their clients may be distinguished: 1. Representative earns trust of customers and reduces their fears against making a transaction. Representatives are stable people who control their emotions. They express their opinions in a precise and clear way. They are better perceived in more formal situations and during presentations. 2. Bond creator makes contracts by building warm and friendly relations with customers. Bond creators are approachable and focus on analysing individual needs of a customer. They sell following the rules of being polite to others and earning trust for themselves. They are interested in people and in favour of teamwork. 3. Adjuster is able to perfectly identify the type of the customer s organizational culture and adjust appropriate behaviour to it. Adjusters earn trust and confidence in the relations with customers by sharing their opinions and values. 4. Destructor can establish contacts and do business by gaining advantage over the customer s organizational culture and creating the feeling of inconsistency. Destructors express independent and radial opinions. They achieve success in organizations which require an innovative and creative way of thinking. 5. Enthusiast is full of energy and arouses enthusiasm. Enthusiasts need success and firmly compete with other people in order to achieve this success. Based on their values, they can, for example, persuade a customer into buying a product which is quite unknown to them. 6. Task performer is determined to perform contractual obligations or sell goods. Task performers firmly and stubbornly seek to achieve success looking for bargains and avoiding barriers. They are always in the right place and time. 7. Winner is a person eagerly required at the stage of establishing a company or gaining new markets, mostly motivated by rivalry and the highest stakes. They are very active, constantly seek new bargains and possibilities of expanding a company or making a favourable contact. They quickly make decisions. 8. Technician is able to recognize customer needs in terms of a product offered. Technicians are in favour of an intellectual sales style. They consider an alternative situation and appreciate complex and high-tech products as well as the tasks requiring a logical analysis and creativity. They are very intelligent, which allows them to recognize the least obvious sales possibilities and bargains. However, it is dangerous since some customers may regard them as excessively intelligent and may even feel embarrassed. 9. Administrator is a thinker who plans everything in advance and provides a customer with administrative and legal safety of a contract. Administrators pay great attention to analysing all aspects of customer relations. They are valuable in the case of customers who are worried about details and do not trust a traditional attitude towards selling. 74 H. Brdulak, J. Brdulak, Sztuka i technika negocjacji, Wydawnictwo Bizant, Warszawa 1996, p. 68.

132 130 Bohdan Jeliński Thus, as far as choosing people is concerned, the art of negotiations requires selecting an appropriate negotiation team consisting of individuals with personalities relevant to a given negotiation technique Negotiation styles and features of a good negotiator on the South Baltic markets A negotiating style is a set of distinguishing features determining negotiations in a given time and under specific circumstances. It is a derivative of a given strategy and negotiation tactic and of personal features of particular people selected as a negotiation team. A good and experienced negotiator can adjust a negotiation style to specific situations and measures or arguments available at a given moment, to the relations with particular superiors and the scope of powers, to a given stage of negotiations as well as to the partners personality 75. The following styles are most frequently distinguished: win-win cooperative style (soft negotiations) win-lose competitive style (hard negotiations) loose-loose competitive style (hard negotiations) In cooperative negotiations, it is assumed that the parties are not opponents, but partners cooperating in harmony. Each party takes care of its interests, yet not at the expense of another party. Instead of competing, mutual cooperation in order to solve a problem is preferred. This style is characterized by the following features: friendly atmosphere, politeness, tactful behaviour, showing trust, ability to make a compromise, cooperation, openness and honesty only when partners know each other well and plan a long-term cooperation. The activities fostering this type of negotiations include: showing the other party that we are focused on cooperation, checking whether the other party shares our attitude, adopting an attitude based on solving problems, creating the atmosphere of trust and respect, praising positive actions of the other party, avoiding inflexible and defensive actions, avoiding reference to regulations, statutes, procedures, etc. The cooperative style may be endangered by a consistent and decisive competitive style. Then, adopting this style may translate into a negotiation failure 76. The win-lose negotiation style is characterized by the atmosphere of a reasonable competition and comprise the following aspects: the parties negotiation power determines final success, a more powerful party reaps more benefits, behaviours are controllably aggressive, a kind of mistrust and suspicion in talks, potential threats and forcing unilateral concessions, 75 See: R. Pałgan, Natura negocjacji handlowych, Wydawnictwo Gdańskiej Szkoły Wyższej, Gdańsk 2012, p See: Z. Nęcki, Negocjacje w biznesie, Wydawnictwo Antykwa, Kraków 2000, p

133 Negotiating and making contracts 131 manipulating. The methods used to safeguard against this kind of negotiators include: checking the real position of the other party, checking whether the other party does not bluff, adopting the style of an active defence, controlling emotions. The lose-lose style results in a competitive atmosphere and the lack of benefits for both parties incurring losses (time, costs of conducting talks). Such negotiations are caused by a negative attitude towards other party 77. This attitude may be, in turn, triggered by the following factors: ascribing negative features and intentions to the other party, prejudices resulting from existing stereotypes, bias and lack of objectivity significant cultural differences in international business. There exist two derivatives of these basic negotiation styles substantive and integrative. The substantive style helps to avoid the choice between the cooperative and competitive style. The most important assumptions of this style is separating emotions of negotiators from a given problem, focusing on the interests and not on positions, constantly seeking new and positive possibilities as well as establishing objective evaluation criteria. The substantive negotiation style leads to a more effective agreement and maintains the best business and personal contacts with the other negotiating party. These two conditions are the key factors determining an effective cooperation between the parties. The essence of the integrative style is, in fact, balancing contractual benefits for both parties, which is more effective than individual expectations of the parties before starting negotiations. This style is more likely to be used since it creates strong and stable relations between negotiators and the bond of sympathy and mutual acceptance is created. As a result, this style helps to reduce costs, strengthens the conviction of compensating mutual concessions, adjusts individual plans and actions and effectively connects the initial negotiating positions of both parties. In negotiations, we may also distinguish the national negotiation styles, embodying national customs, personality features and lifestyles as well as historical experiences of a given country or a group of countries 78. It is explicitly noticeable within an international economic cooperation in the Baltic Sea region. In this region, trade relations exist between the North and South and they are dominated by the national negotiation styles: German style (Germany), Scandinavian style (Sweden), Slavic style (Poland). Germans are regarded as unquestionable supporters of a good and well-organized work. They follow the rules of effectiveness, creativity and stubbornness. German traders perceive themselves as professionalists and expect the same from their partners. They set very high qualitative requirements both when buying and selling products. Therefore, it is advised to engage specialists (experts) in negotiations in order to carefully present useful values and to emphasize a qualitative aspect of a transaction. What is meant here, is the information about delivery dates, packaging, qualitative collection of goods and payment methods. Germans are primarily interested in facts, history, forecasts, advantages and restrictions. They pay great attention to the partners credibility. Therefore, it is well perceived and even required to present appropriate references, certificates, formal authorizations and quality marks. German credibility is confirmed by the strength of the German economy, which specializes on the international markets in delivering high-tech devices and machines, complete industrial facilities, chemical products and consumer electronics. They are also proud of their carmaking industry. Trading in these goods requires knowledge, good organization, market expertise 77 E.M. Cenker, Negocjacje, Wydawnictwo Wyższej Szkoły Komunikacji i Zarządzania, Poznań p Savoir-vivre. Poradnik dobrego wychowania, Wydawnictwo Buchmann Sp. z o.o., Warszawa 2012, p

134 132 Bohdan Jeliński and proper financial instruments. It is sometimes difficult to negotiate with Germans since they are convinced about the quality of the goods offered and their adequacy to the price. Germans are also perceived as excellent financial experts, which is confirmed by an extended and efficient banking and insurance infrastructure operating worldwide. In the case of not performing contractual obligations, Germans are stubborn in making claims and seeking high compensations. In serious and difficult situations, they use financial experts and complex tools for safeguarding contractual payments. They most frequently suggest making standard agreements, which should be agreed on, since they result from a long-term practice and experiences. Usually, the agreements may be supplemented with an appropriate appendix since renegotiations are not well perceived. While negotiating with German, one should be prepared to adopt a strong negotiation position. Moreover, an alternative suggestion, favourable for a partner, should be carefully prepared and skilfully used. It must be noted that Germans attach great importance to preparing for negotiations and they usually bear in mind a few previously discussed solutions referring to a potential course of actions. Suggested prices and conditions should be realistic. It is advisable to avoid sudden concessions. However, making a contract does not mean the end. After that, the parties discuss further steps, which are scrupulously recorded in the course of negotiations. These notes ensure that the parties will consistently perform contractual obligations. Germans are in favour of all written records of completed negotiations, even if this is only a stage in reaching a final agreement. They are scrupulous, precise and follow the work hierarchy in partner relations and communication. They also try to be punctual. It is commonly believed that if somebody is late for a meeting half an hour, then it is possible that this person will be delayed with a delivery or payment half a month. They are against all serious disruptions of the work cycle since they are famous for filling their calendar carefully. Germans are rarely emotional and open since they appreciate privacy and try to separate private from professional life. Business relations remain very formal. Negotiators are distanced from each other and the atmosphere between them is rather reserved. Germans are not used to receiving too many compliments, so it is advisable to be careful with them. While negotiating with them, people should avoid showing their lack of decisiveness and inconsistency of their actions, lack of knowledge of the negotiation subject or any form of improvisation. All hospitality gestures should be shown only after signing a contract, not during the negotiation process. Germans rarely dine with their partners while cooperating. When cooperation is close and long-term, they are willing to do so 79. Swedes are similar to Germans, yet they adopt even more reserved negotiation styles. They are very difficult negotiators. Swedes initiate talks when they are perfectly prepared. They are primarily interested in the product quality and delivery arrangement. They never show interest in the possibilities of price negotiations, which usually means that the offered price is final and it may only be subject to small changes. Swedes are more sensitive than other European negotiators with reference to the proper product quality. It is impossible for them that particular deliveries differ in terms of quality and do not comply with contractual conditions. Mutual contacts should be deprived of improvising, coming late or postponing meetings. The relations are determined by typical Scandinavian coldness. Swedes are well-organized, which translates into their punctuality and precise planning of their daily schedules. While contacting foreigners, they are official and appreciate privacy 80. They are reserved in establishing first contacts, value the recommendations of a given partner by another Swedish company or person. They need considerable time to initiate cooperation. However, after positive and beneficial cooperation, they unwillingly withdraw from it. While negotiating, Swedish partners do not express emotions. They are in favour of planning. Therefore, negotiations are effective and quick and they are conducted according to a well-prepared scenario which is reluctantly changed. Swedes appreciate the quality of a product and its professional presentation. Therefore, the price of a product is not the key factor determining the decision about signing a contract. Swedes invite a partner to a restaurant usually after finishing 79 See: A. Pałgan, Natura negocjacji, op. cit., p See: H. Brdulak, J. Brdulak, Negocjacje handlowe, PWE, Warszawa 2000, p. 179.

135 Negotiating and making contracts 133 negotiations. Inviting somebody to a private house is rare and means a great award. Such invitation is made after a few years of fruitful cooperation. Polish enterprises are more and more frequently noticeable on an international scene, especially on the German and Swedish market. After the political and economic transformation in Poland, enterprises have adopted American and Western European business customs. However, a specific style of doing business was retained and translated into the business culture typical of Poland as a combination of domestic and foreign elements. The statements of Polish negotiators are open and direct. It must be noted here that mixing lowcontext communication with the focus on maintaining positive partner relations is typical of Polish people and rarely noticeable worldwide. Poland is perceived as a country in which great importance is attached to ceremonial aspects and social hierarchy. Decisions are usually made by people of the greatest importance in a company and, preferably, men do business with other men. According to Western observers, business meetings in Poland start rather punctually. However, several-minute delays will not be perceived negatively. A typical feature of Polish negotiators is that they frequently argue with each other while negotiating. It may be perceived as being unprepared and not having a common view. Above all, such behaviour is perceived as impolite. Business guides recommend using scientific titles while calling Polish partners. A serious attitude towards doing business may be confirmed by the fact that Polish people are in favour of presenting products or services and their technical details, as well as other important information. Unfortunately, it is believed that while negotiating, Polish people focus on immediate profits, forgetting about longterm benefits, which frequently leads to irrational bargaining. According to the last important opinion of Western experts about Poland, sorting out an issue in this country lasts longer than in other Western countries (sluggish clerks and legal intricacies). This opinion is supplemented with the view that Polish people are not reliable. They first assure that they can do something or that something has been done. Then, it turns out that something is impossible for objective and predictable reasons. The above-mentioned Polish weaknesses may constitute an obstacle for foreign negotiators, especially those who do not remember Poland before transformation. Elderly partners bear in mind many positive changes which occurred in Poland. They do not have excessive expectations and emphasize that Polish people are quick learners. It must be remembered that national negotiation styles are influenced by deeply rooted stereotypes. On the other hand, the stereotypes evolved into these national negotiations styles coming closer to each other. This situation results from globalization understood in a broad sense Basic areas of potential disputes and contractual mistakes In export activity, it is very important to properly specify mutual rights and obligations by the contracting parties. Contractual mistakes may result in serious implications. Therefore, it is necessary to avoid blunders in written contracts. The most common mistakes in export contracts may be divided into formal, linguistic and substantive ones. The most common formal mistakes include: no date of making a contract, pre-dating a contract, no signature of a person authorized to represent a partner, signing a contract by a person who is not authorized to represent a partner, 81 See: J. Baylis, S. Smith, Globalizacja polityki światowej, Wydawnictwo Uniwersytetu Jagiellońskiego, Kraków 2008 and M. Raich, S.L. Dolan, J. Klimek, Globalna transformacja biznesu i społeczeństwa, Wydawnictwo Difin, Warszawa 2011.

136 134 Bohdan Jeliński no initials of all pages of a contract and all appendices constituting an integral part of this contract, wrong names of the contracting parties, incompatible with the names recorded by proper registration organs, wrong seal of a contract (the seal content does not reflect the reality in the countries using seals), hand-made written changes in a contract without the initials of all contracting parties, improper punctuation, no consecutive page number (the best numbering is, e.g. 1/6 the first number means the number of the current page and the second one means all pages in total). Linguistic and semantic mistakes are the following: no definition of basic terms which may be differently understood by the parties, using imprecise words which make it possible to interpret some fragments differently by the contracting parties, using terms in a foreign language differently understood by the contracting parties, preparing a counterpart in a foreign language as an ordinary translation work performed by an inexperienced translator. Substantive mistakes include: inaccurate definition of the contractual subject type, sort, batch, size, quality and condition of a good when delivered, etc. imprecise quantity of goods not accounting for potential natural losses during transportation, imprecise specification of the product packaging and labelling, price which is too low, e.g. as a result of improperly evaluated transportation costs, disregarding insurance costs or customs (in the countries outside the European Union), no indications of price reviews and the rules of reviewing prices in long-term contracts, disregarding the insurance of goods, no proper assessment of other risks taken by an exporter, specification of an impossible delivery date, no precise specification of handing goods to a buyer it is the moment when a buyer takes further risk related to collecting goods, improperly specified payment conditions a payment method which is risky, without sufficient guarantee, no precise decisions about the transfer of ownership rights by a buyer, improperly specified conditions of controlling and collecting goods, no specifications related to the information confidentiality, no specifications related to the re-export prohibition, no specifications related to the prohibition or restriction for a partner conducting competitive activity against an exporter, no proper liquidated damages for not performing contractual obligations concerning the delivery date, payment conditions, quantity or quality of the goods delivered, prohibition of reexporting or conducting competitive activity, no specifications related to force majeure, relieving a party from contractual obligations not performed because of force majeure, lack of specifications or improper specifications related to the complaint procedures, the clause covering dispute settlement in the courts charging high fees or by means of a costly (or implausible) arbitrage, improper language of a contract. The above list of mistakes made in export contracts is certainly not complete. In order to draft a proper contract, it is necessary to be knowledgeable about partners and their credibility. When negotiating a contract, one should bear in mind the risks accompanying this operation and mutual

137 Negotiating and making contracts 135 cooperation. It is also required to reasonably evaluate your own capabilities in order not to impose obligations which would be impossible to perform 82. A common distinction of contractual clauses includes: formal organizational, basic and supplementary. Undoubtedly, the last group contains the greatest number of mistakes. The name of this group is commonly perceived as not objective since the word supplementary is regarded as less important. However, a contract is essentially a compromise made as part of the interplay of the parties conflicting interests. Supplementary clauses regulate many additional issues indirectly related to the essence of a contract covered by the formal and organizational as well as basic clauses. Supplementary clauses are not obligatory in a contract. When the partners decide not to specify them in detail, then potential disputes between the parties are settled by dispositive norms of the law governing a contract. If detailed contractual regulations are included, it probably makes them significant for and binding on the parties. There arises the question about the parties intentions when including them in a contract. We should remember that they supersede dispositive norms regulating similar issues. Among many supplementary clauses, conditional clauses contain the mistakes resulting from misunderstanding their essence. They indicate the occurrences and activities which make a contract effective. They include, e.g.: obtaining import/export license, opening a letter of credit by an importer, transferring pre-payment/advance, delivering components for production, sending appropriate technical documentation or certificates (related to health, conditions of goods, technical norms, stock, etc.), submitting a bank guarantee or other security (e.g. payments, specification of the contractual subject). Conditional clauses describe the occurrences or activities: which do not result from the will of one of the parties (e.g. obtaining an export license depends on an administrative decision), which depend on appropriate actions of a given party (e.g. opening a letter of credit, sending documentation). In the second case, the party which should perform appropriate activities to make a contract effective/executed and failed to do so, must bear in mind that it may be requested to compensate for the loss or may be sued for compensation. In the international law, there are not unambiguous regulations on complying with conditional clauses. Contracts include various complaint clauses resulting from potential incompatibilities of a good and specifications of the parties. These clauses should determine the following issues: elements of a good not subject to a complaint procedure, dates and ways of making a complaint, complaint procedure (handling a faulty good) and its date, required documents confirming the validity of a complaint and documents confirming that the complaint is investigated. As a result of quality defects, a good may be subject to: price discount, changing, repairing, adding specific elements, replacing these elements, etc., exchanging for another good, return. When the method of handling complains and their scope is not specified, the issues related to breaching a contract in this regard are regulated by the legal norms governing this contract. If these 82 See: H. Treder, Podstawy handlu zagranicznego, Wydawnictwo Uniwersytetu Gdańskiego, Gdańsk 2005, p

138 136 Bohdan Jeliński norms are the Vienna Convention s regulations, it must be emphasized that the Convention specifies the scope of potential complaints broader that many typical complaint clauses. A complaint may be based not only on the differences in the quantity or quality of goods, but also on, for example, delivery delays or problems with using a good according to its precise purpose. The guarantee clause is similarly conflicting, yet it safeguards the parties interests. It is a contractual obligation of a seller to eliminate the natural defects of a good which is the subject of a contract in a specific time. Frequently, guarantee clauses are associated with complaint clauses. As in the case of the complaint clause, while specifying the guarantee clause, it is advisable to decide on the mode of reporting defects and the course of their repair or the exchange of a good. It is also worth remembering that when there are no guarantee clauses, a buyer, when spotting the defects of a good, may use its warranty, which is regulated by the applicable law of a given contract. When not performing contractual obligations, the parties may claim compensation. It is in the parties interests (especially in an exporter s interest) to estimate the compensation for potential losses and include it as the liquidated damages clause. This clause specifies the penalty for not performing contractual obligations. The penalty results from: delivery delay or partial delivery delay, changes in the quantity and/or quality of a good, delay in payments, transferring guarantees, bills, other securities, delay in submitting documentation, delay in performing specific preliminary activities. Although, in theory, the parties can freely specify the essence and value of liquidated damages, they should not cross a reasonable border measured by the size of a loss incurred. A contract should specify the circumstances making the parties partially or fully relieved from the obligations not performed. They are differently defined by particular legal systems. Thus, it must be remembered to account for the force majeure clause specifying such occurrences. The abovementioned occurrences include: natural catastrophes, such as fires, floods, earthquakes, epidemics, military violence, wars, riots, rebellions, revolutions, strikes, lockouts, blockades, acts of national or international authorities: embargoes, bans and sudden import/export restrictions. In order for a party to be able to refer to force majeure as a result of not performing contractual obligations, three premises of relieving this party from contractual obligations must be present: an occurrence taking place after signing a contract, a direct cause and effect relation between an occurrence and not performing a contractual obligation, force majeure objectively making it impossible to perform a contractual obligation. A party affected by force majeure must prove that all its decisions were made reasonably and that all actions were taken to perform contractual obligations. The party should give credible evidence to confirm a given scenario. The unforeseeable circumstance clause, also referred to as the renegotiation clause, is less commonly included in contracts and aimed at redefining a contractual obligation rather than relieving the parties from it by means of specifying particular occurrences initiating contractual provisions. It may be assumed that this is the clause indicating those occurrences which result in renegotiating contractual provisions. Frequently, contracts include its detailed versions, such as the price review clause. Contracts may also cover less important clauses concerning the following issues: prohibition of re-exporting goods; prohibition of re-exporting goods or the conditions under which a seller accounts for re-export, conditions of collecting and accepting goods; types of certificates, tests, quantity and quality confirmations, method of researching a good and place of controlling goods as well as authorized institutions,

139 Negotiating and making contracts 137 protecting a potent, brand or trademark; seller s right to use the patent, brand, trademark, etc. and the permission for a buyer to use them according to the seller s rules. When a contract does not cover the above-mentioned issues, the parties may unintentionally seek compensation. Other clauses from the above-mentioned supplementary clauses are more commonly used and it is generally obvious that they are included in a contract. A required situation is when a contract is performed without conflicts. It means that a buyer receives a good on time, the good complies with specific contractual conditions, its delivery is appropriate and the payment of an agreed price is made under contractual provisions. To sum up, it must be remembered that the Vienna Convention regulates the actions of a party expressing in advance justified worries about another party not performing contractual obligations. Under Article 71 of the Vienna Convention, such suspicion is justified if: a party, directly after making a contract, shows a serious deficiency in its ability to perform contractual obligations or in its creditworthiness, it becomes apparent that a party will not perform its contractual obligations. In this situation, a worried party may: suspend the performance of its obligations, yet the other party should be notified of it, withdraw from performing a contract, immediately notifying of such intention if the suspicion about not performing contractual obligations by the other party becomes apparent. The parties rather do not intend to withdraw from a contract. However, the possibility of such situation may not be excluded. The above-mentioned contractual mistakes in supplementary clauses may be regarded as the consequences of insufficient general knowledge and professional experience. However, a contract may include more common mistakes which probably result from hasty actions or even from the negotiators negligence. These mistakes may lead to serious implications. Hence, it is generally required to avoid such blunders in the content of a contract, which must be precisely drawn Methods of avoiding potential conflicts in the contracting process There exists a general way of avoiding potential conflicts during negotiations. It is an immediate and reasonable consideration of the entire negotiation process. Hence, it is necessary to divide negotiations into seven stages: 1. Preparing for negotiations 2. Establishing contact 3. Gathering information and conceiving a project 4. Making offers/proposals and persuading a partner into accepting them 5. Handling difficult situations 6. Making a contract 7. Maintaining long-term contact 83 Preparing for negotiations includes the following activities: specifying the problems or areas of negotiations gathering information, analysing your own needs and the needs of the other party, identifying the aims/interests of the parties involved in the negotiation process, specifying the possibilities of the best methods for negotiating an agreement. This stage should last relatively long. A better prepared and informed party may take a better negotiating position. When preparing for negotiations in international business, it is necessary to consider cultural differences which determine our behaviour and the behaviour of the other party. It is worth 83 See: R.A. Rządca, P. Wujec, Negocjacje, PWE, Warszawa 1998.

140 138 Bohdan Jeliński knowing the other party s attitude towards the way of negotiating, time, expressiveness and rituals. It may be helpful to prepare a set of questions and answer them: 1. Why do we initiate negotiations? 2. What is the subject of negotiations? 3. Who do we negotiate with? 4. Which style may be adopted by our partners? 5. What are our aims? 6. Are our aims equally important? 7. What would be the best time for initiating negotiations? 8. Which style should we adopt? 9. What will be our initial offers? 10. What concessions can we make? 11. Are intermediaries accounted for in negotiations; do we negotiate ourselves or in a team? 12. Which people should be included in this team? 13. Where do we negotiate at our place, at our partners place or on a neutral ground? 14. How long are we going to negotiate? 15. How to assess the negotiation situation, its opportunities and threats? Establishing contact as the second stage of negotiations is very important for their success. Nonverbal communication plays a significant role gestures, movements, behaviour, mimics, appearance (clothes, hairstyle, etc.), attitude, first impression, politeness or smiling. The third stage, referred to as gathering information about the participants involved in negotiations, accounts for presenting team members, communication process (sender message and medium receiver), specifying the competencies of competitors and their leader, asking open and closed questions, active listening and paraphrasing in order to communicate more effective. The fourth stage covers making an offer (proposal), with the initial position playing a significant role. It is worth using specific negotiation strategies (avoidance, concession, rivalry, compromise, cooperation) depending on a strategy adopted by competitive parties. Proposals and arguments supported by an excessively expressive behaviour may cause a diverse effect. Making offers constitutes the most important part of negotiations. When the offers are presented convincingly, it means that the course of negotiations is controlled. Usually, making offers requires mutual concessions ( we may reduce a given price by x% if you increase the amount of goods bought by y ). It is necessary to remember that arguments play an auxiliary role. Interestingly enough, the subject of negotiations does not only cover the price and quantity of goods, but also the following elements: payment method, currency specified in a contract, delivery dates, transport responsibility, mode of transport, insurance responsibility, distribution, packaging, penalties for delays, credit guarantees, cooperating banks, etc. While negotiating, the parties should be prepared for concessions underlining the negotiation process. The rule of reciprocity should be applicable one concession for another concession. Usually, the negotiation margin is supposed to depend on the nature of a given culture represented by the partners and the specificity of a good. It is intentional to make small concessions even if the negotiation margin is assumed to be narrow. It is helpful to determine the middle point within a specific range. Unilateral concessions may occur only in exceptional and ultimate situations.

141 Negotiating and making contracts 139 Handling difficult situations as the fifth stage of negotiations requires considerable experience and negotiation skills. The following situations may occur: difficult partner, objections, manipulation tactics, psychological war, trench warfare, Machiavellianism, conflict circumstances, course and resolution. The sixth stage is referred to as concluding negotiations. This stage accounts for summarizing the issues subject to negotiations and mutual obligations as well as upholding the decisions made and specifying further steps. The seventh stage may only take place when negotiations are successful for both parties ( win win rule). Satisfaction of both parties results from achieving initial aims underlying the creation and maintenance of long-term relations, which are the essence of this stage. In international business negotiations, avoiding conflicts in contracting requires an appropriate selection of a negotiation team. Particular attention should be paid while negotiating with the representatives of ceremonial cultures. If negotiation strategies in international business are expected to end successfully, they must be adjusted to cultural differences of the partners. Hence, a selection of a negotiation team is supposed to be made carefully. The number of negotiators should be balanced and agreed on within pre-negotiation talks. It is worth adding that a team which is too large hinders control and coordination. When selecting a team, the following aspects should be considered: negotiation skills and competencies of the members, their personalities, substantive knowledge of the issues negotiated (legal, technical and technological, etc.) and teamworking skills (adaptation, internal balance, trust). The skills are to be adjusted to performing various team roles. Usually, it is suggested that a team should comprise the people able to perform the following roles: leader, recorder, listener, critic and controller. While negotiating with the representatives of some cultures, it is advisable to engage a lawyer in a team. However, other cultures may perceive it as an evidence of dishonest intentions and mistrust towards the partners. It becomes more and more common to have a psychologist in a team, who will be able to properly interpret the behaviour of the other party. A leader should make decisions and be competent in terms of the following aspects: substantive (knowledge of the issues negotiated), intellectual (precise thinking about stressful situations, choosing the best solutions) and emotional aspect (calmness, tactfulness, trust, agreement). The role of a recorder is to write all relevant negotiation arrangements and data presented by both parties as well as to cooperate with a leader in terms of the most important data, issues discussed, etc. A listener is an individual who does not take an active part in negotiations. The role of listeners is to observe the negotiators behaviour, especially the competing team, record the opinions stated and the way in which they are expressed. A critic is supposed to constructively and critically observe the negotiation progress and particular team members in terms of performing their roles, analyse consecutive negotiation stages as well as help in improving and streamlining the tasks delegated. A controller, in turn, is an individual having the authority and formal position, who is able to evaluate the activity and progress of a negotiation team and, if necessary, create the atmosphere of tensions while teamworking and negotiating. Hence, as an appropriate method in this case, it mixes substantive and personal elements of the contracting process.

142 140 Bohdan Jeliński 8.6. Forms and procedures of dispute settlement If a contracting party fails to correct the mistakes made during negotiations and when drafting the content of a contract and makes other mistakes in performing contractual obligations, the parties have the chance to eliminate or reduce the negative effects of these mistakes by various unconventional activities helping to avoid a formal conflict. If the situation is reverse, the parties enter into a dispute. With reference to international contract, there exist three forms and compatible procedures of dispute settlement: court proceedings, mediation and arbitrage. Disputable issues may be traditionally subject to court proceedings. However, it is not convenient for both parties since every country has its own legal regulations. Thus, a contract should be subject to the law of one party, which would dissatisfy the other one. Moreover, court proceedings take time because of the process of gathering documentation, its use and possibility of multiple appeals to other court instances. It is also costly and requires professional lawyers. In international trade, disputes may be resolved in other ways by alternative dispute resolutions, including mediation and arbitrage. Mediation Mediation is histrionically the first and most important variation of alternative, yet formal, methods of settling disputes between the parties to a contract. The essence of mediation may be best understood by regarding it as supported negotiations. Negotiating the conditions of resolving conflicting issues are the most commonly used proceedings in shaping legal relations and settling disputes. Mediation means an arranged activity of a voluntary nature, regardless of its name or specification, in which at least two parties attempt to reach and agreement in order to resolve the conflicting issues and to reach this agreement using help of a mediator. Mediation may be initiated by the parties or the court and it may result from the law of a member country. This term covers mediation conducted by a judge who is not responsible for any court proceedings related to a dispute in question. However, it does not cover the attempts made by the court or judge settling a dispute in the court proceedings. The distinguishing features of mediation include: consensual (voluntary) nature of the procedure and its result (agreement); autonomy of the parties; impartiality of a mediator who is an agent of both parties selected and dismissed by them and subject to their instructions. In theory and practice, there exist two types of mediation: conventional mediation, that is the procedure initiated by the parties under a prior mediation agreement or an incidental agreement meaning a compromise related to a dispute (conventional mediation); mediation in the course of court proceedings, that is the procedure initiated by the court. The advantages of mediation may be presented by means of the below analysis of its effectiveness. The analysis includes an overview of the criteria used to compare mediation with the proceedings before the national court and with arbitrage. Apart from its obvious advantages, mediation is also criticized for the below-mentioned disadvantages.

143 Negotiating and making contracts 141 Table 26. An analysis of advantages and disadvantages of the basic methods of settling disputes Criteria Mediation Court Arbitrage costs very low high high time very short (a few days or very long (measured in long (measured in years) weeks) years) Who decides? parties judge arbiter Who controls? parties lawyers lawyers Rules of arbitrary no very formal partially formal proceedings Confidentiality complete no complete Aim future future future Communication between intensive no poor the parties Problems with the no existing existing from time to time jurisdiction Level of parties high very low low satisfaction Result success of both parties success/failure success/failure Factors of tensions relieving stress maintaining stress maintaining stress Source: Based on self-study. It is possible that the parties are not balanced (economic and intellectual asymmetry), which results in abusing the advantage by a more powerful party. Undoubtedly, it is a serious potential problem whose solution may be found in systemic guarantees of the rules of law resulting from the established standards of mediation procedure, in the mechanisms of selecting a mediator, ethical code and professional attitude of a mediator and in an active role of the court confirming the mediation agreement in terms of legality and honest trade (rules of social coexistence). It is necessary to consider the risk of the court overreacting in terms of a substantive review of the mediation agreement, which is not allowed. The accusation is made that mediation increases the costs of settling a given dispute since the parties, after unsuccessful negotiations, must rely on the court proceedings or arbitrage. Generally speaking, this accusation is wrong. With reference to the out-of-court mediation, a quick and final dispute settlement accepted by the parties in the course of a few mediation sessions in terms of their substantive aspects and costs is more common than traditional court proceedings or arbitrage, especially from the economic perspective. However, such situation is determined by voluntary mediation and refers to the disputes whose parties and type account for conducting successful mediation ending in agreement. Mediation success greatly depends on the legal advisers involved, their understanding of the mediation process and its governing rules. Appreciating the values of mediation, the European Union enacted the directive 2008/52/EC of 21 May 2008 on certain aspects of mediation in civil and commercial matters, which came into force as of 13 June It is difficult to specify its significance for the development of mediation in Europe. However, it is certain that the EU lawmaker attaches great importance to mediation, especially with reference to transnational commercial disputes. The standards of mediating and the behaviour of a mediator were also specified. These standards are the guidelines for mediators, not the source of law and they cannot underlie legal claims. The standards fulfil the following roles: helping in conducting mediation practice; ensuring better safety for the mediation parties and mediators themselves; developing social trust towards mediation as a means of dispute settlement; helping the candidates for mediators while making a decision to assume this role.

144 142 Bohdan Jeliński Typical mediation standards established and used in Poland include 10 guidelines 84. Conducting mediation as an effective method of dispute settlement depends, to a great extent, on a professional attitude of mediators and their ethical code as well as on the parties conviction as to the effectiveness of this form of resolving conflicts. For the purposes of this code, mediation is defined as every process in which two or more parties agree to meet with the third party called a mediator. The aim of such meeting is helping to settle a dispute between the parties without resorting to a court decision. Such way of seeking agreement, depending on the specificity of a place in which it occurred, may be called by different proper names. Accepting these standards cannot violate the applicable law or professional rules followed when practising a particular profession. It must be considered that organizations delivering mediation services can establish their own more developed standards adjusted to the context or type of mediation offered. Arbitrage In foreign trade, arbitrage is a very popular form of dispute settlement while performing a contract since there is only one instance and specific customs are considered 85. A prior specification of an alternative dispute resolution in the form of the arbitrage clause makes it impossible to file claims by directing a case before the national court of a given country. It is rather unlikely that the parties agree on such solution. Before including the arbitrage clause in a contract, it is necessary to make sure whether the country hosting the other party signed the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards and, if not, whether it is the party to a protocol on the arbitrage clauses (the so-called Geneva Convention of 1923). Moreover, while formulating the arbitrage clause, parties should bear in mind the content of the European Convention of the International Commercial Arbitration, which is supposed to help in cooperation between various European countries in terms of developing European trade by removing, if possible, some obstacles in the performance of the international commercial arbitration between natural and legal persons. The New York Convention ensures mutual enforceability of the arbitrage decisions made by the parties. As a result, the decisions of alternative courts are easier to be enforced than the decisions of national courts referring to the same cases. The New York Convention was signed by 120 countries, including Poland. The parties must be willing to use arbitrage. In other words, they cannot be formally persuaded into such dispute settlement method. A consent for using arbitrage may be reflected in the arbitrage clause, that is a specific statement included in a contract when signed or in the form of the so-called compromise. A compromise means a consent for using arbitrage after a dispute arises, that is when the parties have entered into a conflict. Both methods bring the same effects. However, it must be remembered that the party feeling that it is not right may agree on arbitrage even just after a dispute arises. The party would rather bring an action before the national court, especially when the court located in the defendant s place of residence will be applicable. Therefore, it is safer to include an appropriate clause when a contract is signed (exemplary clauses are presented in the further part of this chapter). An arbitrage tribunal may take three forms: permanent, administrative and the so-called ad hoc arbitrage. Permanent arbitrage is available at different economic and commercial chambers as well as associations. They have their own offices, list of arbiters and arbitration rules. Thus, in the arbitrage clause, the parties do not have to specify significant elements on their own (e.g. who and how is going to choose the arbiters and the so-called superarbiter or when arbitrage should take place). If we decide to use exclusively the office services or to rent the room, then we could choose administrative arbitrage. In this case, the arbitration court performs various paid services, yet does not participate in the main proceedings. Finally, we can use ad hoc arbitrage, theoretically ensur- 84 These standards were established by the Polish Association of Economic Mediation and enacted at the meeting of the Association Board on 26 June See: 85 See: Transakcje handlu zagranicznego, ed. by B. Stępień, PWE, Warszawa 2004, p

145 Negotiating and making contracts 143 ing the greatest freedom, yet requiring greatest knowledge and good preparation. It is an arbitrage court established exclusively in order to settle a specific dispute between the parties. In the case of this kind of a tribunal, it is necessary to remember about specifying the conditions of its activities in a contract. It is not enough to apply for arbitrage. In practice, it is necessary to supplement the main contract with an appendix specifying all issues. It may turn out that this appendix will be longer that the contract itself. Therefore, in most cases, permanent arbitrage is worth recommending. The decisions of the arbitrage court, at least, in principle, are binding on both parties and must be complied with. However, there are a few situations in which the decisions are invalid. The party which received a decision of the arbitrage court is entitled to appeal to the national (common) court in order to reverse its judgement. This situation is exceptional. Such activity may be performed by the court only when specific premises are accounted for. In Poland, they are included in Article 1206 of the civil code. A party is entitled to appeal when: there was no mention of the arbitration clause, the clause was invalid, ineffective or became invalid under the applicable law, a party was not properly notified of appointing an arbiter and of the arbitration court proceedings or a party could not defend its rights in any other way, it refers to settling a dispute not covered by the arbitration clause or extending its scope, the requirements were not met as to the members of the arbitration clause or the basic arbitration procedures specified under the act or by the parties, a decision was associated with a crime or was based on a falsified or changed document, the court issued a binding judgement related to a dispute between the same parties. Reversing a judgement is also possible when the court decides that under the law, a dispute could not be settled by the arbitration court or its judgement is contradictory with the basic rules of public order (the so-called public order clause). Some of the premises do not raise any doubts. The lack of the arbitration clause, that is a voluntary agreement to be subject to a given decision of the arbitration court, cannot cause negative effects for a given party. If a party does not wish a contract to be subject to arbitrage, it cannot be forced to any activities in this regard. In other words, if a contract does not include the arbitration clause, the national court will be responsible for settling a dispute (similarly, when there was no arbitration clause and when a dispute arises only one party wishes to use arbitrage). Another issue is expanding the scope of the arbitration clause or settling a dispute which should not be subject to arbitrage at all. In fact, it may be a premise to invalidate a court decision. However, also in this case, there are some restrictions. If settling disputes covered by the arbitration clause may not be separated from those disputes not covered by such clause or extending its scope, then it is possible to revoke a judgement only with reference to the disputes not covered by the arbitration clause or extending its scope. Moreover, extending the scope of the arbitration clause cannot be the basis of reversing a judgement if a party participating in the proceedings does not express its objections as to accepting claims beyond the scope of this clause. As in the case of national court proceedings, the rule of res judicata (a matter already judged) is also applied in arbitrage. Thus, if a given dispute between the same partners was once settled (by arbitrage or the national court), it may not be the subject of any further proceedings. Then, such further judgement may be the basis for appeal. A party stating that a judgement was based on falsified or changed documents may use its right and make an appeal. As has been mentioned, arbitrage proceedings are less costly than national court proceedings. If the parties made a contract for ad hoc arbitrage, they specify the arbiters remuneration on their own. Permanent arbitration courts have their own fee schedules. The fees are usually lower than those charged by national courts. Considering that arbitration covers one-instance proceedings, a party does not bear the costs of further instances. The arbitration court specifies the fees at its own discretion and according to the applicable rules, considering the circumstances of a given dispute, particularly the result of the proceedings See: B. Pankowska-Lier, D. Pfaff, Arbitraż gospodarczy, Wydawnictwo C.H. Beck, Warszawa 2000.

146 144 Bohdan Jeliński The most common arbitration courts settling disputes related to international trade include: Arbitration Tribunal at the International Chamber of Commerce in Paris, Paris, France, International Chamber of Commerce, 38 cours Albert 1er, tel.: , fax: , website: Vienna International Arbitral Centre, BP 319 Vienna, Austria, Wiener Hauptstraße 63, tel.: , fax: , website: Arbitration Institute of the Stockholm Chamber of Commerce, SE Stockholm, Sweden, P.O. Box 16050, tel.: , fax: , website: Polish Court of Arbitration in Warsaw, Warszawa, ul. Bukowiecka 92, tel.: , fax: , website: London Court of International Arbitrage, London, United Kingdom, Hulton House, 6 th Floor, Fleet Street, tel.: , fax: 44 (171) , website: Court of Arbitration at the Polish Chamber of Commerce in Warsaw, Warszawa, ul. Trębacka 4, tel.: , fax: , website: Alternative methods of dispute resolution, excluding the national jurisdiction, have been wellknown worldwide for centuries. Arbitrage courts were present in the ancient Rome and Justinian made them legally effective as national judgements. Currently, arbitrage is more and more commonly used by entrepreneurs, especially with reference to the disputes resulting from the content of contracts and their performance. Arbitrage has many advantages, noticeable especially in settling international disputes, that is related to the foreign trade transactions.

147 Anna M. Nikodemska-Wołowik 9. Establishing a long-term corporate identity on the foreign market 9.1. The essence of corporate identity of an enterprise operating in the international environment The idea of corporate identity and its practical application Corporate identity provides the framework for the directions of an enterprise and the scope of all its activities (it can be understood as comprehensive identity, company-related identity, group identity). Similarly to a natural person, every organization has its own identity, even not consciously displaying its features to the environment. These elements may be hidden. Thus, identity comprises all visible/invisible and displayed/hidden features of a market entity. It is a way for an enterprise to express itself its management, owners and employees. In most cases, individuals leading an organization define the directions of shaping its identity. Market entities should consciously create their identity according to a well thought-through concept. Thus, corporate identity is a, relatively stable in time, combination of attributes which underlie the performance of an enterprise on the market: those attributes resulting from the organization profile (sometimes, inappropriately referred to as demographic attributes), strategic attributes, also in a legal and financial aspect, axiological attributes, symbolic attributes. Therefore, a modern enterprise strategy, understood in general as a collection of rules governing the intentional (deliberate) and planned performance of an enterprise on the specific markets in a given time, results from its identity. Every entity has its own identity. However, not every entity pursues a specific strategy. Identity is shaped both by the past (in the case of a start-up enterprise it is the market experience of its founders), the present and the future (identity attributes are in line with the strategic plans). It is the importance of time that constitutes a significant problem related to shaping the identity. Against a background of permanent and sudden changes happening in the environment of an organization, a generally stable identity also requires modification during the market existence of a given entity. While stability of the main identity attributes constitutes an asset of an enterprise, a complete indifference towards the environmental changes resulting from the passage of time may become a disadvantage. It happens, e.g. when an enterprise which is indifferent towards the environmental aspects, despite of external pressures, still refuses to actively protect the environment. It is assumed that identity is relatively stable in the long run, but its reception may be distorted as an exclusive result of external changes. It is exemplified by the confectioner of Solidarność, an enterprise established in Poland in Although the Independent and Self-governing Trade Union under the same name started its activity 28 years ago (the names are identical by accident), a new situational context resulted in a strong emphasis on the date of its establishment in the message transfers. Proper identity shaping and its credible, clear and expressive communication to the environment may ensure several benefits for an enterprise, particularly:

148 146 Anna Maria Nikodemska-Wołowik individualistic features ascribed to an enterprise by making it distinct and autonomous in the environment (the so-called differential identity function), internal integration and the feeling of co-responsibility of the staff constituting a specific community (integrative identity function), perception of the image according to the intentions of a sender communicating the attributes, support of the relations with the stakeholders and, hence, strengthening partner relations, guidelines formulated for promotional activities, strengthening of a good reputation of an organization and the brands of goods/services it offers, strengthening of competitive advantage on the market by becoming a valuable intangible asset constituting the intellectual property of an organization and translating into its better evaluation. Currently, one of the biggest challenges of the entities involved in identity shaping is creating the future and, hence, keeping ahead of the market expectations. It is difficult to establish a strong position and gain competitive advantage in the other way, except when an enterprise consciously chooses defensive and adaptation strategies against its competition. The concept of identity is successfully used by the organizations outside the enterprise sector. It is exemplified by a selection of projects prepared by the groups of world consulting leaders who deal with establishing corporate identity. Among the customers of a well-known agency Wolff Olins, there are, e.g. the Principality of Liechtenstein, International Olympic Committee, and among the ordering parties of other well-known agency, Siegelgale, there is, e.g. the US Air Force. It is worth mentioning that the undertakings devoted to establishing the identity are costly. Among the most expensive projects from the end of the 21 st century is the project for the British Telecom in 1989, for which USD 734 m were allocated (including the media production). Another example comes from the Polish market. It is estimated that the changes introduced in Poland in 2006 in the visual subsystem of the Millenium Bank, its trademark and other visual elements, including the branches interior design (then over 330 branches), cost more than PLN 17 m Corporate identity of an enterprise versus its image and overall identification Corporate identity is inextricably linked with the image of an enterprise and its overall identification. For a clear and concise interpretation of the above-mentioned notions, an individual person was referred to, which is presented in Figure 22. Corporate image always refers to the impressions and perceptions of the recipients. In the case of an enterprise, image is a certain opinion which is created in the recipients consciousness and which takes the verbal, visual, aromatic, spatial and/or kinaesthetic form. Identity is inextricably linked with three elements: the external world influencing an enterprise whose identity is being discussed, a recipient equipped with the perception skills and a set of stimuli between them 87. Any attempts to assess the image are exposed to the risk, especially a frequent use of evaluating notions, such as positive, negative and improper. The recipients opinion (e.g. as a result of marketing research) finally enables them to assess the image. This opinion may differ depending on the data source, that is on the person responsible for the evaluation. However, it is allowed to use the notion of a desirable image, which emphasizes the intentions of an enterprise in order to be intentionally perceived by the recipients. The image is not created the image creates itself and the stakeholders related to an enterprise and its environment may influence this creation. Next to intended undertakings, the image also results from the informal activities (e.g. the word of mouth). 87 B. Stern, G.M. Zinkhan, A. Jaju, Marketing images. Construct definition, measurement issues, and theory development, Marketing Theory. Articles, vol.1(2) SAGE, London, Thousand Oaks CA and New Delhi 2001, p. 203.

149 Establishing a long-term corporate identity on the foreign market 147 identity overall identification image analogy Who am I? How do I perceive myself? What is characteristic about me? What do I do so that the environment can assess me? How do I communicate my features? How do other people perceive me? Which of my features are noticeable? Fig. 22. Differences in the notion of identity, overall identification and human image Source: Based on self-study. In Polish, there is not a notion which refers to the process and tools used in transferring the identity to the image. To be precise, there is not a notion comprising activities enabling to materialize the enterprise identity and presenting the attributes to the stakeholders. Therefore, there emerged the notion of overall identification (referred to by an acronym as OI) 88. The OI supports the creation of a desirable corporate image in the consciousness of a recipient and facilitates its autopresentation. Overall identification should be understood as a set of conscious and deliberate market activities which aim at expressing the identity and in which specific tools and procedures are used. When set with the environment, the OI is used to properly transpose the identity into the image. The OI role is to communicate corporate identity according to the assumed strategy of an enterprise. Transposing corporate identity into the image of an enterprise by the overall identification is presented in Figure 23. Constant monitoring of the evaluations of the image perceived by the recipients and frequent identity modifications in order to satisfy these recipients result in an enterprise losing its corporate identity. Then, the so-called tailor-made identity is created, which may lead to the loss of an authentic identity (e.g. when almost all features shaped outside an enterprise in line with the market signals separate the real identity from the image). The activities intended to modify the identity according to the external requirements usually consist in superficial modifications of the visualized attributes and then, the image starts living its own life and does not correspond to the reality. To be precise, the image reflects a false identity. 88 In the publications devoted to this topic, false translations of corporate identity from English are encountered. Neither in American, nor in British English, the OI does not denote overall identification, but refers to a concise and comprehensive identity. An equivalent of the Polish word identyfikacja is an English word identification which denotes the process.

150 148 Anna Maria Nikodemska-Wołowik IDENTITY set of attributes COMMUNICATION by the overall identification feedback IMAGE Fig. 23. Transposing corporate identity into the image Source: Based on self-study Corporate identity of an enterprise versus its brand A popular term branding initially denoted the creation of a good or service and was used in a broader sense with reference to the brand management. In this sense, the brand becomes visualized, which expresses its inseparable relation with a trademark. It is associated with formulating the sales offer and the attributes ascribed to the brand acquire the meaning of usefulness and symbolism. However, branding has gradually been used with reference to more and more aspects of the enterprise performance connected with formulating its strategy, human resource management or communication in a broad sense. It even happened that branding and identity shaping were treated synonymously. Therefore, since there are frequently incoherent and even contradictory interpretations, it is suggested to use the term branding in its narrow and classic sense mentioned above. Another term which requires an explanation is corporate brand (fostered mainly by L. de Chernatony). The authors usually mean corporate identity and/or image since the term brand does not account for this differentiation. Within the scope of the issues discussed above, there is also the role of brand in expressing identity understood as a set of individual and interrelated features typical of a given good/service and consciously displayed by an enterprise. In the case of some enterprises, especially those trading in fast moving consumer goods, a product primarily embodying the identity attributes is perceived by the final consumer. The producer image is created on the basis of sales experiences, consumer experiences and the product evaluation made by a buyer. These may be both the real attributes of a given good and the features created for a serviced market segment. Including in the brand of a product the message expressing certain attitudes and values cultivated by an organization contributes to strengthening or weakening its evaluation by the recipients. As an example one may consider the picture of a dolphin, well-recognized on an international scale. The picture appears on the packages of food products (fish and seafood products) and indicates that fishing does not pose a danger for these marine mammals. Thus, in this case, a significant identity element, that is an orientation towards eco-friendliness, is transferred, even though the producer name does not have to be explicitly displayed in the marketing activities. Both in highly developed and newly industrialized countries and emerging economies, there appears a tendency to use the term brand for expressing every positive enterprise activity which strengthens its image and the image of the products offered. However, a less radical solution should be suggested. Brand is a key asset of an enterprise. However, it serves a subordinate function with reference to identity. It constitutes one of the pillars of identity as a result of conscious and interre-

151 Establishing a long-term corporate identity on the foreign market 149 lated undertakings connected with the promotion and overall identification. In conclusion, brand is always regarded in relation to the environment, as opposed to identity. Brand is an image transposed from identity according to the sender s intention, imprinted over years in the consciousness of its recipients, generalized and, hence, made objective. Brand takes a material, measurable and visualized form Attributes of corporate identity of an enterprise and their communication Classification and criteria of choosing the key attributes displayed on the foreign market Identity attributes are treated as relatively stable in time features of an enterprise (owners and employees are aware of them) and communicated to the market environment by means of properly constructed tools. In Table 27, there are four key types of attributes presented. Table 27. Classification of the identity attributes of an enterprise Resulting from the organizational profile country of origin, ownership structure, ownership form, size, industry, date of establishment, geographical range of activities, dominant nationality of the enterprise representatives, educational level of the staff Strategic (also in a legal and financial aspect) mission, objectives, range of activities in terms of segmentation, internationalization form and international orientation, value of a protected trademark Axiological attitudes towards social challenges, business ethics, employment code and tradition Symbolic archetypes, assumed project style, colours used, rituals Source: Based on self-study. Within each of the above-mentioned categories, there are many attributes. However, only those attributes regarded as the most important in a given enterprise are communicated to the market. It may happen that identity loses its consistency when too many attributes are displayed and, as a result, it leads to the perception of a blurred image. Thus, this situation hinders the positioning of an enterprise against the competitors who have a definitely specified identity reflected in their clear image. The identity attributes which fall into these four categories are interrelated and interdependent. The same distinguishing feature may reflect a few dimensions, e.g. displaying the date of establishing an enterprise as an attribute resulting from the organization profile and an attribute of a symbolic nature. Symbolic and axiological dimensions are determined by the country of origin of a given organization, that is the attribute related to the enterprise profile, whereas the strategic dimension resulting again from the enterprise profile is determined by the structure after the changes in ownership. In turn, strong leadership and charisma of an individual leading an organization mixes strategic, axiological and symbolic features.

152 150 Anna Maria Nikodemska-Wołowik An example of displaying a few attributes of a Swedish enterprise by referring to the country of origin Swedes are proud of their nationality, Scandinavian lifestyle and design which is regarded as a symbol of simplicity. These values are also expressed in the identity attributes of their enterprises, which is exemplified by IKEA. Four types of attributes with an axiological aspect (national tradition) as its main component can be observed here. A proof is found on the official website of the enterprise. OUR SWEDISH ROOTS It is not an accident that the logo of IKEA has two colours: blue and yellow. These are the colours of the national flag of Sweden. In Sweden, nature and home play a significant role in human life. To be honest, a Swedish style of decorating interiors can be simply expressed by a description of nature which is full of light, fresh air as well as moderate and unpretentious elements at the same time. Source: [access: ]. Whether identity is created for an enterprise operating in the domestic or foreign market, where economic exchanges take place on an international scale, it is subject to the mechanisms of passive and active internationalization. Active internationalization means that an enterprise operates on the foreign market at least by exporting. Passive internationalization, in turn, means that an enterprise is influenced by the foreign entities operating on its domestic market 89. Therefore, when choosing the attributes, it is necessary to account for the turmoil of the international environment and the resulting difficulty in predicting the market situations. The beginning of the third millennium shook the economies of many highly industrialized countries, revealing the weaknesses of economic forecasts and the implications of false analyses. Moreover, in that period, the economic scandals such as Tyco, Andersen, Enron or Ahold were revealed. Almost a decade later, the crisis (and the recession in such countries as the USA), which was accompanied by the state of uncertainty and danger felt until today, forced entrepreneurs operating on an international scale to be careful in choosing trade partners. The financial market turmoil initiated in 2008 and its big implications proved that even the entities leading their industries and holding a good international reputation use unacceptable practices violating the law and triggering their market failure. The feelings ignited by the antiglobalists and opponents of big corporations exposed global strategies to criticism. Former views concerning the role of an enterprise per se in the contemporary economy were reviewed. As a consequence, scepticism towards foreign capital increased, especially in poorer countries. There appeared fears against acting according to the following scenario: buying an enterprise as a bargain, transferring profits and selling or transferring the profits to the country with lower labour costs, and fears against the M&A operations intensifying the feeling of uncertainty. Therefore, trust in the relations with a foreign partner is a value more frequently searched for Trust and CSR as the attributes appreciated on the Scandinavian markets In the contemporary business, trust is the most important identity attribute. Trust, which comprises the feeling of reliance on somebody or something, belongs to axiological attributes. However, according to the assumption that the same distinguishing feature can account for a few dimensions, trust also belongs to strategic attributes. Trust is one of the basic distinguishing features of corporate identity, accounting for the cooperation strategy in which establishing partnership and cooperation 89 The author follows the distinction suggested by M. Strzyżewska, Marketing na rynkach zagranicznych, [in:] Biznes międzynarodowy. Od internacjonalizacji do globalizacji, ed. by M.K. Nowakowski, Oficyna Wydawnicza Szkoły Głównej Handlowej, Warszawa 2005, p. 419.

153 Establishing a long-term corporate identity on the foreign market 151 based on trust leading to, e.g. lowering transactional costs, becomes more and more important. Figure 24 presents trust among the attributes of corporate identity. Identity attributes of an organization resulting from the organizational profile strategic axiological symbolic trust Fig. 24. The role of trust among the identity attributes Source: Based on self-study. The issue of trust grows in importance in the relations with the Scandinavian partners. Trust is necessary for the successful cooperation. In this case, the relations based on trust should be ascribed a more formal character. What is meant here is making the activities credible as a result of holding relevant certificates, accreditations and documents issued by the objective external institutions. Certainly, as in the case of most business contacts, a positive opinion of former customers is irreplaceable. It must be added that Swedes are better than, for example, Poles in perceiving public institutions and offices. Thus, recognizing the achievements of an enterprise by them is well perceived. Ranking of Swedish trust towards institutions and enterprises In March 2012, MedieAkademin/TNS Sifo AB published another Trust barometer based on the online questionnaire conducted in February Swedes primarily trust*: 1. Swedish radio (78%), 2. public TV (74%), 3. Ikea and higher education institutions (64%), 4. Volvo (60%), 5. healthcare (56%), 6. tax office, the National Bank and Google (54%), 7. government (53%), 8. local newspapers (51%), * institutions and offices trusted by more than half of the Swedish society were mentioned Source: [access: ]. Trust is by no means a positive term evoking positive connotations. However, from the perspective of any market activity, this notion must be made precise: trust, which is certainly not in vacuum, is associated with specific entities, that is organizations and individuals representing these entities (lack of anonymity recommended), these individuals should trust each other (mutual character), the situation, in which such trust is present, must occur (e.g. sales act), the subject of trust should be specified (e.g. meeting deadlines in the case of deliveries). In the market activity, when referring to trust-related values such as reputation, credibility, truth and pure intentions, groundless populism and demagogy is supposed to be safeguarded against. This assumption should be made when displaying another attribute from the perspective of an enterprise pro-social involvement, that is CSR (corporate social responsibility).

154 152 Anna Maria Nikodemska-Wołowik An example of referring to trust as one of the fundamental values A communication from the official website of a Swedish enterprise: The second place in the contest for the Best Employment Place 2012 in Poland. We would like to be the leading and most frequently chosen employer who offers an excellent workplace. Therefore, we are subject to the evaluation of the external institutions and our employees. In the contest organized this year by the Institute, Great Place to Work, which evaluates the level of trust, satisfaction and work atmosphere, IKEA occupied the second place in Poland! Source: [access: ]. If these values are to be the identity attributes, they should be long-term, not short-term activities to which, for many years, even groundlessly, an organization refers to. In turn, informing about simultaneous involvement in many charitable undertakings increases the enterprise credibility, which can spoil the creation of a stable and clear image. Moreover, presenting the achievements to the environment is frequently a kind of a self-evaluation, deprived of objectivity. Hence, there appear practical guidelines for the entities communicating axiological identity attributes: assessment by independent eternal entities, recognized on an international scale and confirming the effectiveness of the pro-social activity (e.g. ISO 26000, the norm communicated by the International Organization for Standardization in 2010; even though it is not a form of certification or an obligatory regulation, but a practical guide to corporate social responsibility, which defines its framework, values and ideas; the norm, for the sake of its prestige and global scope, is becoming the most common interpretation of CSR); voluntary compilation of the so-called social reports, which are subject to the prior expert audit (the countries leading in this aspect include Sweden, e.g. in 2010, more than 100 Swedish enterprises signed the UN initiative, Global Compact, and 83 enterprises compiled the reports according to the guidelines issued by the Global Reporting Initiative). Moreover, in Sweden, public companies are obliged to submit the reports complying with the GRI since 2009; in Poland, PKN Orlen S.A. became in 2003 a pioneer in compiling the reports complying with the GRI; evaluation of the enterprise performance by the stakeholders, particularly customers and their associations; in the case of big organizations following the rules of corporate governance, seeking to strengthen a long-standing presence in the international rankings prepared by well-known economic press publications such as a well-recognized magazine Euromoney or Financial Times; the annual reports of a monthly magazine Fortune, The Most Admired Companies, including the rankings of the enterprises perceived as the best in the world; a clear distinction between those identity elements which are regarded in the contemporary economy as a relatively common standard and the elements exceeding this standard and expressing less popular elements; strengthening the above-mntiond activities by the visual communication. In the case of an organization with credible underpinnings, in order to communicate a key distinguishing feature to the environment, e.g. eco-friendliness, selected media of its information subsystem should include an objective confirmation of this fact. In order to impartially make eco-friendliness credible, the media may include the information about holding the ISO/TR 14062:2002 certificate. This norm refers to the so-called Design for the Environment or Eco Design, which is inextricably linked with the product strategy. It is based on a systematic implementation of the environmental

155 Establishing a long-term corporate identity on the foreign market 153 protection methods from the stage of extracting the minerals necessary for production to the end of the product life cycle, while complying with the criterion of eco-friendliness New challenges for creating the identity attributes The customers, both institutional and individual, more and more clearly demand explicit information about the country of the product origin/production as well as a producer and owner of the brand. The owners anonymity, and, in the case of the M&A operations, an assumption that the acquired entity is a temporary source of maximizing profits along with an exclusive strategy of profit-orientation, may lead to the identity weakening. In turn, the fast moving consumer goods producer, Procter & Gamble, with many daughter companies, took a new challenge in the 90s of the 20 th century entering the Russian market. The company presented, in a non-standard way, not only the brands of the offered products, but also its corporate identity (e.g. a trademark) which somehow reflects the company 91. This situation initiated a new approach towards communicating the identity of a multi-brand producer. It can be added that it is not a single case. In 2009, similar actions were undertaken by Unilever (offering, e.g. Lipton tea, Dove cosmetics, Knorr food products) which placed its trademark in the commercial spots and then, gradually, also on the packages. An example of changes in the consumer behaviour towards the origin of a producer and its offer A statement made by Anita Stec, Communication Manager of Unilever: It is our response to the consumer changes. Foreign research indicates that they are more and more aware and demand information about the following issues: who produces and what is produced, whether a producer complies with the ethical standards and whether a producer is responsible for the environment and employees. Source: V. Makarenko, Unilever wychodzi z ukrycia, Gazeta Wyborcza , p. 30. It is worth noticing the phenomenon of identity transfer while creating subsidiary enterprises by the organizations with a well-established position on the international market, yet in the industries not related to the former business activity (in such cases, a close relation between an industry and the expressed identity attributes disappears). One can refer to the following examples: Volkswagen Direct and Toyota banks owned by the car makers and tourist clothes Cat offered by Caterpillar Inc., the producer of heavy construction equipment. It turns out that the industry traditionally ascribed to a given entity is not as important as the universal features of corporate identity transferred even to incoherent, not long enough penetrated areas of the market activity. Among the pioneers and leaders of transferring the identity is the British holding, Virgin (e.g. airlines, wine distribution, publishing, travel agency and mobile communications). 90 For more information see: Z. Foltynowicz, M. Wilk, A. Lewandowska, Zasady proekologicznego projektowania wyrobów (DfE), [in:] Zarządzanie produktem wyzwania przyszłości, ed. by J. Kalla, B. Sojkina, Wydawnictwo Akademii Ekonomicznej w Poznaniu, Poznań 2006, p G. Hankinson, P. Cowking, The Reality of Global Brands. Cases and Strategies for the Successful Management of International Brands, The McGraw-Hill Companies, London 1996, p

156 154 Anna Maria Nikodemska-Wołowik 9.3. Creating the overall identification system in an enterprise Visual, behavioural and information subsystems and their role in the performance of a business entity The overall identification (OI) system is a system materialized on the media (visual, audio, verbal, non-verbal) and a set of defined identity attributes which are consciously shaped by an organization and communicated to the external entities. The system contributes to the strengthening of corporate identity and implies the creation of its image, influencing the power of its action. The elements of the overall identification system can be precisely distinguished and characterized since it is the real system, with tangible and visible components. Depending on the size of an organization and a range of its market activity, the OI system may consist of a few or even a few thousand of stylistically homogeneous elements. The OI system includes three subsystems which are presented in Table 28. Table 28. The structure of the OI system Behavioural subsystem (behaviour-dependent) standards and customs present in an organization; relations of its representatives with the environment, serving the purpose of expressing the identity attributes in the internal and external contacts; co-creating the organizational culture the most important in B2B relations and professional services Source: Based on self-study. Overall identification system Visual subsystem a set of elements identifying an organization, depending on the image and shaping the organizational style based on the basic graphical, visual and spatial features used on different media the most important in B2C relations Information subsystem a set of tools for the conscious and controlled notification of the internal (e.g. employees) and external entities (e.g. customers) of key identity attributes and its origin; especially used PR and publicity similar relevance in various relations The main idea of the OI system is the synergy, which is a common, mutual and interrelated activity of the elements included in the above-mentioned subsystems. All these components should be precisely described in the manual of the OI system, which is a multi-coloured record, both in the printed and electronic version. An ideal solution is to prepare the manual in English and, potentially, in the language of the main cooperator. The behavioural subsystem serves the purpose of expressing the market identity. It is an intentional and planned behaviour of the enterprise representatives: owners, managers and employees. Therefore, it gains in importance when it comes to interpersonal contacts. It also contributes to the creation of the organizational culture, e.g. by specifying corporate etiquette and referring to the issues seemingly trivial, yet memorized by business partners during the first contact and later influencing even a substantive assessment (e.g. words used when answering the phone, the way of welcoming guests and dress code including physical appearance and clothing). The visual subsystem is based on a comprehensive and multiplex picture creating the organizational style. The elements of this subsystem used on various media evoke strong stimuli more than 80% of human impressions deciding on the knowledge or idea of given phenomena are created by visual sensations. Therefore, visual aspects should be carefully considered in an enterprise. The visual subsystem is also a tool enabling to present changes occurring in an organization to the environment. If the performance of this subsystem is to be effective, it must be continuous, coherent and consistent. If the subsystem is outdated, incomplete and accidentally created, it communicates false messages and misinforms a recipient, which harms an organization. The visual

157 Establishing a long-term corporate identity on the foreign market 155 subsystem is dominated by a trademark, which may take the form of an emblem (in other words graphic feature), a logo or a combination of these two elements. logo a simple style of the letters creating the surname of a wellknown designer emblem created by two C letters Fig. 25. A trademark consisting of a logo and an emblem Source: Based on self-study. A trademark is sometimes accompanied by the constans which is a dominant idea fully expressing the mission of a given organization and its identity. It is superior towards the promotional slogan and long-lasting as well, e.g. a German confectioner, Storck reserved both a trademark and the constans (Part of Your World). However, in some cases, the name expressed by a logo literally describes the subject of an emblem, e.g. Mitsubishi (both an emblem and a name denote three diamonds), Shell (shell), Blaupunkt (blue point), Nestle (nest), Puma or Jaguar (predators). The elements of the visual subsystem are presented in Table 29. Table 29. Elements of the visual subsystem Basic elements Trademark a visual sign identifying a market entity and consisting of a logo and/or a graphic symbol Emblem a graphic feature which complements a logo; an element of a trademark Logo a graphic interpretation of the sound of an organization s name or product, the record of this name by a specific letter style and defined colours, an element of a trademark Constans of an organization a permanent graphic layout in line with a trademark, a full name and the necessary information about a given entity Colours permanent colours ascribed to particular basic elements Font styles uniform graphic styles of writing, regardless of its size Multiplication a graphic layout based on repeating constantly a given element or a set of elements Minimum spacing a free space around the graphic elements protecting its legibility Minimum sizes the borders of legibility of the graphic elements Examples of the remaining elements Job printing e.g. letter forms, envelopes, business cards, fax cards, folders Means of transport external: trucks and passenger cars, internal: lifts, cranes Promotional methods e.g. brochures, posters, catalogues, press announcements, flags Internet resources e.g. web page, layout, presentation on the social media portals Forms e.g. protocols, invoices, transport cards Clothing e.g. clothes of the managing staff and technical service staff, clothes worn during promotional activities Product labelling e.g. labels, unit packages, group packages Exhibition e.g. spatial layout, colours, exhibition arrangement, clothes of the servicing staff Spatial orientation outside the place, at the place and in the buildings, e.g. information elements, a set of marks, visual spheres, special marks, leading-in marks Façade own and sponsored buildings, e.g. administrative, social and production buildings Interior architecture the appearance of rooms and corridors, e.g. reception desk, secretary offices, offices, conference rooms Source: Self-study based on: A.M. Nikodemska-Wołowik, P.T. Górski, M. Wołowik, Nie tylko logotyp. Wyróżnienie i przynależność w biznesie, Oficyna Wydawnicza Branta, Bydgoszcz Gdańsk 2004, p. 82.

158 156 Anna Maria Nikodemska-Wołowik The information subsystem comprises the activities and intentionally constructed tools to convey clear messages about corporate identity. It fulfils an auxiliary role, which does not make it less important than the remaining two subsystems. Enterprises can operate on the market without informing the environment about the identity attributes, but this regularity does not occur without using visual tools and without specific behaviour. Informing about the identity attributes primarily consists in: presenting its origin, presenting potential and real relations between them and/or between them and the external environment, interpreting properly its meaning, presenting the benefits for the stakeholders, confirming its authenticity. When the environment interprets the meaning of, e.g. a trademark contrary to the enterprise intention, the tools of the information subsystem should be applied, while communicating with the stakeholders. These tools create proper ideology and make the idea convincing. There emerges a simplified parallel orange astonishes as the national colour of the Dutch people since the flag is coloured with red, white and navy blue. Orange became accepted and the Dutch people willingly explain its monarchist meaning Referring selected elements of the overall identification system to the international environment Word, image and gesture are the media present in three OI subsystems. Simultaneously, they convey information in all human societies. An interpretation of the message is culturally conditioned. Therefore, when acting in the international environment, it is necessary to conduct a detailed analysis and check how the elements of the OI system are perceived in the country of a trading partner. Those elements which a recipient encounters first include the name, graphic symbols, shapes, colours, letter styles as well as ways of verbal and non-verbal communication (movement, gesture, mimics). Choosing the form and content of the message in collectivist cultures, including the Scandinavian countries, it is necessary to emphasize the community and common activity by means of proper symbols. In individualist cultures, individual power is focused on. Usually, the first information reaching a trading partner is the name of a potential partner s enterprise. This name, simultaneously, underlies the OI system and strongly expresses the identity of a business entity (Figure 26). THE NAME PERCEIVED AS: record and sound visual message, verbal and phonic message usually a permanent element of a trademark Fig. 26. An enterprise name the basic element of the OI system Source: Based on self-study. Visual stimuli (in the case of a record) and audio stimuli (in the case of speech) cause that the perception of the name is frequently a preliminary stage of recognizing the identity. However, relying on the pronunciation of the name does not authorize to call it a medium of the key identity attributes. It is necessary to formalize the distinguishing features by their written and/or visual record. It is difficult to prepare a universal list of criteria which a good name of an international enterprise should

159 Establishing a long-term corporate identity on the foreign market 157 meet. The suggestion presented in Table 24 includes some basic guidelines, with the reservation that sometimes the entities with at least controversial names successfully perform on the market. Features of a good name of an international enterprise short, simple, easy to memorize, easy to pronounce and to write (without diacritical signs), distinguishing itself among the competition names, suitable to ne recorded in the Internet on websites, in addresses, associated positively, with cultural differences considered, adequate for business activity of an enterprise, development-oriented, flexible, legally protected on an international scale, in the case of listed companies facilitating the record in the share price tables. Bearing the above-mentioned criteria in mind, positive and controversial names of enterprise and product brands were exemplified. The lack of an analysis of the meanings carried by the words included in the media transferring the identity attributes may cause an unintended transmission of doubtful messages. Market practice shows that, in some cases, pejorative connotations evoked by several foreign entities are ignored, e.g. Osram, Sika, Pupa, and Uniqua perform on the Polish market despite their negative associations. Other examples of controversial names of domestic enterprises include: meat processing establishments, ŁMeat from Łuków (although 85% of production was exported, the name remained as the combination of the Polish letter Ł and an English word meat ) and Wars (frequently recognized by the foreigners associating the Polish railway carriages with the military operations from the second World War an English word wars denotes military conflicts). The above-mentioned examples indicate the necessity to consider the change of a name as a result of the foreign market entry. In practice, such decisions are made incidentally. However, it is more frequent in the case of product brands. Making changes also result from the legal regulations applicable in the host country (e.g. when a given name has already been registered by another entity). Examples of changing the enterprise name caused by the foreign market expansion An interesting example of a consistent support of the cosmopolitan identity is a company form Gdańsk offering IT and educational services, Young Digital Planet (they use the acronym YDP). From the beginning of its market existence, at the first stage only operating domestically, the enterprise consciously participated in the passive internationalization process. It is proved by selecting an English name which emphasizes the Polish roots: Young Digital Poland: Interactive publishing houses. When entering the stage of the foreign expansion, the last English part of the name was replaced with the word Planet (maintaining a former well-recognized acronym YDP), which emphasizes the identity of an internationally competitive enterprise. When operating internationally, it is necessary to remember that the names change their nature in the Internet records and may change their meaning into a negative or even a vulgar one. The examples of such unintentional changes are the following: (Experts Exchange), (Pen Island), (Mole Station nursery), (Speed of Art.), (Powergen Italia).

160 158 Anna Maria Nikodemska-Wołowik If an enterprise name creates and/or co-creates a trademark, then adding ornaments ascribes additional symbolic meaning to it. The symbolism behind numbers, colours and wildlife is widely applied in communicating the identity by means of the visual signs. Humans mostly communicate non-verbally (over 60%). Identity communication occurs by using a series of signs, beginning from simple and repeatable gestures, which are the basic element of the behavioural subsystems (e.g. the ways of welcoming a passenger on the board of specific airlines), and ending with the complex structures of spatial orientation in the visual subsystem (e.g. in the headquarters of a bank offering retail and corporate services). All these signs, both verbal and nonverbal, are a unified semiotic conglomerate whose function is to facilitate contacts between the two market participants. International context determines the meaning of a symbol to be interpreted differently not only because of the age, educational level, perception skills or life experiences, but also because of the nationality and cultural identity. Some of the visual and conceptual elements of the symbols are universal; others fulfil their role with reference to a specific culture or historical period. It can be proved by the following examples: known from the Polish market, the insurance company, LINK 4 could not operate successfully on the Chinese, Japanese or Korean market since 4 as a number expresses misfortune or death and replacing 4 with 5 would change its meaning into fortune and happiness, 99 as a number of religious meaning in Islam excludes 9 from the announcements sent in the Arab countries, a definitely positive sign of a dragon in South-East Asia is interpreted differently in the European tradition and means evil associated with fire and destruction, a dog bringing bad luck in the Islamic countries, in Europe and in North America symbolizes a faithful friend, red colour is generally well-perceived in the majority of cultures in the world, but in some African countries it evokes the connotations with death, in the United Kingdom, raising eyebrows means scepticism, in China the lack of trust and in North America interest and astonishment, showing and calling with a finger, displaying the shoe sole, directing the thumb upwards, using the OK sign, using the left hand, signalling something by means of feet all these examples are regarded in Asian, Arab and Latin-American countries as offensive and impolite. An example of using a sign of a dragon by a Swedish enterprise in a pejorative sense The Swedish enterprise, Mercatus (offering cleaning and recycling technologies of the contaminated liquids for the industry, water supply systems and thermal power plants on a global scale) is perceived by itself as a knight fighting with a dragon devastating the environment. The dragon is associated with evil, danger and cataclysm. However, a positive figure of a knight appears on the official websites of Mercatus and the metaphor of a hero fighting a horrifying enemy is common in various activities of the enterprise. New employees are called squires and after being employed for a specific time period they become knights. The main conference room in the headquarters of Mercatus is called the Knight Chamber. Using this symbol helps to strongly unite the staff and effectively focus on achieving the objectives of the enterprise leading the industry. Source: Polskie i szwedzkie MSP wobec wyzwań CSR, ed. by A.M. Nikodemska-Wołowik, Responsible Business Forum Pomerania Development Agency (Agencja Rozwoju Pomorza S.A.) IUC Kalmar Lan, Warszawa 2011, p This example proves that the Swedish society is attached to the traditional symbols, even when it comes to their professional life. Moreover, some rituals are present in everyday behaviour of people co-creating an enterprise. It is an important observation from the perspective of establishing the behavioural subsystem on the Scandinavian markets. An intentional and planned way of behaviour serves the purpose of expressing the identity attributes by verbal and non-verbal techniques of contacting corporate representatives. Thus, the behavioural subsystem plays a significant role in such industries as:

161 Establishing a long-term corporate identity on the foreign market 159 professional and commercial B2B and B2C services, retail and wholesale trade, governmental and non-governmental institutions. In the case of operating on the foreign markets, one of the greatest problems is the creation of a unified code of behaviour of the enterprises created as a result of the M&A operations. When the representatives of two or more countries meet, significant problems arise. They result from the differences between the national and organizational culture. A unification of the visual subsystem is easier to achieve than one of the behavioural subsystem which is heavily influenced by the human factor. The convictions and values of particular individuals affect proper behaviour according to the accepted norms. When cultural differences are undervalued, then most failures in the process of mergers occur 92. Cultural differences resulted in the failure of the cooperation between Citroen and Fiat, Renault and Volvo, Alitalia and KLM as well as Leyland and Innocenti Practical methods of strengthening the OI system Using additional elements establishing a long-term identity is well-grounded in the case of enterprises initiating their foreign expansion and which are not yet recognized on a given market. Membership of a prestigious institution, cooperation with the entities leading the industry and holding the certificates appreciated worldwide (apart from those which are obligatory and common) helps to gain competitive advantage on an international scale. Having such a distinguishing feature deserves to be displayed and constantly included in the communication activities. As has been mentioned before, in the Scandinavian countries, the society trusts the public institutions and, as a result, the documents confirming the enterprise achievements by the proper entities are highly appreciated. Hence, placing the name of a supporting entity next to the name of a given enterprise helps to consider it from a broader perspective and, in some cases, allows an enterprise to be distinguished. The need of supporting the identity results from a few factors which can be considered together. These factors include: achieving a defined strategic objective, especially entering the foreign market, increasing the market share or improving profitability. The benefits might be mutual for both parties of such agreement or just one party can be beneficiary (e.g. the Spanish airlines, Iberia, as a member of the international alliance, One World; the credit card of the Citibank, MasterCard with the Wizzair airlines; Fortis Bank as a member of the international developer enterprise; Ghelamco and the producer groups unifying the exporters forming a group of fruit growers, Owoce Południowego Mazowsza), certifying the offer quality by an international cooperation with the entities leading the industry also refers to the producers focusing on the so-called brands-components; both partners may be the leaders (e.g. a producer of Toshiba notebooks and a producer of Intel integrated circuits) or one of the partners may occupy an inferior position on the market (e.g. a TV information channel TVN24 and an American broadcasting station CNBC); in some cases, thanks to the M&A operations (e.g. the image of Skoda and Seat was strengthened after being acquired by the VW/Audi concern), confirming that the global criteria are met by being a member of an industry-specific international organization (e.g. the employees of a marketing researched agency associated in ESOMAR; Hotel SPA. Dr Irena Eris, a member of the International SPA Association, a certificate and a sign of Slow Food for the producer of Miody Pitne, Maciej Jaros), confirming competitive advantage in a given specialization by presenting the prizes, accreditations and awards (e.g. a domestic producer Roleski and a prestigious EU certificate 92 B. Łapiński, The commentary od the case study: Międzynarodowe fuzje, czyli o sztuce łączenia oliwy z wodą, Harvard Business Review Polska, , p. 39.

162 160 Anna Maria Nikodemska-Wołowik organic food, which confirms that the food is eco-freindly, the EU labels confirming that the project was financed from the EU funds), supporting pro-social attitudes (e.g. a prestigious award granted by an objective Schwab Foundation for the pro-social and transparent enterprises, a confirmation of participation in the Fair Trade initiative received by a German producer of food, Kaffeerösterei Hubert Tempelmann, and El Puente, a chain of coffee shops, Starbucks and a coffee producer, Tchibo), expressing national and/or regional values, which contradicts with a cosmopolitan and global anonymity (e.g. the EU certificates and confirmations that the food products are traditional, the sign Teraz Polska on the Polish products). The identity is also supported by the visual features referring to one of the basic attributes date of establishment of an enterprise. This distinguishing feature appears as the constans together with a logo and emblem of an organization and, in some cases, it is an integral part of a trademark. Such solution was applied by Bank Handlowy w Warszawie S.A., operating since 1870 (until 2001, when the bank was acquired by Citigroup as Citibank Handlowy). It proves that the date of establishment of an enterprise is universal and indicates that a common need for stability, continuity and survival is celebrating its revival. Using in the name of an organization the surname of its founder, which is a common practice in the family enterprises, has a similar meaning for a strong identity. It is becoming a kind of a guarantee for the stakeholders. The surname is placed on a trademark and in the case of the consumer goods market, the trademark accompanies the products being a kind of an extension of the producer identity. An example of strengthening the identity with a few elements Torres, a well-known Catalonian wine producer, labels its products (unit packages in the form of bottles) with the following significant identity attributes: the inscription Familia Torres desde 1870 ( the Torres family since 1870 ), a copy of the owner s signature Miguel A. Torres, the sign confirming that he is a Member of Leading Wine Families, a family coat of arms and the information about being involved in the protection of local forests and a Catalonian species of the eagle Overall identification programme Recommending the activities performed at particular stages of implementing the overall identification programme The process of creating and implementing the overall identification system is called the overall identification programme. Figure 28 presents the phases and stages of the OI programme. Direct causes of launching the OI programme include: establishing a new market entity from scratch, considering the former OI system as outdated or inadequate for the business profile, seeking strategic partners, especially foreign partners, lacking coherence of the existing OI system elements weakening corporate identity, emergence of frequently interrelated changes, mainly including: changes in the ownership, internal organization, management, market strategy and restructurization. Launching activities within the OI programme frequently results from the ownership changes after the M&A operations. They are reflected in adopting new solutions for the visual subsystem, which is quickly noticed by the environment.

163 Establishing a long-term corporate identity on the foreign market 161 Phases Research and conceptual phase Design and verification phase Execution phase Stages 1. Corporate identity audit 2. Creating the concept of the OI system 3. Designing the subsystems and their verification 4. Formulating the procedure of the OI system implementation 5. Informing about the changes 6. Implementing the OI system 7. Assessing its effectiveness and efficiency feedback Fig. 27. Phases of the OI programme Source: Based on self-study. An example of starting the OI programme as a result of the changes in the Scandinavian enterprises Nordic Baltic Holding, creating a Scandinavian institution Nordea in the middle of the 90s of the 20 th century, maintained for a few years the original names of its domestic subordinate entities, e.g. Nordbanken in Sweden, Merita Bank in Finland, Unibank in Denmark and Christiana Bank in Norway. In December 2001, they gained a new identity a new OI system of Nordea was created. The name was based on two words: Nordic and ideas. This choice was explained by referring to the Nordic heritage, to a similar approach of the Nordic countries nationals towards cooperation, while simultaneously maintaining the differences accounting for the reciprocal learning of something new as well as to common Nordic values, such as freedom, equality and ecofriendliness. It is worth noticing that in July 1999, Nordbanken AB and Bank Komunalny in Gdynia executed the subscription and investment contract and the biggest Scandinavian bank group became a strategic investor of Bank Komunalny. Since 26 June 2001, the bank changed its name into Nordea Polska S.A., adopting the Nordic patterns in its activities. In turn, two entities, Japanese Sony and Swedish Ericsson used the identity attributes of the merged entities and slightly changed them. The Japanese and Swedish strategic alliance, Sony Ericsson Mobile Communications AB was created at the end of 2001, focusing exclusively on the production of mobile phones and offering multimedia services. The company mixed the Ericsson technology with a good design of consumer electronics and the marketing strategy presented by Sony. In particular phases of the OI programme, the below-mentioned activities are recommended. Research and conceptual phase To present the tasks briefly, the aim and direction of activities are established. The process requires specialists with interdisciplinary preparation, knowledge as well as experience. The partner cooperation comprises not only the advisors on identity shaping, but also other entities supporting the programme at its further stages, e.g. helping with public relations, media production and implementation or organizational psychology (in terms of implementing changes). Delegating tasks connected with the identity shaping to the external consultants ensures a fresh, objective and impartial view on corporate problems from the perspective of a neutral person.

164 162 Anna Maria Nikodemska-Wołowik At the identity audit stage, the answers to the questions about the above-mentioned self- -determination, that is the questions related to the strategy (philosophy, mission, objectives) are searched for. An existing enterprise and the one that is currently being established are meant. An audit is conducted internally and externally. For the entities operating outside their domestic country, the task becomes more complicated since they must account for the specificity of the foreign market and the necessity to use an appropriate research method adjusted to it. Discovering cultural differences, the way of perception and interpretation of the reality or accepted norms of behaviour, at this stage, eliminates potential dangers which could occur in further phases. Introducing the OI system in big organizations is costly and requires the scale of an undertaking to be determined, e.g. in the case of shopping centres, the number of shop windows and business cars as the identity attributes is specified. In the existing organizations, an evaluation is directed towards former activities performed to implement and maintain the OI system (e.g. control of the OI system performance, subjective and objective scope of responsibility, condition and completeness of the OI system standards). An analysis of the competition image (including the foreign competition) enables to outline the background in which a new OI system (also understood as just modified) of a given organization starts existing on the market. The information obtained at the stage of an audit imply the progress of further activities, which helps to prepare the concept of the most important changes of the former OI system or, for the organization just being established, the changes of the OI system created from scratch. Thus, at the second stage, the key features of the created system are defined, that is the identity attributes and their recipients as well as the grounds of choosing a particular concept. There emerge unified and objective assumptions for the future projects from the perspective of the real needs of an enterprise as a counterbalance to the subjective criteria, e.g. strictly esthetic. The issues in question include, e.g. different versions of the identity positioning, optimal structure of the OI system and guidelines for the symbols, letters or colours in the international context. Design and verification phase Designing three OI subsystems opens the creative process. Semiographic direction is then determined, which means that the style and type of the language which will be used to create the elements of the OI system are specified. What is also important is the compatibility of the interpretation and associations communicated according to the senders intentions. At this stage, distinguishing features such as colour, design of the logo letters or iconospheric relations (the relation of the OI system with the background) are also described. Specifying the role of a particular media enables to choose the key media (e.g. for the Orlen petrol stations the flags were selected, the so-called greeting signs and friezes appeared first since they could be easily implemented and, as a result, the changes in the concern were quickly and clearly manifested). At the design and verification stage, marketing research is conducted in order to make the designed elements of the OI system objective, especially in terms of understanding the communication and its clarity, legibility and ergonomic aspects. At the third stage, the design is verified in terms of the production costs. Availability of technology needed to create all the elements of the system is then specified and the materials of the media are adjusted to the style and esthetic features accepted in the project. The fourth stage is necessary to prepare the system for its implementation, which requires proper planning and management of work according to the accepted schedule. The OI system management may be compared to the performance of the IT systems which reach all units of an enterprise. Effective management depends, to a large extent, on using the unified programmes and behavioural norms. Therefore, the members of an organization are prepared to accept the new system. At the fourth stage, the following issues are tackled: optimal technical solutions are prepared, the methods of implementation and the sequence of tasks are selected and also procedure-related activities which help in handling formalities when implementing the changes are specified.

165 Establishing a long-term corporate identity on the foreign market 163 Execution phase This phase initiates the stage of the identity changes being fully communicated to the environment. The internal and external recipients are notified of the OI system being created and its assumptions by means of the information subsystem. Efforts are focused to make the message homogeneous. In turn, implementing behavioural norms is to facilitate the standard performance of the OI system in the future. It is desired to unify the standards, which will gain in importance in time. Then, some elements of the OI system require changes (e.g. re-printing business cards according to the accepted pattern) and the organization must account for the predicted expenditure to maintain the created OI system. All these elements are precisely described in the so-called OI manual, which is a print and electronic document containing all the information necessary for the proper implementation of the OI system and its management (the manual contains, e.g. design boards in different colours achromatic and construction colours, description of the programme producers, colour samples, negatives, size patterns, colour codes, multimedia presentations). Simultaneously, the staff trainings are conducted. The trainings concern the causes of changes, the aims of ascribing new identity attributes as well as new symbols and interrelated values. At the stage of implementation, potential dangers for the future performance of the OI system are diagnosed. The main causes of ineffective performance of the system are, e.g. parallel existence of the former and new elements, initiatives of the employees freely implementing new elements into the system, acceptance of an attractive concept of the system without determining the competition activities within this scope (with legal implications), improper use of the capacity of the organization places and media as a result of establishing the OI system based on a single graphic solution Tools for researching corporate identity and guidelines for their implementation When the implementation of the OI programme begins, entrepreneurs face many dilemmas concerning an effective management of the process and proper way of making the key decisions, without which the work progress is impossible. Table 30 briefly presents the areas, objects and problems encountered in the marketing research related to corporate identity Table 30. The scope of the marketing research of the identity Areas Identity Overall identity Image Objects features of the entities individuals and groups composed of them (especially employees and owners); the features of the objects artefacts, actions (e.g. own activities and competition activities), external phenomena (e.g. demographic changes) seeking the identity base and its attributes in the internal and external environment Source: Based on self-study. features of the entities individuals and groups composed of them (especially buyers and business partners); the features of the objects artefacts (also the prototypes of the tools), actions, external phenomena (e.g. causing information disruptions) Problems choosing the OI system type; seeking optimal tools for expressing the identity in order to ensure the clarity of the message and its unambiguous interpretation features of the entities individuals and groups composed of them (especially participants of the exchange act the closest stakeholders); features of the objects newly created artefacts and the actions taken within the OI framework evaluating the accepted way of communicating the identity; specifying the adequacy of the image to the identity assumptions

166 164 Anna Maria Nikodemska-Wołowik There are many arguments in favour of the marketing research supporting the implementation of the OI programme. The research is intended to support the decisions in particular phases. It should not hinder the works (providing data which are precise, but do not imply any favourable conclusions is a waste of time). This may be exemplified by the colour research leading frequently to trivial and absurd discussions. Present knowledge and a great number of secondary sources about perceiving colours is sufficient to create at least the preliminary versions of colour designs without the opinion polls. On the other hand, there is a problem with using the methods and techniques adequate to the aims of the OI programme and, primarily, their wrong application and routine attitude, that is offering research which is not customized in terms of the information needs, then incompetence of people involved in a project and the lack of synergy of the project and research actions. It is necessary to warn against using services of the so-called pseudo-researchers, also in Poland, who use trivial and even banal techniques. Thus, while choosing a research agency, especially while conducting research on an international scale, a few key criteria should be considered (Figure 28). staff (e.g. the number of researchers, specialists in foreign research, people enjoying reputation, organization of the poller chains abroad) opinions and recommendations of the former ordering parties experience (time of performance, customer list, type of conducted research, foreign projects, research similar to the planned one) marketing research agency tangible resources (e.g. office furniture, equipment, software, new technologies) way of treating a customer and a customized approach to his/her problem cost of research implementation way of presenting research results (type of a report or an oral presentation) adjusting appropriate research forms and methods, considering cultural differences deadlines of completing research membership in prestigious industry-specific organizations, especially the international ones location and the offices in the countries covered by research Fig. 28. Criteria helping in an optimal choice of a research agency Source: Based on self-study. The ordering parties frequently do not know what they expect from the OI programme and think they will receive definite answers in the research reports. They use the research, with one particular aim in mind as an explanation for their decisions, that is as the protecting shields. They worry about the necessity to make their own decisions and a laconic and superficial knowledge of research methodology causes dangerous stereotypical thinking and forcing the implementation of unjustified research. They assume that the risk of a wrong decision was reduced and, in turn, delays in preparing reports give an excuse to suspend the decision. It sometimes happens that the management board or the owner reject the measurement results and consider them as completely contradictory to their ownpreferences or vision of changes. Then, placing confidence in consultants who should reliably assess the value of the research information becomes significant.

167 Establishing a long-term corporate identity on the foreign market 165 In the identity research, the main emphasis is placed on an effective audit implementation and the main aim here is to understand the source of a problem and its pertinent formulation. The research will not give any definite answers about the performance of the OI system before its implementation. However, it comes useful in day-to-day verification of work. Although the consumers buying goods or using services of a given enterprise provide valuable information for the OI programme, it frequently happens that former business partners, e.g. suppliers, own sales department and employees establishing the first contact with the environment constitute much more available and fruitful data source. There evidently exists a need for the ratios, e.g. customer recommendation showing how many customers recommend a given enterprise/brand to other people reacting accordingly. The recipients of the research include the entities of divergent information needs, which must be considered in creating the projects and preparing reports: direct recipients, e.g. management board, shareholders and staff as well as indirect recipients, e.g. banks and mass-media. Table 31 presents research methods and techniques used to establish corporate identity. Currently, the research combining qualitative methods (useful for creative works) and quantitative methods is gaining in importance. It is necessary to warn against using focused group interviews which are frequently substantively unjustified. On the other hand, the role of undervalued ergonomic methods should be emphasized, especially their application in researching the visual subsystem. Their results help to adapt the elements of the OI system to the features of human fitness determined by anatomy, physiology and psychology. Ergonomic methods facilitate, e.g. analysing the quality of perceiving the visual communication generated by all graphic features (e.g. trademark, colours and letters). For example, if several visual ergonomics tests had not been used in order to change the PKN Orlen trademark, it would not have been so legible in diverse conditions. The visibility of the coat of arms and logo was analysed in terms of the vehicle speed, climate conditions, building density and land formation. It is necessary to emphasize a significant role of research for the entrepreneurs operating in the international environment. The multicultural dimension of the OI system means that the research is necessary and should be planned considering the equivalence of the research object, measurement, research sample and direct research process. From the perspective of the identity research, it becomes a challenge to achieve the functional and notional equivalence (in other words, ascribing specific functions and meanings to selected objects and notions) and the translation equivalence (correctness in expressing specific senses in a given language). Proper selection of words, images and other stimuli is important so that the respondents representing different cultures can interpret them unambiguously. For example, Chinese lacks an equivalent for personality in the sense understood by the Western cultures since in China, human existence as such is determined by its relations with a social group. The contextual equivalence concerning cultural limitations and obstacles in gathering data from the secondary sources serves this purpose. The respondents represent different attitudes towards participating in research, which is radically exemplified by an exclusion of women in some Arab countries from participating in an opinion poll determined by their compulsory withdrawal from the social life.

168 166 Anna Maria Nikodemska-Wołowik Table 31. Selected methods of primary research in establishing the identity Qualitative methods in-depth group interviews (e.g. focused, creative, extended, confrontational) in-depth individual interviews (e.g. semi-structured, narrative) participating observation (active), open or hidden Techniques supporting qualitative research Projection techniques Segregation technique Semiotic technique (analysis) Quantitative methods Questionnaire methods Delphi method (called an expert method, panel of experts) Interviews (e.g. personal, group, telephone, computerassisted: CATI, CAPI, CAWI) Non-participating observation Panels Market test (standard and panel) Schuhfried s Vienna tests (e.g. DAUF attention test, SIGNAL test)* Ergonomic methods Tachistoscopic test (mechanical and projection tachistoscope) Distance test In-depth visual analysis test Visual angle test (vertical and horizontal) Corrective differences test Source: Based on self-study. Examples of the aims diagnosing the needs of potential customers with reference to the behavioural norms exhibited by the staff of a service enterprise recognising the influence exerted by the visual system on the evaluation of the prestige ascribed to an international organization exploring the stakeholders attitudes towards new labelling of the spatial orientation of a partner s office Examples of the aims reaching the customer opinions about the essence of an eco-friendly organization (e.g. by means of the collage techniques) locating an organization among the competitors and classifying it into an appropriate category of criteria set by the customers themselves specifying the relations between the elements of the spatial orientation of an organization interior design Examples of the aims evaluating the elements of the current image of an organization perceived by the customers specifying the tendency in implementing the CSR assumptions in international enterprises diagnosing the associations evoked by the sound of a name defining the customers reaction to a new system of spatial orientation identifying the customer opinion about sequentially implemented changes of the customer service rules measuring the interest of the exhibition stand of an organization during the trade fairs diagnosing the abilities to perceive the stimulus when the background is changed Examples of the aims measuring the speed and precision of the perception and interpretation of a logo on different media specifying the maximum distance of trademark legibility on the means of transport specifying the trademark legibility on the means of transport when visibility is low specifying the legibility of the communication placed on the facade from a a different angle determining a degree of noticeability of the former trademark corrections

169 Establishing a long-term corporate identity on the foreign market 167 An example of differences in approaching the marketing research in the Polish and Swedish project At the turn of 2010 and 2011, research of the SME sector was conducted aimed at evaluating the implementation of the CSR strategy by the enterprises from both countries. The basic measuring instrument was an interview questionnaire accounting for different stages in implementing the CSR ideas on these markets. Two versions of the questionnaire were created: a simple one for the Polish entrepreneurs and a more complex one for the Swedish entrepreneurs. The Polish part of the research was conducted by the computer-assisted telephone interviewing (CATI method). The owners and co-owners were the main interviewees. The second group of respondents comprised individuals co-deciding about the enterprise development or influencing the strategic decision-making process. In Sweden, in turn, an online questionnaire was used. A group of respondents was enlarged by individuals holding senior positions in an enterprise, who lacked the power of strategic decision-making. In Sweden, conducting online research is more common than in Poland. The research has a longer tradition and is more trustworthy. In Poland, the telephone research is perceived as more reliable. Source: Polskie i szwedzkie MSP wobec wyzwań CSR, ed. by A.M. Nikodemska-Wołowik, Responsible Business Forum Pomerania Development Agency (Agencja Rozwoju Pomorza S.A.) IUC Kalmar Lan, Warszawa 2011, p Cooperation with the OI consultants It is now difficult to call the OI consultants designers. The role of graphic and interior designers cannot be diminished, but they do not belong to the interdisciplinary teams composed of different specialists. They are unified and their common efforts shape and direct the OI programme of a given organization by regarding this undertaking as comprehensive and not focusing exclusively on a single aspect. Following market expectations, the offer of the OI programme implementation was extended and the cooperation with an ordering party rather takes the form of business counselling than designing. Therefore, the OI consultants consider their tasks comprehensively and, what is more, support the ordering parties in diagnosing these problems. A clearly specified aim of the OI programme, fully understood by both parties, and conducive conditions for cooperation are one of the key determinants of an undertaking achieving success. If the management board members and the staff as a well-integrated team are deeply convinced that choosing a particular OI concept is right, they follow the direction taken and verify only some elements of a project and they do not question the preliminary assumptions. In rare cases, the OI consultants reject these preliminary assumptions and completely discourage the ordering parties from the original ideas. They would rather like to sense the enterprise soul. The rule not to seek trivial excuses to change the OI system proves correct. Discomfort of a superior subjectively perceiving the former distinguishing features as anachronistic does not authorize to start the OI programme. A few factors in favour of the changes should coincide. In a situation, when an enterprise starting the OI programme lacks the leaders of changes and the employees are not unified around common goals and when there is not a preliminary concept, the OI consultants must face more tasks. They are supposed to go deeply into an enterprise, help to organize this internal chaos and later formulate the assumptions of the concept. Enterprises frequently face the problem of an independent and precise specification of the direction which their searching for the concept of an appropriate OI system should take. A verification of the OI specialists may be conducted in a four-stage selection process presented in Figure 29. It is worth adding here that first, the assumptions of the OI concept are formulated, then a preliminary creative idea is determined, and finally, the research process is launched. If an ordering party chooses the reverse order, then, most probably, the results of the earlier research will destroy a creative thought and the innovations as well as will frustrate both the consultants and decision-makers.

170 168 Anna Maria Nikodemska-Wołowik STAGE 1. DIRECTING TOWARDS SELECTED POTENTIAL CONTRACTING PARTIES QUESTIONS ABOUT THE TEAM POTENTIAL this potential is specified by, e.g.: duration of the market performance proving the OI experience, list of former customers (whether it also contains foreign, loyal and long-term customers), description of the examples of OI activities performed for the international enterprises of a similar profile, of a similar organizational scale and/or of similar problems, description of the organizational structure of permanent employees (number of individuals, positions), office and laboratory equipment (software, multimedia equipment, advanced technologies), individual skills and experience of the employees within the scope of the OI (seniority, educational level, achievements, international projects), hiring specialists from different complementary disciplines (e.g. international marketing, management, organizational psychology, architecture, graphic design, pattern design, ICT). STAGE 2. FIRST SELECTION OF THE CONSULTANTS a selection of maximum three agencies fully meeting the established criteria STAGE 3. EVALUATION OF THE PRELIMINARY OI PROJECTS the procedure includes, e.g.: inviting the pre-assessed consultants to present their proposals, conveying (while maintaining confidentiality) more precise information about the problems to be solved, presentations prepared by potential consultants more detailed project including, e.g. an outline of the stages of the OI system, a range of activities and a method of cooperation, directing creative searches; the ideas do not show final results, e.g. in the form of finished trademarks, but sometimes they show the necessity to completely resign from an anachronistic coat of arms, presentation prepared also for the decision-makers from an ordering party s enterprise. STAGE 4. FINAL SELECTION OF THE OI CONSULTANTS consultants assessed considering the following criteria: analysis of the key aspects of shaping corporate identity, optimization of creative works in terms of the market effect, comprehensive range and level of work precision, possibility of adjusting the course of the OI programmes to the organization, time-related and financial need of an enterprise, preparation of a contracting party to implement the process. COOPERATION WITH A SELECTED ORDERING PARTY Fig. 29. Verification of the OI specialists Source: Based on self-study.

171 Establishing a long-term corporate identity on the foreign market Financial and legal aspects of corporate identity A growing interest in intangible values on an international scale is accompanied by establishing competitive advantage based on the attributes financially and legally distinguished and properly displayed (these attributes include a trademark). As intangible assets, the attributes are exchanged on the market. The identity elements coherently communicated by the OI system constitute valuable assets of an enterprise, implying the creation of corporate image and the power of its influence. As a consequence, they increase the value of an enterprise, frequently exceeding its book value twice or even more, which is especially typical of listed companies. The difference between the transaction cost and the market value of net assets is called goodwill and denotes the value of an enterprise 93. In other words, goodwill is the difference between the book value of a purchased enterprise and the amount which a buyer actually paid. Thus, it is the value of the enterprise intangible assets which primarily include the human capital, trade contacts, distribution, investment opportunities and brand 94. The above-mentioned differences result from intangible assets, not revealed in the balance sheet, that is not reflected in the enterprise book value 95. In accounting, the definition of goodwill is slightly simplified: it is the value of all intangible assets not reflected in the balance sheet. According to the economic interpretation of goodwill, it comprises non-identified intangible assets of an enterprise and their value constitutes this part of the intellectual capital which is not allocated directly or indirectly to other assets. There are many examples illustrating the financial dimension of the identity attributes in the case of enterprises operating in the international environment. In 1990, an American car maker Ford Motor Co. bought the British Jaguar for GBP 1,6 bn, even though the book value of an enterprise did not exceed GBP 500 m. The machine park and the technology of car production was regarded as outdated, but such valuation was determined by the enterprise intangible assets, including those identity-related assets, such as the name, tradition and the image shaped by the environment 96. By contrast, an example from gastronomy proves the success of a relatively new enterprise, the chains of Starbucks coffee shops, as a result of a strong identity. The proportion of its market value to its book value in 2001 was 5,45. The calculations made by M. Marcinkowska indicate that the market value of such global enterprises as Coca Cola or Microsoft is based, respectively, in 96% and in 95% on goodwill. Many elements of corporate identity constitute intellectual property which is legally protected, including such elements of the visual subsystem as the enterprise name, graphic sign and communication slogan. Intellectual property may be exchanged and intellectual property rights may be traded or charged with costs. Third parties can use them by licence and franchise agreements 97. Intellectual property protection comprises the results of human intellectual activity, including artistic, literary, scientific and industrial activity. The industrial activity includes: trade secrets, intellectual property right and related aspects and industrial property. Industrial property should interest the entrepreneurs since this category includes inventions (patents), utility models, industrial patterns, trademarks (also service marks and house marks), geographical marks and integrated circuit layout design. 93 In the Polish civil code, the term company name denotes the name of an enterprise. In the case of the balance sheet and fixed assets, the company value is expressed in monetary terms. Thus, in this chapter, the term is used in its second meaning. 94 P. Sadowski, Ile warta jest marka: od pomiaru do zarządzania, Harvard Business Review Polska, 09/2003, p See: M. Marcinkowska, Kształtowanie wartości firmy, Wydawnictwo Naukowe PWN, Warszawa 2000, p In finance, the market value added is defined in this way. 96 K. Obłój, Strategia organizacji. W poszukiwaniu trwałej przewagi konkurencyjnej, PWE, Warszawa 2001, p K. Szczepanowska-Kozłowska, Jak chronić markę?, Polish Association of Branded Goods Manufacturers Pro- Marka, Warszawa 2003, p. 5.

172 170 Anna Maria Nikodemska-Wołowik Conformity marks, which contribute to the authentication of identity, are also subject to registration and, as a result, legal protection. This group also includes safety marks (e.g. confirming by the Institute of Mother and Child that a product can be used by children) or eco-friendly marks placed on the products and packages which are biodegradable and subject to recycling (Canada, Japan, Germany and France have their own marks). It is worth referring to another mark important for the producers of woollen clothes, the so-called Woolmark, a joint guarantee trademark confirming that a piece of clothing was made of pure wool (protected in 140 countries). An enterprise directing its offer to the foreign buyers should constantly analyse all versions of the legal solutions since even for the same good, there are different submission/registration procedures. It depends on, e.g. the preferred time of protection financial capabilities (e.g. a single charge for protecting a trademark for 10 years in Poland is PLN 550 for the paper submission, PLN 500 for the electronic submission in the case of three classes of goods and each class higher requires additional PLN 120 the amounts for 2010). subjective assessment of the value of a given good elements/attributes which could be protected geographical coverage of the enterprise operations this process can take place on: a) the national level individually in proper institutions of the countries in which an enterprise intends to operate (in Poland, it is the Patent Office of the Republic of Poland), b) the regional European level (in the Patent Office of the Republic of Poland or in the European Patent Office inventions and utility models in the Office for Harmonization in the Internal Market. Trade Marks and Designs industrial designs and trademarks/brands, c) the international level in the World Intellectual Property Organization. Table 32 presents the institutions helping in the registration procedure.

173 Establishing a long-term corporate identity on the foreign market 171 Table 32. Institutions helpful in the registration procedure Range of protection Institution Main objects of protection International global WIPO (World Intellectual Property inventions (patent pending), Organization) trademarks Regional dimension European dimension EPO (European Patent Office) inventions (patent pending) OHIM (Office for Harmonization in the Internal Market Trade Marks and Designs) trademarks National dimention e.g. in Poland UPRP (Patent Office of the Republic of Poland) inventions (patent pending), trademarks, utility designs, industrial designs e.g. in Sweden PRV (Patent- och Registreringsverket) Swedish Patent and Registration Office inventions (patent pending), trademarks Source: Based on self-study.

174

175 Dorota Simpson 10. Cultural differences in conducting business in the South Baltic Region The essence, elements and layers of culture When specifying the essence of culture, it is worth using the quotation which relatively well illustrates this notion by means of the following metaphor: A fish only discovers its need for water when it is no longer in it. Our own culture is like water to a fish. We live and breathe through it. What one culture may regard as essential, a certain level of material wealth for example, may not be so vital to other cultures 98. According to an Indian saying, in turn, there are three great mysteries: air for a bird, water for a fish and a human being for itself. The notion of culture is extremely difficult to define and has over 160 definitions classified into groups according to specific criteria 99. In many definitions the following statements prevail: Culture is the learned behaviour, a set of convictions and thinking patterns as well as customs, traditions and beliefs shared by the representatives of a given society. The author of a contemporary definition of culture referring to the language used by the representatives of the IT era is Geert Hofstede 100. Culture is the collective mind programming differentiating the members of one group or category of people from another. It is necessary to note an evaluative and universal approach towards culture. The evaluative approach assumes assessing cultures of particular communities, while according to the universal approach, culture is a set of diversified, interrelated and interdependent phenomena which are worth researching, describing and analysing and which should not be subject to any assessment. Cultural relativism, as opposed to cultural ethnocentrism, assumes that no culture has an absolute criterion which would be helpful in its assessment and gradation of other cultures artefacts. An assumption that all cultures are equal helps to establish tolerance and respect for cultural differences. Importantly enough, we should attempt to understand the causes and implications of these differences. It is not an easy task since apart from values, norms and customs shared by the members of a given community, there are also the elements of the so-called hidden culture, such as basic 98 F. Trompenaars, C. Hampden-Turner, Riding the Waves. Understanding Cultural Diversity in Business, Nicholas Brealey Publishing, London 1999, p American researchers, A.L. Kroeber and C. Kluckhohn classified all definitions according to the following types: descriptive and enumerative, historical, normative, psychological, structural and genetic. See: A.L. Kroeber, C. Kluckhohn, Culture. A Critical Review of Concepts and Definitions, Vintage Books, New York 1952, p G. Hofstede, G.J. Hofstede, M. Minkov, Kultury i organizacje, PWE, Warszawa 2011, p. 21.

176 174 Dorota Simpson assumptions about the purpose of human beings existence, the essence of evil and good, etc. They determine a given way of behaviour and they are quite natural for a given culture, but not easily recognized by the members of any other culture. Recognizing this hidden part of culture becomes a real challenge for business partners representing distinct cultural groups. In business practice, there exist different attitudes towards the representatives of other cultures 101. Parochial stage ignoring other cultures: my way is the only way Ethnocentric stage I know their way, but mine is better Synergistic stage my way and their way : we know and understand other ways of acting as well as other people know and understand our way of acting; in a given situation, we choose the way which creates the synergy effect and brings benefits for both parties Participatory stage creating common rules by means of a dialogue, so that, in a given situation, the needs of both parties could be met In practice, mutual business contacts benefit the most from the last two approaches mentioned above. According to the Hofstede s definition of culture, it is acquired and specific for a given group, while human nature is inherited and constitutes a kind of an operational system which is common for all people. Personality, in turn, is specific for an individual and partially inherited, partially acquired throughout human life. Culture consists of the following elements: language (verbal and non-verbal) religion economy and politics social institutions values and attitudes customs education tangible elements and aesthetics, etc. Some of these elements are easily recognizable for the representatives of other cultures. These elements primarily include: tangible elements, language, education, economy or social institutions. Sometimes culture is compared to an onion with its layers: outer layer, middle layer and core. Frequently, culture is described by means of the iceberg metaphor. In order to recognize what is hidden under the surface, it is necessary to put considerable effort and dive deeply. Then, it is possible to discover the middle layer, which consists of customs, norms, attitudes and values important for a given community. It is sometimes impossible for an individual from a different cultural community to reach the core. It is the most difficult sphere to identify and understand. It consists of the basic assumptions about human existence, the meaning of life and the notion of good and evil. Apart from the layers of culture, there also exist the levels of culture: national culture (or national cultures, in the case of immigrants), culture reflecting the membership to a regional, ethnic or language group, culture reflecting a gender, generation culture generations, social class culture related to the possibility of receiving education and profession, organizational or corporate culture, which is considerably determined by a function or position in a workplace. 101 S. Quappe, G. Cantatore, What is Cultural Awareness, anyway? How do I build it?, ( )

177 Cultural differences in conducting business in the South Baltic Region 175 Outer layer artefacts and behaviour Middle layer beliefs and values Core basic assumptions Fig. 30. Layers of culture iceberg metaphor Source: Based on self-study. Usually, corporate culture is derived from national culture. The problem becomes much more complex in the case of transnational corporations having their subsidiaries worldwide and operating in the intercultural environment. Depending on the strategy pursued by a given corporation, its culture is imposed on subsidiaries, which generally takes place when the global strategy is chosen or when subsidiaries are left autonomous. It happens when a corporation uses differentiating strategies and attempts to adjust its actions to the local market. It is worth emphasizing that some corporations have strong organizational cultures and attempt to implement them uniformly in all subsidiaries, which does not always bring the anticipated effects 102. The problem of cultural adjustment is particularly noticeable in the case of mergers and acquisitions as well as international joint ventures. According to the statistics, around 60 70% of mergers and acquisitions achieve success since the productivity and profits expectedly increase A comparison of cultural dimensions typical of the South Baltic countries Not all countries presented above fall into the category of South Baltic countries. However, in order to take a broader perspective, cultural circumstances typical of the entire group will be analysed (Norway, Sweden, Denmark, Germany, Poland, Russia, Lithuania, Latvia, Estonia and Finland). In terms of culture, Baltic countries belong to two distinct groups: North-West Europe and South-East Europe. The former group include English-speaking countries (the United Kingdom and Ireland), Nordic countries (Sweden, Norway, Denmark, Holland and Finland), Germanic countries (Germany, Austria and German-speaking Switzerland). The latter group includes Romanic countries (France, Italy, Spain and Portugal), Middle-East countries (Greece and the European part of Turkey), the countries of Central-East Europe (Albania, the countries of the former Jugoslavia, the Czech Republic, Georgia, Poland, Russia, Slovakia, Hungary) 104. Lithuania, Latvia and Estonia are the countries 102 Undoubtedly, strong organizational cultures have their advantages. However, their disadvantages should be also borne in mind, e.g. lack of flexibility or blocking new initiatives and new solutions, which in the era of constant changes may negatively influence market competitiveness of an organization. 103 S. Magala, Cross-Cultural Competence, Routledge, London New York 2005, p D. Simpson, Uwarunkowania kulturowe jako determinanta stylów przywództwa, [in:] Zarządzanie międzykulturowe w jednoczącej się Europie, ed. by R. Krzykała-Schaefer, Wydawnictwa WSB w Poznaniu, Poznań 2010, p. 54.

178 176 Dorota Simpson whose cultures, in some respects, are similar to Russia and Poland as well as to Nordic group 105. Estonian people are considerably similar to Finnish people since they share similar languages and ethnic origin. Lithuanian people, in turn, are culturally similar to Russia and Poland while business behaviour of Latvian people is compatible with the Lithuanian and Estonian attitudes in business 106. Fig. 31. Baltic countries Source: blog.kurierwilenski.lt/samsel/ In order to compare various cultures, a set of models was developed. The models become useful in analysing business contacts. Florence Kluckhohn and Fred Strodtbeck are regarded as the pioneers in this respect and their model inspired other authors who suggested their own versions. Kluckhohn and Strodtbeck assumed that all communities must find the answers for and solve six basic problems: Kluckhohn-Strodtbeck model Orientation in time focusing on the present, past and/or future Attitude towards nature harmony, dominance, subordinate character Perception of space common (open), private (closed) or mixed Essence of human nature human beings are bad, good, or mixed by nature Attitude towards action a concern whether to be or to have or whether to exercise control Relations with others collectivism, individualism, hierarchy 105 R.R. Gesteland, Różnice kulturowe a zachowania w biznesie. Marketing, negocjacje i zarządzanie w różnych kulturach, Wydawnictwo Naukowe PWN, Warszawa 2000, p Ibidem.

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