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Table of Contents 1.0
Introduction ..................................................................................................................... 2
1.1 Greece............................................................................................................................... 2 1.1.1 Sri Lanka – Greece Trade.............................................................................................. 2 1.2 Italy................................................................................................................................... 3 1.2.1 Sri Lanka – Italy Trade .............................................................................................. 4 1.2.2 Export tea to Italy ...................................................................................................... 4 2.0 Greece Debt Crisis ............................................................................................................... 5 3.0 Italy Debt Crisis ................................................................................................................... 7 4.0 Exchange Rate Risk ............................................................................................................. 9 4.1 The impact of exchange rate risk on exporting firms....................................................... 9 4.2 Import, Export Earnings and Real Exchange Rate ......................................................... 10 4.3 Exchange Rate Risk for the company exports to Greece and Italy ................................ 10 4.4 Ways to reduce Exchange rate risk ................................................................................ 11 5.0 Other Risks ..................................................................................................................... 12 5.1 Economic Risk ............................................................................................................... 12 5.2 Business Risk ................................................................................................................. 12 5.3 Legal Risk ...................................................................................................................... 13 5.4 Political Risk .................................................................................................................. 13
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6.0 Regional economic integration (REI) ................................................................................ 14 6.1 Forms of International economic Integration ................................................................. 14 6.2 European Union (EU)..................................................................................................... 15 6.3 Impact of Regional Economic Integration (REI) ........................................................... 15 6.3.1 Trade Creation and Trade Diversion ....................................................................... 15 6.3.2 Economies of Scale ................................................................................................. 16 6.3.3 Common Currency .................................................................................................. 16 6.3.4 Common Regulations .............................................................................................. 16 7.0 Mode of Entry .................................................................................................................... 17 8.0 Culture & Ethics ................................................................................................................ 20 8.1 Greece............................................................................................................................. 20 8.2 Italy................................................................................................................................. 21 8.2.1 Italian Coffee Culture .............................................................................................. 21 8.3 European Coffee Culture ................................................................................................ 21 9.0 Selling and Marketing Tea in Europe ................................................................................ 22 9.1 Marketing Plan ............................................................................................................... 22 10.0 Conclusion ....................................................................................................................... 23 Appendixes .............................................................................................................................. 28
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1.0 Introduction
1.1 Greece Greece is the country with 131,957 sq.km area of land with a population of nearly 295,002 (est.2010). Legal immigrants make up approximately 6.95% of the population and the population growth rate 0.1% estimated for year 2010. Greece major cities include Athens (capital), municipality of Athens, Greater Thessaloniki, municipality of Thessaloniki, Piraeus, Greater Piraeus and 1,400 islands. (U.S Department of State: Greece, 2011) Tourism and shipping being the most prominent protagonists of the socio-economic arena, Post-World War II Greece has sustained a sublime state of success, until it was dramatically demolished by the financial crisis in late 2000s as a result of extravagant public expenses, prevalent tax evasion, credit burden and the consequent economic recession.(BBC News:Greece, 2011) Some of the other major economic statistics are as follows; GDP (2010 forecast): $315 billion. Per capita GDP (estimated 2009): $30,035. Growth rate (forecast 2010): -4.00%. Inflation rate (forecast 2010): 4.6%. Unemployment rate (annual average, forecast 2009): 11.8% Exports (estimated 2009) - $21.37 billion. Imports (estimated2009) - $64.27 billion. (U.S Department of State: Greece, 2011)
1.1.1 Sri Lanka – Greece Trade Tea is the major Sri Lankan export product to Greece. According to the information available, in year 2009 Sri Lanka had a total trade turnover of $ 13.6 million. Sri Lanka exported $ 6.7 million worth tea in 2009, which accounts 49% of total export product to Greece. Refer Appendix 1
(Embassy of Sri Lanka Rome: Greece, n.d) 2
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1.2 Italy Italy has a geographical area of 301,225 sq. Km with a population of 60.6 million (est. Jan 2011) and annual population growth rate is nearly 0.04% during 2010. Italy major cities include Rome (capital), Milan, Naples, Turin. Italian is the primary ethnic group in Italy together with small groups of German, Slovene and Albanian-Italian. (U.S Department of State: Italy, 2011) Italy possessed the fourth largest European economy and prolonged the pleasure of having one of the highest per capita incomes in Europe, in spite of the drawback in such conventional industries as apparel and automobile due to globalisation. Yet it was also one of those euro zone countries who were victimized by the financial crisis hit the globe in 2008. As a result by the summer of 2010, Italy incurred one of the loftiest levels of public debt in the euro zone, 120% of GDP.
Some of the other major economic statistics are as follows GDP (purchasing power parity, 2010): $1.77 trillion. GDP per capita (purchasing power parity, 2010): $29,400. GDP growth: 1.3% (2010); -5.2% (2009); -1.3% (2008); 1.5% (2007); 2.0% (2006) Exports (2010) - $447.2 billion Imports (2010) - $483 billion (U.S Department of State: Italy, 2011)
Italy has the lowest birth rate in Europe which makes the economic involvements of an ageing community a concern. Predictions of population for the next half a century has fallen substantially.
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1.2.1 Sri Lanka – Italy Trade
When considering past trade transactions among Sri Lanka with Italy; it can be highlighted that from year 2005 there is a rapid increased in exports from Sri Lanka to Italy, except in year 2009 and 2010. Main reason for this is economical debt crises in Italy. According to the Sri Lankan custom figures; the total trade between these two countries value $604.49 Mn in 2009, which is a decline by 10.7% over the previous year exports. Refer Appendix 2 (Embassy of Sri Lanka Rome: Italy, n.d)
1.2.2 Export tea to Italy
Statistics of 2008 indicates that the major tea supplier to Italy was Sri Lanka its main competitors being Kenya, India, Vietnam and China. During the years 2004-2008, Sri Lankan tea exports to Italy grew in terms of value and quantity by 16% and 6% respectively. In addition, during these years, Sri Lankan market share for tea, in the Italian Market was 13%.
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2.0 Greece Debt Crisis
Greece is the country which was benefited by a strong economy in the early-mid 2000s. At this time government took the advantage by running a large deficit. Later with rapid changes in the business cycle of Greece main such industries such as tourism and shipping affected to pile up its debt rapidly. In fact Greece has not been able to manage its spending for more than a generation. Over the past 6 years government spending increased by 87%, where as revenue increased only by 31%. Moreover higher level of salaries with holiday bonuses maximised government spending and affected its national debt level. As a result of continuous corruption, weakness of civil society and inefficient use of public sector led Greece situation more badly than earlier. Greece now holds $413.6 billion of national debt which is greater than its GDP. (Figure 1) Moreover Greek government was continuously unable to effectively reform its economical activities. This resulted Greece to be a witnessed of ineffective reforms in all areas including local government, transport, health, education, labour market, social security system, etc. As a result of all these, Greece GDP growth rate shrink over the last few years. (Figure 2) Greece - General government debts as a % of GDP
General Government Debt
2007 95.6%
2008 99.2%
2009 126.8
2010 142%
2011 152.3%
Figure 1 Source: World Economic Outlook (WEO) - Recovery, Risk, and Rebalancing- October 2010
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Figure 2 Source: Tradingeconomics.com; National Statistic service of Greece
All these underperformed economical activities led Greece to downgrade its ability to pay debt as the lowest in the Euro zone. These lead foreign investors to viewed Greece as a financial black hole which discouraged foreign direct investments. As a result country struggles to pay its bill as interest rate on existing debt.
Greece- Unemployment Rate
Unemployment Rate
2008 7.7%
2009 9.4%
2010 12.5%
2011 14.8%
Figure 3 Source: World Economic Outlook (WEO) - Recovery, Risk, and Rebalancing- October 2010
Therefore as a result of mismanagement, excessive government expenditures, sky high debts and unregulated labour market led Greece has fallen into present crisis, which is able of affecting the entire Euro zone.
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3.0 Italy Debt Crisis
Italy is the one of major country exist in EU since 1952 which has the eight largest economies in the world and the fourth largest economy in Europe with GDP of $1.77 trillion. Even under this greater economic strength, Italy has not been able to manage its general government debts during past few years. (Figure 4) This fact mainly courses a heavy economic crisis for Italy and for Europe. Moreover facts such as deprived regulation, ageing population and weak investments; accelerate present crisis and slow down the country’s ability to increase production. As a result country has a dreadful 0.75% of average annual economic growth rate over the past 15 years. (Figure 5) This is comparatively lower than rate of interest that the country pays for debts. Therefore this fact creates enormous risk to have high government debts which is beyond the country’s economic capacity. Italy - General government debts (Millions of Euros) General Government Debt As a % of GDP
2005 1,514,408
2006 1,584,096
2007 1,602,116
2008 1,666,603
2009 1,763,864
2010 1,843,051
105.9
106.6
103.6
106.3
3 116.1
119.0
Figure 4 Source: Banca D’Italia - Abridge Report- Statistic (Italy Central Bank), 2010
Figure 5 Source: Tradingeconomics.com; ISTAT 7
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Moreover during good years, Italy always tended to increase wage levels of the country in a high amount. As a result during years of weaker growth and inflation, government faced so much of difficulty to meet that wage level which ultimately leads to labour issues, as Italian workers found their pay is frozen or even cut. This will diminished direct foreign investments to the country and left Italy with a much less sustainable debt level. In fact during the past few years unemployment rate in Italy has been continuously intensifying. (Figure 6)
Italy- Unemployment Rate
Unemployment Rate
2008 6.7%
2009 7.8%
2010 8.5%
2011 8.6%
Figure 6 Source: World Economic Outlook (WEO) - Recovery, Risk, and Rebalancing- October 2010
Whilst this economical uncertainty has increased the demand of the lenders for high interest rates from Italy in order to lend it new money. As a result Italy now has to pay nearly 6.05% of interest rate where as countries such as Germany pay only 0.25% for borrowings. Therefore this high cost of borrowing makes Italy’s debt management less sustainable and it’s now in a position to seek more debts to repay the existing debts. At the same time, since Italy has the European fourth largest economy, a bailout would be vastly expensive unlike other such countries as Greece Ireland, etc. While all these are happening Italian bond yield rate rose up to 7% which is same like countries such as Greece, Portugal and Ireland who were obliged to seek bailout from EU. At the same time Italian Youth unemployment rate has passed 30% and Wall street journal 2011, ranks Italy in the 87th position in a field of 92 relatively free economies.(Number one is Hong Kong) (The Wall Street Journal: Markets,2011)
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4.0 Exchange Rate Risk
Exchange rates play a vital role in the context of international business. Fluctuation of exchange rates can result various impacts to any business firm involved in the international business.
4.1 The impact of exchange rate risk on exporting firms There are main three types of impacts that the exporting firm face from exchange rates. Those are as follows; Transaction risk refers to the influence of variations in exchange rate on the value of committed cash flows (cash flows that lie in the future, but the nominal value of which is known). These mostly consist of receivables (payables) from export (import) contracts and repatriation of dividends. Normally, the duration for committed transactions (the time between contracting and payment) is relatively short. But, it can in some situations extend up to several years, where deliveries are done a long time in advance (e.g. US dollardenominated forward sales of planes or building contracts). Economic risk explains the impact of movements of the exchange rate on the current value of uncertain future cash flows. It comprises the impact of exchange rate variation on future revenues and expenses via variations in both price and volume. Translation risk refers to the impact of exchange rate changes on the valuation of foreign assets (mainly foreign subsidiaries) and liabilities on a consolidated balance sheet of a multinational company. In general, translation risk is estimated in net terms, i.e. net foreign liabilities subtracted from net foreign assets.
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4.2 Import, Export Earnings and Real Exchange Rate Real Exchange Rate index can be used to indicate the exportable competitiveness of a country as it reveals the price of the goods and services of a country in relation to the price of goods and services of other countries. A tumble in the RER index implies that the products of the country get relatively cheaper than those of other countries and therefore the export demand of the country may augment. On the other end, demand for the imported products will be reduced as those are relatively expensive. Therefore depreciation in exchange rate positively affects export and negatively affects imported products. As a result, imports will be more expensive and unprofitable which in-turn may stimulate firms to decrease imports volume. Decreasing import volume may support to decrease import earnings, given that the firms involve in exporting products to the particular country with depreciated currency will be unprofitable. In addition, many analysts suggest that depreciation may coincide with greater exchange rates volatility and vagueness and such vagueness may have favourable effects on import.
4.3 Exchange Rate Risk for the company exports to Greece and Italy Euro is the official currency use in Greece and Italy as same as many other euro zone countries. In general during past few years Euro has been weakening with many other currencies which mainly include USD. This creates unfavourable environment for export products to Europe zone. As a result of weak currency, imports products (in Italy and Greece) are unable to sell under competitive prices. But since the exchange rates are highly subject to fluctuate rapidly, this will be vary time to time. As company is new to Greece and Italian market, depreciated exchange rates will put some pressure to sell its tea products under competitive prices. Therefore it is extremely important to manage its exchange rate risk.
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Impact of a sustained 10% depreciation of the euro on the real economy After 4 quarters
After 8-12 quarters
Real exports
+1.1%
+1.4%
Real imports
-0.2%
-0.2% Figure 7
Source : T. Hofmann & R. Schneide, 2010
4.4 Ways to reduce Exchange rate risk The company already exports its tea product to many countries and deals exports transactions based on US dollars as many other exporters. Therefore Euro currency depreciation against USD would create enormous pressure on product pricing and in profit transfer from Euro to USD. As a company which involved in international business, we have already identified that the exchange rate risk associated with international trade cannot be ignored nor control fully. Therefore it is extremely important to identified possible ways to reduce exchange rate risk. Accordingly the company has identified the need of establishing an exchange management system and obtain forward exchange agreement as main options to minimise exchange rate risk. Refer Appendix 3
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5.0 Other Risks Apart from foreign exchange currency risk, there are many other types of risks available in international business when dealing with business operations in host country nation.
5.1 Economic Risk In the context of International business economic risk can be viewed as one of the major risks. The economic risk mainly includes the facts such as exchange controls, tax policy, price controls available in the host country’s economy. These types of control imposed by host country will lead to various difficulties such as profits minimisations, rise in operation cost, reduced ability to compete, etc. Refer Appendix 5
5.2 Business Risk This is another major risk faced by companies when dealing with international business. Reasons such as tendency to select less suitable host country agent and distributors, less knowledge in trade knowledge and customs, etc; leads to create business risk for the company when trading with host country. Some agents may already represent competitors or some may not with basic requirements such as ability to stock, distribute and other services. Therefore it is extremely important to the firm to spend special care to appoint best suited overseas agents and distributors and keep closely monitor their operations.
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5.3 Legal Risk Business laws and regulations are usually varied from country to country. Therefore before starting trade with new country, it is important to be aware of all relevant laws and regulations such as import procedures, agent/distributor agreements, tax liability, health and safety requirements, currency trading, treatment of intellectual properties, etc. Failure to comply could cause various losses. Hence from conducting proper market research with full of realistic facts and figures together with proper legal consultations will minimise this risk up to certain level.
5.4 Political Risk Exporters’ favourability or un favourability in host country market mostly depends on political decisions such as shift in economic policies, expropriations, nationalisations, democracy issues, economic sanctions, boycotts and embargoes, etc. These facts are highly subjected to changes and lead to business risk. Therefore proper information, market research, communication with host country will help to forecast those changes prior and exploit opportunities.
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6.0 Regional economic integration (REI)
Regional economic integration (REI) has become a major trend in the global economy in recent years. Regional economic integration implies concurrences among countries in a geographical region with the objective to reduce or remove tariff and non tariff barriers in order to establish free flow of goods, services and factors of production between each other. (Hill & Jain, 2009) Few of REI include; European Union (EU), Southern Common Market Treaty (MERCOSUR), North American Free Trade Agreement (NAFTA),ASEAN Free Trade Area (AFTA), etc.
6.1 Forms of International economic Integration Stage of
Abolition of
Common Tariff
Abolition of
Harmonization
Integration
Tariffs and
and Quota
Restrictions on
and Unification
Quotas among
System
Factor
of Economic
Movement
Policies and
Members
Institutions Free trade area
Yes
No
No
No
Customs union
Yes
Yes
No
No
Common market
Yes
Yes
Yes
No
Economic union
Yes
Yes
Yes
Yes
Figure 8
Source: Franklin R. Root (1992) International Trade and Investment, Cincinnati, Ohio: South-Western Publishing Company.
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6.2 European Union (EU) The European Union is a major REI which is a consortium of 27 European regimes constituted for economic and political concerns of the territory. In conjunction with the United Nations (UN) from a global perspective, EU has contributed its continent by consolidating peace, stability, affluence and improving quality of life. It has successfully stipulated Euro as the common unit of currency for the entire Europe thereby continuously constructing a single continent-wide market. Refer Appendix 6
6.3 Impact of Regional Economic Integration (REI) 6.3.1 Trade Creation and Trade Diversion
Regional economic integration (REI) is mainly established for the benefit of member countries while creating common barriers for non-member countries. As a major Regional economic integration; European Union maintains free trade among member countries which encourage export and import within the region while maintaining common external tariff for non- member countries. As a result of this, products from member countries would be much cheaper than those imported products from outside the union. Therefore this creates enormous pressure for non- member countries that trade with EU. Thus trade diversion is inherently negative because the competitive advantage has shifted away from the lower cost producers to higher cost producers. This impact of REI may not influence much for tea export to Europe since there is no significant tea production available in EU countries. Nevertheless substitute products such as coffee are highly benefiting from the economic integration. Therefore this would lead to place tea as a high price product comparing to coffee which is produced within the EU. In other words this would act as an entry barrier as well as creates high competitiveness.
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6.3.2 Economies of Scale
As a result of enlargement of the market, producers and exporters within the REI enjoy economies of scale. This threat to products comes from outside the region. Therefore when exporting tea to EU countries such as Greece and Italy; this would affect as it’s reducing the prices of region origin substitute products such as coffee.
6.3.3 Common Currency
Introduction of common currency is one of the major characteristics of REI in today’s context. These impacts exporters as they need to rely on one common currency exchange rate when trading with REI. Therefore exchange rate risk would equally spread among all countries within the REI. Accordingly exchange risk in exporting products to Italy and Greece or any other European Union country would be the same. At the same time the company can follow a common pricing strategy for the entire region.
6.3.4 Common Regulations
Regional economic integrations generally apply common trade regulations for all nonmember countries. EU as a relatively liberal import regime has adopted common trade regulation policies for all imports from third world countries. Generally EU requires import licensing only for certain sensitive products such as weapons, tobacco, etc. Therefore when the company exports tea to Italy and Greece, same regulations will apply.
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7.0 Mode of Entry
Going international in the present is an entirely new way of doing business which needs to follow certain strategies in order to exploit the global market opportunities. Mode of entry is one of the major strategic decisions in International business. There’re main three types of entry methods are available, include export based entry, manufacturing based entry and relationship based entry. (Wu & Zhao 2007) Refer Appendix 7 Export based entry consists of two main types of modes of entry, indirect exporting and direct exporting. Indirect exporting means that the company exports its product into the foreign market by using an agency in the home country. Direct exporting means that the company involves directly in international trade by selling its product to the end users or selling via host country distributor. Since there are many options available to enter into foreign market, (as mentioned in Appendix 7) it is important to follow particular framework in selecting one mode. Following is one framework that can be used in strategic selection of an entry mode is as follows.
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Firm factors Firm Objective
Strategy
Experience
Environment factors Competition/ Demand
Desire mode characteristics
Mode Chosen
Control Risk Resources Flexibility
Socio Cultural conditions Government policies
Political/ Economic conditions
Corporate policies
Firm size
Moderators
Figure 9 Source: Wu, D. & Zhao, F. (2007). ‘Entry Modes For International Markets: Case Study Of Huawei, A Chinese Technology Enterprise’, International Review of Business Research Papers, Vol 3, March, pp. 183 - 196
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Since the company is planning to export tea to Italy and Greece as an initial stage of entering into European region; it is important to have better control, flexible mode of entry in order to gain experience and knowledge within the new market, which will be beneficial for future expansion to other relative countries. Indirect exporting mostly relies on the agent and the company may not be able to control its export operations according to its objectives. Moreover most of the agents are not using the optimum market potentials and sometimes may represent some competitive products as well. In fact all company’s total export profit and progress are highly relying on third party. Furthermore ability to gain market experience, information and knowledge is highly limited and inaccurate in indirect exporting. Therefore if the company selects this mode of entry; its long term target of expanding export to other European countries will be obstructed. Direct exporting can be done in two methods. One is with the use of intermediaries and other is without intermediaries (selling directly to end consumers by the company staff and facilities). Export without intermediaries is more complex. Under this, company staff needs to be sent to host country in order to carry out all its operations. When select direct export with use of intermediaries this complexity will be reduce. This method allows the company to take service from well experienced trading partner, which will leads to provide added advantage to enter into new market. Since there are high threat from existing players and substitute products such as coffee in new market; encourages the real need of more control and flexibility on export. Therefore it is more suitable to select direct exporting with the use of intermediaries, as an entry mode to Italy and Greece. This will facilitate the company for future expansion to other European countries. At the same time, company should be able to find the most appropriate intermediary in host country unless it will lead to fail company business in the host country market. Therefore continuous assessment, monitoring, communication and direct control are extremely important.
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8.0 Culture & Ethics
Culture and ethics act a vital role in international business. As a company that already carries out international operations the company is keen to have a good understanding about the host country culture and ethics as an off balance sheet behaviour. Culture and ethics influence the way of present company business in host country which includes the way of express company products to meet customer preferences. Culture is the acquired knowledge or the practice that people use to interpret experience general social behaviour. This knowledge & practice will form values, create attitudes & influence behaviour. (Hodgetts, Luthans And Doh, 2008: 92-120)
8.1 Greece
The Greeks are overt to discussion on most matters but their perspective of information processing is more associative than abstract. Interpersonal relationships are of major significance in the total scheme of matters. Friendships are deep and bear obligations. The extended family and deep friendships give structure and security to the individual role expectations. Patience is a sine qua non in business, yet with quick judgement, given that Greeks are excellent at bargaining. Business is usually carried out over a cup of coffee or in a restaurant (taverna). Accepting more food is considered a compliment by the host. The greeting can come in the forms of a hand shake, a hug or a kiss which can all come across at first encounters or among friends and acquaintances. (UHY International: Doing Business in Greece, 2008)
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8.2 Italy Italian culture emphasises on family and age-old friendships together with an abated sense of national identity and of state. Members of well associated families are entertained with more respect than usual. Italy has the largest number of Catholic churches per capita than any other country; hence its values are slightly swayed by Christian credence, ethics, and jurisprudence. Italy has a renowned history of substantial depravity in business and politics, quintessentially the Parmalat scandal, which is valuated to have cost 14 billion Euros. Italy’s solid family and sloppy national identities have paved the way for much of its corruption. 99% of Italian companies are estimated to be governed by families, entitling excessive energy to CEO’s and executives than acceptable in other countries. Many families exploit public companies as if they were personal property, often ensuing deceitful accounting practices and silenced records. (Gumbel, P,2004)
8.2.1 Italian Coffee Culture
Ever since the sixteenth century when the coffee bean brought from the Islamic world arrived at the ports in Venezia, Italians have been fond of their coffee. They have it first thing in the morning, usually espresso or cappuccino; have it after lunch; may be a quick quench during day time at work; then one after dinner. No matter what the occasion is coffee must be done right in Italy. It's an art, and there's no fooling around about the perfect espresso: rich, creamy, ideally balanced from the beginning to the end.
8.3 European Coffee Culture
Consumption of coffee is a cultural behaviour in most of the European countries. This consumption behaviour leads company into a greater challenge to market its tea products in those countries. Nevertheless company expects to position all its tea products in this new market by using its previous foreign trade experiences and appropriate marketing mix.
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9.0 Selling and Marketing Tea in Europe
Company is planning to export its tea products to Italy and Greece, as an initial step of entering into the EU market with an adaptive marketing mix strategy. Since this is a new market entrance, company is highly concerned of its marketing present in those two countries. Company intends to pursue the following marketing plan by seeking high return on investment.
9.1 Marketing Plan Marketing plan of the company for exporting tea to Italy and Greece is mentioned in Appendix 8.
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10.0 Conclusion
The essence of this report focuses on the new venture of the company to expand its business to Greek and Italian markets as an approach to reach other EU nations. An in-depth research has been carried out from this report in order to evaluate the expansion feasibility of the company towards its targeted market. The report reveals present situation of Greece and Italy while disclosing major reasons for the crisis in these countries. Further, it evaluates the situations in those markets in terms of the future expansion of the company. Consequently, the report has identified such potential areas of risks as exchange rate, economy, law and politics that the company might face with regard to this new market entry. As Greece and Italy play major roles in regional economic integration (REI), this report evaluates the impact of the European Union on the company’s businesses in Greece and Italy. Furthermore, the report has identified available entry strategies for the company and out of all, recommended the most appropriate approach to implement in Greek and Italian markets to be direct exporting with the use of intermediaries. In addition, the report has identified cultural awareness as a critical factor in these new markets and highlighted some of the major cultural behaviours and ethics in Greece and Italy. Further the report has explained the coffee culture in Europe and identified it as a key threat to enter into the new markets. At the end of the report, a marketing plan has been proposed for the company, based on the marketing mix elements in order to sell and market its tea products in the new markets.
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Recommendations
When applying porter’s five forces model into Greece and Italy markets in general (Refer Appendix9), it is noted that the both markets consist of high rate of risks. Therefore in order to mitigate these risks following recommendations can be suggest for the company expansion plan to Greece and Italy as an initial step to enter into other European nations.
Direct export using host country intermediaries as an entry mode to new markets:
As mentioned in the report this method provides various added values for the company expansion plan in Greece and Italian markets. Since there is high level of economical and political uncertainty available in these country it is important to select most appropriate well experienced business trade partner in these countries, which reduce the overall business risks associated with its foreign market operations.
Exchange rate risk management system :
The report has been identified exchange risk as a one of the major risk in international business context and highlighted the need of establishing exchange rate risk management system for the company foreign business operations. Refer Appendix3
Forward exchange agreement is an option available to mitigate exchange rate risk. Refer Appendix3
Adaptive marketing plan with greater accepting cultural values and ethics in the host country. Refer Appendix 7
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Franklin R. Root (1992) International Trade and Investment, Cincinnati, Ohio: SouthWestern Publishing Company. Greece Pricing: Cafe babel; http://www.cafebabel.co.uk/article/24326/italys-pastaprices-soar-to-14.html [retrieved on 22 Nov, 20011] Gumbel, P. (2004).Fortune: Italy: The Land of Bilk and Money, 149(2), 32. Available Business Full Text database [Retrieved 22 Nov, 2011] Harvard referencing guide: central Queensland University (2007), [online], Available: http://www.intec.edu.do/pdf/HARVARD/harvardguide%5b2%5d.pdf [retrieved on 28th Dec 2011] Hill, C.W.L & Jain A.K. (2009) International Business. 6th ed. Tata McGraw-Hill Publishing company Limited New Delhi.
Hill, C. W. (2007), International Business, 6th edition. McGraw Hill, NY. Hodgetts, R.,Luthans, F. And Doh, J (2008) International management: Culture, Strategy and behaviour. 6th ed.Delhi, Tata McGraw-Hill Publishing Company Limited. Jacque, L. (1996) Management and Control of Foreign Exchange Risk. Norwell, Massachusetts: Kluwer Academic Publishers Mendis, T. Referencing PPT (2010) Papaioannou, M.G. (2006) ‘Exchange rate risk measurement and management: Issues and approaches for firms’ South-Eastern Europe Journal of Economics, Vol 2, 129146. Root, R.F. (1992) International Trade and Investment, Cincinnati, Ohio: SouthWestern Publishing Company. Sercu, P & Uppal, R. (2003) Exchange rate volatility and international trade T. Hofmann & R. Schneide (2010) Economic Research & Corporate Development Working Paper 141: Euro zone debt crisis: Impact on the economy, [online], Available: https://www.allianz.com/staticresources/en/economic_research/images_englisch/pdf_downloads/working_papers/v_ 1278590982000/schuldenkrise_2010_e.pdf [retrieved on 21 Nov 2011].
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The Wall Street Journal: Markets: Live Blog: Fears Grow Around Italy, November2011[online], Available: http://blogs.wsj.com/source/2011/11/10/live-blogfears-grow-around-italy/?KEYWORDS=index+of+economic+freedom growth [retrieved on 22 Nov 2011]. Trading Economics: National Statistic service of Greece; http://www.tradingeconomics.com/greece/gdp-growth-annual [retrieved on 20 Nov 2011]. Tradingeconomic: ISTAT; http://www.tradingeconomics.com/italy/gdp-growth [retrieved on 21 Nov 2011]. U.S Department of State: Greece; http://www.state.gov/r/pa/ei/bgn/3395.htm [retrieved on 13 Nov 2011]. U.S Department of State: Italy; http://www.state.gov/r/pa/ei/bgn/4033.htm [retrieved on 13 Nov 2011]. U.S Government- export: EU export & Import; http://export.gov/static/EU_2009_Latest_eg_main_018166.pdf [retrieved on 20th November 2011] UHY International: Doing Business in Greece, 2008[online], Available http://www.uhy.com/media/PDFs/doing_business_guides/Doing%20Business%20in %20Greece.pdf [retrieved on 22 Nov 2011]. Wong, K.N & Tang, T.C. (2007) Exchange variability and the export demand for Malaysian’s, Monash University discussion paper, [online], Available: http://www.buseco.monash.edu.au/eco/research/papers/2007/1307variabilitywongtang .pdf [retrieved on 28th Nov 2011]. World Economic Outlook (WEO): Recovery, Risk, and Rebalancing, October 2010 Available: http://www.gfmag.com/gdp-data-country-reports/266-greece-gdp-countryreport.html#axzz1e3xn6T5e [retrieved on 19 Nov 2011]. Wu, D. & Zhao, F. (2007) ‘Entry Modes For International Markets: Case Study Of Huawei, A Chinese Technology Enterprise’, International Review of Business Research Papers, Vol 3, March, pp. 183 - 196
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Appendixes
Appendix 1
Source: Mongabay.com; http://data.mongabay.com/commodities/category/2-Trade/8Crops+and+Livestock+Products/667-Tea/61-Import+Quantity/84-Greece [retrieved on 18th November, 2011]
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Appendix 2
Sri Lanka Exports, Imports, Total Trade & Balance of Trade with Italy Value in USD MN (2005-2009)
Year
Sri Lanka’s Exports
Sri Lanka’s Imports
Total Trade Turn Over
Balance of Trade
2005
198.52
150.57
349.09
47.95
2006
260.36
159.10
419.46
101.26
2007
392.22
208.80
601.02
183.42
2008
445.05
232.46
677.51
212.59
2009
437.29
167.20
604.49
270.09
Sri Lanka Custom: Export & Imports; http://www.srilankaembassyrome.org/en/trade/srilanka-italy-trade-relations.html [retrieved on 20th Nov. 2011]
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Appendix 3
Exchange management system
In order to reduce vulnerabilities of an enterprise from major exchange rate movements, measuring and managing currency risk exposure are important functions. A company becomes vulnerable to these risks mainly because of the involvement in international operations and investments, where changes in the exchange rate could affect profit margins through their impact on sources for inputs, markets for outputs and debt and the value of assets. Cautious management of currency risk has been increasingly encouraged by corporate boards, especially after the currency-crisis incidents of the previous decade which consequently intensified international attention on risks in accounting and balance sheet. Multinational companies exploit different hedging strategies contingent upon the specific type of currency risk in order to manage it. These strategies have transpired to be increasingly intricate as they try to accost transaction, translation and economic risks simultaneously. As these risks could be harmful to the profitability and the market valuation of a company, corporate treasurers even of smaller-scale companies have become increasingly proactive in controlling these risks. Thus, a huge demand for hedging protection against these risks has appeared and in return, a greater variety of tools has been created by the intelligence of the financial industry. (Papaioannou, 2006) Some of the important solutions that the company can implement in order to establish the exchange management system within the organisation are as follows. 1. Identify different types of exchange rate risks that an enterprise is exposed to and measure those associated risk exposure. As previously mentioned, this deals with the determination of transaction, translation and economic risks, together with specific reference to the currencies related to each type of currency risk.
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2. Develop an exchange rate risk management strategy. After recognizing the types of currency risk and evaluating the risk exposure of the enterprise, establishing a currency strategy is necessary to tackle those risks. Particularly, this strategy should specify the currency hedging objectives of the enterprise – whether and why the enterprise should fully or partially hedge its currency exposures. In addition, a detailed currency hedging approach should be established. It is indispensable that an enterprise itemizes the entire currency risk management strategy including the implementation process of currency hedging, the hedging tools to be used, and the monitoring process of currency hedges on the operational level. 3. Create a concentrated essence in the treasury of the enterprise to cope with the practical aspects of the execution of exchange rate hedging. Responsibilities of this centralized entity are exchange rate forecasting, the hedging approach mechanisms, the accounting procedures regarding currency risk, costs of currency hedging and the establishment of benchmarks for evaluating the performance of currency hedging. (for large multinational companies, These tasks may be carried by a chief dealer.) 4. Develop a set of controls to monitor the exchange rate risk of the company and make sure suitable position taking. This includes setting position limits for each hedging tool, position monitoring via mark-to-market valuations of all currency positions on a daily basis (or intraday), and the establishment of currency hedging benchmarks for periodic monitoring of hedging performance (usually monthly). 5. Develop a risk supervision committee. This committee would in particular approve boundaries in position taking, investigate the feasibility of hedging tools and revise the risk management policy on a recurrent basis. (Papaioannou, 2006)
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Appendix 4
Forward exchange agreement
Forward exchange agreement is a contract between two parties to exchange a specified amount of one currency for another currency on a particular date, using a set rate calculated at the point of making the agreement. (Hill, W.L and Jain, K.J, 2009) This is a way of hedge future exchange rate risk involved in the international trade. Accordingly, the company can enter into a forward exchange agreement with European banks for a particular time period (30days, 90 days and 180 days into the future). Entering into a this forward contract, the company is guaranteed of an exchange rate to a particular set rate for the future irrespective of spot Euro exchange rates. If Euro were to depreciate further, the company would be protected. However, if it were to appreciate, then the company would have to forego that favourable movement. Since Euro has been depreciate continuously during last few months this way of minimising exchange rate risk would be more suitable for the company.
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Appendix 5
Economic Risk In the context of International business economic risk can be viewed as a one of the major risk. The economic risk mainly includes the facts such as exchange controls, tax policy, price controls available in the host country economy. These types of control imposed by host country will leads various difficulties such as minimise profits, raise in operation cost, reduce ability to compete, etc. Exchange controls are controls imposed by host country, as an effort to reduce the importation of goods that are considered as a luxury or sufficiently available in local market. Such regulations mainly affect the importation of goods, parts, or suppliers that are vital to production operations in the country. Tax policy is another control that can be imposed by host country which leads to change in prices of particular imported product. This will ultimately leads to change in business revenue in the host country. When host country imposed tax on particular imported products, prices of the products will be increased and reduce its ability to compete with other local products. Moreover this will be discouraging new entrance for the particular country. Any imports from non- European Union countries to European Union countries are subject to EU’s common customs tariffs. According to International Custom Journal- EU (Journal no 14); Italy and Greece conversional rate of duties for tea is 3.2% (Green tea (not fermented) in immediate pickings’ of a content not exceeding 3 kg). For most of manufactured products will be charge 5% - 8% for non-EU countries. (EU export & Import, 2009)
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Price control is another major risk face by business firms which is involve in international business. Many countries tend to use this tool for sectors that are highly sensitive for political pressure such as foods and health care. Countries tend to impose price control for main two reasons. One is to encourage customers to buy domestic products and second one is to protect domestic producers from product dumping. Moreover host countries economical facts such as inflation, customers buying power, etc; affect international business operations directly. High Inflation leads to reduce customers buying power. As a result of that demand for imported products within the host country will be reduce. This will create risk for firms when do trade in the host country. In Italy consumer goods has been increase nearly 5% during last few years. At the same purchasing power got affected accordingly. Property owners least affected with 1.4% of purchasing power reduction followed workers with 7.9% and retirees with 15.5%. In Greece this situation is more likely the same due to heavy debts. Therefore when start trade with these countries the company will be face considerable risk with relate to demand. (Greece pricing, n.d)
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Appendix 6 Overview of European Union
The European Union is a consortium of 27 European regimes constituted for economic and political concerns of the territory. Its incumbent members according to the alphabetical order include Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania ,Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and United Kingdom whereas Albia, Bosnia, Iceland, Macedonia, Montenegro, Serbia, Turkey etc; await affiliation.
In conjunction with the United Nations (UN) from a global perspective, EU has contributed its continent by consolidating peace, stability, affluence and improving quality of life. It has successfully stipulated Euro as the common unit of currency for the entire Europe thereby continuously constructing a single continent-wide market. This supports the global village concept enabling people, goods, services, and capital of all the fellow nations to diffuse independently as if they belong to one country. The border controls between countries of the union has been revoked, reducing restrictions to travel, reside and employ among them.
The EU was a consequence of contemplations to compensate adverse Second World War effects to regional economy by cherishing cooperation among economically interdependent countries to avoid conflict. To date, the EU has evolved from a sole economic alliance into a community of vast area of such interests as development aid and environmental policy. The EU actively encourages human rights and democracy and is most enthused in achieving emission reduction targets fostering the fight against climate change in the globe. (“Basic information on the European Union, n.d)
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Appendix 7
Mode of Entry
Modes of entering foreign markets
1. Export-based entry.
Indirect exporting – refers to the use of agencies in the home/domestic country to get the product into the foreign market.
Direct exporting- involves selling product overseas direct to the end user or finding a local distributor in the overseas market to sell the product on the exporters behalf.
Sales office in overseas market – having employees in the foreign market to sell products on behalf of the home office.
Licensing – involves earning an up front fee for the transfer of know-how and a royalty linked to volume produced and sold in the overseas. It enables the overseas party to legally use the firm’s brand, technical innovations, corporate image, etc.
Franchising – a form of licensing whereby the franchisor (the seller) gives the franchisee (the overseas buyer) the legal right to undertake business in a specified manner under the franchisor’s name in return for royalty payment usually in the form of percentage of sales.
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2. Manufacturing-based entry.
Joint venture – a collaborative foreign market entry method whereby two or more parties unite to access an overseas market where each party bring their own expertise to the relationship. Each party takes responsibility for some of the risk and proportionately some of the profit sharing.
Acquisition – Involves entering an overseas country buy purchasing a company in that country. The company purchased may be a potential competitor. Useful preferred by cash rich organisations.
Greenfield operation – This is where the firm, using its own funds, builds a manufacturing operation overseas.
3. Relationship-based entry.
Contract manufacturing – a foreign market entry method whereby the international marketing firm contracts the manufacturing of the product to overseas manufacturers but retains control of the marketing of the product
Strategic alliances – collaborations between firms in various countries to exchange or share value creating activities.
Countertrade – a foreign market entry method that involves linking of an import and an export transaction in a conditional manner.
Source: Wu, D. & Zhao, F. (2007). ‘Entry Modes For International Markets: Case Study Of Huawei, A Chinese Technology Enterprise’, International Review of Business Research Papers, Vol 3, March, pp. 183 - 196
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Appendix 8 Marketing Plan Company entire marketing plan is develop to achieve following main two objectives.
To break even within the first year and thereafter increase profits by 2% annually for the next five years.
To achieve a sales increase by 3% every year for the next three years.
Product Company is plans to export its all main product range to Italy and Greece, which include Ceylon black, white and green tea. When these products are being entered into a new market, and most often a foreign one there might be certain aspects of the product that needs to be modified to suit the target market.
Core component Company would not be changing any of its core product components of ingredients when exporting to Italy and Greece, as the company believes in selling a uniform product in every country.
Packaging component
Each product packages will have certain modifications in the way its match with the country culture and other regulations. Company products are packaged in bulk using cardboard material so that it can be recycled later.
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
Support services component
Company has taken measures to provide customers with great customer service. Firstly, it has a separate section in its web site where customers could mail any queries to and also leave behind their details where they could be notified of new promotions etc through mail. A customer care hotline will be set up where customers would also have the option of calling for any information required. Price Italy and Greece has price controls only for agricultural and pharmaceutical products. When pricing a product, firms should consider payment and credit terms. Italy and Greece both countries charge 19%- 21% of VAT. (EU VAT rates, n.d)
Place During first year company is planning to distribute its entire product range among main cities of both countries via host country distributors. (Ex- Rome, Milan, Naples in Italy/ Athens, Thessaloniki, Patras in Greece)
Promotions Company needs to carry an effective advertising campaign to full fill both push and pull promotion objectives. The advertisements would feature the core message of the product being the naturalness. Push strategies would also be conducted to a certain extent in order to; -
Accept the product in stores.
-
Acquire more shelf space.
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Create a positive relationship with host country distributors.
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Secure cooperation among host country distributors and the company.
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Gain customer insights directly from the host country distributors.
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Appendix 9
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