Channels of Distribution PDF

**MOTIVATIONS FOR CHANNELS OF DISTRIBUTION** - [Global competition] is motivating firms to seek innovative ways of entering new markets. - Export managers must decide which marketing functions are to be delegated to other intermediaries or partners and which are to be performed int...

**MOTIVATIONS FOR CHANNELS OF DISTRIBUTION** - [Global competition] is motivating firms to seek innovative ways of entering new markets. - Export managers must decide which marketing functions are to be delegated to other intermediaries or partners and which are to be performed internally. - Selecting and managing the right distribution systems is the key to successful internationalization. - They provide a competitive advantage in global markets by helping to identify market opportunities. - Channels are difficult to change and thus require careful planning. - Contracting is determined by the governance mechanism that seeks to minimize transaction costs. i. Specific assets are involved in investments made in market research, branding, product design, and human assets. ii. "Uncertainty" refers to changes in market forces stemming from individuals' limited information or opportunistic motives of other actors. iii. "Frequency" concerns the frequency and volume of transactions. B. **THE INDIRECT CHANNELS OF DISTRIBUTION** - Indirect channels refer to an approach where firm exports through an independent local intermediary that assumes responsibility for moving the product overseas. - Indirect exporting entails reliance on another firm to act as a sales intermediary and to assume responsibility for marketing and shipping the product overseas. - The manufacturer incurs no start-up cost, and this method provides small firms with little experience in foreign trade access to overseas markets without their direct involvement. However, using indirect channels has certain disadvantages: - the manufacturer loses control over the marketing of its product overseas. - the manufacturer's success totally depends on the initiative and efforts of the chosen intermediary. - The latter could provide low priority to, or even discontinue marketing the firm's products when a competitor's product provides a better sales or profit potential. C. **THE DIRECT CHANNELS OF DISTRIBUTION** - - - - - - - - - - - - D. **FACTORS THAT DETERMINE CHANNEL CHOICE** 1. **Manufacturer's Resources and Experience** - - Firms with strong financial resources are likely to establish channels that they either own or control (direct channels). In some cases, indirect channels may require significant investment in terms of loans and subsidies in cases of competitive adversity such as poor exchange rates, demand for frequent deliveries, stocking costs, or training costs for post-sales service. - Even though direct channels may result in high profit margins, it is important to realize that the additional sales generated by intermediaries may, in the long run, more than compensate for the difference. 2. **Nature and Availability of Intermediary** - Every country has certain distribution patterns that have evolved over the years and are complemented by supportive institutions. - Firms that have used specific types of distribution channel in certain countries may find it difficult to use similar channels in other countries. - This occurs in cases in which distributors have exclusive arrangements with other suppliers or competitors or when such channels do not exist. 3. **Customer Characteristics** - Customer characteristics in term of age, gender, or education (demographics), interests, attitudes, and values (psychographics) are important in making channel design decisions. - These factors along with questions relating to when, how, or why customers buy the product help the firm make appropriate channel choices that lead to a firm's relative positional advantage. - Appropriate evaluation of customer needs may result in the introduction of two types of channels to serve different market needs. - If the number of consumers is large and concentrated in major population centers, the company may opt for direct or multiple channels of distribution. - Direct exporting is often preferable if customers are geographically homogeneous, have similar buying habits, and are limited in number, which allows for direct customer contact and greater control. 4. **Product Characteristics** - The choice of channel structure is primarily dictated by market considerations. - However, in certain situations, the nature of the product determines channel choice. - Industrial equipment of considerable size and value that requires more after-sales service is usually exported to the user or using other direct channels. - Direct channels are also frequently used for products of a perishable nature or high unit value (since it will bring more profit) or for products that are custom-made or highly differentiated. - 5. **Marketing Environment** - Examination of the marketing environment requires a focus on the country's distribution culture as well as the characteristics of the market. - Most countries have a distribution system that has evolved over years and that has established linkages and structures between channel - The characteristics of the market have implications for channel choice. - This includes but is not limited to the size of the market, levels of disposable income, potential market growth, and purchasing habits. 6. **Control** - - 7. **Coverage** - - E. **THE DIFFERENT TYPES OF INTERMEDIARIES** - - - - - **Indirect Channels** 1. **Exporters that Sell on Behalf of the Manufacturer** i. - Manufacturer's export agents usually represent various manufacturers of related and noncompeting products. - They may also operate on an exclusive basis. - It is an ideal channel to use especially in cases involving a widespread or thin overseas market. - They are also used when the product is new and demand conditions are uncertain. - The usual roles of the MEA are as follows: - Handle direct marketing, promotion, shipping, and sometimes financing of merchandise. The agent does not offer all services. - Take possession but not title to the goods. The MEA works for commission; risk of loss remains with the manufacturer. - Represent the manufacturer on a continuous or permanent basis as defined in the contract. ii. - Export management companies act as the export department for one or several manufacturers of non-competitive products. - An EMC often does extensive research on foreign markets, conducts its own advertising and promotion, serves as a shipping/forwarding agent, and provides legal advice on intellectual property matters. - It also collects and forwards credit information on overseas customers. - Most EMCs are small and usually specialize by product, foreign market, or both. Some can perform only limited functions such as strategic planning or promotion. Export management companies solicit and carry on business in their own name or in the name of the manufacturer for a commission, salary, or retainer plus commission. - Occasionally, they purchase products by direct payment or financing for resale to their own customers. Export management companies may operate as agents or distributors. - The following are some of the disadvantages of using EMCs: - Manufacturers may lose control over foreign sales. To retain sufficient control, manufacturers should ask for regular reports on marketing efforts, promotion, sales, and so forth. This right to review marketing plans and efforts should be included in the agreement. - Export management companies that work on commission may lose interest if sales do not come immediately. - They may be less interested in new or unknown products and may not provide sufficient attention to small clients. - Exporters may not learn international business since EMCs do most of the work related to exports. - Despite these disadvantages, EMCs have marketing and distribution contacts overseas and provide the benefit of economies of scale. Export management companies obtain low freight rates by consolidating shipments of several principals. By providing a range of services, they also help manufacturers to concentrate on other areas. iii. - Trading companies are the most traditional and dominant intermediary in many countries. - In Japan, they date back to the nineteenth century and in Western countries, their origins can be traced back to colonial times. - They are also prevalent in many less developed countries. - They are demand driven; that is, they identify the needs of overseas customers and often act as independent distributors linking buyers and sellers to arrange transactions. - They buy and sell goods as merchants taking title to the merchandise. Some work on a commission. - They may also handle goods on consignment. - Trading companies offer services to manufacturers like those provided by EMCs. - Trading companies offer more services and have more diverse product lines than export management companies. Trading companies are also larger and better financed than EMCs. - Trading companies are not exclusively restricted to export--import activities. Some are also engaged in production, resource development, and commercial banking. Korean trading companies. 2. **Exporters that Buy for Their Overseas Customers** - Export commission agents (ECAs) represent foreign buyers such as import firms and large industrial users and seek to obtain products that match the buyer's preferences and requirements. - They reside and conduct business in the exporter's country and are paid a commission by their foreign clients. - In certain cases, ECAs may be foreign government agencies or quasi-government firms empowered to locate and purchase desired goods. - They could operate from a permanent office location in supplier countries or undertake foreign government purchasing missions when the need arises. - The confirming house may also carry out some functions performed by the commission agent or resident buyer (making arrangements for the shipper and so on). - For the exporter, this is an easy way to access a foreign market. - There is little credit risk, and the exporter has only to fill the order. - Another variation of the ECA is the resident buyer. - The major factor that distinguishes the resident buyer from other ECAs is that in the case of the former, a long-term relationship is established in which the resident buyer not only undertakes the purchasing function for the overseas principal at the best possible price, but also ensures timely delivery of merchandise and facilitates principals' visits to suppliers and vendors. - This allows foreign buyers to maintain a close and continuous contact with overseas sources of supply. - One disadvantage of using such channels is that the exporter has little control over the marketing of products. 3. **Exporters that Buy and Sell for Their Own Accounts** i. *Export Merchants* - Export merchants purchase products directly from manufacturers, pack and mark them according to their own specifications, and resell them to their overseas customers. - They take title to the goods and sell under their own names, and, hence, assume all risks associated with ownership. - Export merchants generally handle undifferentiated products or products for which brands are not important. - In view of their vast organizational networks, they are a powerful commercial entity dominating trade in certain countries. - When export merchants, after receiving an order, place an order with the manufacturer to deliver the goods directly to the overseas customer, they are called export drop shippers. In this case, the manufacturer is paid by the drop shipper, who in turn, is paid by the overseas buyer. - Such intermediaries are commonly used to export bulky (high-freight), low-unit value products such as construction materials, coal, lumber, and so forth. - Another variation of export merchant is the export distributor (located in the exporter's country). Export distributors have exclusive rights to sell manufacturers' products in overseas markets. They represent several manufacturers and act as EMCs. - The disadvantage of export merchants as export intermediaries relates to a lack of control over marketing, promotion, or pricing. ii. *Cooperative Exporters (CEs)* - These are manufacturers or service firms that sell the products of other companies in foreign markets along with their own. - This generally occurs when a company has a contract with an overseas buyer to provide a wide range of products or services. - Often, the company may not have all the products required under the contract and turns to other companies to provide the remaining products. - The company (providing the remaining products) could sell its products without incurring export marketing or distribution costs. - This helps small manufacturers that lack the ability or resources to export. This channel is often used to export products that are complementary to that of the exporting firm. - A good example of this is the case of a heavy equipment manufacturer that wants to fill the demand of its overseas customers for water drilling equipment. - The heavy equipment company exports the drilling equipment along with its product to its customers. - Companies engage in cooperative exporting in order to broaden the product lines they offer to foreign markets or to bolster decreasing export sales. 1. Direct Marketing from the Home Country - A firm may sell directly to a foreign retailer or end user, and this is often accomplished through catalog sales or traveling sales representatives who are domestic employees of the exporting firm. - Such marketing channels are a viable alternative for many companies that sell books, magazines, housewares, cosmetics, travel, and financial services. - Foreign end users include foreign governments and institutions, such as banks, schools, hospitals, or businesses. - Buyers can be identified at trade shows, through international publications, and so on. - If products are specifically designed for each customer, company representatives are more effective than agents or distributors. - The growing use of the Internet is also likely to dramatically increase the sale of product and/or services directly to the retailer or end user. - Direct sales can also be undertaken through foreign sales branches or subsidiaries. - A foreign sales branch handles all aspects of the sales distribution and promotion, displays manufacturers' product lines and provides services. - The foreign sales subsidiary, although similar to the branch, has broader responsibilities. - All foreign orders are channel through the subsidiary, which subsequently sells to foreign buyers. - Sales subsidiaries are often used for lucrative markets with growth potential or products with a high intellectual property content as well as those that require sophisticated training and after-sales service. - This approach may raise issues of transfer pricing. - Direct marketing is also used when the manufacturer or retailer desires to increase its revenues and profits while providing its products or services at a lower cost. The firm could also provide better product support services and further enhance its image and reputation. - A major problem with direct sales to consumers results from duty and clearance problems. A country's import regulations may prohibit or limit the direct purchase of merchandise from overseas. Thus, it is important to evaluate a country's trade regulations before orders are processed and effected. 2. Marketing Through Overseas Agents and Distributors i. - Overseas agents are independent sales representatives of various noncompeting suppliers. - They are residents of the country or region where the product is sold and usually work on a commission basis, pay their own expenses, and assume no financial risk or responsibility. - Agents rarely take delivery of and never take title to goods and are authorized to solicit purchases within their marketing territory and to advise firms on orders placed by prospective purchasers. - The prices to be charged are agreed upon between the exporters and the overseas customers. - Overseas agents usually do not provide product support services to customers. - Agency agreements must be drafted carefully so as to clearly indicate that agents are not employees of the exporting companies because of potential legal and financial implications, such as payment of benefits upon termination. - In some countries, agents are required to register with the government as commercial agents. - Overseas agents are used when firms intend to: - sell products to small markets that do not attract distributor interest, - market to distinct individual customers (custom-made for individuals or projects), - sell heavy equipment, machinery, or other big-ticket items that cannot be easily stocked, - solicit public or private bids. - Firms deal directly with the customers (after agents inform the firms of the orders) with respect to price, delivery, sales service, and warranty bonds. - Given their limited role, agents are not required to have extensive training or to make a substantial financial commitment. - They are valuable for their personal contacts and intelligence and help reach markets that would otherwise be inaccessible. - The major disadvantages of using agents are: - legal and financial problems in the event of termination (local laws in many countries discriminate against alien firms (principals) in their contractual relationships with local agents). - firms assume the attendant risks and responsibilities, ranging from pricing and delivery to sales services including collections. - agents have limited training and knowledge about the product, and this may adversely impact product sales. ii. - These are independent merchants that import products for resale and are compensated by the markup they charge their customers. - Overseas distributors take delivery of and title to the goods and have contractual arrangements with the exporters as well as the customers. - No contractual relationships exist between the exporters and the customers, and the distributors may not legally obligate exporters to third parties. - Distributors may be given exclusive representation for a certain territory, often in return for agreeing not to handle competing merchandise. - Certain countries require the registration and approval of distributors (and agents) as well as the representation agreement. - Distributors, unlike agents, take possession of goods and also provide the necessary pre- and post-sales services. They carry inventory and spare parts and maintain adequate facilities and personnel for normal service operations. They are responsible for advertising and promotion. - Some of the disadvantages of using distributors are: - loss of control over marketing and pricing (they may price the product too high or too low). - limited access to or feedback from customers. - limited opportunities to learn international business know-how and about developments in foreign markets. - dealer protection legislation in many countries that may make it difficult and expensive to terminate relationships with distributors.