INTERNATIONAL MARKETING

SECTION 8C

GLOBAL DISTRIBUTION SYSTEMS

ALAN L. WHITEBREAD

CHANNEL POWER and DIFFERENTIAL ADVANTAGE

• CHANNEL POWER– is obtained through differential advantage.

• DIFFERENTIAL ADVANTAGE CAN BE ANY COMBINATION OF THE FOLLOWING.– Physical / experiential– Psychological [communication / perception]– Purchase environment– Total cost including price and terms of sale– Post-purchase satisfaction [cognitive dissonance]

WHY ARE CHANNELS IMPORTANT?

• One of the least developed areas of business, they present an opportunity to rapidly expand sales and profitability– ALTOIDS [a product of Kraft Foods of Altria] went from <$10M to

>$100M by changing from a niche to a mass distribution strategy including supermarkets, drug chains, and mass merchandisers. There were no changes to the other 3 P’s.

• Companies have prospered and declined primarily based on their evolving [or not] channel strategies.– Office products firms / Dell and Compaq

• The emergence of multi-channel shopping provides firms the opportunity to provide products through multiple channels.– You buy toilet paper at a retail store [a grocery store or pharmacy for

example] for your home but you purchase it in large quantities for your factory from a paper products distributor.

PRODUCTS &

SERVICES

APPLICA-TIONSMARKET[S]

SEGMENT[S]

CHANNELS OF DISTRIBUTION

Channels of distribution tie markets, segments, products, services, and applications together.

INTERNATIONAL DISTRIBUTION

• Channel Structures

• Distribution Patterns

• Types of Resellers

• Channel Selection

• Channel Relationships

CHANNEL STRUCTURES

PRODUCERSAND

PROVIDERS

CHANNELS BUSINESSCONSUMERS

CHANNELS OF DISTRIBUTION PROVIDE UTILITY OF PLACE, TIME, POSSESSION, & INFORMATION

CHANNEL STRUCTURE

• To really understand channel structure, you must understand the role [functions] the entity is filling. You can not use their name as a guide.

• What the types of channel members are available in your country?

• What is the channel intensity for the– Firm?– Market?

• How many channels should be used to cover the market [segments]?

CHANNEL MEMBERS

MANUFACTURER • Manufacturers, importers, or primary providers, or any other entity the appears as the originator as perceived by their markets or market segments.

CHANNEL MEMBERS

Manufacturer

DISTRIBUTORor

WHOLESALER

• Manufacturers or importers or primary providers

• Large resellers generally service smaller resellers.– DISTRIBUTOR to DEALER for B2B– WHOLESALER to RETAILER for B2C

CHANNEL MEMBERS

Manufacturer

NATIONALor REGIONAL

RETAIL CHAINS

• Manufacturers or importers or primary providers

• Significant purchasing power exists for multiple retail brands / stores.– Department store, mass

merchandiser, specialty store, category killer, convenience store, off-price retailer, supermarket chain, …

CHANNEL MEMBERS

Manufacturer

Distributor or

Wholesaler

DEALERor

RETAILER

• Manufacturers or importers or primary providers

• Large resellers generally servicing smaller resellers

• Generally smaller resellers– Smaller retailers, franchisees, Value Added

Resellers [VARs], individual stores, …– Potentially licensees– Beware of the DEALER label – it can mean

the same as DISTRIBUTOR in some countries or industries.

CHANNEL MEMBERS

Manufacturer

Distributor or

Wholesaler

Dealer or Retailer

BUSINESSCONSUMERS

• Manufacturers or importers or primary providers

• Large resellers generally servicing smaller resellers

• Generally smaller resellers although there are very large retailers

• Business consumers of various types generally purchasing for any of the following reasons.

1. Consumption in the operation of their business2. As a component of a finished product they produce3. As a final product for resale

DEFINING CHANNEL STRATEGY AND OBJECTIVES

• Market share / volume• Market coverage [distribution intensity]• Distribution strategy• Channel roles, expectations, and controls• Others

– Presence and continuity– Channel alignment, control, length, and leadership– Distribution and channel logistics– Profitability

CHANNEL STRATEGIES

• Use the market segments to determine which sets of channels of distribution may be the optimum ones.– One often finds that channel sets are not optimized.– This requires significant discussion with existing

channel members.

• Build a new channel of distribution– Risky and expensive – especially overseas– Consider an acquisition or joint venture

INTERNATIONAL CHANNELS

• They may be longer and thus require a larger number of intermediaries.– Wholesalers, distributors, retailers, and many other

types exist.– In some countries like Japan, laws prevent you from

shortening the channel.

• They are more complex to manage due to the differences of intermediaries and their environments.

• They are more difficult to effectively and economically control.

TYPES OF VERTICAL MARKETING SYSTEMS [VMS]

Greater

Degreeof

DirectControl

Lesser

Greater

Degreeof

DirectControl

Lesser

CORPORATECommon Ownership at Different Channel Levels

CONTRACTUALContractual Agreements Among Channel Members especially internationally

ADMINISTEREDLeadership is Assumed by One or a Few Dominant Members; Contracts are not common

TYPES OF CHANNELS

Corporate

Subsidiaryor JV

Corporate

Subsidiaryor JV

Contractual

Resellers Licensees [Franchisees]

Contractual

Resellers Licensees [Franchisees]

Administered

No agreement

Administered

No agreement

International Vertical Marketing Systems [VMS]

Degree ofDirect

Control

Degree ofDirect

ControlGreater Lesser

International channels of distribution for a company may use any possible combination of the above systems. There is frequently significant region-to-region variation and sometimes major country-to-country differences. Each business must build the best VMS combination

for their needs.

DISTRIBUTION STRATEGY: INTENSITY

INTENSIVEFrito-Lay:

we need to have potato chips available everywhere.

SELECTIVEPanasonic:

we need to select technically competent resellers.

EXCLUSIVEJaguar:

we need a single strong dealer in every territory

CHANNEL MAPS: Understanding the channel flow

• A channel map provides a picture of the flow of goods and/or services through the various functional channel members from the originator to the final consumer.

• It is a great tool for explaining your system, or system changes and why they are needed. It is especially good for explaining changes in channels or new channels to your sales organizations.

B2B [INDUSTRIAL] CHANNEL MAP[Simple direct distribution]

Manufacturer’ssales branch

Manufacturer’srepresentative

Manufacturer

B2B CONSUMERS

Manufacturer’sInternet site

B2B [INDUSTRIAL] CHANNEL MAP[Simple indirect distribution]

Manufacturer’ssales branch

Manufacturer’srepresentative

Manufacturer

B2B CONSUMERS

Manufacturer’sInternet site

Many Types of Industrial Distributors [See NAICS]

May Resell to Many Types of Industrial Dealers

CONSUMER CHANNEL MAP

Wal-Mart DCDistribution Center

Wal-MartMass merchandiser

Wrigley’s Gum

Candy & TobaccoWholesaler

Small RetailerConvenience Store

CONSUMERS

Wal-MartRetail Store

Coca-Cola USA

CHANNEL MAP:COCA-COLA [U.S. simplified]

ConvenienceBP, 7-Eleven

SupermarketsKroger

Cold DrinkRestaurants

Co-operativesMass Mdsers.Wal-Mart

Coca-Cola Bottling [owned and franchised]

Special EventsFIFA World Cup

Coke Machines

CONSUMERS

DIRECT DISTRIBUTION

Pros• Close to customers• Active market development• Greater control over

strategies• More uniform policy and

program implementation• Increased market

knowledge

Cons• Difficult to manage if not

familiar with new market• Time consuming• Expensive• Requires sufficient volume

INDIRECT DISTRIBUTION

Pros• Simple• Inexpensive• Small start-up costs• Intermediaries usually

represent several clients

Cons• Lose marketing control

in target market• Depend on performance

of intermediary• Potential reseller conflict

of interest• Intermediary may have

significant bargaining power

THINKING ABOUT CHANNELS OF DISTRIBUTION

• To build good channels of distribution one needs to understand the buying choices and preferences of every channel level.– For example, what choices do you have for where to

purchase a digital camera in the U.S.?• Camera specialty store• Discount merchandiser• Warehouse club• Drug store• Online• In what other types of stores can you buy a digital camera?

TYPES OF RESELLERS: WHOLESALING INTERMEDIARIES• MERCHANT

WHOLESALERS• Take Title to Goods• Independently owned• Distributors / Dealers• Fairly standard arrangements

EXAMPLES INCLUDE:• Distributors - Wholesalers• Dealers - Retailers• Exporter• Export Trading Company• [possibly state

controlled]

• REPRESENTATIVES• Independently owned• Never take Title to Goods• Help negotiate business

arrangements• Be careful of payments !

EXAMPLES INCLUDE:• Agent• Broker• Export Broker• Export Management Company• Manufacturer’s Rep.• Freelance Sales Person

WHOLESALER PROBLEMS

• Problems of fragmentation• If the number of wholesalers is high, transaction costs are

high and drive consumer prices up.• Smaller firms carry smaller lines, less variety, smaller

assortment, order smaller quantities, and have limited market coverage and service

• Dealing with fragmentation– Increase the company role

• Increase foreign direct investment into building channels• Use master wholesalers to reach smaller ones

RESELLERS ADD VALUEBY PERFORMING FUNCTIONS

• FOR THE SUPPLIER

• -Market coverage• -Sales contact• -Inventory• -Order processing• -Information• -Customer support

• FOR THE CUSTOMER

• -Information• -Credit / Payment

methods• -Customer service• -Technical support• -Allocating / expediting

CUSTOMER-CHANNEL MEMBER INTERACTION AND THE NATURE OF

THE EXCHANGE TRANSACTIONAL EXCHANGE

RELATIONAL EXCHANGE

Office supplies Key component

Short-term oriented Past, present, and future considered

Sharp-in, sharp-out Reciprocity

Self-interest only Relationships

No concern for the future Long-term focus

One time deals Win-Win

SOURCES OF INTERNATIONAL RESELLER INFORMATION

• Competitor’s resellers

• Consultants

• Industry Associations [and directories]

• Trade shows

• U.S. Embassy

• U.S. Department of Commerce– Agent Distributor Service– Export Marketing Service

B2B CHANNELS – TYPES OF DISTRIBUTORS

• General Line• Material handling / Material handling supplies• Plastic• MRO• Electrical• HVAC• Plumbing• Medical instruments / Medical supplies• Chemical • …many more• What are the types of distributors and their “natural”

channels in your country? HINT: you may want to refer back to NAICS in the previous lecture to help do this.

SELECTING CHANNEL MEMBERS

• A key to solid long-term growth is selecting resellers that fit a defined profile. Some key profile items include …

– Have they successfully sold similar products?– How may their competitive lines impact our sales?– Can they adequately cover the territory [number of

sales people, locations, …]?– Will they fit with our corporate culture and philosophy?

SELECTING CHANNEL MEMBERS

• SCREENING AND SELECTING CHANNEL MEMBERS: CRITERIA – Must fit the customer profile [characteristics] – Meet minimum qualifications – Use and acceptable sales style– Possess product and market segment knowledge– Possess industry experience – The product[s] will fit with existing product lines– They are willing and able to perform all specified

channel role[s]

SELECTING CHANNEL MEMBERS

• SCREENING AND SELECTING CHANNEL MEMBERS: CRITERIA [continued] – Must be a team player– Sales strategy: existing and potential fit– Make some sales calls with their people to verify

sales skills– Administrative / management fit– Management orientation [long vs. short] and

chemistry– Risk assessment– Check references [industry, suppliers]

STRUCTURING CHANNELS WITH TERMS & CONDITIONS OF SALE

ACCOUNT TYPE PAYMENT TERMS DELIVERY TERMS SPECIAL TERMS PROMOTION & INCENTIVES

Regional distributor

Distributor

Retailer

Dealer

B2B Consumer

Less

STRATEGY FOR NEW MARKET ENTRY

• ENTRY OPTIONS– Use established channels [competitive]– Build your own channels [risky and expensive]– Abandon the market

• You must provide incentive to channel members to accept a new product and/or vendor.

• Indirect distribution is often the most effective alternative.

ALL U.S. FIRMS SHOULD HAVE

1. some form of Export Reseller Questionnaire that they use with every reseller inquiry, and

2. a completed Reseller Compliance Application for every foreign reseller

to have maximum protection under U.S. law for dual-use products and transshipments! See the Readings for examples.

SECTION 8C: REVIEW

• Channel decisions are difficult to manage globally.

• A global marketer must – tailor marketing programs to various types of channels– and / or introduce new distribution / merchandising

concepts

• Effective channel management is dependent on control—from the selection process through the implementation of roles, expectations, and controls.

SECTION 8C: REVIEW

• You should now have knowledge of– Why channels of distribution are important– Types of channel members and VMS– Key channel issues

• Distribution intensity, channel maps, direct or indirect• Wholesaling intermediaries and problems• Channel roles, expectations, and controls

– Channel control, selecting channel members, and channel conflict