Selecting Channel Members

2617 words (10 pages) Essay in Marketing

12/07/17 Marketing Reference this

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Distribution plays an important role in the implementation of the international marketing program as it enables the products and services to reach the ultimate customer. And international marketing firm has the option of managing its distribution function either directly or indirectly through middleman or a suitable combination of the two.

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Due to physical distance, and also the differences in geographical, cultural and market characteristics of the trading countries, use of middlemen is found quite prevalent in international marketing. In fact, distribution is one such primary functions of marketing which makes use of the services of external independent agencies that bind the firm in a long term relationship.

International Distribution Channels:-

Distribution has two elements, the institutional and the physical. Physical distribution aspects cover transport and warehousing.

The longer the channel, the more likely that producer’s profits will be indirectly reduced. This is because the end product’s price may be too expensive to sell in volume, sufficient for the producer to cover costs. Yet cutting channel length may be impossible, as country infrastructure requirements may dictate them being there.

As already mentioned international marketers have the options of organizing distribution of their goods in foreign markets through the use of indirect channels, i.e. Using intermediaries, direct channels or a combination of the two in the same or different markets.

Indirect Distribution

Indirect channels are further classified based on whether the international marketer makes use of domestic intermediaries. An international marketer therefore, can make use of the following types of intermediaries for distribution in foreign markets.

Domestic Overseas Intermediaries

Commission buying agents

Country-controlled buying agents

Export management companies (EMCs)

Export merchants

Export agents

Piggy backing

Foreign Intermediaries

Foreign Sales Representatives

Foreign Sales Agents

Foreign Stocking and Non-Stocking Agents

State Controlled Trading Companies

Direct Distribution

The options available to international marketer in organizing direct distribution include sending missionary skies representatives abroad from the headquarter, setting up of local sales/branch office in the foreign country or for a region, establishing a subsidiary abroad, entering into a joint venture or franchising agreement.

Companies having long-term interest in international marketing find it expedient to deploy their own sales force in foreign markets. This helps them in increasing their sales volume through committed market development activities, better control and motivation of foreign intermediaries being used, and paving the way for smoother transition to direct distribution and marketing.

International Distribution Policy:-

The international distribution policy of a firm according to Cateora, should cover the following factors:

  • Question of control, size of margins, length of channels, terms of sale and channel ownership.
  • Resource (money and personnel) commitment plans for the distribution function management keeping profit goals in a foremost position.
  • Specific market goals expressed in terms of volume, market share and margin requirements, to be accomplished.
  • Return on investment, sales volume and long run potential as well as guidelines for solving routine distribution problems, and
  • The relationship between long-and short-term goals, the extent of the company’s involvement in the distribution system as well as the extent of its ownership of middlemen.

Adapting to distribution patterns

Notwithstanding, the international distribution policy of the company, the factor of flexibility to adapt the distribution policy to local conditions of the foreign markets is very crucial for effective results.

A clear understanding of the target market characteristics covering aspects such as traditions and conventions in the wholesaling and retail distribution patterns shopping habits of customers including customers reliance on channel members for product information and servicing; commercial terms; and legal requirements help define the selection of channel.

The following trends help to illustrate the need to the above analysis for suitable adaptation of the distribution patterns:

In the US, there has been a rapid expansion of large supermarkets and other retail chains, and also the deep-vertical integration into wholesale and manufacturing by large retail houses:

In Sweden, a powerful consumer-oriented cooperative movement handles a substantial business in food, petroleum, etc.

In Mexico, there is a modern retail distribution for the urban people, and traditional outlets and public distribution system exists for the poor.

In China, wholesalers mainly control the Chinese distribution system.

In Japan, large trading companies, handle half of Japanese trade while a large number of wholesale and retail outlets help products to penetrate in its market.

In Saudi Arabia, a small number of hands approved by the royal family control its manufacturer-wholesaler retailer distribution system.

Agents in Foreign Markets

Agents, known by different names and performing varying functions in different foreign markets, have a historically established place in international distribution. While agents do not take the title to the goods, their importance stems from: local language proficiency, access to important policy and decision-makers, overcoming business culture differences, short circuiting the buying-selling process, and performing the cumbersome formalities and complying with routines and procedures of the foreign market.

Selecting Distribution Channels and Channel Members:-

Channels are an integrative part of the marketer’s activities and as such are very important. They also give a very vital information flow to the exporter. A channel is an institution through which goods and services are marketed. Channels give place and time utilities to consumers. In order to provide these and other services, channels charge a margin. The, longer the channel the more margins are added.

Within the overall international distribution policy of the firm, the factors of:

capital requirements;

level of distribution costs;

desired extent of control over distribution channel;

depth of market coverage;

product-market distribution pattern characteristics;

competitive practices;

legal requirements; and

Short-term versus long-term involvement of the firm in international marketing govern the choice of distribution channels.

Basically the choice comes down to two alternatives, the producer /seller selling direct or through an international merchant or agent.

This is followed by the development of criteria for the selection of specific intermediaries. The criteria generally includes factors as financial soundness, local government contacts, business reputation, distribution network, technical support and infrastructural facilities (esp. relating to heavy industrial goods), business experience and managerial expertise, commercial terms, and extent of exclusivity to the international marketer. As the selection of the channel members commit the marketer to them for a relatively long period of time, their selection involves a cautious process and a careful analysis and referencing. Some international marketers make us of an elaborate process in this regard which begins with relative rating of candidate firms on pre-determined criteria.

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After the channel member is selected it is a prudent business practice to enter into a written agreement spelling out the scope of commitment to each other and thus minimizing the possibility of disputes and misunderstandings, 5 lists the items that should be included in a typical agreement with the foreign channel members.

Items to include in an Agreement with Foreign Channel Members

Name and address of both parties

Date when the agreement goes into effect

Duration of the agreement

Provisions for extending or terminating the agreement

Description of sales territory

Establishment of discount and/or commission schedules and determination of when and how paid.

Provisions for revising the commission or discount schedules

Establishment of a policy governing resale prices

Maintenance of appropriate service facilities

Restrictions to prohibit the manufacture and sale of similar and competitive products

Designation of responsibility for patent and trademark negotiations and/or pricing

The assign ability or non-assign ability of the agreement and any limiting factors

Designation of the country and state of contract jurisdiction in the case of dispute

Motivation of Channel Members

In order to get the best out of the international marketer and channel member relationship it is necessary that economic and non-economic incentives be used for the purpose. It may be emphasized that channel members being independent business entities, their key consideration for relationship is economic. If the channel member does not get an adequate economic return it is unlikely that he will put in his best in the business. In addition, regularity of contact, involvement in goal setting, better understanding of the international marketer’s business, and provision of assistance in market development or other areas of deficiency of the channel members capability prove useful for getting the channel members more than what they are generally expected to contribute.

Robert Douglas Stuart suggests the following ways for strengthening the channel member’s loyalty:

  • Build your distributor with your company: bring him into your picture; discuss future plans as they affect his area with him, seek his advice.
  • Give your distributor an effective profit margin; try to keep in mind that you want to be in business with him for several years; make him want to continue the relationship.
  • Be sure he has credit terms which make him competitive, or more so, in amount and length of payment.
  • Maintain regular correspondence, and make sure he can clearly understand what you have to say.
  • Make a point of commenting on successful distributors in whatever communication you use in his area (advertising, publicity, sales bulletins, and so on)

Control of Channel Members

Control of channel members in international distribution though difficult yet is an important aspect of its management. Accomplishment of sales targets, market coverage and development goals, payment schedules, and profit contribution made are some of the factors on which the performance of channel members is appraised and controlled. Constant monitoring, periodic reviews, regular communications and intermittent suggestions help a marketer to control its channel members and keep the marketer-channel member power balance in its favor. Legal requirements and adverse impact on reputation must be given their due weight age if and when the unavoidable decision of termination of channel member is to be taken.

International Physical Distribution Management (IPDM):-

Ever since globalization transformed the transport sector, national boundaries have become permeable to penetration by trade, creating the need for flexible transport solutions. Intermodalism and containerization were the by-products of this era and were poised to metamorphosis transport of “general cargo”, moving it `seamlessly’ through sea and land arteries. Forty years ago, the physical process of exporting or importing goods was arduous. Goods needed to be transported by lorry to the port, unloaded into a warehouse and then reloaded into the ship `piece by piece’.

The management of physical distribution of goods includes the functions as well as costs associated with packing, order taking and processing, and inventory control. Given the geographical distance, the associated business risks and the variety of transportation modes available, the management of this function poses a difficult challenge so far as the objectives of ensuring ready and regular supply of goods, in foreign markets at the most optimal costs are concerned.

Physical Distribution Management, known as the dark continent of marketing offers tremendous potential in cost cutting and improving profitability. It requires the use of a systems approach and the management of the transportation, warehousing and inventory functions in an integrated manner.

Containerization

`Containerization’, the term very familiar to present day shipping industry was a completely unknown concept a few decades back.

It was Malcom McLean, owner of a huge trucking company in USA, who first conceived the idea of containerization by transporting. Containers through `Ideal – X’ in 1956 and initiated a revolution in the history of shipping industry. Over the years, the industry has created a separate identity within the shipping world through continuous development and Maersk Lines, P&O Nediloyd, Sealand Services (CSX), APL and others have come up as international majors serving customers all over the globe.

The growth of containerization in India has been slow and steady. The formation of Container Corporation of India (Concor) as an autonomous body under the Ministry of Railways in 1988 boosted the efforts at increasing containerized traffic in the country. Over the years, volume of container traffic has experienced continuous growth and registered a volume of2.22 million TEUs in 1999-2000 at the major ports of India.

A significant number of international container lines are active in India making business through their own office or through selected agents. Amongst the Indian shipping companies, only `The Shipping Corporation of India’ is active in the international liner business. It has tied up with Zim Navigation of Israel and Yang Ming Line of Taiwan to provide services on international routes.

Of the 11 major ports of the country, Jawaharlal NehruPort (JNP) and Mumbai Port have. Established as the gateway ports for container traffic to India having a combined market share of around 60% of the total container traffic. Lack of adequate infrastructure in form of container handling equipment, CFS network and rail network in other ports have led to concentration of container traffic at Mumbai and JNP. Liberalization and privatization policy taken up by the Government of India has resulted into the commissioning of new ports like Adani and Pipavav.

The various advantages offered by containerization include:

  • Containers can be loaded and sealed at the consignor’s premises or at nearby container depot, minimizing the risk of theft.
  • Since the goods are not directly handled during voyage, the risk of damage is minimized.
  • Cargo can be loaded in a matter of hours rather than days the reduction in handling time at ports results in increasing berth capacity.
  • The faster turn-round enables ships to make a higher number of annual voyages and reduces the number of necessary ships.
  • Because of the numerous advantages, both air and water carriers encourage the use of containers by charging lower rates for containerized shipments.

Conclusion:-

International distribution and sales policy decision is one of the most complex aspect of international marketing management. Along with price and promotion decisions, a decision has to be made on the distribution system. There are two components to this the physical (order processing storage/warehousing and transport) and the institutional aspects. The latter involves the choice of agents, distributors, wholesalers, retailers, direct sales or sales forces. Again, each has its own advantages and disadvantages.

However, it is in the channel of distribution that the international marketer can encounter many risks and dangers. These involve many transaction costs both apparent and hidden. Risks include loss in transit, destruction, negligence, nonpayment and so on. So careful choice and evaluation of channel partner is a necessity.

Regular report on foreign markets, foreign visits, and deployment of sales force abroad and, an in-depth analysis of physical distribution cost and obstacles help a firm to streamline its international distribution, offer superior customer service, and keep distribution cost within reasonable limits. Since distribution decisions bind the marketers with their channels for long-term, its implications in terms of costs, flexibility, control and reputation must be examined carefully before committing the decision.

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