Course Title: International Marketing

Chapter 7: Distribution Strategies in International Context

7.1. Meaning of logistic
Word, ’Logistics’ is derived from French word ‘loger’, which means art of war pertaining to movement
and supply of armies. According to Council of logistics management: “Logistics is the process of
planning, implementing and controlling the efficient, effective flow and storage of goods, services and
related information from point of origin to point of consumption for the purpose of conforming the
customer requirement”. Logistics means the art of managing the flow of raw materials and finished
goods from the source to the user. Logistics of an international company includes movement of raw
materials, coordinating flows into and out of different countries, choices of transportation, cost of the
transportation, packaging the product for shipment, storing the product, and managing the entire
process.

7.2. Distribution Patterns

International marketers need a general awareness of the patterns of distribution that confront them in
world marketplaces. Nearly every international trading firm is forced by the structure of the market to
use at least some middlemen in the distribution arrangement. However, the pattern of structure may
differ from market to market. Thus, understanding the various kinds of distribution patterns may assist
international marketers to make an appropriate choice.
Line Breadth: Every nation has a distinct pattern relative to the breadth of line carried by wholesalers
and retailers. The distribution system of some countries seems to be characterized by middlemen who
carry or can get everything; in others, every middleman seems to be a specialist dealing only in
extremely narrow lines. Government regulations in some countries limit the breadth of line that can be
carried by middlemen and licensing requirements to handle certain merchandise are not uncommon.
Costs and Margins: Cost levels and middleman margins vary widely from country to country,
depending on the level of competition, services offered, efficiencies or inefficiencies of scale, and
geographic and turnover factors related to market size, purchasing power, tradition, and other basic
determinants. In India, competition in large cities is so intense that costs are low and margins thin; but
in rural areas, the lack of capital has permitted the few traders with capital to gain monopolies with
consequent high prices and wide margins.
Channel Length: Some correlation may be found between the stage of economic development and the
length of marketing channels. In every country channels are likely to be shorter for industrial goods and
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Course Title: International Marketing

for high-priced consumer goods than for low-priced products. In general, there is an inverse
relationship between channel length and the size of the purchase. Combination wholesaler-retailers or
semi-wholesalers exist in many countries, adding one or two links to the length of the distribution
chain.
Blocked Channels: International marketers may be blocked from using the channel of their choice.
Blockage can result from competitors’ already-established lines in the various channels and trade
associations or cartels having closed certain channels. Associations of middlemen sometimes restrict
the number of distribution alternatives available to a producer.
Stocking: The high cost of credit, danger of loss through inflation, lack of capital, and other concerns
cause foreign middlemen in many countries to limit inventories. This often results in out-of-stock
conditions and sales lost to competitors. Physical distribution lags intensify their problem so that in
many cases the manufacturer must provide local warehousing or extend long credit to encourage
middlemen to carry large inventories.
Often large inventories are out of the question for small stores with limited floor space. Considerable
ingenuity, assistance, and, perhaps pressure are required to induce middlemen in most countries to carry
adequate or even minimal inventories.
Power and Competition: Distribution power tends to concentrate in countries where a few large
wholesalers distribute to a mass of small middlemen. Large wholesalers generally finance middlemen
downstream. The strong allegiance they command from their customers enables them to effectively
block existing channels and force an outsider to rely on less effective and more costly distribution.

7.3. Alternative Middleman Choices

A marketer's options range from assuming the entire distribution activity (by establishing its own
subsidiaries and marketing directly to the end user) to depending on intermediaries for distribution of
the product. Channel selection must be given considerable thought since once initiated it is difficult to
change, and if it proves inappropriate, future growth of market share may be affected.
The channel process includes all activities beginning with the manufacturer and ending with the final
consumer. This means the seller must exert influence over two sets of channels, one in the home
country and one in the foreign-market country. In the home country, the seller must have an
organization (generally the international marketing division of a company) to deal with channel
members needed to move goods between countries. In the foreign market, the seller must supervise the
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Course Title: International Marketing

channels that supply the product to the end user. Ideally, the company wants to control or be involved
in the process directly through the various channel members to the final user. To do less may result in
unsatisfactory distribution and the failure of marketing objectives. In practice, however, such
involvement throughout the channel process is not always practical or cost effective. Consequently,
selection of channel members and effective controls are high priorities in establishing the distribution
process.
Once the marketer has clarified company objectives and policies, the next step is the selection of
specific intermediaries needed to develop a channel. External middlemen are differentiated on whether
or not they take title to the goods – agent middlemen represent the principal rather than themselves, and
merchant middlemen take title to the goods and buy and sell on their own account. The distinction
between agent and merchant middlemen is important because a manufacturer's control of the
distribution process is affected by who has title to the goods in the channel.
Agent middlemen work on commission and arrange for sales in the foreign country but do not take title
to the merchandise. By using agents, the manufacturer assumes trading risk but maintains the right to
establish policy guidelines and prices and to require its agents to provide sales records and customer
information.
Merchant middlemen actually take title to manufacturers' goods and assume the trading risks, so they
tend to be less controllable than agent middlemen. Merchant middlemen provide a variety of import
and export wholesaling functions involved in purchasing for their own account and selling in other
countries. Because merchant middlemen primarily are concerned with sales and profit margins on their
merchandise, they are frequently criticized for not representing the best interests of a manufacturer.
Unless they have a franchise or a strong and profitable brand, merchant middlemen seek goods from
any source and are likely to have low brand loyalty. Some of the advantages of merchant middlemen
include minimized credit risk and elimination of all merchandise handling outside the home country.
Middlemen are not clear-cut, precise, easily defined entities. It is exceptional to find a firm that
represents one of the pure types identified here. Thus, intimate knowledge of middlemen functions is
especially important in international activity because misleading titles can fool a marketer unable to
look beyond mere names.

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Course Title: International Marketing

Only by analyzing middlemen functions in detailed simplicity can the nature of the channels be
determined. Two alternatives are presented: first, middlemen physically located in the manufacturer's
home country; and second, middlemen located in foreign countries.

A. Home-Country Middlemen
Home-country middlemen, or domestic middlemen, located in the producing firm's country, provide
marketing services from a domestic base. By selecting domestic middlemen as intermediaries in the
distribution processes, companies transfer foreign-market distribution to others. Domestic middlemen
offer many advantages for companies with small international sales volume, those inexperienced with
foreign markets, those not wanting to become immediately involved with the complexities of
international marketing, and those wanting to sell abroad with minimum financial and management
commitment. A major trade-off for using home-country middlemen is limited control over the entire
process. Domestic middlemen are most likely to be used when the marketer is uncertain and/or desires
to minimize financial and management investment. A brief discussion of the more frequently used
domestic middlemen follows.
Trading Companies: Trading companies have a long history as important intermediaries in the
development of trade between nations. Trading companies accumulate, transport, and distribute goods
from many countries.
Large, established trading companies generally are located in developed countries; they sell
manufactured goods to developing countries and buy raw materials and unprocessed goods from
developing countries.
Complementary Marketers: Companies with marketing facilities or contacts in different countries
with excess marketing capacity or a desire for a broader product line sometimes take on additional lines
for international distribution; although the generic name for such activities is complementary
marketing, it is commonly called piggybacking. General Electric Company has been distributing
merchandise from other suppliers for many years. It accepts products that are noncompetitive but
complementary and that add to the basic distribution strength of the company itself.
Manufacturer's Export Agent: The manufacturer's export agent (MEA) is an individual agent
middleman or an agent middleman firm providing a selling service for manufacturers. The MEA does
not serve as the producer's export department but has a short-term relationship, covers only one or two
markets, and operates on a straight commission basis.
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Course Title: International Marketing

Home Country Brokers: The term broker is a applicable for a variety of middlemen performing low-
cost agent services. The term is typically applied to import-export brokers who provide the
intermediary function of bringing buyers and sellers together and who do not have a continuing
relationship with their clients. Most brokers specialize in one or more commodities for which they
maintain contact with major producers and purchasers throughout the world.
Export Merchants: Export merchants are essentially domestic merchants operating in foreign markets.
As such, they operate much like the domestic wholesaler. Specifically, they purchase goods from a
large number of manufacturers, ship them to foreign countries, and take full responsibility for their
marketing. Sometimes they utilize their own organizations, but, more commonly, they sell through
middlemen. They may carry competing lines, have full control over prices, and maintain little loyalty to
suppliers, although they continue to handle products as long as they are profitable.

B. Foreign-Country Middlemen
An international marketer seeking greater control over the distribution process may elect to deal
directly with middlemen in the foreign market. They gain the advantage of shorter channels and deal
with middlemen in constant contact with the market. As with all middlemen, particularly those working
at a distance, effectiveness is directly dependent on the selection of middlemen and on the degree of
control the manufacturer can and/or will exert.
Using foreign-country middlemen moves the manufacturer closer to the market and involves the
company more closely with problems of language, physical distribution, communications, and
financing. Foreign middlemen may be agents or merchants; they may be associated with the parent
company to varying degrees; or they may be temporarily hired for special purposes. Some of the more
important foreign-country middlemen are manufacturer's representatives and foreign distributors.
Manufacturer's Representatives: Manufacturer's representatives are agent middlemen who take
responsibility for a producer's goods in a city, regional market area, entire country, or several adjacent
countries. When responsible for an entire country, the middleman is often called a sole agent.
Foreign manufacturer's representatives have a variety of titles, including sales agent, resident sales
agent, exclusive agent, commission agent, and indent agent. They take no credit, exchange, or market
risk but deal strictly as field sales representatives. Manufacturers who wish the type of control and
intensive market coverage their own sales force would afford, but who cannot field one, may find the
manufacturer's representative a satisfactory choice.
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Course Title: International Marketing

Distributors: A foreign distributor is a merchant middleman. This intermediary often has exclusive
sales rights in a specific country and works in close cooperation with the manufacturer. The distributor
has a relatively high degree of dependence on the supplier companies, and arrangements are likely to be
on a long run, continuous basis. Working through distributors permits the manufacturer a reasonable
degree of control over prices, promotional effort, inventories, servicing, and other distribution
functions. If a line is profitable for distributors, they can be depended on to handle it in a manner
closely approximating the desires of the manufacturer.
Foreign-Country Brokers: Like the export broker discussed in an earlier section, foreign-country
brokers are agents who deal largely in commodities and food products.
The foreign brokers are typically part of small brokerage firms operating in one country or in a few
contiguous countries. Their strength is in having good continuing relationships with customers and
providing speedy market coverage at a low cost.
Dealers: Generally speaking, anyone who has a continuing relationship with a supplier in buying and
selling goods is considered a dealer. More specifically, dealers are middlemen selling industrial goods
or durable consumer goods direct to customers; they are the last step in the channel of distribution.
Dealers have continuing, close working relationships with their suppliers and exclusive selling rights
for their producer's products within a given geographic area.
Some of the best examples of dealer operations are found in the farm equipment, earth-moving, and
automotive industries.

7.4. Factors Affecting Choice of Channels

The international marketer needs a clear understanding of market characteristics and must have
established operating policies before beginning the selection of channel middlemen. The following
points should be addressed prior to the selection process.
a. Identify specific target markets within and across countries.
b. Specify marketing goals in terms of volume, market share, and profit margin requirements.
c. Specify financial and personnel commitments to the development of international
distribution.
d. Identify control, length of channels, terms of sale, and channel ownership.
Once these points are established, selecting among alternative middlemen choices to forge the best
channel can begin. Marketers must get their goods into the hands of consumers and must choose
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Course Title: International Marketing

between handling all distribution or turning part or all of it over to various middlemen. Distribution
channels vary depending on target market size, competition, and available distribution intermediaries.

Key elements in distribution decisions include:

a. Functions performed by middlemen (and the effectiveness with which each is performed),
b. Cost of their services,
c. Their availability, and
d. Extent of control, which the manufacturer can exert over middlemen activities.
Although the overall marketing strategy of the firm must embody the company's profit goals in the
short and long run, channel strategy itself is considered to have six specific strategic goals. These goals
can be characterized as the six Cs of channel strategy: Cost, Capital, Control, Coverage, Character, and
Continuity.
In forging the overall channel-of-distribution strategy, each of the six Cs must be considered in
building an economical, effective distribution organization within the long-range channel policies of the
company.
Cost: There are two kinds of channel cost:
1) The capital or investment cost of developing the channel and
2) The continuing cost of maintaining it. The latter can be in the form of direct expenditure for the
maintenance of the company's selling force or in the form of margins, markup, or commissions
of various middlemen handling the goods. Marketing costs (a substantial part of which is
channel cost) must be considered as the entire difference between the factory price of the goods
and the price the customer ultimately pays for the merchandise. The costs of middlemen include
transporting and storing the goods, breaking bulk, providing credit, and local advertising, sales
representation, and negotiations.
Capital Requirement: The financial ramifications of a distribution policy are often overlooked.
Critical elements are capital requirement and cash-flow patterns associated with using a particular type
of middleman. Maximum investment is usually required when a company establishes its own internal
channels, that is, its own sales force. Use of distributors or dealers may lessen the capital investment,
but manufacturers often have to provide initial inventories on consignment, loans, floor plans, or other
arrangements. Coca-Cola initially invested in China with majority partners that met most of the capital

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Course Title: International Marketing

requirements. However, Coke soon realized that it could not depend on its local majority partners to
distribute its product aggressively in the highly competitive, market-share-driven business of
carbonated beverages. To assume more control of distribution it had to assume management control and
that meant greater capital investment from Coca-Cola.
Control: The more involved a company is with the distribution, the more control it exerts. A
company's own sales force affords the most control but often at a cost that is not practical. Each type of
channel arrangement provides a different level of control and, as channels grow longer, the ability to
control price, volume, promotion, and type of outlets diminishes. If a company cannot sell directly to
the end user or final retailer, an important selection criterion of middlemen should be the amount of
control the marketer can maintain.
Coverage: Another major goal is full-market coverage to
1. Gain the optimum volume of sales obtainable in each market,
2. Secure a reasonable market share, and
3. Attain satisfactory market penetration. Coverage may be assessed on geographic and/or market
segments. Adequate market coverage may require changes in distribution systems from country
to country or time to time. Coverage is difficult to develop both in highly developed areas and
in sparse markets – the former because of heavy competition and the latter because of
inadequate channels.
Character: The channel-of-distribution system selected must fit the character of the company and the
markets in which it is doing business. Some obvious product requirements, often the first considered,
relate to perish ability or bulk of the product, complexity of sale, sales service required, and value of the
product.

Continuity: Channels of distribution often pose longevity problems. Most agent middlemen firms tend
to be small institutions. When one individual retires or moves out of a line of business, the company
may find it has lost its distribution in that area. Wholesalers and especially retailers are not noted for
their continuity in business either. Most middlemen have little loyalty to their vendors. They handle
brands in good times when the line is making money, but quickly reject such products within a season
or a year if they fail to produce during that period. Distributors and dealers are probably the most loyal
middlemen, but even with them, manufacturers must attempt to build brand loyalty downstream in a
channel in case middlemen shift allegiance to other companies or other inducements.
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