International Channels and Distribution Mgmt

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    C O U R S E : L 3 0 1 ( I N T E R N A T I O N A L B U S I N E S S

    E N V I R O N M E N T )

    I N S T I T U T E O F B U S I N E S S A D M I N I S T R A T I O N ( I B A ) ,U N I V E R S I T Y O F D H A K A

    I N S T R U C T O R : P R O F . A B U Y O U S U F M D . A B D U L L A H ,P H D

    Int. Channels and DistributionManagement

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    Introduction

    The distribution process for internationalprogrammes involves all those activities related totime, place and ownership utilities for industrial and

    ultimate consumers. The selection, operation andmotivation of effective channels of distribution areoften crucial factors in a firms differential advantagein int. markets.

    The channels of distribution available in a countryare the result of culture and tradition.

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    Channel theory

    The Channels of Distribution often depend on the stage of economicdevelopment of a country. Thus, it has been concluded:

    1) The more developed countries have more levels of distribution, ie, moresupermarkets, stores, etc.

    2) The influence of the foreign import agent declines with economic development.

    3) Manufacturer-wholesaler-retailer functions become separated with economicdevelopment.

    4) Wholesaler functions approximate those in North America with increasingeconomic development.

    5) Financing functions of wholesalers decline and wholesale markups increase

    with increasing development.6) The number of small stores decline and the size of the average store increases

    with increasing development.

    7) The role of the peddler and itinerant trader and the importance of the open-garden-fair decline with increasing development.

    8) Retail margins improve with increasing economic development.

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    Indirect distribution through Agents

    Such agents include :

    Export Management Companies (EMCs)

    Its an independent export organization that serves different companiesin their export endeavours. The EMC regards the exporter as a client,

    not as an employer. They deal in a number of allied but noncompetitivelines. Usually, the EMC handles the entire export functions for amanufacturer.

    Other benefits of EMCs are:-

    1) Credit assistance

    2) Licensing3) Demonstrations

    4) Saving through consolidated shipping expenses

    5) Specialization

    6) Overseas travel

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    Indirect distribution through Agents (Cont.)

    Manufacturers Export Agent (MEA)

    They have functions almost similar to EMCs exceptthey cover limited markets. Also, the contractual

    relationship is short term only (a few months or ayear or two).

    Webb-Pomerene Association

    Its formed among competing U.S manufacturers,

    especially and exclusively for the purpose of exportsaccording to the Webb-Pomerene Act of 1918. Suchagreements are exempt from antitrust laws.

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    Indirect distribution through Agents (Cont.)

    Foreign Freight Forwarder

    They specialize in handling overseas shipping arrangements.Their services can be utilized for handling goods from oneport to another. Sometimes, they also handle inland

    shipment.Commission agent

    They represent foreign customers interested in buying (say)U.S products. They serve as so-called finders for their

    principals and locate the appropriate goods at the lowestprices.

    Country-controlled buying agents

    They are official buyers of the foreign governments seeking to

    buy designated goods for their country.

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    Indirect distribution through MerchantIntermediaries

    These intermediaries include:

    Export Merchant

    They buy directly from manufacturers according to theirspecifications, taking title to the goods.

    Cooperative exporter

    Its the name given to any co. that has an established system ofhandling exports for its own goods and distributes productsoverseas for other manufacturers on a contractual basis.

    Export vendors They specialize in buying poor quality and overproduced goods

    for distribution overseas. They buy goods outright, taking title tothem and ship to one or more countries and sell them throughtheir established contacts.

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    Direct distribution through agents

    This can be done through:

    Sales representatives

    They are appointed as a manufacturers representative. Themanufacturer supplies them with literature and samples to conductsales in a predesignated territory. They usually work on a commissionbasis, assume no risk or responsibility and are under contract for adefinite period of time.

    Purchasing agent

    They seek goods of interest for their foreign principals and it is from

    these principals that the product quality and price demands arise.Export broker

    They bring the seller and the foreign buyer together. They receive acommission or fee from the seller for their services. They neither taketitle nor possession of goods and assume no financial responsibility

    relative to the export transaction.

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    Direct distribution through Merchant Intermediaries

    They can be:

    Export distributor

    They purchase goods from the manufacturer at the

    greatest possible discount and resell them for aprofit. They often sell products that require periodicservicing.

    Foreign retailer

    They deal directly with manufacturers , especially forconsumer goods. Contacts are made throughtraveling salespersons or by mail using catalogs or

    brochures.

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    Direct distribution through Merchant Intermediaries(Cont.)

    Export Jobber

    They determine customer needs overseas and fillthem by purchasing the local products. Some

    Jobbers reverse the role by supply imported goods .Trading company

    This is often associated with the colonial era whenmany European countries, mainly Britain and

    France, used them to develop trade with othernations, eg, the East India company.

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    Channel Management

    Channel Management covers selection of appropriatechannels of distribution and making them work.

    Channel selection

    Establishing objectives- they are derived from totalmarketing objectives in the foreign market. They areprimarily concerned with clear cut definition of the targetcustomers.

    Establishing feasible Channel Alternatives- thecharacteristics of customers, product , intermediaries,competitors, marketing environment and the cosstrengths and weaknesses determine the various possiblealternatives for the distribution of a line of products.

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    Channel Management (Cont.)

    Evaluation of Alternative Channels

    Each channel alterative should be evaluated on the basis ofthree factors:

    1. Coverage-this refers to both qualitative and quantitativecoverage of customers and is determined by an analysis ofcustomers, including such factors as their geographicallocation, sales potential and service requirements.

    2. Control-this refers to the discretion the co. has, or wants

    to have, in seeing the goods through to the customers.

    3. Cost-direct distribution by the co. is usually more costly ifthe sales base is small. However, it gives full control overdistributions.

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    Pros and Cons of the use of intermediaries

    Advantages

    They bring new assets to the multinational marketer

    The overseas distributor adds to the effective capital

    available for a cos worldwide marketing efforts,because distributors have funds of their own, as wellas local borrowing power that a firm located overseasmay not have.

    Intermediaries afford an opportunity for the stockingand sale of a cos product in a new market at anegligible cost.

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    Pros and Cons of the use of intermediaries (Cont.)

    Disadvantages

    The manufacturer has less direct control over anindependent distributor than over their own employees.

    Theres a risk of violation of U.S law or Common marketantitrust laws when a distributor is directed, particularly incase of pricing

    The manufacturer nay have little contact with (orknowledge of) the retail outlets used by the distributor.

    The manufacturer has little or no control over marketing,sales techniques or credit policies of the distributor.

    In some cases, it may be difficult and costly for themanufacturer to cancel an agreement.

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    Selection of intermediaries

    The following four criteria can be used to selectintermediaries:

    1. Financial strength: the prospective distributormust be financially sound and should have thestrength and will to take the risks involved. Financialstrength involves both credit standing and cash flowposition.

    2. Good connections: in many countries, business isconducted on a personal basis. So for agents anddistributors to be effective, they should be wellconnected both in private and in government circles.

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    Selection of intermediaries (Cont.)

    Other business commitments: Information shouldbe gathered on other commitments that the potentialintermediary is involved in. If they have a goodreputation and have gained experience in handling

    complementary goods, then it could prove to beadvantageous for them.

    Personnel, Facilities and equipment: the numberand quality of the representatives employees,equipment and facilities should be examined becausethe reputation of the foreign firm in the host countrydepends on the activities and behaviour of the peoplerepresenting it.

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    Wholesaling in foreign environments

    Status and role of wholesaler

    The status of wholesalers vary from country to country.In the developing nations, they play a crucial role byhandling imports as well as products of small, domesticmanufacturers and by financing the flow of goods

    between the producer and retailers. Even then, they areheld in low esteem because i) the major economicemphasis in developing nations is on production since

    goods are scarce in virtually all sectors. ii) wholesaletrade, like retail, is dominated in many of these countries

    by foreigners. Hence, the locals look down uponwholesalers as they feel that they are being exploited.

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    Wholesaling in foreign environments (Cont.)

    Services offered by wholesalers Services offered by wholesalers are relative to competition.

    Merchandising policies

    Smaller wholesalers usually limit their business to handling a

    particular family of goods. Whenever they expand, they ventureonly into related goods. Large wholesalers, however, deal indifferent products without any underlying relationship amongthem.

    Margins and efficiency

    These depend on the services they provide and the competitionthey face. Where competition is lacking, they often run aninefficient operation, but this has no relationship to marginswhen they are a monopoly and the goods are in short supply.

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    Retailing in Overseas Markets

    Theory of International Retailing

    Any institutional framework in a country is a function ofits environment. In the are of international retailing, thisthesis is supported by empirical work on the subject, eg,supermarkets were found to be more common and retailoutlets much larger in countries with higher GNPs percapita. In fact, time lags in the development of retailinginnovations and improvements appeared similar in

    length to lags in environmental development. In brief, itcan be said that the retailing structure emerges from theenvironmental characteristics of that country.

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    Retailing in Overseas Markets (Cont.)

    Global retailing trends

    Adoption of U.S Retailing Innovations: innovations like selfservice supermarkets, discount houses, and suburban shoppingcentres are now a trend in European cities and in Japan.

    Internationalization of retailing: Over the years, there has beena growing interest among the large retailers of industrializedcountries in expansion overseas .

    Social marketing: entry into this by retailers has been a trend inthe developing countries, eg, sale of contraceptives.

    Cooperative retailing: this is spreading rapidly in developingcountries in Africa and Asia. The presence of cooperativesreduces the volume of trade handled by private retailers, andincreases the governments control over trade.

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    International Franchising

    Franchising can be defined as A form of marketingor distribution in which a parent company

    customarily grants an individual or relatively smallcompany the right or privilege to do business in aprescribed manner over a certain period of time in aspecified place.

    An important aspect of a franchising agreement isthe continuing relationship between the parties.

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    International Franchising (Cont.)

    Perspectives of Int. Franchising

    Three factors motivate international companies toexpand their franchising operations internationally:

    market growth opportunities, profit potential andthe desire to be known as an international firm.

    Marketing strategy

    Firms entering overseas markets through franchising

    must determine if they will follow a standardized ordifferentiated strategy with reference to product,price and promotion.

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    Physical Distribution

    Physical distribution, including arranging for shipping,insurance and preparation of all the required documentsneeds to be addressed. These can be a complex process

    because of:

    1. The passage of goods across national boundaries, withattendant legal requirements

    2. Shipment by ocean going vessels or internationalairlines, with attendant security needs and specific

    documentary requirements.

    3. The time and distance required to complete thetransaction, with attendant needs for ensuringpayments.

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    Importance to management

    There are several reasons why Marketing Managers should be concernedwith physical distribution of their products:

    a) In distributing the product to the place where the user wants it andthe time it is wanted, certain costs are incurred which ultimately areborne by the user.

    b) Its an aspect of export marketing where increased profits can begenerated directly-either through reduced costs or increased sales.Also, physical distribution can have a positive effect on a companyssales volume through the services provided like i)the speed withwhich a product can be provided to a customer ii) the reliability with

    which the average speed of service is achieved iii) the degree ofimmediate availability of the product

    c) National governments exert pressure that can affect the manner inwhich certain physical distribution activities are carried out.

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    Decision areas

    Those to consider include:

    Nature of the shipment: this includes deciding on theunit pack, quantities to be shipped, the type and methodof packing to be used to protect the product from damage

    in transit and the identification markings to be placed onthe outside packing container.

    Transportation: primary concern here is the externalmovement of the product, which involves choosing the

    route the shipment is to follow, selecting the model(s) oftransportation an providing adequate insurancecoverage.

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    Decision areas (Cont.)

    Warehousing:apart from storing, warehousing alsoencompasses other areas like assembling, breaking bulkshipments into smaller sizes to meet customer needs andpreparing products for reshipment.

    Materials handling: provisions must be made for the internalmovement of products within plant and warehouse facilities.

    Carrying inventory: several costs are associated withmanaging inventory, such as storage, interest on capital tied

    up, taxes, lost sales, etc. Order processing and documentation: procedures must be in

    place to process order in as routine a manner as possible.Correct documentation is essential to the successful physicalmovement of a shipment.

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    Facilitating organizations and services

    Freight forwarders

    They have two main classes of functions- one group is concernedwith the forwarding of an export shipment from the point oforigin to the ultimate destination in some foreign market; the

    other is concerned with the engaging of space on transportcarriers.

    Although they can carry out every necessary physical distributionservices from time to time an order is placed until the shipmentis delivered at the foreign destination, perhaps a forwarders

    major contribution lies in the taking over of traffic anddocumentation work on international freight movements. Also,by being able to consolidate small shipments into larger ones,the forwarder can secure lower transportation rates than anysingle shipper could get directly from the carriers.

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    Facilitating organizations and services (Cont.)

    Free areas

    There are two types of such free areas throughout the world:

    1. A Free trade Zone: an enclosed, political area without residentpopulation in, adjacent to, or near a port-of-entry, into which foreigngoods not otherwise prohibited may be brought without formalcustoms entry.

    2. A Free port: it encompasses a port or entire city isolated from therest of the country for customs purposes, eg, Singapore

    Export packing

    This is different from packaging. Sound export packing is not just theoperation of putting a piece of merchandise into a container so that itarrives at its destination in good condition. Additional objectivesinclude economizing shipping space, saving on expenses byemploying economical packing materials, preventing pilferage andassuring lowest assessable customs duties.

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    Required documents

    Export License and Export Declaration

    Most countries require that in addition to a license, shipmentsabroad be accompanied with an export declaration. Thisdeclaration is prepared by the exporter, given to the shipping

    company and then filed with customs officials at the port ofentry. This declaration lists the descriptions, quantities and

    values of the various types of merchandise in the shipment. Italso lists the name of the shipper, the name of the agent of theshipper and the destination and consignee.

    Commercial Invoice

    this is the bill that the exporter or consignor sends to theimporter or consignee . It lists the particulars of the shipment.

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    Required documents (Cont.)

    Consular invoice (or special customsinvoice/factura)

    This is a document obtained by the exporter in his/hercountry from the Governmental Representative of the

    importers country. This document helps to ensure thatfair market values would be listed on the invoicesprepared by the exporter.

    Packing list

    Often its shown on the commercial invoice, or it may bea separate document, depending on the no. of packagesand the complexity of the list.

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    Certification and other documents

    Certificates of origin are documents certifying theplace of origin of the merchandise. They are required bysome countries for all products and by other countriesfor only certain types of products or only for products

    originating in certain countries. Special certificates include a wide variety of special

    inspection certificates issued by various authorities andmay be required by the importer to meet his/her own or

    government requirements. These are also issued forcertain types of merchandise to certify a requiredcomposition or the existence of specific ingredients.

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    Ocean transportation and bills of landing

    The Bill of Landing in ocean transportation serves three purposes:

    1. its the contract of carriage between the shipper and thetransportation co.

    2. Its a receipt for the goods issued by the steamship co.

    3. Its evidence of title to the merchandise.Selecting the route and getting the merchandise to the

    port

    When selecting a route to send the goods by shipment, an exporter

    should bear in mind i) which route will bring the shipment toits port of destination within the shortest possible time ii)which route will be most economical. (because often, thequickest route is not always the most economical)

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    Ocean transportation and bills of landing (Cont.)

    Freight rates and space reservations

    Ocean freight rates can be obtained directly fromshipping lines or through the foreign freight forwarder.The next step involves reserving space.

    Container shipment

    Containers may be filled on the deck before loading onthe vessel, or they may be filled at the exporters plant.

    Dock receipt In some places, when the shipment has been delivered to

    the pier the receiving clerk signs a dock receipt.

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    Air shipments and airwaybills

    Over time, air freight delivery has been expandingrapidly. Since they are not bound by long years oftradition and innumerable legal decisions,international airlines have been able to eliminatesome of the routine of export procedure required ofocean carriers. Most importantly, anAirwaybillisused instead of a standard bill of landing. In somecases, they may also replace the commercial invoice,the consular invoice, the certificate of origin and theinsurance certificate.

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    Distribution strategy

    If a firm manufactures its products in the particularcountry, it can sell directly to the consumer, to theretailer or to the wholesaler. The same options areavailable to a firm that manufactures outside thecountry.

    Alternatively, this firm may decide to sell to animport agent, who then deals with the wholesale

    distributor, the retailer, or the consumer.

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    Differences between countries

    The three main differences between countriesdistribution systems are :

    1. Retail concentration- in some countries the

    retail system is very concentrated, whereas in othercountries its fragmented. In a concentrated system,a few retailers supply most of the market. Afragmented system is one in which there are many

    retailers, none of which has a major share in themarket.

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    Differences between countries (Cont.)

    2. Channel length- this refers to the number ofintermediaries between the producer (or manufacturer)and the consumer. If the producer sells directly to theconsumer, the channel is very short. If the producer sells

    through an import agent, a wholesaler, and a retailer, thena long channel exists.

    The most important determinant of chain length is thedegree to which the retail system is fragmented. .

    Fragmented retail systems tend to promote the growth ofthe wholesalers to serve retailers, which lengthenschannels(The reason for this is economics; the morefragmented the retail system, the more expensive it is forthe firm to make contact with each individual retailer).

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    Differences between countries (Cont.)

    3. Channel exclusivity- an exclusive distributionchannel is one that is difficult for outsiders to access.This arises because retailers tend to prefer to carrythe products of long established manufacturers withnational reputation rather than gamble on theproducts of unknown firms.

    How exclusive a distribution system is varies

    between countries.

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    Choosing a distribution strategy

    Choosing a distribution strategy determines which channel thefirm will use to reach potential consumers.

    Since each intermediary in a channel adds its own markup to theproducts, there is generally a critical linkage between channel

    length, the final selling price, and the firms profit margin. Thelonger the channel, the greater is the aggregate markup, and thehigher the price charged for the final product.

    To ensure that prices dont get too high due to markups bymultiple intermediaries, a firm might be forced to operate with

    lower profit margins. But, the advantages of having a longerchain often outweighs the disadvantages. Also, a longer chaingives more market access-the ability to enter an exclusivechannel.

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