1. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 13 Distribution Management

2. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channels of distribution provide the essential linkages that connect producers and consumers. The general distribution systems used by companies include: –Direct sales to customers through a firm’s own field sales force or through electronic commerce. –Indirect sales through independent intermediaries at the local level. –Indirect sales through an outside distribution system having a regional or global coverage. Channel Structure

3. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Structure Channels can vary from direct (producer-to-consumer types) to elaborate (multilevel channels employing many types of intermediaries). Channel configurations for the same product will vary within industries, even within the same firm, because national markets quite often have unique features. Channel structures are designed to manage multidirectional connections for: Physical movement of goods and services. Transactional title flows. Information communications flows.

4. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Wholesaler Exhibit 13.1- Channel Configuration Consumer / Industrial User Retailer Producer Originator ConsumerIndustrial User Agent Wholesaler Retailer Industrial Distributor Consumer Products Industrial Products Services Retailer

5. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Channel design –Refers to the length and width of the channel employed. Length - Determined by the number of levels or different types of intermediaries. Width - Determined by the number of institutions of each type in the channel. –Is determined by factors that are integral to the development of new marketing channels as well as modification and management of the existing ones.

6. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.2 - Determinants of Channel Structure and Relationships Internal –Company objectives –Character –Capital –Cost –Coverage –Control –Continuity –Communication External –Customer characteristics –Culture –Competition

7. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Customer characteristics –The demographic and psychographic characteristics of targeted customers form the basis for channel design decisions. –Focusing on customer needs by understanding why, when, and how they are buying commodities helps to generate a competitive advantage in the product.

8. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Culture –While planning the distribution system, the firm needs to analyze: The existing channel structures or the distribution culture. The functions performed by the various types of intermediaries. –Foreign legislation affecting distributors and agents is an essential part of the distribution culture of a market.

9. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.4 – Internationalization of Retailers

10. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Competition –Channels used by competitors may be the only product distribution system that is accepted by both the trade and consumers. –If distribution channels used by competitors are not satisfactory, the exporter can: Form jointly owned sales companies with distributors to exercise more control. Seek a good company fit in terms of goals and objectives.

11. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Company objectives –Management considerations influence channel designs. –The distribution channel must comply with the overall company objectives for market share and profitability.

12. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Character –The nature of the product impacts the channel design. –The channel must match the positioning of the product in the market. –Distribution channels change to reflect changes in overall market conditions, such as currency fluctuations. Capital –Describes the financial requirements for setting up a channel system; the marketer’s financial strength determines its ability to establish channels it either owns or controls.

13. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Cost –The expenditure incurred in maintaining a channel once it is established. –Varies according to the relative power of the manufacturer vis-à-vis its intermediaries. –Incurred for protecting the company’s distributors against adverse market conditions.

14. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Coverage –Describes the number of areas in which a product is represented and the quality of that representation. –Is two-dimensional (horizontal and vertical). –The area to be covered depends on the dispersion of demand in the market and the time elapsed since the product’s introduction in the market. –Involves three different approaches – intensive, selective, and exclusive.

15. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Control –Determined by the use of intermediaries, product type, and the marketer’s use of power. –Correlated to the type of product or service being marketed. –The degree of control a marketer wishes to have is reflected in the cost incurred in securing that control. Continuity –Rests heavily on the marketer as foreign distributors have a short-term view of the relationship. –Is expressed through visible market commitment.

16. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Design Communication –Provides the exchange of information that is essential to the functioning of the channel. –Social, cultural, technological, time, and geographical distances create communication problems. –Assists the international marketer in conveying the firm’s goals to the distributors, in solving conflict situations, and in marketing the product. –Is a two-way process that does not permit the marketer to dictate to intermediaries.

17. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Selection of Intermediaries Two basic decisions are involved in choosing the type of intermediaries to serve a particular market. –Determining the type of intermediary relationship Distributorship Agency relationship –Determining the type of exporting function Indirect exporting Direct exporting Integrated distribution

18. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.8 – International Channel Intermediaries

19. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.11 - Sources for Locating Foreign Intermediaries

20. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Selection of Intermediaries Screening intermediaries –The potential candidates must be compared and contrasted against an exporter’s list of determined criteria. –Before signing a contract with a particular agent or a distributor, international marketers should satisfy themselves on certain key criteria. –Some of these criteria can be quantified while others are qualitative and require careful interpretation and confidence in the data sources providing the information.

21. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.12 – Criteria for Choosing an International Distributor

22. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Selection of Intermediaries The distributor agreement –After a suitable intermediary is found, the international marketer draws up a foreign sales agreement. –Some important terms to be included in the agreement are: Contract duration. Geographic and customer boundaries. Method of compensation. Products and conditions of sale. Means of communication between parties.

23. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Management Coordinating two independent entities with shared goals. The relationship needs to be managed for the long term. Exporters establish distributor advisory councils to help address reactive or proactive measures. Factors which complicate channel management are: –Ownership. –Geographic, cultural, and economic distance. –Different rules of law.

24. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.14 – Performance Problems & Remedies When Using Overseas Distributors

25. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Management Gray markets (parallel importation) –Refers to authentic and legitimately manufactured trademark items that are produced and purchased abroad but imported or diverted to the market by bypassing designated channels. –They are fuelled by price segmentation and exchange rate fluctuation. –They under cut local marketing plans, erode long-term brand images, eat up costly promotion funds, and sour manufacturer–intermediary relations.

26. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Management Arguments for gray markets: –The right to “free trade.” –Consumers benefit from lower prices. –Discount distributors find a profitable market niche.

27. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Management Arguments against gray markets: –Hurts the legitimate owners of trademarks. –Reduces incentive among trademark owners to undertake product development. –Take unfair advantage of the trademark owners’ marketing and promotional activities. –Parallel imports can deceive consumers by not meeting product standards or their normal expectations of after-sale service.

28. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Management Solutions to the gray market problem: –A contractual relationship that ties businesses together. –A one-price policy. –Producing different versions of products for different markets. –Conducting educational and promotional campaigns.

29. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Channel Management The channel relationship can be terminated due to: –Changes in the international marketer’s distribution approach. –Dishonoring of the contract by either of the parties. –Market expansion program undertaken by the producer. –Structural changes in the product lines.

30. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E-Commerce Web services not only serve as a communication tool but also act as a builder of interactive relationships and a device to sell products and services. E-commerce helps to bring together buyers, sellers, distributors, and transaction payment processors in one single marketplace, making convenience the key attraction. Companies must come to terms with issues related to security, privacy, and access to global networks, while at the same time promoting global commerce over the Internet.