CHAPTER 13

DISTRIBUTION MANAGEMENT

Chapter Outline

A. Channel Structure
B. Channel Design
1. Customer Characteristics
2. Culture
3. Competition
4. Company Objectives
5. Character
6. Capital
7. Cost
8. Coverage
9. Control
10. Continuity
11. Communication
C. Selection of Intermediaries
1. Types of Intermediaries
2. Sources of Finding Intermediaries
3. Screening Intermediaries
4. The Distributor Agreement
D. Channel Management
1. Factors in Channel Management
2. Gray Markets
3. Termination of the Channel Relationship
E. E-Commerce

Chapter Objectives

The chapter focuses on setting up the essential linkages between the buyer and the seller. In
discussing structure, two essential elements are addressed: the design of the linkages, as well
as the entities that form the design once the configuration has been decided upon. The issue
of design has been summarized into the eleven C’s to aid in their retention and
comprehension. Customer characteristics, culture, competition, company objectives,
character, capital, cost, coverage, control, continuity, and communication will determine the
length and the width of the channel.

The second part of the chapter deals with issues on the choice of the actual individual
entities (distributors) to perform the distributive function. After a short summary of the
general types of intermediaries, different sources for finding prospective distributive
partners are discussed. Since the process is one of selection, the discussion progresses to
variables to be used in the screening of the candidates to the distributor agreement which is
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 to outline the functions performed by both of the parties concerned. The distribution
decision, being the most long-term of all of the marketing-mix decisions, takes careful
management of the relationship. A challenge to an established relationship may be the
emergence of parallel importing by unauthorized entities.

The chapter also includes an introduction to the workings of the distribution system from
the point of view of the emerging e-business phenomenon.

Suggestions for Teaching

Depending on the degree of channels exposure students have had (for example, is a channels
of distribution class required of marketing majors), the attention to the basics of channel
structure can vary. The best introduction to the session is to go over a number of firm’s
distribution structures along the lines of those in Exhibit 13.1. Asking students to construct
a particular company’s international channel of distribution is an excellent
presentation/paper topic. Although materials do not exist where companies’ channels would
be depicted, they can be put together with company/distributor contact. Many of the
channels are actually quite simple. Consider, for example, Toyota’s channel in the United
States: Toyota Japan to Toyota USA to the franchised dealers to the final consumer.

Given the fact that Japanese distribution systems have been seen as the most difficult to
master in the world, a discussion might focus on the Japanese system and what can be done
to overcome it. Videos on the Japanese retail distribution system (Michigan State
University) are available to highlight the issues. The “Toys-‘R’-Us”
(http://www.toysrus.com/shop/index.jsp?categoryId=2255956) case can also be used as an
example in this respect.

Various trade journals, such as Chain Store Age (http://www.chainstoreage.com/), are quite
useful in collecting topical international news items. Students can also be requested to find
advertisements for intermediaries. Commercial News USA is an official publication of the
U.S. Department of Commerce that features advertisements by producers soliciting
distribution leads.

Key Terms

Intermediaries: Independent distributors of goods, operating primarily at a local level.

Distribution culture: Existing channel structures and philosophies for distribution of goods.
Distributor: An intermediary that purchases goods for resale through its own channels; they
exercise more independence compared to agencies.
Agent: An intermediary for the distribution of goods who earns a commission on sales, and does
not physically handle the goods.
Indirect exporting: A distribution channel that requires dealing with another domestic firm that
acts as a sales intermediary for the marketer; often taking over the international side of the
marketer’s operations.

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Direct exporting: A distribution channel in which the marketer takes direct responsibility for its
products abroad by either selling directly to the foreign customer or finding a local representative
to sell its products in the market.
Integrated exporting: Requires the marketer to make an investment in the foreign market for the
purpose of selling its products in that market or more broadly.
Commissionario: An intermediary for the distribution of goods who may sell in its own name
(as a distributor would), but for an undisclosed principle (an agency concept).
Del credere agent: An intermediary for the distribution of goods who guarantees the solvency of
the customer and may therefore be responsible to the supplier for payment by the customer.
Facilitating payments: Small fees paid to expedite paperwork through customs; also called
“grease”; not considered in violation of Foreign Corrupt Practices Act or OECD guidelines.
Parallel importation: Authentic and legitimately manufactured trademark items that are
produced and purchased abroad but imported or diverted to the markets by bypassing designated
channels; also called “gray market.”

Questions for Discussion

1. Relate to these two statements: “A channel of distribution can be compared to a marriage.”

“The number one reason given for divorce is lack of communication.”

In order for a channel of distribution to be successful, it must be a joint venture in which all
participants cooperate to achieve their respective goals. To ensure cooperation,
communication of goals, concerns and problems is necessary.

As in a successful marriage, the communication process must be in both directions; one

partner cannot impose demands without regard for the other's concerns. If the partners have
different objectives to accomplish in the channel relationship, both must take the others into
consideration and help the partner achieve his objective while at the same time achieving his
own objective.

The main cause for divorce is lack of communication and the main cause for problems in
distribution channels is improper communication between the channel members. The cause
for communication problems may be similar in both situations: social, cultural, time and
geographical distance. If problems do exist, the best way to deal with them is through
communication. However, because of the various distances, the communication process is
complicated and complex and requires efforts from both partners. Rather than
communicating about the problem, partners usually only pass on the information about the
problem and often are reluctant to discuss it and explore other opportunities while
communicating each party's goals and needs.

In both situations, the problem of future communication problems may be avoided through
careful determination of the type of partner that is desired as well as screening of the partner
for various characteristics.

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2. Channels of distribution tend to vary according to the level of economic development of a
market. The more developed the economy, the shorter the channels tend to be. Why?

Channels of distribution tend to be shorter the more developed the economy because each
channel member is able to cover a larger geographical area for the following reasons:

A. infrastructure: with a well developed infrastructure, the physical movement of goods

is facilitated.

B. channels of communication: in a less developed economy, the communication process

between geographically distant parties may not be smooth or timely. This may be due to
lack of proper telecom connectivity or poor postal service. As a result, more channel
members that are located within short distances may be required for an effective
communication process. Moreover, the use of Web or e-commerce for communication
and interaction is at an advanced stage in developed economies while it is at a nascent
stage in the developing countries. Hence marketers are unable to utilize this medium of
communication in less developed economies.

C. resources: with a well-developed capital markets, channel members are able to secure
more financial resources and well-developed economies also provide more opportunities
for expansions. Developed economies also witness the emergence of a few dominant
players (such as retailers) that will command direct channels of distribution and
communication (e.g., sales offices of marketers in cities where they do the buying).

D. lower costs: by using more channel members, the distributors use a lot of abundant
resources (labor), while saving scarce resources (capital). In addition, it has been found
that less developed economies are reluctant to adapt innovative channel structures.

3. If a small exporter lacks the resources for an on-site inspection, what measures would you
propose for screening potential distributors?

An exporter must consider the distributor as an independent entity with its own goals. As
such, it is important to determine the latter’s business strategy. If a small exporter lacks the
resources for an on-site inspection, the following measures for screening potential
distributors may be used:

- contact the distributor’s customers, suppliers, facilitating agencies, competitors, and

other members of the local business community to understand the business conduct of
the distributor.
- ask the potential distributor for a local market plan and competitive analysis
- use the following sources for financial information:

* the distributor's suppliers

* other distributors not in direct competition
* local banks
* credit reports from the WTDR, FCIB/NACM, Dun & Bradstreet and local credit
reporting agencies
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 - make a trial agreement with minimum purchase requirements
- check the distributor's reputation with customers
- analyze the distributor’s existing product lines along four dimensions: competitiveness,
compatibility, complementary nature, and quality.
- find out the extent of the distributor's market coverage through the size of his physical
facilities, sales training and number of sales outlets
- test the distributor's commitment by setting reasonable conditions in the first agreement
and getting feedback to them

4. The international marketer and the distributor will have different expectations concerning
the relationship. Why should these expectations be spelled out and clarified in the contract?

Spelling out and clarifying the expectations of both parties in the contract should help avoid
future conflicts about expectations and provides the marketer with information as to what
means may be useful in motivating the distributor to optimize performance. The
distributor’s business strategy will allow the international marketer to understand the
expectations of the distributor from the channel relationship and thus determine their
position in the strategy. Before signing up a foreign sales agreement an international
marketer must carefully study the following elements:

a) Contract duration
b) Geographic boundaries for the distributor
c) Specifications in the payment section
d) Product/product lines and conditions of sale

The international marketer also has to keep in mind the possibility of legal problems with a
foreign intermediary. Although the complications arising may be varied, two crucial ones
are (a) the difficulty of terminating an intermediary in many countries, and (2) dealing with
foreign courts which may have a bias for the local (small) business, especially if the other
party is a larger (U.S.) conglomerate.

5. One method of screening candidates is to ask distributors for a sample marketing plan.
What items would you want included in the plan?

Items to be included in the marketing plan are analysis of existing channel structures,
functions performed by the various types of intermediaries, market description and
environment, market size and growth, marketing objectives, competition, opportunities and
problems, marketing strategy with programs and target accounts, budgets and deadlines.

The following is a shortened version of a basic marketing plan outline:

A. Situation Analysis
a) business environment
b) market segments
c) competition
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 d) past year programs
e) summary - company's current position
B. Company marketing objectives and strategies
C. Key marketing plans by product or segment
a) product development
b) sourcing
c) pricing
d) distribution channels
e) marketing communication
f) distribution logistics
g) service
h) additional research
i) organization
j) budgets
k) summary schedule and assignments
D. Sales territory plans
a) objectives
b) territory strategy
c) key account actions
d) distribution channel actions
e) other programs
f) organization
g) budgets
h) expenditure measures
E. Control and contingency plans

For an exporter looking at such a plan, however well it is compiled, the key is the resources,
monetary aspect, manpower, and intellectual that are committed for the particular
product(s). At the same time, the exporter has to realize that few intermediaries are in
business for one company, and have to, therefore, balance their commitments.

6. Is gray marketing a trademark issue, a pricing issue, or a distribution issue?

In principle, gray marketing can be discussed as any of the three issues. Those who oppose
gray marketing consider it a trademark issue with parallel importation constituting
trademark violation. The courts in the U.S. have not agreed except in cases of licensing.
Those in favor of gray marketing state that it is a price discrimination issue by the
international marketer; i.e., if a marketer wants to charge more in one market due to demand
conditions, he/she should then also be prepared to face intra-brand competition from
entrepreneurs who bring the product to commerce through unauthorized channels. In the
final count, gray marketing is a distribution issue, because the phenomenon will not occur
without an authorized entity leaking genuine, legally trademarked goods from the authorized
channels to entrepreneurs not included in the marketer’s overall distribution scheme.

Internet Exercises
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1. Using the Web site of the U.S. Commercial Service (http://trade.gov/cs), assess the types of
help available to the exporter in establishing distribution channels and finding partners in
this endeavor.

The U.S. Commercial Service promotes trade and introduces its members to qualified
buyers apart from providing them world class market research, conducting trade events
that promote product or service to qualified buyers, and counseling and advocacy. The
U.S. government’s export portal (http://www.export.gov/) used by the U.S.
Commercial Service provides online resource to export clients.

Most governments have distributor/agent services which provide not only the contact
information of interested parties (many of which have contacted the government agency in
question), but also evaluative information about them: product lines carried, principals
served, and credit information. In most cases, the cost is minimal (e.g., $100 in the U.S. for
an International Company Profile Report as shown in Exhibit 13.9).

2. The Alliance for Gray Market and Counterfeit Abatement (http://www.agmaglobal.org/) has
as its primary purpose to “mitigate gray marketing and counterfeiting of high-technology
products.” Is it appropriate to equate the two? Are the arguments by this industry coalition
convincing?

Gray marketing occurs for any products for which there are significant price discrepancies in
the world marketplace. Typically, the products are well-known branded goods which have
been “pre-sold” to the customer; i.e., the customer will not hesitate to buy them from an
unauthorized source because they are familiar with it and its dimensions.

The attempt to equate unauthorized imports and distribution of legally trademarked goods
and intellectual property violation are understandable as a method to plant concern in the
minds of customers about the products they are buying. In some cases, product
formulations may vary from market to market, rendering gray-market goods ineffective or
even dangerous.

AGMA is an assembly of intellectual property brand owners for discussing issues related to
the gray market fraud and counterfeit in the technology sector. Since development of high-
tech products involve huge expenditure on research, the price of these products are very
high. Thus, customers are always on the look out for similar technology at lower price. This
kind of a demand among consumers encourages gray market operations, whereby local
producers forge these high-technology products and introduce them into the market at a very
low price. Due to such counterfeit operations international marketers incur a huge loss. As
per the research conducted by AGMA high-technology products are most prone to
counterfeiting and gray marketing.

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