foreign market entry & channels of distribution

7/31/2019 Foreign Market Entry & Channels of Distribution

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Merits and Demerits


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Can be Direct or Indirect Suitability depends on size of market, nature of

product line, costs of entry and the involvement

of company Indirect exports happen Recognized Merchant

Exporters or Export Houses will buy in Indiasell them abroad

Other way is when you sell to Resident BuyingHouses Suitable for small company, as risks are low

and payments are quick


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Company after years of exports will remainignorant of export market & operations

Dependant on export houses/ foreign buyersfor its overseas business

Margins added by the intermediaries could behigh and seller has no control of prices

Merchants may focus in few markets and onlyprofitable products


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Export Department or Separate Export Company

Establishment of Branches / Plants in foreign markets improves after sales service, off the shelf supplies,

and catering to other regional markets Volume of business and regulations in the market

would justify such a move

Foreign manufacturing reduces transport costs andcontributes to national aspirations of the importingcountry, and cheaper materials/ labor ,and overcomintariff and non-tariff barriers


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Assembly Plants will help avoid Anti-Dumpingduties for low priced exports

Licensing Arrangements allow manufacture

of goods locally with sellers brand name inexchange for royalty

No investment on exporting company and riskof nationalization are low

Quality control is difficult and importingcompany could become competitor in thirdmarkets

Appointment of exclusive agents


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Most widely used method as simple andless expensive

Is sole representative of manufacturer inthe agreed territory

May handle non-competing lines butshould not take up competitors range

Gets commission and operates underguidance and control of the Exporter


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Via media between having a plant abroad andlicensing arrangement

Exporting company has some investment and

a voice in the management Can utilise the local skills and distribution

system of the partner Higher return than royalties and better control

on Production & Marketing Greater investment and risks but

nationalization is almost unlikely


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Sole importer of exporters products

Buys holds large stocks and could own

wholesale and retail outlets Provides repair and service facilities at

cost


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Make goods available from producer tocustomer

Depends on nature of product andmarketing strategy of the company

Channel of consumer product is longerthan industrial products generally

For industrial goods the producer maysell directly


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What is the marketing channel available in themarket ?

Most appropriate channel to link domestic

operations to overseas channel ? Who are the consumers? Retail Outlets to

reach them ? Market coverage needed based on product /

market character ? Internal constraints ? Expectations from

channel members ? Support system neededtosatisfy channel members ?


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Gravity Approach Seller is in touch withintermediary only and hopes merchandise willmove to final customers

Push Policy Channel is used as promotionalinstrument , so planning is needed andexporter has to be channel leader

Pull Strategy Reach final customers byintensive promo campaigns and pre-sellproduct to consumers thus create pressure onchannels to carry the product


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Selection of level of distributionat which to sell

No. of Distribution organisations to which to sell

Type of distribution organizations to sell

Level of Distribution Wholesaler, Retailer,Supermarkets, chain stores, or speciality stores

Direct Vs Indirect Distribution factors in favor of directselling are Control ,Customer Satisfaction , Profit , etc

Factors against Direct Selling are Standing in themarket , Economies of scale


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Costs involved

Competition behavior

Feedback on product acceptance

Existing channels in various markets Identify foreign agents from various sources and with

relevant experience

Payment of Agency Commission should not exceed

12.5% now raised to 15% on the FOB value Role of Export / Trading Houses promoting small

scale industries


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In USA the retailing channels are diverse Wholesale clubs like Price Costco and Sams Club and

shopping malls offer rock-bottom prices

Biggs in Cincinnati was one and half the size of afootball field with 75 aisles and 40 checkout lanes and60000 items

Carrefour, Euromarche, Kmart and Wal-Mart have allset up hypermarkets but soon these big stores havehad problems

Americans found these stores too big and also did notwant to mix food and nonfood purchases from onelocation ( cost of running such stores meant 8% grossmargin) and minimum buying needed to be US $ 43


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Cokes leadership in world markets is based onits ability to put Coke within an arms reach ofdesire place utility.

Dells meteoric rise in world computer industrywas based on its innovative direct marketingand BTO (build to order) channel strategy

Self-service discount pricing in US has been

studied and applied by retailers in Europe andAsia Price could become more important than

deliver


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Influence channel design and vary from country to country andneed for multiple channel intermediaries increases with increase innumber of customers

For mass-market products bought by millions of customers retaildistributor or mail-order distribution is required

In case of large number of low-volume retailers it is cheaper toreach market customers via wholesalers

Direct selling can be a good way to serve large-volume retailersbut individual countries may respond differently to suchgeneralization e.g. Toys R Us faced considerable oppositionfrom Japanese toy manufacturers to sell directly to the Americancompany at its first store in Japan


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Channel design is influenced by standardization,perishability, bulk, service, and unit price

Products with high price are often sold throughcompany sales force because of complexity and needfor explaining features

Perishable products need direct channels to ensuresatisfactory condition at time of purchase

Bulky products need channels that minimize theshipping distances and the number of times theproduct changes hands before reaching the customere.g. soft drinks and beer are bulky products that needwidespread availability for effective marketing


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Middlemen are in business to maximize their own profitand not for that of manufacturer

They are notorious for cherry-picking practice of

taking orders for products and brands which are indemand, to avoid real selling effort

To counter this danger a new export-sourced productcould be distributed by company relying on distributorsown sales force. This allows direct-selling support and

distribution support, and the distributor is happy tohave free sales representative with potential for aprofitable line addition


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To find a good agent or distributor you may approach the IndianEmbassy, Consulate of the destination country, Ministry ofCommerce & Industry, or Chambers of Commerce

Go to country and talk to end users of products you sell and findout which distributors they prefer two or three names will keepcoming up. Meet them and others short listed and arrive atacceptable commission rates and volume of business at start yearand beyond

Termination and Performance clauses become important inensuring the distributor becomes effective business representative

In some countries like Ecuador legal hurdles could affect thetermination as courts may take too long to arrive at a decision

Advice of a legal counsel is advised before signingtheAgent/Distributor agreement

Must be able to read and understand the terms of the agreement


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Political Risk Lower the level morelikely a company will invest in country or

market e.g. political risk in Triad countriesis low as compared to Latin America,Africa or Asia ( A Serbian cap was addedto the Golden Arch McDonalds logo in

war-torn Belgrade, Yugoslavia, priceslowered and free hamburgers given toanti-NATO demonstrators !! )


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Local content laws

BOP problems can cause market access

problems May need to produce within market to

avoid tariff and non-tariff barriers e.g.

Japanese car industry


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Land, labor and capital costs Cost of skilled and unskilled workers, technical,

management, etc

In LDC the per hour rate could be $ 0.5 and indeveloped countries $ 6-20 for direct labor

Material availability and costs Advanced computer controls and new

manufacturing technology can neutralise cheaplabor costs and improve productivity Tax incentives given by the market countries


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Greater distance between product source andtarget market greater is the delivery time, andhigher cost of transportation

Inter modal services facilitate global deliveryand allow containers to be transferred from rail,boat, air and truck carriers

Transportation costs in US are 5% of total costof imports and exports

In Europe a single market means fewer bordercontrols and so faster delivery and much lowercosts


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Power, transportation, roads, communication,service, component suppliers, labor pool, civilorder, and effective governance

Reliable access to foreign exchange to ensurebuying of materials and products can beshipped to customers

Countries like Lebanon, Uganda, El Salvador,Russia, and even China have constraints tohandle the increasing volume of shipments


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At any time the attractive location for production canbecome unattractive due to exchange rate fluctuations

In 1998 financial crisis in Russia saw rouble drop from

6 to the USD to 25 roubles !! Prudent company will incorporate exchange volatility

into its planning assumptions and be prepared foralternate country options for supplying markets

Hence if $, Yen or Euro become seriously overvaluedproduction could be moved to other locations toachieve competitive advantage if such options areavailable


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After research a visit is essential to corroboratethe market potential findings or contradict

First hand sizing up of details before makingthe export marketing plan with additionaldetails

Trade Fair would be a good place to start withas also missions find agents, buyers,distributors, locate end users (direct selling )

Learn about competitors technology, prices,and depth of market penetration


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Exporting

Licensing

Franchising

Joint Ventures

FDI

foreign market entry & channels of distribution

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