8.

Distribution Policy in international marketing

1. The nature of distribution channels in international marketing.
2. Channel behaviour and channel organization.
3.Channel design decisions.
4. Channel management decisions.
5. Physical distribution decisions.
1. The nature of distribution channels.

Meaning and Definitions of International Distribution Channels:

The sole objective of production of any commodity is to help the goods reach the ultimate consumers. In the
era of modem large scale production and specialization it is not possible for the producer to fulfill this work in
all circumstances. The size of market has become quite large. Therefore, the producer has to face numerous
difficulties if he undertakes the distribution works himself.

Besides, in the age of specialization it is not justified on the part of a single person or organisation to entertain
both production as well as distribution work. Thus the producer has to take help of many distribution channels
to transfer the goods to the ultimate consumers. In other words, many different distribution channels are
needed between producers and consumers for effective distribution of products.

Most producers use middlemen to bring their products to market. They try to forge a distribution channel. A
distribution channel is the set of firms and individuals that take title, or assist in transferring title, to a good or
service as it moves from the producer to the consumer or industrial user.

Why Are Middlemen Used?

Why do producers give some of the selling job to middlemen? This means giving up some control over how
and to whom products are sold. The use of middlemen largely boils down to their greater efficiency in making
goods available to target markets. Through their contacts, experience, specialization, and scales of operation,
middlemen usually offer a firm more than it can achieve on its own.
Figure 1 shows one way that using middlemen can provide economies. Part A shows three producers each
using direct marketing to reach three customers. This system requires nine different contacts. Part B shows the
three producers working through one distributor, who contacts the three customers. This system requires only
six contacts. In this way, middlemen reduce the amount of work that must be done by both producers and
consumers.
From the economic system's point of view, the role of middlemen is to transform the assortment of
products made by producers into the assortments wanted by consumers. Producers make narrow assortments of
products in large quantities. But consumers want broad assortments of products in small quantities. In the
distribution channels, middlemen buy the large quantities of many producers and break them down into the
smaller quantities and broader assortments wanted by consumers. Thus, middlemen play an important role in
matching supply and demand.

M C M C

M C M D C

M C M C

A B
Distribution Channel Functions
A distribution channel moves goods from producers to consumers. It overcomes the major time, place,
and possession gaps that separate goods and services from those who would use them.

Members of the marketing channel perform many key functions:

  Research—gathering information needed for planning and aiding exchange
 Promotion—developing and spreading persuasive communications about an offer
 Contact—finding and communicating with prospective buyers
 Matching—shaping and fitting the offer to the buyer's needs, including such activities as
manufacturing, grading, assembling, and packaging
 Negotiation—reaching an agreement on price and other terms of an offer so that ownership or
possession can be transferred
 Physical distribution—transporting and storing goods
 Financing—acquiring and using funds to cover the costs of the channel work
 Risk taking—assuming the risks of carrying out the channel work
The first five functions help to complete transactions; the last three help fulfill the completed
transactions.
The question is not whether these functions need to be performed—they must be—but rather who is to
perform them. All the functions have three things in common—they use up scarce resources, they can often be
performed better through specialization, and they can be shifted among channel members. To the extent that
the manufacturer performs them, its costs go up and its prices have to be higher. At the same time, when some
functions are shifted to middlemen, the producer's costs and prices are lower, but the middlemen must add a
charge to cover their work. In dividing up the work of the channel, the various functions should be assigned to
the channel members who can perform them most efficiently and effectively to provide satisfactory
assortments of goods to target consumers.
Types of Distribution Channels:

There are different types of channels of distribution and a manufacturer may select any one of these channels.

These channels may be broadly divided into two parts:

I. Distribution Channel of Consumer Goods:

The channels of distribution for consumer products may be as follows:

1. Manufacturer → Agent → Wholesaler → Retailer → Consumer:

In this method of distribution channel, product reaches the agent from the manufacturers and from the agent to
wholesaler and then to consumers through retailers. In India, most of the textile manufacturers adopt this
method of distribution.

2. Manufacturer → Agent → Retailer → Consumer:

In this method of distribution, the wholesaler is eliminated and goods reach from manufacturer to agent and
then consumers through retailers only. Manufacturers who want to reduce cost of distribution adopt this
method.

3. Manufacturer → Agent → Consumer:

As per this method of distribution channel, there is only one middleman that is the agent. In India, for the
distribution of medicines and cosmetics, this channel of distribution is commonly adopted.

4. Manufacturer → Wholesaler → Retailer → Consumer:

A manufacturer may choose to distribute his goods with the help of two middlemen. These two middlemen
may be wholesalers and retailers.

5. Manufacturers → Retailer → Consumer:
In this method of distribution channel, manufacturers sell their goods to retailers and retailers to consumers. In
India, Gwalior Cloth Mills and Bombay Dyeing adopt this channel of distribution to sell textiles.

6. Manufacturers → Consumers:

A producer of consumer goods may distribute his products directly to consumers. The goods may be sold
directly to consumers through vending machines, mail order business or from mill’s own shops.

II. Distribution Channel of Industrial Products:

The channels for industrial products are generally short as retailers are not needed.

However, following methods may be adopted:

1. Manufacturer → Agent → Wholesaler → Industrial Consumer:

Under this method, product reaches from manufacturer to agent and then to industrial consumer through the
wholesaler.

2. Manufacturer → Agent → Industrial Consumer:

Under this system, goods reach industrial consumer through the agent. Thus there is only one middleman.

3. Manufacturer → Wholesaler → Industrial Consumer:

This distribution channel is the same as above, the only difference is that in place of agent, there is wholesaler.

4. Manufacturer → Industrial Consumer:

Under this channel there is no middleman and goods are directly sold to industrial consumer. Railway engines,
electric production equipment are sold by this system.

Direct channel is popular for selling industrial products since industrial users place orders with the
manufacturers of industrial products directly.

To plan about an export distribution, knowledge on two different aspects are a must:

(i) The marketing channel that is available in the Foreign Market.

(ii) The most appropriate channel is to link the domestic operations to the overseas channels.

The principal forms of penetrating exports markets are selling to local export houses or buying organisations
for indirect exporting and appointing agents or distributors for direct exporting.

If these forms are combined with the domestic channel of distribution in the importing country, the
export distribution channel can be identified as follows:

a. Direct Distribution Channel:

This figure is illustrative of distribution of channel of consumer goods. In case of industrial products, the
channel will be shorter because there is no need of retailers. In fact, in many cases, there may not be any
wholesaler.

Producer → Agent → Industrial buyer

b. Indirect Distribution Channel:

In indirect exporting, the firm delegates the task of selling products in a foreign country to an agent or export
house.

This figure is illustrative of distribution channel of goods. In case of industrial products, the channel will be
shorter because there is no need of retailers. In fact, in many cases, there may not be any wholesaler.

The channels of distribution may differ from country to country, market to market and product to product. So,
the first task of the producer is to find out the possible distribution channel through which he wants to reach
the consumers on the foreign market, keeping in view the characteristics of his product and the marketing
strategy he wants to follow in the market.

While selecting a distribution channel for foreign markets, the management of the exporting company
should consider the following aspects:

(i) Who are the consumers? Which are the available retail outlets to reach them?

(ii) Which type of market coverage is required, keeping in view the product and consumer characteristics?

(iii) Are there any internal constraints for the exporter like finance which will influence the decision regarding
choice of the distribution channel?

(iv) What are the expectations from the channel members? Are there some specific expectations?

(v) What is the required support system to satisfy the expectations of the channel members?

It should be realised that the distribution channel is the mechanism through which the seller reaches the
consumers and, therefore, the selected channel must be suitable to the company’s operations and marketing
strategy.

Export Distribution Channels:

The distribution process for international marketing involves all those activities related to time, place and
ownership utilities for industrial and end consumers. The selection, operation and motivation of effective
channels of distribution often turn out to be important factor in firm’s differential advantage in international
markets. The diverse cultural differences play an important role in formulation of distribution strategies for
any exporter entering foreign markets.

International marketing distribution is similar to that in domestic marketing. Main difference is in

environmental effects. The exporter, therefore, needs to understand how environmental factors affect the
distribution policies. Using this knowledge the exporter must use the most appropriate channels on a country-
to-country basis.
The distribution system available in a country is also influenced by the economic development of the country,
the personal disposable income of consumers and as well as some other factors such as culture, physical
environment and the legal/political system. Exporters, while developing a distribution strategy must focus on
how the goods can be transported from the manufacturing locations to the consumer most effectively.

Although distribution can be totally handled by the manufacturer, often the goods are moved through
middlemen such as wholesalers, distributors, retailers or agents. An understanding of the available distribution
system in a particular county is extremely important in the development of a sound distribution strategy.

Number of Channel Levels

Distribution channels can be described by the number of channel levels. Each layer of middlemen that
performs some work in bringing the product and its ownership closer to the final buyer is a channel level.
Because the producer and the final consumer both perform some work, they are part of every channel. We will
use the number of intermediary levels to indicate the length of a channel. Figure 2 shows several consumer
distribution channels of different lengths.
Level 0
Manufacturer Consumer
Level 1
Manufacturer Retailer Consumer

Level 2
Manufacturer Wholesaler Retailer Consumer
Level 3
Manufacturer Wholesaler Jobber Retailer Consumer

Channel 1, called a direct-marketing channel, has no intermediary levels. It consists of a manufacturer

selling directly to consumers. For example, Avon and World Book Encyclopedia sell their products door-to-
door; Franklin Mint sells collectables through mail order; Singer sells its sewing machines through its own
stores. Channel 2 contains one middleman level. In consumer markets, this level is typically a retailer. For
example, large retailers such as Sears and K mart sell televisions, cameras, tires, furniture, major appliances,
and many other products that they buy directly from manufacturers. Channel 3 contains two middleman levels.
In consumer markets, these levels are typically a wholesaler and a retailer. This channel is often used by small
manufacturers of food, drug, hardware, and other products. Channel 4 contains three middleman levels. In the
meatpacking industry, for example, jobbers usually come between wholesalers and retailers. The jobber buys
from wholesalers and sells to smaller retailers who are not generally served by larger wholesalers. Distribution
channels with more levels are sometimes found, but less often. From the producer's point of view, a greater
number of levels means less control. And, of course, the more levels, the greater the channel's complexity.
Figure 3 shows some common industrial distribution channels. The industrial-goods producer can use its
own salesforce to sell directly to industrial customers. It can also sell to industrial distributors who in turn sell
to industrial customers. It can sell through manufacturer's representatives or its own sales branches to
industrial customers, or use them to sell through industrial distributors. Thus zero-, one-, and two-level
distribution channels are common in industrial goods markets.
 Level 0 Industrial
Manufacturer
Customer
Level 1
Manufacturer Industrial Industrial
distributor Customer
Level 2
Manufacturer Manufacturer’s Industrial Industrial
reprezentative distributor Customer
Level 3
Manufacturer Manufacturer’s Industrial Industrial
sales branch distributor Customer

All the institutions in the channel are connected by several types of flows. These include the physical
flow of products, the flow of ownership, payment flow, information flow, and promotion flow. These flows can
make even channels with only one or a few levels very complex.

2. Channel behaviour and channel organization.

Distribution channels are more than simple collections of firms tied together by various flows. They are
complex behavioural systems in which people and companies interact to accomplish individual, company, and
channel goals, Some channel systems consist of only informal interactions among loosely organized firms;
others consist of formal interactions guided by strong organizational structures. And channel systems do not
stand still—new types of middlemen surface and whole new channel systems evolve. Here we will look at
channel behaviour and at how members organize to do the work of the channel.
Channel Behavior
A distribution channel is made up of dissimilar firms that have banded together for their common good.
Each channel member is dependent on the others, A Ford dealer depends on the Ford Motor Company to
design cars that meet consumer needs. In turn, Ford depends on the dealer to attract consumers, persuade them
to buy Ford cars, and service cars after the sale. The Ford dealer also depends on other dealers to provide good
sales and service that will uphold the reputation of Ford and its dealer body. In fact, the success of individual
Ford dealers will depend on how well the entire Ford distribution channel competes with the channels of other
auto manufacturers.
Each channel member plays a role in the channel and specializes in performing one or more functions. For
example, IBM's role is to produce personal computers that consumers will like and to create demand through
national advertising. Computerland's role is to display these computers in convenient locations, answer buyers'
questions, close sales, and provide service, The channel will be most effective when each member is assigned
the tasks it can do best.
Ideally, because the success of individual channel members depends on overall channel success, all
channel firms should work together smoothly. They should understand and accept their roles, coordinate their
goals and activities, and cooperate to attain overall channel goals. By cooperating, they can more effectively
sense, serve, and satisfy the target market.
But individual channel members rarely take such a broad view. They are usually more concerned with
their own short-run goals and their dealings with those firms closest to them in the channel. Cooperating to
achieve overall channel goals sometimes means giving up individual company goals. Although channel
members are dependent on one another, they often act alone in their own short-run best interests. They often
disagree on the roles each should play—on who should do what and for what rewards. Such disagreements
over goals and roles generate channel conflict.
Horizontal conflict is conflict between firms at the same level of the channel. Some Ford dealers in
Chicago complain about other dealers in the city stealing sales from them by being too aggressive in their
pricing and advertising or by selling outside their assigned territories. Some Pizza Inn franchisees complain
about other Pizza Inn franchisees cheating on ingredients, giving poor service, and hurting the overall Pizza
Inn image.
Vertical conflict is even more common and refers to conflicts between different levels of the same
channel. For example. General Motors came into conflict with its dealers some years ago by trying to enforce
policies on service, pricing, and advertising. And Coca-Cola came into conflict with some of its bottlers who
agreed to bottle Dr Pepper. A large chain saw company caused conflict when it decided to bypass its wholesale
distributors and sell directly to large retailers such as J. C. Penney and K mart, which then competed directly
with its smaller retailers.
Some conflict in the channel takes the form of healthy competition. This competition can be good for the
channel—without it, the channel could become passive and noninnovative. But sometimes, conflict can
damage the channel. For the channel as a whole to perform well, each channel member's role must be specified
and channel conflict must be managed. Cooperation, assigning roles, and conflict management in the channel
are attained through strong channel leadership. The channel will perform better if it contains a firm, agency, or
mechanism that has the power to assign roles and manage conflict.
In a large company, the formal organization structure assigns roles and provides needed leadership. But in
a distribution channel made up of independent firms, leadership and power are not formally set. Traditionally,
distribution channels have lacked the leadership needed to assign roles and manage conflict. In recent years,
however, new types of channel organizations have appeared that provide stronger leadership and improved
performance. We will now look at these organizations.

Channel Organization
Historically, distribution channels have been loose collections of independent companies, each showing little
concern for overall channel performance. These conventional distribution channels have lacked strong
leadership and have been troubled by damaging conflict and poor performance.
Growth of Vertical Marketing Systems
One of the biggest recent channel developments has been the vertical marketing systems that have emerged to
challenge conventional marketing channels. Figure- 4 contrasts the two types of channel arrangements.

Conventional
marketing Manufacturer Wholesaler Retailer Consumer
channel

Retailer
Vertical 2. Contractual VMS. A contractual
Consumer
marketing Wholesaler VMS consists of independent firms at
system
Manufacturer different levels of production and
distribution who join together through
contracts to obtain more economies
A conventional distribution channel consists of one or more independent producers, wholesalers, and
or even
retailers. Each is a separate business seeking to maximize its own profits, salesat the
impact
expensethan they forcould
of profits the
system as a whole. No channel member has much control over the other achieve alone.andContractual
members, VMSs
there are no formal
means for assigning roles and resolving channel conflict. have expanded rapidly in recent
By contrast, a vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting
years. There are three types of
as a unified system. Either one channel member owns the others, has contracts with them, or wields so much
contractual VMSs.
power that they all cooperate. The vertical marketing system can be dominated by the producer, wholesaler, or
retailer. VMSs came into being to control channel behavior and manage Wholesaler-sponsored
channel conflict. They voluntary
achieve
economies through size, bargaining power, and elimination of duplicatedchains services.
are systemsVMSs have in become
which
dominant in consumer marketing, serving as much as 64 percent of thewholesalers
total market. organize voluntary
We will examine three major types of VMSs shown in Figure-5. chains
Each oftypeindependent retailers
uses a different means for to
help them compete with large chain
setting up leadership and power in the channel. In a corporate VMS, coordination and conflict management are
attained through common ownership at different levels of the channel.organizations.
In a contractual VMS, Thethey wholesaler
are attained
through contractual agreements among channel members. In an administered
developsVMS, a leadership
program is assumed
in which by
one or a few dominant channel members. independent retailers standardize
1. Corporate VMS. A corporate VMS combines successive stages theirof selling
production practices and achieve
and distribution under
single ownership. For example, Sears obtains over 50 percent of its buying
goods from companies that it
economies that let the group partly or
wholly owns. Sherwin-Williams makes paint but also owns and operates two thousand retail outlets, Giant
compete
Food Stores operates an ice-making facility, a soft-drink bottling operation, an iceeffectively
cream making with
plant, chain
and a
bakery that supplies Giant stores with everything from bagels to birthday cakes. In such corporate
organizations. Examples include the systems,
cooperation and conflict management are handled through regular organizational channels.
Independent Grocers Alliance (IGA),
Western Auto, and Sentry
Hardwares.
 Retailer cooperatives are systems in which retailers organize a new, jointly owned business to carry on
wholesaling and possibly production. Members buy most of their goods through the retailer co-op and plan
their advertising jointly. Profits are passed back to members in proportion to their purchases. Non-member
retailers may also buy through the co-op but do not share in the profits. Examples include Certified Grocers,
Associated Grocers, and True Value Hardware.
In franchise organizations, a channel member called a franchiser links several stages in the
production-distribution process. Franchising has been the fastest-growing retailing form in recent years.
Franchised businesses now account for about one-third of retail sales in the U.S. Almost every kind of
business has been franchised— from motels and fast-food restaurants to dentists and dating services, from
wedding consultants and maid services to funeral homes and tub and tile refinishers. Although the basic idea is
an old one, some forms of franchising are quite new.
There are three forms of franchises. The first form is the manufacturer-sponsored retailer franchise
system, as found in the automobile industry. Ford, for example, licenses dealers to sell its cars —the dealers are
independent businesspeople who agree to meet various conditions of sales and service. The second type of
franchise is the manufacturer-sponsored wholesaler franchise system, as found in the soft-drink industry.
Coca-Cola, for example, licenses bottlers (wholesalers) in various markets who buy its syrup concentrate and
then carbonate, bottle, and sell the finished product to retailers in local markets. The third franchise form is the
service firm-sponsored retailer franchise system. Here, a service firm licenses a system of retailers to bring its
service to consumers. Examples are found in the auto rental business (Hertz, Avis), fast-food service business
(McDonald's, Burger King), and motel business (Holiday Inn, Ramada Inn).
The fact that most consumers cannot tell the difference between contractual and corporate VMSs shows
how successful contractual organizations have been in competing with corporate chains.

3. Administered VMS. An administered VMS coordinates successive stages of production and distribution—
not through common ownership or contractual ties but through the size and power of one of the parties.
Manufacturers of a top brand can obtain strong trade cooperation and support from resellers. Thus, General
Electric, Procter & Gamble, Kraft, and Campbell Soup can command unusual cooperation from resellers
regarding displays, shelf space, promotions, and price policies.
Types of Middlemen
A firm should identify the types of middlemen available to carry on its channel work. For example,
suppose a manufacturer of test equipment has developed an audio device that detects poor mechanical
connections in any machine with moving parts. Company executives feel that this product would have a
market in all industries where electric, combustion, or steam engines are made or used. This market would
include such industries as aviation, automobile, railroad, food canning, construction, and oil. The company's
current salesforce is small, and the problem is how best to reach these different industries. The following
channel alternatives might emerge from management discussion:
 Company salesforce. Expand the company's direct salesforce. Assign salespeople to territories and
have them contact all prospects in the area. Or develop separate company salesforces for different
industries.
 Manufacturer's agency. Hire manufacturer's agencies—independent firms whose salesforces handle
related products from many companies—in different regions or industries to sell the new test
equipment.
 Industrial distributors. Find distributors in the different regions or industries who will buy and carry
the new line. Give them exclusive distribution, good margins, product training, and promotional
support.
Sometimes, a company has to develop a channel other than the one it prefers because of the difficulty or
cost of using the preferred channel. Still, the decision sometimes turns out extremely well. For example, the
U.S. Time Company first tried to sell its inexpensive Timex watches through regular jewellery stores. But
most jewellery stores refused to carry them. The company then managed to get its watches into mass-
merchandise outlets. This turned out to be a wise decision because of the rapid growth of mass merchandising.
Number of Middlemen
Companies also have to decide on the number of middlemen to use at each level. Three strategies are
available.
Intensive Distribution. Producers of convenience goods and common raw materials typically seek
intensive distribution—stocking their product in as many outlets as possible. These goods must be available
where and when consumers want them. For example, toothpaste, candy, and other similar items are sold in
millions of outlets to provide maximum brand exposure and consumer convenience.
Exclusive Distribution. By contrast, some producers purposely limit the number of middlemen handling
their products. The extreme form of this practice is exclusive distribution, whereby a limited number of
dealers are given the exclusive right to distribute the company's products in their territories. Exclusive
distribution is often found in the distribution of new automobiles and prestige women's clothing. By granting
exclusive distribution, the manufacturer hopes for stronger distributor selling support and more control over
middlemen's prices, promotion, credit, and services. Exclusive distribution often enhances the product's image
and allows higher mark-ups.
Selective Distribution. Between intensive and exclusive distribution lies selective distribution—the use
of more than one but less than all the middlemen who are willing to carry a company's products. The company
does not have to spread its efforts over many outlets, including many marginal ones. It can develop a good
working relationship with selected middlemen and expect a better-than-average selling effort. Selective
distribution lets the producer gain good market coverage with more control and less cost than intensive
distribution. Most television, furniture, and small appliance brands are distributed selectively.