Global Expansion and the Need for an Effective Distribution Channel Strategy

Successful companies have a fundamental understanding of what their customers want and how to provide solutions they will buy. They also understand where and how their customers want to buy. This success is ultimately dependent on the efficiency and scope of the company’s go-to-market strategies. Therefore, optimizing their distribution channel strategy is a crucial factor to companies achieving sustainable growth and competitiveness in both their domestic and foreign markets.

The rise of emergent market middle class and the resurgence of developing economies in the past two decades have accelerated globalization at an exponential rate. Tantalizing new opportunities in regions such as South East Asia and the Gulf Cooperation Council are complicated to achieve but impossible to ignore. Most companies are aware that global expansion carries risks but few truly appreciate the need for a comprehensive market entry strategy and the supplemental research. This is understandable; domestic success often breeds complacency and even undue confidence, the idea that “if it works here, it will work there” is not an uncommon one in the contemporary SME. Not uncommon but dangerous, understandable but avoidable. Many companies experience significant setbacks in growth and even bankruptcy following inefficient market entry.

Weaknesses and inefficiencies within a company’s distribution network can have detrimental consequences to both short-term financial results and long-term competitiveness. Additionally, poorly managed distributor relationships are an entirely preventable drain on supplier’s resources. These effects are significant within a domestic market but in a foreign market they can be disastrous. Potential consequences arising from ineffective market entry are poor-fit partners (often with exclusivity contracts); misaligned distributor objectives and cultural conflicts that disrupt channel partner relationships before they have a chance to succeed. This inevitably results in a failure to reach end-users allowing competitors the opportunity to establish significant market presence in your absence.

To achieve successful market expansion companies must engage in comprehensive market research to ascertain, not only the economic status and cultural preferences of the target market, but also to investigate the key players in their sector and the best-fit partners to sell their product and, ultimately grow their business. The factors to consider are numerous and diverse. Market maturity can guarantee stability and sustainability but may yield low margins through competitive pricing in a saturated market. Alternatively, emerging markets may yield greater margins at greater risk. Effective research applied to a methodical channel development strategy will reveal the intricate details of a target market, allowing suppliers to make truly informed decisions. When eventually a supplier is faced with choosing a distributor, they would do well to consider potential future market entry strategies. Larger distribution companies often have presence in multiple markets so a single long-term contract could yield multiple market entries facilitated by an ally that knows those markets well.

Market expansion is not just that, it is also a diversification of a company’s market portfolio. To maximize opportunity and dilute risk, companies should avoid over concentration in one region or sector and the eternal temptation of putting too many eggs in one basket!

International expansion of a company can be challenging but a comprehensive and methodical strategy that is founded in considering the distribution channel needs of each market separately will yield success. For any company considering or currently initiating expansion and diversification, start now! Develop and apply a global distribution channel strategy to support more effective business strategies, increase profitability and drive sustainable growth.

How to Develop a Distribution Channel Strategy

Before one can contemplate a distribution channel strategy, one must first understand what is a distribution channel. Distribution channels are the sequence of intermediaries that goods and services pass through until they reach the end-customer. In the contemporary global market place, distribution channels take many forms, from wholesalers and distributors to retailers and web-shops, and everything in between. These can be broken down into two essential categories; distributors such as retailers that take ownership of the goods along the path to the end-user, and representatives such as agents that do not take ownership but facilitate the movement of goods or services.

Essentially, a distribution channel strategy facilitates the sale of goods and services in sectors or geographical markets that a company’s sales team cannot operate in directly for any given reason. The strategy may avail of any of the channels described above with different channels offering advantages and disadvantages depending on the type of company and its requirements. Successful companies will allocate appropriate resources to the upkeep of their distribution channel strategies because, in order for the channel to operate effectively, the company must maintain and exercise an appropriate level of control, communication and support to incorporate their changing needs.

Active and sustained communication with the distribution channels also serves to promote the exchange of ideas across culturally diverse markets through the central company. This movement of ideas may inform advances, not only in distribution strategy, but also in the companies overall sales strategy.

To develop an effective distribution channel strategy, a company must consider 5 primary factors: scope, expense, contribution, support and customer service.

1.     Scope – The objective of any sales strategy is to grow the company. Identify the target market and all the players in it; distribution channels, competitors and suppliers of complimentary products. Decide on a structured set of criteria that the distribution channel must meet in order to provide the best fit for your company. For example, the channel must have revenue of 2-5 million euro, have operated in the market for 5 years and stock no competitive products.

2.     Expense – Confirm the cost of establishing an indirect distribution channel strategy in your target market and compare it with the costs of setting up a network or direct sales team there. A direct sales team will incur all the expenses associated with processing, warehousing, distribution, invoicing and after-care whilst a distributor may incur lower margins through discount pricing. These costs will vary depending on the nature of the market and the goods sold, compare and make the right choice for your business.

3.     Contribution – As mentioned above, sustained communication your distribution channels may encourage the exchange of ideas, which will contribute to the cultural and structural growth of your business. A more tangible aspect of distribution channel contribution will be access to additional customer base and market knowledge that will lower sales and marketing costs associated with initiating market research and advertising campaigns.

4.     Support– As mentioned above, the sustained support and control of the distribution channel strategy is quintessential to its success. Support may take the form of a dedicated manager tasked with monitoring the distribution channel, identifying needs and offering knowledge based assistance or direct funding of sales and marketing activities. The level of support offered will depend on how significant the contribution of that distributions channel to overall revenue or the potential growth of the distribution network through that channel.

5.     Customer Care – As with distribution channels, it is critical for companies to identify the target end-customers as part of their distribution channel strategy. Key accounts may need to be reached directly by the company to provide customer care or technical support beyond the capability of the distribution channel partner. In this instance, the channel may be responsible for larger scale customer care for the majority of customers, leaving the parent company with ample resources to look after the key accounts.

Choosing an Export Distribution Channel

Once a business has identified the market/markets to export to, the next step is to establish who will sell the product/service to potential customers and how it will be sold and distributed. How a business organises their sales presence in export markets is one of the key decisions to be made by an exporter. The choice of selling method will be influenced by the nature of the product/service. It is important to assess the usual local distribution practice with regard to similar products.

There are 2 main ways of exporting to overseas markets, these are:

1. Direct Exporting

• Selling Direct from the exporter’s location

2. Indirect Exporting

• Opening Operations in Overseas Markets

• Using a Commission Agent

• Using an Overseas Distributor

1. Direct Exporting - Selling Direct

Some larger companies prefer to purchase directly from the manufacturer without the services of a middleman. This typically involves making frequent sales visits to the particular country, as well as telephone sales or accepting of overseas orders on an e-commerce website. This can be a straightforward, cost effective way of entering overseas markets; however, it can have implications. It may leave the exporter remote from customers, and unable to share the exporting workload with partners or intermediaries.

Advantages of Direct Selling

• Existing resources can be used to start exporting into the overseas market • Enables a business to maintain full and direct control over the process • It is a strategy that can be easily reversed • Profit does not have to be shared with partners or intermediaries

Disadvantages of Direct Selling

• A good knowledge of the overseas market is essential in order to locate buyers and establish business relationships

• The exporter will be responsible for logistics, unless the business commissions a specialist freight forwarder to handle this

• The exporter is often remote from customers

• The exporter is unable to share exporting workload with partners

2. Indirect Exporting - Opening Operations in Overseas Markets

This is generally the most costly and time consuming method to enter an overseas market, however, it can be the most rewarding.

A business can set up an overseas operation by:

• Opening a local office, using existing employees as staff

• Setting up a new business in the overseas market – a locally registered subsidiary company. This is subject to local regulations and legislation

• Partnering with a local business in the form of a joint venture, to set up the new business with shared ownership

Very few companies will be in a position to immediately set up their own office with resident personnel; however, this is often the long term objective in the key overseas markets. Furthermore, there are vital legal and financial implications involved in setting up in an overseas market. A company should seek legal advice from a solicitor and an accountant business adviser when considering this option.

Advantages of Opening Operations in Overseas Markets

• Enables exporter to plan long term sales

• Customers take a product more seriously when it is locally based, especially when after sales service is required

• A joint venture enables the company to share the risk

Disadvantages of Opening Operations in Overseas Markets

• An in depth knowledge of local employment and tax law is a necessity

• If things go wrong, this could lead to very high costs

• Multiple financial implications involved

3. Indirect Exporting - Using a Commission Agent

An overseas agent represents the exporter in the overseas market, sells the exporter’s product or service to the overseas customer and routes orders back to the domestic market. Once the goods are paid for by the customer, the overseas agent receives commission from the exporter.

The commission varies from 2% to 15%, depending on the nature of the goods being handled. Commission should be included in the price quoted to the customer. It is essential to recruit a commission agent that has extensive experience in the particular business context, as well as relationships with potential buyers.

Advantages of Using a Commission Agent

• Recruitment, training and payroll costs of using your own employees to enter the overseas market are avoided

• The commission agent is well placed to identify and exploit opportunities

• More control over price and brand image are maintained when using an agent – compared with using a distributor

Disadvantages of Using a Commission Agent

o The exporter is still responsible for trade logistics such as shipping o There can be a problem with after sales service when selling through an intermediary o After sales service can be difficult when selling through an intermediary

4. Indirect Exporting - Using an Overseas Distributor

A distributor buys the goods from the exporter, and then takes responsibility for selling them on to a third party. The role of a distributor is to find customers for the exporter’s goods. Distributors bridge the gap between the exporter and the end-user customers. It is imperative to seek legal advice before concluding a distributorship agreement.

Advantages of Using a Distributor

• Using a distributor enables a business to access international markets, and avoid logistics issues and risks associated with trade

• It is a lot more straight forward for an established distributor to introduce a new brand into the market than it would be for the exporter

• Distributors normally invest in the marketing of the goods in order to boost their sales

• Many distributors buy in bulk, to ensure they carry a stock of the goods they are selling; they also look after warehousing and inventory control

Disadvantages of Using a Distributor

• Distributors often demand significant discounts and liberal credit terms from exporters, in return for taking on trade related risks and burden

• There is a risk of losing control of the way goods are marketed and priced

• Distributors frequently demand long periods of exclusivity, so therefore it is essential that the distributor has identified a potential market and has extensive experience in selling the particular goods

• Whilst a commission structure can be employed to motivate a sales agent, this is not the case with a distributor

Useful tips when choosing an agent or distributor

• The agent or distributor should be selling to the same companies which interest you

• Agents and distributors must have relationships with potential customers

• Do not give the agent exclusivity for too large an area – ensure that the area allocated can be covered effectively

• Consult your lawyer in relation to the type of agreement you intend to enter into with a potential agent, and do not sign any agreement without approval from your lawyer

• Verify your distributors financial standing to ensure he/she is financially sound

• Agreements made with agents and distributors should be formalised in a clear written contract!

Key points that should be included in a contract with overseas agents and distributors: Checklist

• Names and addresses of the businesses involved and the nature of the relationship

• A clear description of goods

• The geographic location in which the company goods will be sold

• The price received from distributors for goods and the price an agent will charge customers

• The commission an agent is to receive

• Due date of payment, currency and exchange rate

• Termination date for the contract agreement

• Confidentiality clause

• Intellectual property – identify the rights the agent or distributor has regarding the use of company titles, brands, logos, etc.

• Exclusivity – what rights the agent or distributor has to the goods

• Jurisdiction – Identify which country’s laws apply to contract

Qupact has launched an app to help companies find different types of sales channel partners to develop routes to market. Register for a FREE trial today and find Export Sales Partners and develop a Distribution Channel Strategy. http://www.qupact.com

A Complete Guide to Finding Export Sales Channels

It is essential for a business to research overseas markets before embarking on marketing, promoting and selling a product or service within them. In order to be successful in the overseas market, a business needs to find the most appropriate market and the best method to approach it. Furthermore, a clear understanding of the market or markets and how the product/service will fit within them will also increase chances of success. Entering an overseas market without this information could lead to very costly oversights. 

When a business is planning to export, it is essential to carry out extensive market research to assess the customers who will buy the product, the competition and the overall market situation. This is achieved through: 

Secondary Research Primary Research 

Knowing where to look for export information can be a daunting task for a business, particularly when they are not ‘au fait’ with the research process. 

Carrying out Market Research on Overseas Markets As mentioned above, market research consists of secondary and primary. 

1. Secondary Research 

Once a business has recognised that opportunities exist for them in the overseas market, these opportunities must be identified and quantified. 

Comprehensive secondary research (or desk research) is essential and will narrow the interest of a business down to a manageable number of markets. When exporting for the first time, it is advisable to concentrate on the traditional export markets which are the UK, EU and the USA, as they present fewer risks than other dissimilar countries. 

Secondary research may also be conducted to assist a business in gathering information under some or all of the following information categories. These include recent import statistics, size of local market for products, local economic data, competitors’ products and prices, import license, quota regulations and administration and tariffs to name but a few. 

2. Primary Research 

It may also be necessary to conduct primary research (field research) within the potential market. This is particularly useful in assessing customer needs, wants and requirements. Primary research offers the benefit of direct contact, through a survey or interview, with certain markets and/or customer groups, and can be tailored to meet the needs of an organization and provide specific and detailed information. 

Exporters need to assess potential target countries and the purchasing behaviour of customers within them. 

The following areas should also be examined: 

1. Market Issues 

2. Export Operations 

3. Infrastructure 

4. Legislation 

1. Market Issues 

In order to understand market issues, it is essential to fully understand local cultural influences. A product or service may be viewed as a basic commodity at home; however, this may not be the case in the overseas market. 

Another important factor to remember is that of language barriers. A business may need the local language in order to market the product effectively; otherwise access to professional translators may be necessary. 

2. Practical Research for Export Operations 

A business that plans to export overseas must undertake research to assess how the export operation should be executed in the overseas market. 

Distribution channels available for selling between different markets will vary, and a business may need to locate local distributors. The most suitable skilled staff will also need to be sourced, with this in mind, it is critical to research whether they are available in the particular overseas market. 

3. Infrastructure 

A further area of consideration for a potential exporter is the access the potential target market has to a communications infrastructure, including, telephone, fax and internet. The quality of air, sea, road and rail transport available may also need to be examined, particularly for a business that may have special requirements, such as, temperature, fragility and sell by deadlines. 

4. Legislation 

Legislation varies greatly in markets overseas, which will subsequently affect how a business sells into them. An exporter may need to adjust a product or operational set up in order to comply with local laws. 

The following areas should be investigated: 

1. Local export legislation and technical regulations 

2. Certification and testing requirements 

3. Local standards affecting existing and future products 

4. Patents and trademarks 

5. Staff qualifications 

In order to investigate whether there is a niche in the overseas market for a particular product or service, a business should ask the following questions in relation to the countries and the customers: 

Questions to ask in relation to the target Countries 

1. What size is the potential market? 

2. What is the political situation? – Is there an unstable political climate in the country?

3. Economic climate – is it favourable? 

4. Culture – Are there barriers to the products success? Will the product have the same value here as in the domestic market? 

Questions to ask in relation to the potential Customers 

1. Who will buy the product? 

2. What influences customers purchasing decisions? 

3. What role will the product fulfill for the target market? 

4. How much is the potential market willing to spend on the product? 

5. How will I sell and promote the product? 

By answering these questions, a business should be able to tell whether they can successfully sell into a particular overseas market. 

Useful tips when selecting export markets 

• Do not examine too many export markets at one time – refine your search! 

• Remember smaller markets can be as profitable as larger ones, so do not overlook them 

• Select a market that will offer sufficient potential to justify your efforts 

• Select a market that offers a degree of competitive advantage 

• Plan on investing time and money invisiting the market before committing to exports 

• Avoid markets in which import restrictions may restrict scope 

• Do not take on business that you are unable to handle 

Qupact has launched an app to help companies find different types of sales channel partners to develop routes to market. Register for a FREE trial today and find Export Sales Partners and develop a Distribution Channel Strategy. http://www.qupact.com