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.