Seven Rules of International Distribution

An established corporation looking for new international markets makes a foray into an emerging market, carefully limiting its exposure by appointing an independent local distributor. At first, sales take off, revenues grow pleasingly, and the entry is praised as a smart move. But after a while, stagnation sets in and sales plateau. Alarmed, the multinational’s managers try to discover what happened. They soon settle on what they perceive to be the main obstacle to sustained growth: the local distributor that got the company off to a flying start has run out of ideas and is now underperforming.

This pattern is repeated again and again as multinationals expand into new markets in developing countries, says David Arnold in the Harvard Business Review. Over time, a corporation’s executives decide that the distribution organization isn’t run as they would like. They rush in and make major changes, in some cases buying the local distributor or, more often, reacquiring the distribution rights and starting their own subsidiary. In either case, it’s messy. A transition from indirect to direct sales is usually costly and disruptive. It can also create new problems that come to the surface only in the long term: executives may discover a few years later that they’ve gone too far in correcting a number of situations like this, saddling the multinational with a dense and inefficient network of national distributors.

The frustrations are summed up by the CEO of a major U.S. specialty chemical company: “In the end, we always do a better job with our own subsidiaries: sales improve, and we have greater control over the business. But we still need local distributors for entry, and we are still searching for strategies to get us through the transitions without battles over control and performance.”

Arnold examined this pattern of imbalance and correction in a two-year field study of eight corporations in the consumer, industrial, and service sectors. These companies had entered almost 250 new country-markets, and he looked at their international distribution strategies in these markets. The research showed that avoiding the pattern of underperformance and correction meant accepting that, in most cases, the problem wasn’t as simple as the distributor’s being poorly run. Arnold learned that a corporation could avoid this scenario by overseeing marketing strategy from the start.

Below, He will look at what goes wrong with most distribution arrangements in developing countries and then present seven guidelines to head off potential problems. In the long run, multinationals come to see that it makes sense to continue working with independent local distributors who handle sales and a distribution system, even after the international companies have taken control of marketing strategy and major global accounts.

What Goes Wrong and Why

 

Arnold says that most multinationals stumble onto a stepwise strategy for penetrating markets in emerging countries through a series of unplanned actions to reinvigorate sales. As the pattern recurs with entries into subsequent markets, this approach, dubbed the “beachhead strategy,” becomes official policy in many organizations.

On the surface, the strategy makes a certain amount of sense. Multinationals start from scratch in sales and distribution when they enter new markets. Since markets are nationally regulated and dominated by networks of local intermediaries, corporations need to partner with local distributors to benefit from their unique expertise and knowledge of their own markets. The multinationals know that on their own, they cannot master local business practices, meet regulatory requirements, hire and manage local personnel, or gain introductions to potential customers.

At the same time, the multinationals want to minimize risk. They do this by hiring local distributors and investing very little in the undertaking. Thus, the companies cede control of strategic marketing decisions to the local partners, much more control than they would cede in home markets.

Nevertheless, as the CEO of the chemical company points out, up to now many multinationals have eventually wanted to control their own operations through directly owned subsidiaries; they’re seeking the economies of scale and control obtainable across a global network of marketing operations. For many multinationals, it’s a foregone conclusion that local distributors have merely been vehicles for market entry, temporary partners incapable of sustaining growth in the long term.

David Arnold is an Assistant Professor at Harvard Business School.

Source: Harvard Business Review, November 2000

About Prof Janek Ratnatunga 1129 Articles
Professor Janek Ratnatunga is CEO of the Institute of Certified Management Accountants. He has held appointments at the University of Melbourne, Monash University and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked with KPMG.