When a company decides that its most attractive export channel is an agent or distributor channel, it must then initiate a screening process to choose individual agents or distributors.6 Finding good foreign distributors and agents is a major problem for manufacturers, and demands considerable attention and effort. In this section, we shall focus on choosing a distributor, but what we have to say is fully applicable to choosing an agent.
The screening process to choose a foreign distributor has four phases: (1) drawing up the distributor profile, (2) locating distributor prospects, (3) evaluating distributor prospects, and (4) choosing the distributor.
1. The Distributor Profile
The distributor profile lists all the attributes that a company would like to get in its distributor for a foreign target market. In effect, the profile is an adaptation of the company’s channel performance specifications, and therefore reflects the product, marketing objectives, and the marketing plan. It includes the following specifications, as well as any others of concern to the manufacturer:
Trading areas covered.
Lines handled.
Size of firm.
Experience with manufacturer’s or similar product line.
Sales organization and quality of sales force.
Physical facilities.
Willingness to carry inventories.
After-sales servicing capability.
Financial strength/credit rating.
Overall experience.
Relations with local government.
Knowledge of English or other relevant languages.
Knowledge of business methods in manufacturer’s country.
Willingness to cooperate with manufacturer.
2. Screening Distributor Prospects
Information on prospective distributors in a target country may be obtained from numerous sources: government agencies, banks, manufacturers exporting complementary lines, trade associations, trade publications, transportation agencies, freight forwarders, trade fairs, advertising agencies, directories, chambers of commerce, unsolicited inquiries, personal visits, and others. When using these sources to identify prospective distributors, the manufacturer should look for prospects who appear to match his profile.
After the manufacturer has developed a prospect list, he needs to obtain more information for a second screening. The most direct way to do this is by writing a letter to each prospective distributor, asking about his interest in handling the manufacturer’s product line and for information relating to the items in the distributor profile developed in the preceding step. Bank references and names of the distributor’s suppliers in the manufacturer’s own country are particularly helpful information items, because they can be checked personally by the manufacturer.
Several of the letters will probably go unanswered either because a distributor is not interested in the manufacturer’s product line or because he already handles a competitive product line. To lower the proportion of nonresponses, the manufacturer’s first letter to prospective distributors should be a sales letter that promotes his product line by citing its competitive advantages and sales potential in the distributor’s country, important customers in the home country, and the manufacturer’s reputation. It is a good idea, therefore, for the manufacturer to send sales literature along with his letter.
Evaluation of the responses to the first letter, checks with bank and supplier references, and other information provide the basis for a second screening. Next, a follow-on letter can be sent to the remaining prospects, which asks each distributor to outline the marketing plan he would use for the manufacturer’s product line (the manufacturer can design a special form for this purpose), the support he would want from the manufacturer (including functional discounts), expected sales volume, and any other infor-mation pertinent to the manufacturer’s profile. Given this information from responses to the second letter, as well as information from other sources, the manufacturer is able to determine a limited number of “best” prospects.
It is strongly advised that the manufacturer make his final choice only after a round of personal interviews with all the best prospects. Apart from providing answers to specific questions and laying the ground for contract negotiation, personal interviews are the best way for the manufacturer to judge whether he can work with the distributor in carrying out the marketing plan. There is simply no substitute for face-to-face meetings to gain a “feel” for the distributor and his organization. The final choice of a distributor is well worth the time and money for personal visits, because the success of the marketing plan will depend mainly on his efforts. Furthermore, if the manufacturer makes a bad choice, it will be time-consuming and sometimes costly to undo the arrangement. There is an old saying in the export business: “Your line is only as good as your distributor or agent.”
3. Negotiating the Distributor Contract
The ultimate choice of a distributor is the outcome of a negotiation in which the distributor chooses the manufacturer, as well as the other way around. This is particularly true of good distributors who already handle the lines of several reputable manufacturers and are frequently asked to take on new lines. Consequently, the more precisely the manufacturer knows what the distributor wants from him, the more prepared he is to negotiate a viable agreement. Most certainly, this does not mean that the manufacturer should give in to all the demands of the distributor, but rather that the manufacturer anticipate what is most important to the distributor in an agreement.
The distributor’s profile of an ideal supplier will contain the following points:
Differentiated, well-known, prestige product with good sales potential.
Functional discounts that allow high markups.
Exclusive distribution rights protected by the manufacturer.
Contractual obligations assumed by the manufacturer for a lengthy period, with indemnities paid for any cancellation by the manufacturer.
Right of the distributor to terminate the agreement without indemnities.
Right to design and implement the marketing plan without interference or control by the manufacturer.
Generous credit terms.
Full support by the manufacturer—inventory backup, quick order servicing, technical and sales training, advertising allowances, special discounts, and so on.
Product warranties.
Freedom to handle other lines, whether competitive or complementary to the manufacturer’s line.
Paid visits to the manufacturer’s headquarters or to regional meetings. Obligation to provide only minimum information to the manufacturer.
Even if the manufacturer could meet all these conditions, he would be foolish to do so: he would have only a marginal influence on the marketing plan, and he would assume costs that would make the channel unprofitable or less profitable than an alternative channel. Hence the need for the give and take of negotiations in face-to-face meetings.
The negotiation process may be viewed as a reconciliation of the manufacturer’s and the distributor’s respective profiles. In most negotiations, both sides will compromise on some issues. The manufacturer should be
prepared for failure by leaving open his options to negotiate with other distributor prospects. Unless he has dominant bargaining power in all target markets, the manufacturer should not insist on a standard agreement in every particular. Good distributors in one target market may refuse to agree to a standard contract, whereas that contract may be overly generous in a distributor-abundant target market. Flexibility is the hallmark of the effective negotiator.
4. The Distributor Contract
Notwithstanding examples of successful oral agreements, the manufacturer’s agreement with a distributor should take the form of a written contract. The written contract is particularly important when things go wrong. Moreover, it can lay the foundation for cooperation in designing and carrying out the marketing plan. Although it should be adaptable to circumstances, every distributor contract should clearly define all rights and obligations so that both parties fully understand them. The key elements in a distributor contract are as follows:
- General Provisions
Identification of parties to the contract.
Duration of the contract.
Conditions of cancellation.
Definition of covered goods.
Definition of territory or territories.
Sole and exclusive rights.
Arbitration of disputes.
- Rights and Obligations of Manufacturer Conditions of termination.
Protection of sole and exclusive rights.
Sales and technical support.
Tax liabilities.
Conditions of sale.
Delivery of goods.
Prices.
Order refusal.
Inspection of distributor’s books.
Trademarks/patents.
Information to be supplied the distributor.
Advertising/promotion.
Responsibility for claims/warranties.
Inventory requirements.
- Rights and Obligations of Distributor Safeguarding manufacturer’s interests.
Payments arrangements.
Contract assignment.
Competitive lines.
Customs clearance.
Observance of conditions of sale.
After-sales service.
Information to be supplied to the manufacturer.
For most manufacturers, the three most important points in the contract are (1) sole and exclusive rights, (2) competitive lines, and (3) termination and cancellation.
Apart from the question of exclusive distribution rights from the marketing standpoint, there may also be a question of their legality in some countries. In the European Economic Community, for example, the antitrust authorities have generally outlawed exclusive arrangements that restrict sales from one member country to another. As for lines handled, few manufacturers want their distributors to sell lines competitive with their own, although they may urge distributors to take on complementary lines.
The cancellation/termination provisions are probably the single most critical element in the distributor contract. On the one hand, the manufacturer wants a contract easy to terminate in the event a distributor does poorly with his line and also as a basis of control over the marketing program. On the other hand, it is in the manufacturer’s interest that the distributor feel secure enough to justify a commitment to the manufacturer’s product line. Many manufacturers make this trade-off by having a trial period, such as six months or a year, before entering a more permanent arrangement. When the contract is for an indefinite period, it is common to allow either party to terminate it 60 days after proper notice. A cancellation clause usually allows termination without notice for specified reasons, such as the distributor’s bankruptcy, reorganization, death (if an individual), or prolonged failure to pay bills. In some countries, poor sales performance cannot be used to cancel a contract without notice.
This last point brings up the question of the local laws that govern the contract. The manufacturer should not sign a distributor contract until it has been fully checked by legal counsel to ensure that its provisions conform to the laws of the target country. Several countries have special laws that protect distributors and agents by making it very difficult or costly for the manufacturer to terminate an agreement. In those instances, termination/cancellation clauses must be carefully worded to guard the interests of the manufacturer.
A final point: a contract is the legal basis for cooperation between the manufacturer and the distributor, but it cannot guarantee cooperation. Cooperation will require the attention of managers who know how to build a smooth-working channel team with shared expectations and values. Much of a good export manager’s job is taken up with the care and feeding of foreign representatives.7 This task is magnified by the many pitfalls of cross-cultural communication, a subject examined in Chapter 9.
Source: Root Franklin R. (1998), Entry Strategies for International Markets, Jossey-Bass; 2nd edition.
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