Determining the Direct Export Channel

To make a rational determination of a direct export channel for a target country/market, managers need to make decisions on three levels. First, they must decide what the channel is intended to accomplish (determining performance specifications). Second, they need to decide which channel (or channel mix) is optimum by matching their performance specifications against alternative channel systems, with due regard paid to costs (deter­mining channel type). Finally, having determined the most appropriate channel type (or types), managers need to develop criteria to guide the selection of individual channel members (determining channel members).

1. Determining Performance Specifications

To determine their performance specifications for a direct export channel, managers should answer the following questions:

  • What geographical market coverage do we want in the target coun­try?
  • How intensive should our market coverage be?
  • What specific selling and promotion efforts do we want from channel agencies?
  • What physical supply services (for example, volume and location of inventories and delivery systems) do we want from channel agencies?
  • What pre- and post-purchase services (for instance, credit, installa­tion, maintenance, and repair) do we want from channel agencies?

Answers to these and similar questions, which depend on a company’s objectives in the target country (reflecting the nature of the market and competition), its product, and its marketing plan, constitute the perform­ance specifications of the channel.

The desired intensity of market coverage deserves special comment because it has implications for channel control, pricing policy, promotion, and other elements of the export marketing plan. If a company wants intensive or blanket coverage of a dispersed market, then it will need many channel members, especially at the final-buyer level. It will be inclined to use multiple channels with little or no interest in protecting any one chan­nel. Intensive coverage encourages heavier reliance on advertising and less direct promotional support of channel members. Intensive coverage also limits channel control, because intermediaries have no particular allegiance to the manufacturer and can easily resist its efforts to influence their behavior.

More commonly, a company adopts a policy of selective market cover­age. At the extreme, a selective policy uses a single agent or distributor (or sales branch/subsidiary), who is given exclusive selling rights in a desig­nated territory that may embrace the entire target country. Exclusive distri­bution arrangements offer the exporting company more control over channel performance, but, in turn, they demand protection and active sup­port. A policy of selective distribution may fall short of exclusive distribu­tion by using a limited number of agents or distributors to cover the market.

2. Determining the Channel Type

Even with the guidance of performance specifications, the determination of the most appropriate channel type is a difficult task. For one thing, man­agers will be trying to satisfy several channel objectives—sales volume, low costs, control, the cooperation of channel members, and so on—which can seldom be met fully by any given channel system. Furthermore, their ability to estimate the sales potentials and costs of alternative channels is com­monly limited by insufficient and/or unreliable information. Inevitably, therefore, the determination of the most appropriate channel becomes a screening process that leans heavily on qualitative assessments and judg­ment. Even so, managers should endeavor to estimate the profit contribu­tions (incremental revenues minus incremental costs) of alternative channels over the entry planning period.

The first screening step is to compare the branch/subsidiary channel against the agency/distributor channel. The principal appeal of the former is control. When the salesmen of a branch call directly on final buyers (com­mon for many industrial products but not for consumer products), then the manufacturer controls the full marketing channel. When branch salesmen call on wholesalers and retailers, the manufacturer has only partial control over the full marketing channel, but it is still greater than with a channel using foreign agents or distributors. Channel control is significant because with control a company can more nearly develop a channel that meets its specifications. The importance of channel control depends, therefore, on how closely alternative channels meet performance specifications. Only when alternative channels are inadequate in this respect will the branch/ subsidiary channel afford higher sales over the entry planning period, and then only if the manufacturer makes the necessary commitment of re­sources.

The possibly superior performance of the branch/subsidiary channel is acquired at the cost of a higher breakeven sales volume. Agency/distributor costs are mostly variable costs (commissions and markups) tied to sales volume, but a substantial fraction of branch/subsidiary costs are fixed costs that represent office and storage facilities and permanent working capital needed to finance administrative/marketing overheads, minimum invento­ries, minimum accounts receivable, a minimum sales force, and so on.4 The key question, then, becomes: At which level of sales (if any) in the target market will branch/subsidiary unit sales costs fall below agent/distributor unit sales costs? Next comes the question, can the manufacturer reasonably plan to reach that sales level over the entry planning period?

To sum up, the choice between a branch/subsidiary channel and an agency/distributor channel depends on both expected performance (how closely the channel matches specifications) and costs. Managers should try to estimate the profitability of alternative channels through contribution analysis over the planning period. But they may reject the most profitable channel because it fails to meet a critical specification. For example, manu­facturers of technical products who are proud of their quality image will not use agents or distributors who cannot offer proper service backup to customers, even if that channel is the most profitable. As a consequence, they may refuse to sell to small country markets that cannot justify a branch/subsidiary channel. More generally, manufacturers are inclined to use an agent/distributor channel for initial market entry because of the higher risks associated with a branch/subsidiary channel.

If a manufacturer decides to use an agent/distributor channel, then a second screening step compares foreign agents against foreign distributors in the target country.

A foreign agent is an independent middleman who represents the man­ufacturer in the target country. The agent does not take title to the manu­facturer’s goods, and he seldom holds any inventory (beyond samples) or extends credit to customers.5 The agent’s primary task is to make sales to other middlemen (wholesalers, retailers, and so on) or to final buyers, and he may also provide some technical services. Thus the agent is essentially a salesman, and his compensation is ordinarily a commission based on sales.

When the manufacturer receives an order from his foreign agent, he bills the buyer and ships the goods directly to him.

A foreign distributor is an independent merchant who takes title to the manufacturer’s goods for resale to other middlemen or final buyers. In addition to assuming ownership risks, the distributor performs more func­tions than the agent, such as stocking inventories, promotion, extending customer credit, order processing, physical delivery, and product mainte­nance and repair. The distributor’s compensation is his profit margin.

The analytical approach to choosing between an agent channel and a distributor channel is the same as that used to choose between the primary branch/subsidiary and agency/distributor channels. Managers need to evalu­ate how closely each alternative channel matches their channel specifica­tions and how alternative channel costs compare over the entry planning period. In general, the distributor assumes a fuller range of functions, but is more difficult to control than the agent. When comparing costs, it is neces­sary to consider all incremental channel costs, not only agent commissions and distributor functional discounts, but also the cost of all channel func­tions assumed by the manufacturer (in-channel promotion, stocking, han­dling, shipping, order processing, final-buyer services, credit, and so on). Although agent commissions may be substantially below the functional discounts granted to distributors, the cost of an agent channel may be greater when account is taken of all the channel costs.

With expected sales figures and incremental cost estimates in hand, managers can calculate the respective profit contributions of the agent and distributor channels over the entry planning period. But not all channel performance specifications are captured by expected sales. If a critical speci­fication can be met by only one of the channels (say, customer services), then it will be chosen even when it has a lower profit contribution. Consid­erations of control, risk, and legal factors may lead to a similar result.

Up to this point we have assumed that the manufacturer will use only one channel type in the target country. But if the manufacturer seeks to penetrate two or more distinctive market segments in the target country, he may find that multiple channels are more appropriate than any single chan­nel. For example, the manufacturer might decide on a distributor channel to cover the replacement market, but an agent channel (or his own sales­men) to sell to the original-equipment market. Or again, the manufacturer might use an agent for sales to local (or small) customers, but sell directly to multinational firms doing business in the target country or to large customers. When a company uses multiple-channel types in a target coun­try, it should take care to define the “jurisdiction” of each channel in its contractual arrangements.

Summing up, the determination of the channel type calls for a two-step screening process that involves trade-offs among control, profitability, per-formance specifications, and risks. In general, the shorter the channel used by the manufacturer, the greater his control, but also the greater his re­source commitment and risk. Over time these trade-offs may shift with changes in the company’s resources, products, and marketing plan or with changes in the market, competition, channel systems, and government laws and regulations. Hence the most attractive direct export channel may be­come obsolete in the future. For this reason manufacturers should avoid getting locked into a given channel system beyond the entry planning period.

Source: Root Franklin R. (1998), Entry Strategies for International Markets, Jossey-Bass; 2nd edition.

1 thoughts on “Determining the Direct Export Channel

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