International_Distribution_Strategy-19.02.2011

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International Distribution Strategy

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International Logistics The word ‘logistics’ is derived from a French word ‘ loger ’ that means the art of transport, supply, and quartering of troops Thus, logistics was conceptually designed for use in military so as to ensure meticulous planning and implementation of supply of weapons, food, medicines, and troops in the battlefield However, logistics has presently become an integral part of business Conceptualization, design, and implementation of a system for direct flow of goods and services across national borders is termed as ‘international logistics’

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Thus, logistics consists of planning and implementing the strategy for procuring inputs for the production process to make goods and services available to the end customers As depicted in figure 1, logistics has two distinct components, i.e., materials management and physical distribution.

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C O M P A N Y Raw material component & other inputs Processing/Assembly Finished products Market intermediary End customers Material management Physical distribution Figure 1, International Logistics

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Materials Management It involves procurement of inputs, such as raw materials and components for processing or value addition by the firm This is also known as inbound logistics.

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Physical Distribution It involves all the activities, such as transportation, warehousing, and inventory carried out to make the product available to the end customers This is also known as outbound logistics.

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Logistics and the Value Chain Concept The objective of any business firm is to create value by way of performing a set of activities, such as to conceptualize, design, manufacture, market, and service its market offerings This set of inter-related activities is termed as value chain To gain competitive advantage over its rivals, a firm must provide comparable buyer value by performing activities more efficiently than its competitors (lower cost) or by performing activities

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in a unique way that creates greater buyer value and commands a premium price (differentiation) or accomplishes both Figure 2, gives the basic framework of Michael Porter’s concept of value chain to carry out these inter-related activities The primary activities include inbound logistics, operations (manufacturing), outbound logistics, marketing and sales, and after-sales services, whereas the support activities include firm’s infrastructure (finance, planning, etc.) human resource management, technology development, and procurement The model suggests that there are two primary activities related to logistics: procurement of

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inputs, components, raw materials, parts and related services, (inbound logistics) and transfer of finished products to the end consumers Therefore, the competitive advantage of a firm is dependent upon its ability to organize and perform discrete activities Firms create value for their buyers by performing these activities in a competitive manner The ultimate value created by a firm is measured by the amount buyers are willing to pay for its products and services If the value of performing the required activities exceeds the collective cost, the firm becomes profitable Thus, achieving competitive advantage in logistics becomes crucial to the success of a business firm

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Firm infrastructure Human resource management Technology development Procurement Inbound logistics Operations Marketing and sales Services Margin Margin Primary activities Support activities Figure 2, The Concept of Value Chain Out- bound logistics

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Channels of International Distribution Once a firm has decided to enter international markets and identified the markets and the products, it has to ensure smooth flow of goods from the place of manufacture to the ultimate customers For making the goods available from the producer or manufacturer in one country to an overseas customer, a number of market intermediaries are involved for physical transfer of goods Besides, the firm receives the payment through the channel of such intermediaries

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Channels of distribution or marketing channels are the set of inter-dependent organizations involved in the process of making a product or service available for use or consumption The distribution channels play a crucial role to make the products or services reach the end consumers Channel of distribution is defined as an organization of network of agencies and institutions, which, in combination, perform all the activities required to link producers with users to accomplish the marketing task

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The major functions performed by distribution channels include: Physical flow of goods from the producer or manufacturer to the ultimate customer Transfer of ownership to the ultimate customer Realization of payment that flows from the ultimate customers through market intermediaries to the producers or manufacturers Regular flow of information from the ultimate customers and within the channel intermediaries Promotion flow from the manufacturers to the end customers and gathering customer feedbacks

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Channels of international marketing distribution may be defined as a set of inter-dependent organizations networked together to make the products or services available to the end consumers in international markets. Managing distribution channels in international markets is much more complex than managing them in domestic markets due to a number of factors, including the following: The distribution system in international markets varies significantly from one country to another Therefore, a firm has to develop a thorough understanding of the distribution channels in the target markets

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For instance, prior to perestroika , the marketing channels in the erstwhile USSR were controlled by the government The Foreign Trade Organization (FTO), a huge government body, was involved in bulk import and distribution through a government-controlled distribution network However, after the disintegration of USSR, the private distribution channels were largely non-existent in CIS markets and the international firms were required to create their own distribution networks Firms are more familiar with the marketing channels in their home market

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Therefore, selection of distribution channels in overseas markets is a complex decision Collecting information about the distribution channels in overseas markets requires relatively more resources, both managerial and financial Managing distribution channels in overseas markets is much more complex because of the physical distance and also due to the marketing systems’ distance in the target markets Since a firm commits substantial resources to its overseas marketing operations, the long-term commitment of channel members is an important aspect in channel design but one which is difficult to assess.

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Selecting Channels of International Distribution Selection of a distribution channel is one of the most crucial decision a firm has to make while entering international markets A firm may use the following criteria for the selection of channels of international distribution: International marketing objectives of the firm Financial resources Organizational structure Experience in international markets Firm’s marketing image

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Existing marketing channels of the firm Channel availability in the target market Speed of market entry required Legal implications Specific product need, if any Synergy with other elements of marketing mix Depending upon the firm’s objectives and need, appropriate weights may be assigned to each of the above criteria and final ratings based on weightage may be arrived at for final selection of an appropriate international distribution channel

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A firm has the following alternative channel strategies in terms of market coverage: • Exclusive Distribution: The firm opts for a single or a few market intermediaries • Selective Distribution: The firm has limited coverage of the market in terms of area and has a select number of intermediaries • Intensive Distribution: The firm deals with as many numbers of intermediaries and outlets in the market as possible.

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Types of International Distribution Channels Indirect Channels Direct Channels Channel Intermediaries in International Markets

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Firm End user/customer Agent e-channel Merchant intermediary Merchant intermediary Agent International border Figure 3, International Distribution Channels

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Indirect Channels In Indirect channels, an international marketing firm has to deal with domestic agents or market intermediaries without any direct dealing with a foreign-based firm As the firm is not required to deal directly in overseas markets, indirect marketing channels offer the following benefits: Since the firm has to deal with the market intermediary in the domestic market, it needs little investment and marketing experience

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Indirect distribution channels provide low- cost opportunity to test products in the international market However, indirect channels have certain limitations, which are as follows: As the firm has to heavily depend upon domestic market intermediary, its feedback from the ultimate customers is limited The firm has to part with relatively higher share of its profit margins by way of commissions and other payments The firm gets little insight into the market even after operating for several years The firm does not develop its own contacts with the buyers in the overseas market.

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Direct Channels As depicted in Figure 3, direct marketing channels involve selling of goods directly to a market intermediary or the end users or customers in overseas markets The major benefits of using direct channels are as follows: The firm develops a closer relationship with overseas buyers as it comes in direct contact with them The firm develops an insight into the markets of operations which helps in restructuring its marketing strategies as per the market requirements

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The firm’s control over the export process is greater in direct marketing channels compared to indirect marketing channels.

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Channel Intermediaries in International Markets Channel intermediaries in international markets, can be divided into two categories: agents and merchant intermediaries The agents do not take title of the goods and represent the principal firms rather than themselves, whereas the merchant intermediaries take title of the goods and buy and sell it on their own account Agents work for a commission, whereas distributors work on margins

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International Marketing Channel Indirect Direct

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Indirect Channels A1. Agents A1.1 Broker/Commission Agents A1.2 Importer’s Buying Agents A1.3 Country-controlled Buying Agents A1.4 Buying Offices A2. Merchant intermediaries A2.1 Merchant Exporter A2.2 International Trading Companies A2.3 Export/Trading Houses

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Direct Channels B1 Agents B1.1 Overseas-based Commission Agent/Broker B1.2 Manufacturer’s Export Agents or Sales Representatives B1.3 Overseas-based Buying Agents B2. Market Intermediaries B2.1 Merchant Importer B2.2 Distributor B2.3 Wholesaler B2.4 Retailer B2.5 E-channels

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A1.1 Broker Commission Agents The basic function of a broker is to bring the buyer and the seller together Generally, brokers specialize in one or a few commodities and keep themselves in constant touch with major exporters and importers throughout the world Brokers serve on commission basis known as brokerage Home-country brokers generally deal in commodities, such as soybean, oilseed, spices, etc.

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A1.2 Importers’ Buying Agents A large number of international firms send their agents in overseas market to procure supplies These agents work on commission basis for the overseas firms and procure samples and subsequent supplies from competing producers The Buying agents are highly useful especially for small exporters as they come to their doorsteps and assess the suitability of their products for exports to their principals Such importers’ buying agents are common in handicraft, handloom, and garment sectors

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A1.3 Country-Controlled Buying agenst The country-controlled buying agents are appointed by an overseas government or a government organization They identify the countries and the importers for supply of their requirements Such agents make frequent visits to the supplier’s countries or establish their base there.

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A1.4 Buying Offices Overseas firms make their permanent presence in the suppliers’ countries by way of establishing a permanent buying office It indicates a long-term commitment on the part of the international firm to source supplies from such markets For instance, a number of garment firms have established their buying offices in India.

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A2.1 Merchant Exporter The merchant exporters collect produce from several manufacturers or producers and export directly in their own name Generally, merchant exporters have longstanding relationships with their suppliers and work on profit margins Home-based merchant exporters are easy to access and help in avoiding the hassles related to direct dealing with an overseas-based market intermediary.

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A2.2 International Trading Companies International trading companies are generally large companies that accumulate, transport, and distribute goods in various markets Traditionally, trading companies have been in operation for centuries as pioneers of international trade The British East India Company (1600), the Dutch East India Company (1602), and the French Compagnie des Indes Orientals (1664) were supported by their governments and enjoyed not only trading rights but also military protection in exchange for tax and payments

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The basic objective of these trading companies was to find markets for their industrial production and sell them at higher prices while sourcing raw materials and inputs for their manufacturing units As the international trading companies operate globally, they often have presence in the exporting firm’s home country and provide an easy access to international markets A survey of the top 10 global trading companies reveals that the top five companies are from Japan, i.e., Mitsubishi, Mitsui, Itochu, Sumitomo, and Marubeni, and are enormous in size compared to other countries.

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A2.3 Export Trading Houses These are domestic market-based large firms involved in a certain minimum level of exports activities Certain incentives are available to these trading companies under the exim policy so as to assist them in their international marketing efforts Since the export/trading houses are of Indian origin, firms are familiar with the system and feel a sense of security in transacting with them Besides, the relations with export/trading

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houses are relatively on a long-term basis The major bottleneck in exporting though export*trading houses is price realization and lack of knowledge about international markets Presently, as the criteria have been simplified on the basis of export performance, all major exporting firms have got the status of export/trading house The State Trading Corporation (STC) and Metals and Minerals Trading Corporation (MMTC) are among the largest export/trading houses in India.

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B1 Agents Located in overseas markets, agents do not take title of the goods and operate on behalf of the principal.

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B1.1 Overseas-based Commission Agent/Broker Generally, in commodities and food products, overseas-based brokers provide match- making services to the importers and the exporters Since these brokers are based in overseas markets and are in constant touch with both the buyers and the sellers, they facilitate international transactions These brokers generally specialized in commodity and markets They work on the basis of one-time brokerage on a deal-to-deal basis.

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B1.2 Manufacturers’ Export Agents or Sales Representatives The individual intermediaries who operate on a commission basis and travel frequently in overseas markets are known as export agents These agents specialize in one or a few markets and offer their services to a number of manufacturers for non-competing products These agents carry out the business in the name of the firm rather than their own name In the recent years, professionals with wide exposure and market specialization are increasingly working as export agents

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Such export agents are generally employed by small manufacturers who do not have their own distribution networks in overseas markets primarily due to: Small size of operations Lack of experience in overseas markets Resource constraints Too small a presence in target market to justify the presence of a large sales force principals, the producing firm bears the risk of any loss Besides, they do not provide after-sales services, such as installation, complaint handling, and repairs as these are passed on to the principal firm.

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B1.3 Overseas-based Buying Agents Some foreign companies have exclusive contract arrangements with agents to perform their business Generally, these agents are paid on the basis of a specific percentage of profit and the costs incurred Such agents in some countries are also termed as compradors These agents have an ongoing relationship with buyers but not sellers As these agents represent the buyers, they deal in all types of goods for their principals

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A firm may get information for identification of overseas-based agents through: Foreign embassies located in India Indian embassies located abroad Commercial agents associations like International Union of Commercial Agent Import promotion organizations, such as Centre for Promotion of Import from Developing countries (CBI), Japanese External Trade Organization (JETRO), etc. Specialized magazines and journals Bank directories.

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B2.1 Merchant Importer Merchant importer is an overseas-based trader that imports products and further sells them to a wholesaler or a retailer for profit Generally, merchant importers are overseas- based trading firms that take possession and title of the goods, and, therefore, assume risks and responsibilities For bulk commodities, especially agricultural goods and some industrial goods, these merchant exporters serve as an effective marketing channel to reach international markets.

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B2.2 Distributor The distributors in the target markets purchase goods and subsequently sell them to either a market intermediary or the ultimate customers Thus, the distributors take title of the goods and assume full risk and responsibility for the goods The distributors have contractual agreements with the exporting manufacturers and deal with them on a long-term basis Under the contract, distributors are authorized to represent the manufacturers and sell their goods in the assigned foreign territory

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A distributor is generally appointed for exclusively marketing the firm’s products in the contracted overseas market territory The distributor operates on margins As the distributor has long-standing relationship with the exporter, the level of control by the principal is relatively higher The basic functions of distributors in international markets include: To estimate market demand To break bulk, meaning to buy goods in large quantities from the parent firm and break them up for market intermediaries To process orders, and proper documentation and billing

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To store goods and maintain inventors To provide low cost storage and delivery To transport goods To undertake sales promotion and advertising To offer market credit and capital for financing inventory To handle complaints, guarantees, maintenance, after-sales service, repairs, and instructions for use on behalf of the supplier, A firm may select an overseas distributor based on several factors, such as the firm’s size, its financial strength, type of products offered in markets covered, synergy with the firm’s products, experience in dealing with similar

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products, physical infrastructure, such as transport, warehousing, etc., market goodwill, ability and willingness to carry the inventory and public relations.

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B2.3 Wholesaler

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